Streetwise Professor

January 15, 2009

Like I Said

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 9:44 am

The Russo-Ukrainian Winter War continues apace.   Professional and personal time demands preclude an extended original response at this time, so I’ll resort to the gambit employed by baseball broadcasters during rain delays–reruns of past games;-)

Here’s a warning about Gazprom I penned (or would that be “pixeled”) in June, 2006.   This was originally published in World Energy Magazine:

Just Say No–To Gazprom

Churchill famously said that Russia “is a riddle, wrapped in a mystery, inside an enigma.” There is nothing mysterious, however, about recent Russian policy to leverage its primary strategic asset—energy—to regain its status as a world power even as it faces an existential demographic crisis.

The Russian state’s vehicle in this endeavor is the monopoly gas provider Gazprom. Like ripples from a stone thrown in a pond, Gazprom’s influence is spreading from Russia, first to the “near abroad”—Ukraine, Armenia, Georgia, Belarus—next to the old Warsaw Pact countries, now to western Europe, and eventually, perhaps, to the US. Through murky deals and the specter of economic blackmail, the company has obtained control of pipelines in Belarus and Armenia. Georgia is under intense pressure to sell its gas trunkline. With German assistance, Gazprom is in the process of increasing Polish energy vulnerability by building a Baltic pipeline that will allow Russia to sell gas to Western Europe while cutting off Poland, thereby resurrecting unpleasant memories of past Russo-German collaboration at Polish expense.

Gazprom is now obtaining positions in gas distribution networks in Western Europe. It mooted the possibility of buying the British gas distributor Centrica, which set off a controversy in the UK over the wisdom of such a transaction. Recently other Europeans have echoed these concerns. Gazprom and the Russian government have responded acidly to European criticism, calling the Europeans hypocritical in insisting that Russia open its upstream energy market to foreign investment while considering limitations on Gazprom investment in the European midstream.

Europe would be well advised to evaluate Gazprom moves with intense skepticism, and to dismiss charges of hypocrisy. Appreciable control over the midstream would enhance Gazprom’s market power in the European market which it could use to impede or foreclose development of alternative supply sources, thereby allowing Gazprom to charge supracompetitive prices, especially as North Sea gas reserves decline. Insofar as hypocrisy is concerned, not all investment is created equal. Upstream investment in Russia does not raise the same serious competitive concerns as Gazprom ownership of significant slices of the European distribution network and control of most major pipeline routes from producing regions in Russia and Central Asia to consuming markets in Europe.

This advice goes double given the geopolitical ramifications of Gazprom. No less an authority than Russian President Vladimir Putin laid out in his (perhaps partially plagiarized) PhD thesis a strategy to utilize vertically integrated state owned energy companies to restore Russia to its former power and influence. In this regard, it is useful to remember the oft-omitted second part of Churchill’s aphorism, namely that the key to understanding Russia is “Russian national [read state] interest.”

Europe should therefore resist encroachment of Gazprom into the intra-European gas transportation network, encourage and finance development of pipelines from gas producing regions that are outside of Gazprom control, and proceed full speed with development of LNG infrastructure.

Lest this be considered a jeremiad against Russians, nothing could be further from the truth. The interests of the Russian state and the Russian people have been antithetical for centuries, virtually without pause. Although Gazprom’s meteoric rise has enriched a few in Russia, and empowered and emboldened the state, this does not bode well for Russians at large. Petrostates are largely immune from pressures to liberalize their economies and facilitate the development of private property rights and civil society. Pace GM, what is good for Gazprom is not good for Russia.

And the Russian strategy of putting all their strategic eggs in the energy basket is very risky too. Energy prices are high now, and the Russian economy is riding high with them. But energy prices go down too, and a poorly diversified Russia just recovering from a virtual economic collapse in the 1990s (exacerbated by low oil prices) is in no position to thrive given even a moderate correction in energy prices.

So as the G8 Summit in St. Petersburg approaches, Europe, Japan, and the US would be well advised to push their host hard on liberalizing the Russian energy market and to resist pressures to extend Gazprom’s reach to the Atlantic.

I think this stands up pretty well, even if I do say so myself;-)

Of course, the Europeans have done nothing that I (and many others) recommended.   They fiddled while Rome froze, as it were.   As in most things that are important, they demonstrated that EU solidarity is a farce, as each nation cut its own self-serving deal with Gazprom, and eminentos* such as Schroeder and Berlusconi played monkey to Putin’s organ grinder.   (Whenever I see photos of the ludicrously grinning Schroeder next to Putin I can’t get the organ grinder image out of my mind.) If “Europe” (as an entity) wants to be taken seriously, perhaps Europeans should take vital things seriously, rather than merely being supercilious posers.

My warnings of the dangers of Russia’s dependence on energy, its vulnerability to energy price declines, and the corrosive effect of energy dependence on its civil society have also been borne out.

Just call me Cassandra;-)

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  1. “The technical state of Ukraine’s gas transmission system is now in such a condition that it cannot circulate. In such a case it needs to be frankly told about. One must figure out… whether Ukraine’s gas-supply system is capable of circulating gas at all”
    V.Putin, January, 13th

    Comment by viktoria Tokareva — January 19, 2009 @ 5:34 am

  2. Viktoria–

    You’re a pistol! 😉

    In all seriousness, no doubt this is one time Putin is spot on. But . . . this is exactly the issue that the US had pledged to help Ukraine with–only to have Gazprom’s Aleksandr Medvedev accuse the US of engaging in a nefarious plot to undermine Russia. (See my post “How Do You Know They’re Lying?”) Similarly, the EU has pledged to work with Ukraine to repair its decrepit gas system, only to hear moaning from the Russian side.

    My conclusion–Russia doesn’t really want a vibrant, efficient Ukrainian gas system. It just wants to control the Ukrainian gas system, regardless of its condition.

    The ProfessorComment by The Professor — January 19, 2009 @ 8:11 am

  3. Rather odd commments from the Russian side, considering that gas has been flowing through Ukrainian pipelines since before 1991, and even during the Cold War, when the sovok union supplied Western Europe, Russia did not cut off the gas.

    Admittedly, Ukraine’s pipeline system needs updating. But up until now, Ukraine’s “leaky” pipeline system has not been mentioned by Putkin and the Kremlin/Gazprom gang. Those Western PR people that Puttie hired must be working overtime.

    Comment by elmer — January 22, 2009 @ 11:16 pm

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