Friday, January 05, 2007

Small blackmail - not many interested

The beginning of 2006 saw Gazprom throwing its weight around and raising gas prices to Ukraine, citing "market forces" as an argument. Unfortunately, that meant an immediate decrease in the amount of gas Ukraine was sending on to various other European countries and the EU was in an uproar (well, a small uproar). A very swift agreement was reached and, while the price Ukraine paid was raised (unarguably they had been underpaying but that was part of the deal Putin had promised to Yanukevich who proceeded to lose the election once the counting was sorted out) but Russia, Putin and Gazprom did not quite get all they wanted.

In the immediate aftermath of those events there was a great deal of talk about alternative energy sources, pipelines being built and more thought given (though not in Germany) to nuclear power. Little of it came to anything, though pipes are being constructed to various other former Soviet republics.

In the last few months Gazprom has consolidated its control of natural gas and, even, oil production in Russia, forcing Shell to "renegotiate" its contract and cede control of Sakhalin-2. It is beginning to look as if Gazprom, run by various buddies of Putin, is beginning to gnash its teeth at BP. One possible outcome of all this is a gradual dropping off in foreign investment and Russia not being able to fulfil her various contractual obligations to supply energy to European countries.

That could be a disaster for Putin and his possible successor, since the Russian economic boom, such as it is, relies entirely on export of oil and gas plus a few other natural resources. There has been no sign of investment in industry nor any attempt to develop and diversify Russia’s economy.

This year started with another Gazprom attack of the vapours – this is becoming a bit of a tradition. But because this particular attack was on Belarus, led by "Europe’s last dictator", Aleksander Lukashenko and a country through which considerably less gas flows to the West than through Ukraine, the EU and its members remained shtumm.

It seemed rather odd to have Gazprom (or the Russian government, whichever one thinks of first) bullying Lukashenko, who has been Putin’s most loyal ally. He will not take his country down the Western road, unlike the leaders of Ukraine and Georgia. So, why is he being bullied?

Well, some of it is money. Belarus has agreed to an increase in price from $47 to $100 per thousand cubic metres, to be raised again by 2011 to something like $300 per thousand cubic metres. Whether Belarus will be able to afford this and what will happen if it does not, remains to be seen.

Of course, the original price was extremely low. But it ought to be pointed out that it had been negotiated, if that is the word, as a bonus for Lukashenko’s unwavering support. Furthermore, as the Wall Street Journal Europe pointed out two days ago [subscription only], we cannot talk about such things as market prices when Gazprom exercises complete monopoly and refuses to open up to foreign investors.

In any case, the money is not the most important part of the deal and, it would not be altogether surprising if those terms were loosened up at some later stage. What Russia was really after is the 50 per cent stake in Belltransgaz, Belarus's gas pipeline monopoly.

Gazprom’s openly avowed aim is to control and consolidate the production and distribution of gas to all its clients. Russia refuses to ratify the International Energy Charter, under which signatories have to allow free access to pipeline networks.

Nor is Russia particularly happy with the proposed EU liberalization of the energy market, which will break up the existing Continental monopolies but will also prevent gas suppliers to own pipelines. And vice, as they say, versa.

This is most definitely not in Russia's interests and the last few months have shown us quite clearly how that country and its state monopolies understand the expression "market forces". Briefly, it amounts to "what's mine is mine and what's yours is negotiable". At the barrel of the gun, figuratively speaking.


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