Streetwise Professor

April 1, 2007

The Singlemost Important Thing

Filed under: Energy,Russia — The Professor @ 2:52 am

The singlemost important thing the west can do to liberate itself from its increasing dependence on Russian energy is to support the development of alternative transportation routes that circumvent the current Russian stranglehold on the shipment of gas from Central Asia to Europe. The singlemost important component of that strategy is a Transcaspian gas pipeline. This will free gas from Turkmenistan, Kazakhstan, and Uzbekistan to flow to Europe without transiting Russia.

This will provide direct competition for Gazprom. Recall that Gazprom essentially uses Turkmenistan as its gas piggy bank. It pays the Turkmens peanuts and sells the gas to the western Europeans at far higher prices. Gazprom (and the Russian state) pocket the difference. Moreover, access to Central Asian gas makes it easier for Gazprom to meet its contractual commitments without making additional investments in new reserves in Russia. It is now widely recognized that Russia’s domestic production is stagnating, and with growing domestic demand it would have difficulty meeting its commitments unless it could exploit Central Asian reserves at bargain prices–bargain prices because Gazprom provides the only way for this gas to reach the market. Create an alternative route, and the cheap gas would disappear. Without its piggybank, Gazprom is in a world of hurt.

Fortunately, it seems that the US, some states in the Caucasus, and some Europeans recognize this and are looking for ways to achieve this objective. Unfortunately, this article also argues that some Europeans–round up the usual suspects, that is, the French and the Germans–want to deal bilaterally with Russia and don’t support these multilateral efforts. Talk about selling the rope, sheesh. This is the one strategy that poses a serious threat to Russian hopes to retain massive energy market power. Get with the program boys and girls. You can grasp the nettle now, or suffer much greater pain later.

The very fact that this strategy strikes at their vitals will ensure that the Russians will do everything to thwart it. Their pressure on Georgia is part of these efforts. The sweet-talking of the Hungarians and Bulgarians to create a pipeline that would undercut the Nabucco pipeline (a key link in the chain from Central Asia to the Caucasus to Europe) is another. One can expect that the intensity–and dirtiness–of Russian efforts will only increase if these efforts to circumvent them appear to have a prospect for success.

However, Russian squealing and dirty play should only spur the Turkmens, the Azeris, the Georgians, the Europeans, and the Americans to even greater efforts, because squealing and retaliation would indicate that the circumvention strategy is having the desired effect. I am skeptical, however, that the Europeans have the stones to do what is necessary. (One need only to observe its pusillanimous response to Iran’s hostage taking provocation to understand that Old Europe is very old, tired, impotent and cowardly indeed.) Hence, perhaps again the US–this time in conjunction with former Soviet Republics–will have to save the Europeans from themselves. Not that we can expect any thanks (and indeed expect the opposite), but hey, we’re used to that by now.

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