Monday, December 30, 2013

Putin Wins in the Ukraine

James J. Coyle: Putin wins in Ukraine

By JAMES J. COYLE / For the Register
Anti-government protesters gather on Independence Square on Dec. 13, in Kiev, Ukraine.
In Kiev, the crowds are fading from the Euromaidan, scene of the largest demonstrations since the Orange Revolution. The onslaught of winter has driven the people to their homes – and the warmth of New Years and Eastern Orthodox Christmas will hold them there for weeks to come.
Ukrainian anger over President Viktor Yanukovych's spurning of the European Union may simmer for some time, but Russian President Vladimir Putin appears to have won the country by delivering something no one else could: cheap energy to heat their homes through the winter.
Under Russian pressure, Ukraine abandoned its plans to sign an association agreement with the European Union. Yanukovych promised to fire the officials in his government who negotiated the Free Trade Area Agreement and demanded at least $27 billion dollars from the European Union to resume negotiations – a demand EU enlargement chief Stefan Füle said had “no grounds in reality.” EU talks are now suspended.
Both Russia and Ukraine benefit from canceling the deal. For Russia, Ukraine stays in Moscow's economic and strategic orbit. “Ukraine is our fully-fledged strategic partner beyond any doubt,” said Putin.
Russia did not get everything it wanted, however. Moscow pushed Ukraine to join its own economic pact, the Eurasian Customs Union. So far, Ukraine has resisted. Russia also moved one step closer to taking over the Ukrainian natural gas pipeline network.
Ukrainian Prime Minister Mykola Azarov announced it was prepared to resume talks on establishing a consortium to manage the system, a proposal that Kiev had previously rejected. Ukraine's president said the “road is open” to making Gazprom, the Russian government-controlled gas company, a partner.
As for Ukraine, it received a much-needed economic aid package, as well as a reduction in the price it pays Moscow for natural gas. Putin announced the Russian government would purchase $15 billion in Ukrainian government bonds. He said the aid was being granted without any preconditions. The first $3 billion was scheduled to be transferred on Dec. 24.
Gazprom agreed to give the Ukrainian government's natural gas importer Naftogaz more time to pay its $1.3 billion debt and promised not to demand advance payments for future gas shipments. In addition, Gazprom slashed the price Ukrainians will pay for natural gas from over $400 per thousand cubic meters (the highest price in Europe) to $268.5. Reducing the price of gas by one-third gives the deal the boost that is needed to win the support of the Ukrainian populace.
In all likelihood, Gazprom will not lose money, despite the deep discount. Faced with price disputes throughout 2013, Ukraine had reduced the quantities it purchased from Russia by one-third. If gas purchases now return to 2012 levels, Bank of America Merrill Lynch estimates Gazprom's core profit will increase 1.5 percent.
The price cut is also the leash by which Putin keeps Ukraine in line. Russia's president added that the drop might be temporary. In other words, any move to resume relations with Brussels could easily result in a return to the previous price.
James J. Coyle is a professor and the director of Global Education at Chapman University and chair of the Eurasian Committee of the Pacific Council on International Policy.

Al Qaida in Syria Provides Wake Up Call

James J. Coyle: Al-Qaida in Syria provides wake up call
By JAMES J. COYLE / For the Register
Published: Dec. 12, 2013 Updated: 5:28 p.m.
Dozens of Americans have tried to join Islamist rebel groups in Syria, according to U.S. officials. They sought to join the estimated 6,000 to 8,000 foreign fighters.
Approximately 2,000 of their number are European. It is easy for these foreign fighters to reach Syria: international flights bring them to Turkey, where there are training camps exclusively for European recruits. From there, they easily slip across the border. Such numbers are troubling, because they represent a serious threat to the West when they return from their jihad in the Middle East.
The threat is not only to the West; Russia faces a similar problem. An Uzbek Salafist in Turkey uses the Internet to recruit in Europe, North America, Russia and Central Asia, according to EurasiaNet. Radical Kyrgyz in Moscow were recruited for the struggle by North Caucasians. Members of the Islamic Movement of Uzbekistan have left their fighting in Afghanistan and Pakistan to go to Syria. While the number of Central Asians is still small, they have become more prominent in jihadist groups like al-Qaida affiliated Jabhat al-Nusra. One press report says the “most dangerous and barbaric” of the al-Qaida fighters are 250 Chechens in the suburbs of Aleppo.
The group with the largest number of fighters is the Islamic State of Iraq and al-Shams, also known as ISIS. This group has achieved notoriety for fighting as much against other rebels as against government forces. They recently seized the northern Syrian town of Termanin from a rival rebel unit, by seizing the bakery, intimidating the police and beheading those who opposed them. “The executions are designed to make maximum impact,” said activist Firas Ahmad. Jihadists have also kidnapped Kurdish rebel fighters and Orthodox nuns. Most recently, the U.S. government announced on Thursday that they were suspending delivery of non-lethal aid to rebels in Northern Syria because of the reports of the Islamists' seizure of territory from the Free Syrian Army.
The ISIS now control many of the supply lines by which Western powers are trying to resupply other rebel groups. In areas along the border with Turkey in Aleppo and Idlib, the ISIS is also seizing territory held by other hard-line Islamist units, reports the Lebanese Daily Star. Their commander, who goes by the nickname al-Jazaeri, said they had learned their lesson in other conflicts. “Our mistake as mujahidin is that we were preoccupied with fighting [Moammar] Gadhafi and did not pay enough attention to how to hold onto territory,” he told Reuters.
The result is a large swath of territory in the heart of the Middle East under the control of al-Qaida affiliated groups. This area has come to resemble Afghanistan: Islamic schools, training camps and burka-clad women. The threat from these groups, many identified as terrorist organizations, is a common thread that unites Russia and America going into the Jan. 22 Geneva conference talks. The superpowers had appeared to be waging a proxy war in Syria, with Russia and Iran supporting President Bashar al-Assad against rebels backed by the United States, Saudi Arabia and Turkey. Recent meetings, however, show that these alignments are no longer true.
The U.S. accepted Russian Foreign Minister Sergei Lavrov's suggestion of foregoing military action in favor of Syria's decommissioning of its chemical weapons stockpile. With indications that the Dec. 31 deadline for the removal of 30 tons of chemicals might not be met because the road to the coast might not be safe for transport, there are no renewed American threats. Instead, quiet diplomacy seems the order of the day.
Last week, British and American officials met in Ankara with non al-Qaida Islamist groups. While refusing to name which groups with which he had met, Army Gen. Martin Dempsey said it was important to learn the long-term plans of the organizations. Other officials said the purpose of the meeting was to encourage them to join in the Geneva II peace talks. It would appear that the al-Qaida threat is uniting the international community in unanticipated ways.
James J. Coyle is a professor and the director of Global Education at Chapman University and Chair of the Eurasian Committee of the Pacific Council on International Policy. He has been involved with Middle Eastern affairs for over 30 years.

Protesters put Ukraine on edge

Protesters put Ukraine on edge
By JAMES J. COYLE / For the Register
Published: Dec. 3, 2013 Updated: 2:28 p.m.
The largest crowds in Ukraine's history descended Sunday onto Independence Square, scene of the 2004 Orange Revolution. Demonstrators closed off the city center, using Christmas trees, city benches, metal fences and barricades. Protestors occupied City Hall and the trade union headquarters.
Kiev was not the only forum for unrest: demonstrations took place throughout the country, including in President Viktor Yanukovych's home town of Donetsk. Former interior minister Yuriy Lutsenko said what was happening was not a protest, but another revolution.
The government is in disarray: at least two parliamentarians from the ruling Party of Regions have resigned, as well as the chief of the presidential administration staff. The Kiev chief of police attempted to resign but was slapped with a suspension. The president is considering declaring a state of emergency, while the parliament is considering curtailing his powers.
It didn't have to be this way. On Thursday and Friday in Vilnius, Lithuania, the European Union welcomed Georgia and Moldova into the EU's Eastern Partnership.
Ukraine was supposed to be accepted as well, but the cabinet canceled the country's preparations to sign an association agreement after coming under heavy pressure from Moscow. The citizenry was outraged. Opposition parliamentarian Arseniy Yatsenyuk charged the ruling party with hindering Ukraine's movement towards the EU.
President Yanukovych had little room to maneuver. Even though he had been negotiating with the European Union for months, the odds have always favored his alignment with Moscow. Russia supplies Ukraine with 60 percent of its natural gas, and the two countries have been squabbling for months over price for the commodity. The EU has pledged to sell Ukraine natural gas through a reverse flow pipeline from Slovakia, but the quantities are insufficient to replace Russian gas. Russian First Deputy Prime Minister Igor Shuvalov offered a carrot: cheaper gas if Kiev halts free trade talks with Europe.
Russia is not afraid to also use a stick: it cut off natural gas flows in the winters of 2006 and 2009, and Prime Minister Dmitry Medvedev threatened tariffs on the importation of Ukrainian goods to Russia, Belarus and Kazakhstan, if the country aligned with the West. Ukrainian Prime Minister Mykola Azarov subsequently told the parliament this would cost the country 400,000 jobs.
Yanukovych is trying to keep his options open, stating he has not abandoned the idea of joining the European Union someday. Equally telling, he has not agreed immediately to joining the rival, Moscow-backed Eurasian Customs Union.
These half measures have not appeased the crowds, however, who are demanding his resignation. Ukraine and Russia are supposed to set the natural gas price for 2014 in the next two weeks: a strong enough price cut might shore up Yanukovych's support – if the news doesn't arrive too late.
James J. Coyle is the director of Global Education at Chapman University and is the chair of the Eurasian committee of the Pacific Council on International Policy. He has also held various positions in the federal government, including director of Middle East studies at the U.S. Army War College.

Steps Toward Peace in the Caucasus

James J. Coyle: Steps toward peace in the Caucasus
By JAMES J. COYLE / For the Register
Published: Nov. 27, 2013 Updated: Dec. 2, 2013 9:27 a.m.
Last week, the presidents of Armenia and Azerbaijan met in Vienna for the first time in almost two years.
The summit was important, because these two countries have been involved in a “frozen conflict” for two decades, ever since signing a ceasefire in 1994.
The discussions were held under the auspices of the Minsk Group, created by the Organization for Security and Cooperation in Europe and co-chaired by the United States, Russia and France. At the conclusion, the co-chairs issued a statement that the presidents had:
• Agreed to advance negotiations toward a peaceful settlement;
• Instructed their foreign ministers to cooperate with the co-chairs to build on the work done to date, with the aim of intensifying the peace process; and,
• Agreed to meet again in the months ahead.
In addition, the co-chairs agreed to hold working sessions in Kiev on Dec. 5-6, on the margins of an OSCE Ministerial meeting.
For many Armenians in Southern California with families and friends in the affected area, progress in the talks should be welcome news. Armenia's borders with both Turkey and Azerbaijan remain closed because of this conflict.
Today, Armenia is the poorest country in the South Caucasus and its population has decreased 40 percent since the conflict began in 1988. A settlement to the conflict holds the promise of greater prosperity in that country.
Azerbaijan has also felt the effects. Armenia occupies approximately 20 percent of what is internationally recognized as Azerbaijani territory, in defiance of four UN Security Council resolutions. This has resulted in the displacement of one million Azerbaijanis from their homes.
The United States also has interests in the area – domestically and internationally.
Domestically, Armenians have been immigrating to the United States since the 1890s; today, 1.4 million Americans can trace their heritage to Armenia. They have a great interest in what happens in their ancestral homeland.
Internationally, America's major ally in the Middle East, Israel, gets 60 percent of its oil imports from Azerbaijan. European allies, including Greece and Italy, are patiently awaiting the construction of the Trans Anatolian Pipeline that will bring desperately needed natural gas from Azerbaijan to their countries.
A renewal of the fighting could threaten these important economic lifelines. In addition, approximately 40 percent of all air freight for our troops in Afghanistan transit Azerbaijan.
This route, called the Northern Distribution Network, will be crucial in the withdrawal of our troops from Afghanistan. Azerbaijani troops have fought side by side with Americans in both Iraq and Afghanistan.

Surrendering Egypt to Russia

James J. Coyle: Surrendering Egypt to Russia
By JAMES J. COYLE / For the Register
Published: Nov. 22, 2013 Updated: Dec. 2, 2013 9:28 a.m.


Russia is negotiating its biggest arms deal with Egypt since the Cold War after the U.S. cut aid to Egypt.
Source: Bloomberg News
As the United States reduces its footprint in the Middle East, Russia is taking advantage of the power vacuum America's retreat is creating. Egypt, whose defection to the West in 1972 was essential to creating the 1979 Egyptian-Israeli peace treaty, may be transferring its loyalties to the Kremlin.
On July 3, Egyptian military leaders removed Muslim Brotherhood cadres from government positions. This included the removal of President Mohamed Morsi. Confusing liberal democracy with Alexis de Tocqueville's “tyranny of the majority,” the United States decided to punish the generals and canceled a joint military exercise with the Egyptian army. Russian President Vladimir Putin, according to an Egyptian newspaper, immediately offered to discuss Russian joint military exercises.
Egypt warned that they would not take American chastisement lightly, that they had other choices they could make. Not recognizing the warning signs, in October, the U.S. canceled $260 million in cash aid (out of a $1.5 billion annual total) and held up the delivery of military equipment, including F-16 fighter planes. Saudi Arabia, the UAE and Kuwait promptly pledged at least $12 billion to make up for the shortfall in American aid, and Russia offered a major arms deal to the Egyptians.
Russian Defense Minister Sergei Shoigu arrived in Cairo on Nov. 14 – the first Russian defense minister to visit the country since 1971. Shoigu offered to sell MIG-29 fighter jets, attack helicopters, anti-tank missiles and low-range air-defense missiles. The package is worth $2 billion; supposedly, Egypt is looking for loans from Saudi Arabia and Russia to pay for the purchase. Egyptian Foreign Minister Nabil Fahmy proclaimed, “We want to give a new impetus to our relations and return them to the same high level that used to exist with the Soviet Union.”
The new Russian defense relationship might never materialize. Egypt may not be able to afford the weapons package, Russian weaponry would not integrate smoothly with Egypt's American supplied forces and U.S. aid might always be resumed.
But the Russians are pulling out all the stops: the defense minister's arrival was preceded by a port call in Alexandria by the Russian warship Varyag. This could presage the offering of port facilities to the Russian navy as a part of any rapprochement. Israel National News is reporting that Putin himself is expected in Egypt later this month to announce a $15 billion arms deal.
While we no longer face the zero-sum game of the Cold War, it is bad policy to encourage an American ally of forty years into the arms of a country that opposes U.S. policies in the world and is a major ally of Syria's Bashar al-Assad. There is an old saying in the Middle East: you cannot make war without Egypt and you cannot make peace without Syria. Current American policy is allowing Russia to gain control over both countries – and the ability to make war or peace.
James J. Coyle is the director of Global Education at Chapman University and chair of the Eurasian committee of the Pacific Council on International Policy.

U.S. Losing Saudi Arabia as an ally

James J. Coyle: U.S. losing Saudi Arabia as an ally

 By JAMES J. COYLE / For the Register

Published: Nov. 18, 2013 Updated: Dec. 2, 2013 9:28 a.m.


"Saudi Arabia cannot afford to be encircled by Iran, from Iraq and Syria. That is out of the question," said Khalid al-Dakhil, a political sociology professor at King Saud University, who has called for Saudi Arabia to become less dependent on the United States, told the New York Times in October.
In 1988, I asked a member of the Reagan administration what was being done to regain America's position in Iran. “Nothing,” was the reply. “We don't need them as long as we have Saudi Arabia.” How things have changed.
As world powers prepared to move closer to Iran, the head of Saudi intelligence (and former ambassador to the United States), Prince Bandar bin Sultan, told European diplomats that he planned to scale back Saudi cooperation with the United States in Syria. He said this move was in protest over America's policies in the Middle East. The prince promised a “major shift” in relations with the U.S., taking official Washington by surprise. It shouldn't have.
The Saudis were shocked when the United States advised its longtime ally, Egypt's President Hosni Mubarak, to step down during the Arab uprisings. And when the military pushed aside the Muslim Brotherhood-supported President Mohamed Morsi, the American suspension of military aid was met in Riyadh with profound disbelief. The Kingdom immediately promised to make up any aid to Egypt that the Americans cut.
Saudi Arabia answered the call of Bahraini King Hamad bin Isa al Khalifa in 2011 to put down Shia protesters. Military action was in direct defiance of American advice. In Iraq, America's troop withdrawal in December 2011 left a Shia-dominated government in Baghdad, and Saudi Arabia's Sunni allies out in the cold. Meetings with Iran in Geneva involving the U.S., Russia, China, the United Kingdom, France and Germany have sent a shiver of fear through the kingdom – a fear of abandonment as America seeks rapprochement with its Persian nemesis.
The final step was President Barack Obama abandoning his own red-line in Syria. Former head of Saudi intelligence (and former ambassador to the United States and Great Britain) Prince Turki bin Faisal, called the American policy “lamentable.” According to Reuters, the Prince believed the deal between the United States and Russia to be a ruse. “The current charade of international control over Bashar's chemical arsenal would be funny if it were not so blatantly perfidious. And designed not only to give Mr. Obama an opportunity to back down (from military strikes), but also to help Assad to butcher his own people.”
The king was furious at America's actions. The Saudi foreign minister canceled his address to the United Nations General Assembly, and then refused to take a coveted seat on the UN Security Council. “This was a message for the U.S., not the UN,” said Prince Bandar.
The Obama administration is downplaying the crisis. Secretary of State Kerry emerged from a meeting with his Saudi counterpart to say the foreign minister had not raised Prince Bandar's concerns. A senior American defense official said the U.S. remains “fully committed to security cooperation” with the kingdom. A senior administration official said the U.S. and Saudi Arabia have a longstanding partnership. White House spokesman Jay Carney said any disagreements would be worked out in a “candid and forthright way as we maintain the basic foundation of a very important relationship.”
Indications are, however, that the breach is a serious one. Apparently, Saudi Arabia did not warn its American ally before it took the drastic step of rejecting the Security Council seat. Prince Bandar said the Saudis would begin to work in Syria with allies such as Jordan and France, rather than the United States. Military and commercial ties are in danger. According to a Reuters' source close to Saudi policy, “The shift away from the U.S. is a major one. Saudi doesn't want to find itself any longer in a situation where it is dependent.” The source promised an impact; echoing a phrase one usually associates with American decision makers, he said “All options are on the table now.”
James J. Coyle is the director of Global Education at Chapman University and the chair of the Eurasian committee of the Pacific Council for International Policy.

Wednesday, November 13, 2013

EU Reliance on Russian Gas Increasing

The European Union's dependency on Russian energy continues to increase.  Demand for natural gas has grown from 325 bcm (billion cubic meters) per year in 1990 to an estimated 550 bcm in 2015, according to the International Energy Agency.  Consumption is projected to increase to 669 bcm by 2035.    Some European countries, such as Belarus, Latvia, Lithuania and Slovakia depend on Russia for 100% of their natural gas, according to the US Senate's Committee on Foreign Relations.  Several others, such as Austria, Bulgaria, the Czech Republic, Estonia, Finland, Moldova and Turkey rely on Russia for over 60% of their gas needs.

European consumption of Russian gas had been expected to decrease in face of competition from coal, LNG, and shale fuels.  Alternative fuel sources, combined with the slowdown in European economies, was supposed to reduce the demand for Russian gas, which is priced at a premium to the market.

Faced with these forces, Gazprom has initiated a series of price cuts for its European customers.  In 2012 they reduced prices 7-10% on average, even returning money via "retroactive payments" to customers with long-term supply contracts.  These rebates totaled $3.22 billion.  In June 2013, Gazprom export chief Alexander Medvedev announced that prices would be further reduced, but "The price correction will be even less than in the previous round of talks."  Medvedev estimated the new reductions would total less than $800-$900 million.  Medvedev also said that the company would cut prices in new contracts in which the price of gas is tied to the price of oil.  As a result, the average gas price for Europe would decline to approximately $375 per 1,000 cubic meters, from the 2012 price of $402.  (Of course, not all European countries benefit from this action:  Ukraine is stuck with a long term contract with a price of $440 per tcm.)

As a result of these actions, in the first eight months of 2013 Gazprom shipments to Europe and Turkey increased 14%, to the highest level since 2010, according to Gazprom Export.  The reasons are price (the premium over the spot price dropped 66% over the previous 12 months) and the failure of LNG supplies to materialize.  "The European gas market is shifting again, to a certain extent, from a buyer's market to a seller's market because of a sharp decline in LNG supply," said Sberbank analyst Valery Nesterov.

The increase in demand is providing Gazprom a rationale to limit further price concessions.  Gazprom, and its owners (the Russian government) rely heavily on the European market for its revenues--and the Russian budget relies on the income.  50% of the Russian government's budget comes from energy export revenues; with the decline in price for Gazprom's product, the funds are coming more from Rosneft's sale of oil.  80% of energy export revenues today are due to oil, not natural gas. according to the Atlantic Council's senior fellow Dr. Frank Umbach.  This has led to a shakeup in the Kremlin's hierarchy, with Rosneft's Igor Sechin increasing in influence at the cost of Gazprom's Alexey Miller.


Wednesday, November 6, 2013

China--The New Balancer

In 1991, Zbigniew Brzezinski described Central Asia and the Caucasus as "The Grand Chessboard."  He concentrated on the competition between Russia and the West for control of Mackinder's World Island.  Brzezinski wrote in the belief the United States was the world's sole superpower.

Since then, America has been bloodied in the wars of Iraq and Afghanistan.  A country that Brzezinski considered to be on the periphery, China, is assuming a larger role on the world stage.  The chess match continues, but the Russian Federation has a new opponent:  the People's Republic of China.  "China is likely to overtake the United States (as an oil importer), and Russia has to stake its claim in China," said Raiffeisenbank analyst Andrey Polishchuck.  The head of Russian studies at the China Institute of Contemporary International Relations, Feng Yujun, concurred:  "It has become very important for Russia to expedite entering the Asia-Pacific, especially the Chinese market.  It risks losing more opportunities if it keeps dragging its feet."

The record is pretty clear that it is China, and not Russia, that is in the driver's seat on energy deals.  Rosneft is scrambling to fulfill crude oil contracts with China, while reducing forecasts for production from the Vankor field in East Siberia.  As a result, Russia might have to reduce it's delivery of crude to Europe. The company emailed Reuters that "Rosneft's production plans will without doubt ensure that oil supply commitments are met...In the event of possible deviations, existing agreements and the most profitable supply routes will be prioritized."

Rosneft is also granting the China National Petroleum Corporation (CNPC) an equity stake over one of its oil fields.  Rosneft would maintain control of the project (51% ownership) but China will receive 49% in return for its willingness to help develop the field.  The deposit, the Srednebotuobinsk field, is close to the Eastern Siberia-Pacific Ocean (ESPO) pipeline which delivers crude oil to Daqing, China.  Rosneft has a similar deal with the Chinese company Sinopec, to produce oil in the Republic of Udmurtia.

At the same time, Russia has been trying to negotiate for two years a contract to sell natural gas to China, and deliver it via pipeline.  These efforts have been in vain, despite numerous statements from the highest authorities that a deal was imminent.  Despite the Chinese need for energy to fuel its economic machine, it refuses to accept the Russian price for the gas.  According to the Brookings Institute's Erica Downs, "The Russians probably need this more desperately than the Chinese." Fyodor Lukyanov, head of the Moscow think tank, the Council on Foreign and Defense Policy, believes that a gas deal would be a "major breakthrough" for Russia, but the economics of the proposal would scuttle it.  "China...won't agree to major concessions just to improve its strategic partnership with Russia."

This follows on the heals of Chinese president's Xi Jinping's recent visit to Central Asia. Xi signed an agreement in Turkmenistan to double gas exports to China, cut the ribbon on the Galkynysh gas field (the world's second largest), and pledged $8 billion to build a pipeline from the field to China.  In Kazakhstan, Xi signed $30 billion in deals that included the CNPC purchase of 8% of the Kashagan oil fields, agreed to double the size of the pipeline from Kazakhstan to China, and agreed to build a new refinery.  In Uzbekistan he signed $15 billion in purchases of oil, gas and gold; and in Kyrgyzstan he agreed to a $3 billion deal to construct another pipeline.  In Tajikistan, he signed another $3 billion pipeline deal, which resulted in Gazprom cancelling its own pipeline project to that country.

Alexander Rahr, the research director of the German-Russian Forum, believes that Russian President Vladimir Putin is allowing China to increase its Central Asian presence, so that Russia can concentrate on its Western flank.  ""I think this was a firm choice, a difficult choice, but it was made.  He cannot afford to have geopolitical battles with NATO and the West on the one hand and, parallel to that, battles with China for influence in Central Asia."  Rahr believes Russia is using energy to keep Belarus, Ukraine and Modova aligned with Moscow instead of Brussels.

As China moves deeper into Central Asia, it is forcing Russia out--as the Tajikistan pipeline incident demonstrates.  It is locking up energy supplies that Russia was previously selling to Europe, is obtaining equity interest in Russian energy fields, and forcing Russia to divert supplies from European buyers.  China is telling Russia what to do, and not the other way around.

Wednesday, October 23, 2013

Transneft-Rosneft Kiss and Make Up

The summer battle between two energy barons in Vladimir Putin's inner circle has been resolved.  On October 11, 2013 Rosneft chairman Igor Sechin and Transneft chairman Nikolay Tokarev reached agreement on financing the further expansion to China of the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline.

The spat began in anticipation of the June 2013 signing of a contract between Rosneft and the China National Petroleum Corporation (CNPC).  That contract obliges Rosneft to deliver an additional 365 million tons of oil over the next 25 years.  This is an increase over the previous contract Rosneft signed to supply 15 million tons annually for the next 20 years.

With negotiations underway for this landmark agreement, Rosneft's Sechin began lobbying for the expansion of the ESPO pipeline spur to China.  Transneft's Tokarev would have none of it.  In a rare public display of disagreement within Putin's siloviki, the Transneft chair identified the source of the conflict:  money.  "Who will pay to expand the pipeline spur to China?" he asked in May 2013.  "Transneft isn't just a service company for Rosneft."

Despite Tokarev's objections, the contract was signed at the International Economic Forum in Saint Petersburg.  With the question of pipeline financing unresolved, Transneft upped the ante by announcing they would stop pumping Rosneft oil on July 28 because at that point Transneft would have fulfilled its previous contract with the state-owned oil company.  Sechin was unperturbed.  "We are in contact and interact with Transneft's CEO Nikolai Tokarev.  There was no conflict.  Obviously, during commercial work the companies may have different positions.  But this is not a conflict but a regular negotiations process."

Sechin's position was that Rosneft would pay an "economically justified tariff", but he did not believe he should finance the expansion of Transneft's network.  Igor Demin, spokesman for Transneft, disagreed.  He said that the pipeline project would be solely for the benefit of one oil company, Rosneft.  If Transneft had to find financing for the project, the entire Russian oil industry would have to pay for it.

The Russian government remained neutral.  Deputy Energy Minister Kirill Molodtsov basically said he didn't care who paid for the pipeline, as long as it remained profitable.  "Profitability is the top priority.  That applies both to Rosneft and Transneft.  This is what we are looking at when we consider the investment projects proposed by Transneft and Rosneft."

In August, the two oligarchs tried to use their ultimate trump card, their connections with President Putin.  Sechin began by writing an eight page letter accusing Transneft of charging too much to transport oil.  "The current system of Transneft's transport tariff system is not transparent and does not suggest reduced tariffs for oil companies, which invest in this region and supply the Far East region with oil products."  Tokarev responded with an analysis that Transneft tariff's had not contributed to a rise in gasoline prices.

Transneft then accused Rosneft of signing delivery contracts it could not fulfill.  Speaking to a ministerial meeting in September 2013, Transneft vice president Alexei Sapsai warned that Rosneft was in danger of being short at least 3.9 tons for its eastern routes.  If a planned Rosneft petrochemical complex (VNHK) comes on line, the shortage would stand at 15.9 million tons.  Transneft even decided to withdraw their role in the refinery because of the disagreement on tariffs.

Despite the fireworks, the two sides reached an agreement on October 11, 2013.  According to a statement on Rosneft's website, "Rosneft President and Chairman of the Management Board Igor Sechin and Transneft President Nikolai Tokarev have signed a number of agreements in fulfillment of the strategic plans on mutually beneficial terms and based on principles of co-financing to increase oil supplies volumes to China and to the Rosneft's Tuapse refinery in the Krasnodar region.  The package of agreements on oil supplies increase to China envisages commitments by the Parties to finance and implement the activities aimed at the capacity expansion of the Skovorodino-Mohe oil pipeline, as well as to increase respectively the volumes of crude shipment in this direction.  The pipeline capacity is expected to reach 20 million tons of crude per year beginning on 1 January 2015 and 30 million tons per year beginning 1 January 2018.  It means that 15 million tons per year will be supplied to China from 2018 to 2037 in addition to existing volumes."

According to Vedomosti, Transneft will finance the expansion of the pipeline, while Rosneft will pay back the investment through a special long-term tariff to be determined by the Federal Tariff Service.  This is a clear victory for Igor Sechin, who had made the same proposal in July.  In addition, it appears that Rosneft will only have to pay for a small portion of the ESPO expansion.  The Russian Ministry of Energy estimates that the total cost for the development of ESPO will be $1.46 billion (Transneft puts the figure around $2.29 billion), but Rosneft is only financing the Skovorodino-Mohe section, whose cost is an estimated $300 million.

The world's largest oil company has trumped Transneft, a company that is led by Putin's former KGB boss.

Monday, October 21, 2013

Putin leaves Azerbaijan With Limited Improvements

Russian President Vladimir Putin traveled to Azerbaijan in August 2013 to enhance Russian interests in the near abroad.  He was accompanied by six key ministers, including the Russian Minister of Defense, Sergei Shoigu and Minister of Foreign Affairs Sergey Lavrov.

The visit was surrounded by rumors.  Leonid Gusev, senior research fellow of the Institute of International Studies, Moscow State Institute of International Relations, focused on the inclusion of the defense minister.  "Why take Shoigu with you?  Because recently there was information that Azerbaijan and Turkey will create a unified army, and Georgia may join as well.  I think that the leadership of Russia wants to find out what it is, because you understand that Turkey is a NATO country."  Gusev's sources were remarks from Azerbaijani parliamentarian Zakhid Orudzh and Georgian Defense Minister Irakli Alasania.

Gusev's imaginings were quickly dismissed by Azerbaijani parliamentarian and political scientist Rasim Musabekov.  "There are issues in the military area that should be discussed," he said.  "It is not just military cooperation.  It is very important to consider issues that may affect Azerbaijan, such as the situation on the Caspian Sea where military activity has been gaining momentum; there is also the Iranian context, Middle East events and, most importantly, the settlement of the Nagorno-Karabakh conflict.  It is difficult to imagine the settlement of this conflict without Russia."

The Armenians also reacted negatively, convinced that the meeting would result in closer ties between Russia and Azerbaijan.  "Naturally, any bilateral relationship between our enemy and partner states cannot fail to worry us," said the chairman of the Armenian parliamentary committee on foreign relations.  "Azerbaijan is ready to exploit its relationship with any state for painting a distorted picture of its actions in the region."  Similarly, Armenian opposition leaders sounded the alarm.  Armenian National Congress spokesman Vladimir Karapetian said, "These are very worrisome developments for Armenia.  We must be prepared for further developments, especially in the Nagorno-Karabakh peace process."  Gior Manoyan of the Dashnaks criticized the Russian president, stating the visit was "not an ally's behavior."

The Armenians need not have worried.  Azerbaijani president Ilham Aliyev tried to enlist Putin's cooperation on the issue.  "Azerbaijan would like to see Russia as a referee," he said.  "The occupation of Azerbaijani land has continued for more than two decades.  What could be demolished has been demolished.  Twenty percent of our territory is occupied; the U.N. resolutions remain on paper."  In reply, Putin responded with a bland statement that any solution would have to be political.  "I want to stress that Russia is actively facilitating the search for the fastest conflict resolution, which is only attainable by peaceful means," he said.

Relations between the two countries have been strained over the past year.  Against Russia's wishes, Baku cancelled its use of the Baku-Novorossysk pipeline because it was uneconomical, and Russia cancelled its lease of the Gabala radar station rather than pay the rent Azerbaijan was demanding.  Despite these setbacks, Russian Foreign Minister Lavrov insisted the relationship had been neither affected nor deteriorated. 

Emphasizing the good relations between the two countries, President Aliyev highlighted the growing defense cooperation between them.  He said that Azerbaijan was among the top buyers of Russian arms and other military equipment, and the defense relationship was already worth $4 billion dollars.  This defense cooperation was highlighted by a visit of the Russian warship the Dagestan.

Missing from the summit’s summary were any agreements for Azerbaijan to join in Russian initiatives such as the Commonwealth of Independent States Free Trade Area (CISFTA), Eurasian Economic community (EurAsEC), or the Collective Security Treaty Organization (CSTAO-Azerbaijan allowed its membership to lapse in 1999)

The two presidents discussed the legal status of the Caspian Sea, a long-running dispute with ramifications for the underwater deposits of oil and gas there.    Putin described the discussion to reporters:  “During the talks we paid a lot of attention to the issues of the Caspian region,” reported Radio Liberty.  “There really are a very great number of unresolved problems, including security, border delimitation, preservation of biological diversity of the Caspian Sea, etc.  We have a vested interest in seeing all of these issues solved.”  In the past, Russia has used these issues to demand a veto over Azerbaijani proposals to build a Trans Caspian Pipeline.  No progress appears to have been made on these issues.
There were some positive results from the meeting.  The Russkiy Mir Foundation reported that a document on cooperation between emergency ministries was signed, as well as intergovernmental agreements on cooperation in air search and rescue, on the construction of a road bridge over the river that marks the border between the two countries, and a humanitarian cooperation program.
More importantly, Rosneft chief Igor Sechin signed an agreement with State Oil Company of the Azerbaijan Republic (SOCAR) cheif Rovnag Abdullaev.  The two CEOs pledged to cooperate on unspecified joint projects.  Sechin told reporters these would include "reciprocal deliveries, swap operations and opportunities for the use of joint infrastructure."  Rosneft subsequently released a statement that, "The companies agreed to cooperate in marketing and trading operations for hydrocarbons and petroleum products as well as jointly operate certain infrastructure facilities, such as pipelines and terminals."
In the end, both Azerbaijan and Russia emphasized the agreements that were signed, and labeled the visit a success.  On balance, however, when one balances what was achieved with the issues that were left unresolved, one can only conclude that Putin left empty-handed.  The summit meeting, Putin's first visit to Baku in seven years, was a lost opportunity.

Friday, October 18, 2013

Possible New Plans for Baku Novorossiysk Pipeline

Following Azerbaijan's cancellation of the northern flow of Azeri light because of decreasing profits, the Russian firm Rosneft is considering sending Urals crude south through the Baku-Novorossiysk pipeline.  The oil would then either be processed in Azerbaijan or be added to the Baku-Tblisi-Ceyhan (BTC) flow for onward shipment to the world market.  The BTC pipeline currently has spare capacity, as flows from Azerbaijan's offshore flows gradually decline.

Urals crude is a mix of various grades of Russian oil that trades at  approximately $4 per barrel less than Azeri light.  It was the mixing of Urals crude with Azeri light in Novorossiysk that reduced the value of the northern flow of oil, causing the cancellation of the use of the pipeline.  After Azerbaijan announced its suspension of the northern deliveries, Russian Prime Minister Dmitry Medvedev revoked the intergovernmental agreement that had authorized the northern use of Baku-Novorossiysk.

 The discussions on the possible reversal of flow in the pipeline was originally announced by the head of the State Oil Company of the Azerbaijan Republic (SOCAR) Rovnag Abdullayev.  The talks should be completed by the end of the year.  The announcement may have been premature, however:  the pipeline is controlled by the Russian pipeline company, Transneft, who had not been advised of the developments.  According to Mikhail Barkov, Vice President of Transneft, no one had coordinated anything with the company.  Barkov expressed concern that the plans might adversely affect Lukoil, which uses a portion of the pipeline to pump crude from Makhachkala to Novorossiysk.

Rosneft President Igor Sechin, possibly the most powerful oligarch in Russia today, hinted that the Abdullayev report might be correct.  Speaking to reporters, Sechin noted the pipeline was originally constructed with a southern flow in mind.  "Use of all possibilities is simply the effective work in the market," he said.

Transneft President Nilolay Tokarev noted that Rosneft has a refinery on the island of Sardinia, which would probably be the destination of the oil to be shipped from Ceyhan.  Speaking on the Russian television channel Russia 24, he pointed out that the Transneft system through Russia would cost Rosneft $45 less than use of the BTC.  (He possibly was referring to a metric ton, but it is unclear from the text).

The future of Baku-Novorossiysk thus requires two sets of negotiations:  SOCAR/Rosneft, and Rosneft/Transneft.  The latter may be adversely affected by difficulties between the two Russian companies arising from investment requirements for the expansion of the Eastern Siberia/Pacific Ocean pipeline.  Flows to the Mediterranean and flows to the Pacific have become interrelated.

Tuesday, August 20, 2013

Possible Reopening of the Baku-Novorosiysk Pipeline

Following a visit by Vladimir Putin to Baku and the signing of an energy cooperation agreement between Rosneft and SOCAR (State Oil Company of the Azerbaijan Republic),  the two oil companies have begun discussions on possible joint projects.

Rovnag Abdullayev, head of SOCAR, told reporters that he is in discussion with Rosneft to reverse the flow of the Baku-Novorossiysk pipeline.  This pipeline was recently closed when Russia refused to keep it running below capacity, and Azerbaijan refused to increase the flow because SOCAR lost money on the product.  (Russia mixed Azeri light with Urals crude, decreasing the value of the Azeri light).

Abdullayev said the two sides would hold talks through the remainder of 2013, and it was possible that Urals crude could begin traveling south in 2014.  Once the oil reaches Baku, it could either be put into the underutilized Baku-Tiblisi-Ceyhan pipeline for onward shipment to Europe; or, it could be used as feedstock for new Azerbaijani refineries scheduled to be completed by 2018.  Abdullayev said that the use of the pipeline would be negotiated directly by Rosneft with the Russian pipeline company, Transneft.

The two sides are discussing shipping 5 million tons annually (100,000 barrels per day) through the pipeline.  If the entire amount were shipped onward to Europe, the BTC would still have capacity.  Originally built to carry 1.2 million barrels per day, it is currently shipping approximately 750,000 barrels per day as Azerbaijani oil production begins to dwindle.

Thursday, July 25, 2013

Baku-Moscow Growing Closer on Energy

While the Baku-Novorossiysk pipeline remains out of commission, talks have resumed between Baku and Moscow on the future of the pipeline.  Russia claims the line is underutilized and therefore unprofitable; Azerbaijan claims they lose money when Russia mixes Azeri crude with the heavier, Ural blend.

On 8 July 2013, however, Transneft spokesman Igor Demin said commercial negotiations with the State Oil Company of Azerbaijan (SOCAR) had resumed.  In making the announcement, he underscored the issues dividing the two sides: "The issue of the quality of transit oil has not been rasied in negotiations yet, but discussion of the matter of Azeri light oil quality is hardly possible because of the small volume of transportation.  At that, oil can be carried by shipments to maintain the quality, but it will greatly increase the cost of its transportation."

Despite the controversy, talks on other forms of energy cooperation are progressing.  SOCAR President Rovnag Abdullayev and Rosneft President Igor Sechin met in June 2013 in Moscow and July in Baku to discuss long-term projects.  SOCAR issued a press release stating, "The presentation opened the possibility of expanding cooperation between the two companies in Azerbaijan and Russia and in third countries.  In particular, possibilities exist on ongoing and pending projects by the two companies."

One area of cooperation is the Absheron off-shore gas field, jointly owned (40% each) by SOCAR and the French company TOTAL.  Sechin has held recent talks with both parties about obtaining a stake in the project.

The new-found cooperation in energy reflects improving ties in other fields, as well.  In 2012, Azerbaijan ordered a billion dollars worth of weaponry from Russia, including 100 T-90C tanks, and truck-mounted multiple rocket launchers.  Previously, Azerbaijan purchased a $2 billion air defense system from Russia.

Wednesday, July 24, 2013

South Stream Moving Toward 2015 Completion

While the Western news outlets have been full of information on the Shah Deniz 2 consortium choosing the Trans Anatolian Pipeline (TAP) to deliver Caspian gas to southern Europe, Russia has quietly continued work on the rival South Stream pipeline.  The pipeline, which will cross the Turkish economic zone in the Black Sea, is scheduled to make landfall in Varna, Bulgaria.  After that, plans call for the line to split.  One spur will provide product to Russia's traditional client states in Central Europe; the other will challenge TAP by transiting Greece and ending in Italy.  Italy's biggest energy company, Eni SpA stated it expects to receive the first gas from South Stream by the end of 2015.

The key to the project is Bulgaria:  both the pipeline's landfall and the location of the split.  Bulgaria's Minister of Transport, Daniel Papazov, confirmed the project was a top priority of the government, and that everything was ready to begin construction.  "This project will be implemented very soon," he said.  According to a Gazprom spokesman, the company is ready to begin construction in Bulgaria by the end of 2013, with the first phase completed by 2015. Such planning is ambitious, as the project is already behind schedule.  Gazprom CEO Miller said, "The project has been implemented with certain delays from schedule...We are however certain that the deadlines for the start of construction will be met."  Bulgarian Minister of Economy and Energy confirmed Miller's statement:  "We will speed up work on South Stream as it is important to diversity our natural gas delivery routes and have direct deliveries from Russia without passing via third countries.  We need to have final detailed site development plan, environmental impact assessment and front end engineering design by the end of this year and apply for construction permit."

According to  Deputy Head of Project Management Alexander Syromyatin, the need for South Stream continues.  "South Stream is an answer to the increased demand in natural gas and will enable diversification of the Russian gas supply routes to the EU, decrease transit risks, guarantee stable gas supplies to Central and southern Europe and help improve the environment," he said.

The project has the support of the overwhelming majority of Bulgarians.  According to a survey conducted by World Thinks, 68% of Bulgarians support the project.  "Very few feel opposed or strongly opposed," said company director Ben Shimshon.  "Only 5% felt negative about it and the remainder were either unsure or undecided on how they feel."  Shimshon said the public supported the project primarily for the jobs it would create, with good gas prices in second place.  "The public are much more clear," he said, "that there will be economic benefits:  61%  of people agree that Bulgaria will benefit economically from the pipeline."

One reason support may be so high is that the project will not cost the Bulgarian taxpayer any money.  Gazprom CEO Miller confirmed that Russia was prepared to fully finance the construction of the Bulgarian section.  Russia would lend Bulgaria 3.1 billion euros (approximately 5 billion dollars) to be repaid with transit and gas transportation fees.  Bulgarian Economics Minister Dragomir Stoynev confirmed "The South Stream will be financed on a project principle--there will be no money of the Bulgarian taxpayers to be spent."

Not everyone agrees that the pipeline should go through Bulgaria, however.  Julian Lee, a senior energy analyst at the Center for Global Energy Studies in London, claims that Bulgaria does not need South Stream.  "Bulgaria will still have access to gas from Azerbaijan via TAP and the Interconnector Greece-Bulgaria," he said.  Lee is joined by the citizens of Varna, the city where the pipeline will land.  The townspeople are concerned about noise and air pollution from both the construction and the operation of the pipeline and compressor station, to be built less than one mile from the city's southern suburbs.  The entry point is supposed to be the Pasha Dere Beach, which is a protected area under the EU's Natura 2000 program.  However, the project's environmental impact statement lists a number of advantages for Varna, including 2500 new jobs, profits of 30 million euros for the port, and a local business boom with profits for all.(The job creation figure is suspect, since South Stream Bulgaria's CEO Georgi Gegov claims the construction phase will create 2500 jobs in the entire country, not just in Varna.  Once it is built, South Stream Bulgaria will need an addition 3500 jobs to service and supply the pipeline.

Russia also plans a branch of the pipeline to go to Macedonia.  Russian Prime Minister Dmitry Medvedev ordered the Russian energy and foreign affairs ministries to begin discussions with Macedonia for a feasibility study.  Assuming this study shows the viability of the spur, the two countries would establish a 50/50 joint venture to complete the project, although Russia would retain the right to use the pipeline's full capacity, according to a Russian draft agreement that was signed by both countries on July 23.

Serbia is also excited (73% public approval rating) about the pipeline.  Serbian Prime Minister Ivica Dacic said, "South Stream is the most important international project that Serbia is currently involved in and will be key to the country's economic development, ensuring job creation, and energy security for the region...Our objective is to ensure energy sector supply and develop our partnership with Russia."  The Serbian Minister of Energy predicted the pipeline would create at least 1,000 new jobs.

What is clear is that, with Central Europe mired in a recession, the lure of jobs is stronger than the fear of dependence on a Russian monopoly for energy supplies.