Creating Civil Wars is Russian Foreign Policy

Featured in Stars and Stripes on March 24, 2016. To access the original article, click here.

Russia is increasing its presence in Syria, while its efforts to find a diplomatic solution to the impasse grind to a halt. T-90 main battle tanks with explosive armor, only previously deployed in Chechnya and Ukraine, have been spotted outside of Aleppo. Reuters reports seven T-90s are at the Russian airfield in Latakia. Russia took over the main international airport in Damascus last year, and began airlifting tons of supplies, soldiers and armaments into the country, according to Business Insider. President Vladimir Putin confirmed in December that Russia is providing support to the Free Syrian Army.

“We support it from the air, as well as the Syrian army, we assist them with weapons, ammunition and provide material support,” he said.

This is part of a long pattern of Russian expansion of its military reach since the fall of the Soviet Union.

In March 1992, elements of the Russian 14th Army sided with separatists to oppose the central government of Moldova’s efforts to exert sovereignty on the ethnically Russian enclave of Transnistria. Russian officers trained the Transnistrian defense forces, and transferred weaponry to them. The separatist regime engaged in ethnic cleansing, leading to 25,000 Moldovans becoming internally displaced persons (IDPs). Russia then engineered a cease-fire patrolled by predominantly Russian peacekeepers, and the 14th Army remains on Transnistrian soil.

From 1991 to 1993, when Azerbaijan faced a war of occupation by neighboring Armenia, Russia put its entire weight behind pro-Russian Armenia against pro-Western Azerbaijan. This support allowed Armenia to occupy the Nagorno-Karabakh region as well as seven surrounding regions of Azerbaijan. During the war, in February 1992, Russia’s 366th Motorized Rifle Regiment surrounded the Azerbaijani town of Khojaly, while Armenians massacred the residents. Moscow said the Russians who had been involved in this action were “volunteers.”

By 1993, the Russian 7th Army was already protecting Armenia’s borders. Russia then arranged to be a co-chair of the OSCE Minsk Group, which has mediated Armenian-Azerbaijani peace talks for decades without any results. Azerbaijan houses approximately 600,000-1,000,000 IDPs expelled from its occupied regions. For Russia, however, the continuing unrest provides an excuse for maintaining 3,000 troops at the 102nd Military Base, north of Yerevan, Armenia.

Russian forces supported Abkhazian separatists in their fight with the Georgian government in 1992. Human Rights Watch reported, “The conflict in Abkhazia was heightened by the involvement of Russia, mostly on the Abkhaz side, especially during the war’s initial stages. … Russian arms found their way into Abkhaz hands, Russian planes bombed civilian targets in Georgian-controlled territory, Russian military vessels, manned by supporters of the Abkhaz side, were made available to shell Georgian-held Sukhumi, and at least a handful of Russian-trained and Russian-paid fighters defended Abkhaz territory in Tkvarcheli.”

Human Rights Watch later interviewed a group of six armed Russians in Abkhazia who admitted they had been brought to the conflict area on Russian helicopters, were all former KGB and Spetznaz forces, had been fighting Georgian troops, had previously been fighting in Transnistria, and had begun in Moscow as a group of 30 “experienced, disciplined, Russian professionals.” They then denied being members of Russian government forces, but said they were “independent, patriotic forces.” (It was one of the earliest examples of the “little green men” made famous in the 2014 Russian seizure of Crimea.) The result: a cease-fire patrolled by Russian peacekeepers.

This led to devastating results in 2008, when the Russian army intervened in Abkhazia and Ossetia to “restore the peace.” Georgia cares for approximately 300,000 IDPs. Russia is one of three parties involved in the Geneva peace talks. Today, Russian troops remain in these separatist areas, on soil recognized by the international community as Georgian, without the permission of the Georgian government. Russia also recognizes these areas as independent states.

In 2014, Russian forces stationed at the Russian naval station in Crimea surged out of their base in uniforms without insignia, to forcibly evict Ukrainian forces from their own territory. Russian “volunteers” have fought on the side of separatists in eastern Ukraine, and these separatists are armed with Russian tanks, anti-aircraft missiles and personnel carriers. Crater analysis shows that mortar rounds and missiles fired in support of the separatists have their origins inside Russia itself.

Russia has now annexed Crimea, and called for diplomacy to solve the crisis it created in eastern Ukraine. It is a cosponsor of the Minsk talks. Today, Russian troops are stationed in Crimea, and Putin has threatened to introduce Russian troops overtly into eastern Ukraine to “protect” the citizenry.

The pattern is clear: Russian military support for a side in a civil war contributes to unrest, and then Russian diplomatic efforts keep the conflict simmering. The continuing problems justify maintaining a Russian troop presence.

In all these instances, Russian military interventions and/or peace efforts have led to a continued expansion of Russian power and influence. America and its allies in Syria need to learn from history, and not just repeat it.

James J. Coyle, director of Chapman University’s Center for Global Education, is former director of Middle East studies at the U.S. Army War College.

Putin Wins in the Ukraine

James J. Coyle: Putin wins in Ukraine

By JAMES J. COYLE / For the Register

Published: Dec. 27, 2013 Updated: 2:42 p.m.

GETTY IMAGES

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.

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.

No Russian Gas for China Yet

In March 2013, Gazprom CEOAlexei Miller stated that an agreement with China on the pipeline gas deal that they have been negotiating since 2004 would be signed by June 2013.  "The parties plan to sign legally binding principal terms and conditions of the contract in June this year and sign the long-term contract by the end of the year," he said.  With that deadline now on the ash heap of history, Miller is now hopeful for a September contract.  "I think it can be said in September we could achieve the signing of the basic terms of the contract."

Gazprom's Export CEO Alexander Medvedev was not as optimistic.  He said Miller's statement was a hope, not a reality.  He said that Miller was engaged in wishful thinking, and that thinking made it so.  The issue has not changed over the decade:  Gazprom wants to charge China using a price linked to the European market; China has never accepted this, arguing they are a developing country that cannot afford such prices. China has also claimed that the transit distance between Russian fields and China is less than between the wells and Europe; accordingly, prices should be less.

Despite these issues, Russian President Vladimir Putin remains optimistic about the Asian market.  "We  are thinking about entering the promising market in the Asia-Pacific region.  We should find our niche here; we have every chance of doing that," he said.  "The Asia-Pacific region is developing rapidly.  Its consumption is growing rapidly, and Russia can play a prominent role."  Putin's remarks may be fulfilled with the newly signed Rosneft contract to deliver petroleum to China, but Gazprom's $68 billion pipeline project remains mired in the inability of the negotiators to move toward an accommodation.

Russia and China Sign Major Petroleum Deal

On 20 June 2013, Russia and China signed a deal worth $270 billion dollars.  Rosneft agreed to double its sale of petroleum to China by 300,000 bpd over the next 25 years (5 years prolongable,)  from 15 million tons to 30 million tons per year.  The agreement was signed by Rosneft chief executive Igor Sechin and China National Petroleum Corporation (CNPC) chief Zhou Jiping in the presence of Russian president Vladimir Putin.

An important part of the deal is a $60-$70 billion prepayment for the oil, alluded to by Putin at the announcement of the contract.  JP Morgan analysts said, "If confirmed, this would be a transformational event for the company's balance sheet:  Rosneft could even potentially be able to show a net cash position, though working capital would be negative.  The prepayment could minimize financing risks for the leveraged state-controlled oil company."

The increased petroleum flows began even before the contract signing.  Reuters reported on June 18 that Russia was increasing its oil supplies to China by 13 percent in July-September over the previous three month period.  With this increase, Asia as a whole was importing 17% of Russian oil exports.  According to Valery Nesterov, analyst from Sberbank CIB, "Russia has been losing its interest in Europe where oil consumption is stagnant.  It's looking increasingly to the East."

Then came the June 20 deal, in which China acquired the rights to buy from the world's largest gas station:  Russia.  According to Liao Na, Vice President of the energy consulting company, ICIS C1 Energy, the timing was right.  "The seller and the buyer both have strong willingness to reach the deal provided the price was comfortable for each of them.  It is good timing, considering current international oil prices."

It was originally announced that fuel for the deal was to come from East Siberia fields.   In the annual meeting with Rosneft shareholders, Sechin named two fields as the main source of the oil, Vankor and Verkhnechonsk, that are nearing peak output.

In fact, the oil is not coming from East Siberia, but is being diverted from fields that service the European market.  Igor Katsal, Transneft deputy vice president, told reporters, "We supplied those 800,000 mt to the west and now will redirect them to the east.  They won't be replaced in the western direction."  Transneft confirmed that at least half of the redirected crude will be produced at Samotlor in West Siberia.  Deputy Energy Minister Kirill Molodtsov confirmed Russia planned to increase oil exports from the Pacific.  "The balance between West and East will change," he told reporters.

The reason for the diversion is that Russia has promised large quantities to Asia.  In addition to the current flows of 750,000 bpd, Russia promises to send another 9.1 million mt per year to China after a CNPC-Rosneft joint refinery is completed in Tianjin.  These changes are taking place at a time that Russian domestic consumption of crude is also rising.

How the oil will be delivered physically is still undecided.  Transneft spokesman Igor Demin said that there has been no change in its contract with Rosneft.  As a result, although Transneft has adjusted its transit schedule to accommodate the larger oil flows through the East Siberia-Pacific Ocean (ESPO) pipeline, Demin said that shipments might soon be suspended because it will have fulfilled its obligations under existing contracts.

The eastern "black gold" rush is encouraging others to enter into the field.  Lukoil CEO Vagit Alekperov confirmed that they are increasing exploration in East Siberia.  Alexei Kokin, an oil and gas analyst at UralSib Financial Corporation, wrote, "Other Russian companies' experience probably convinced Lukoil that East Siberian projects can be attractive.  As a late entrant, Lukoil will be able to learn from the pioneers' mistakes and be more efficient."

Ukraine: Why buy when you can rent?

Ukraine and Russia may be on the verge of a compromise that grants Gazprom control over the Ukrainian pipeline system, while allowing President Viktor Yanukovych to keep his promise not to sell the asset to the Russians.  Ukraine may grant Gazprom use of the pipelines on a long-term lease.

In a live television program "Dialogue with the Nation," that was aired in February 2013, President Yanukovych floated the idea of renting out the pipeline system.  He continued to complain about the high price the country was paying Gazprom for natural gas under the "take or pay" contract negotiated by former Premier Yulia Tymoshenko, but rejected Gazprom's condition for lowering the price:  sale of the pipeline system.  Yanukovych was stuck between a rock and a hard place, however, in that he also rejected an International Monetary Fund (IMF) demand that Ukraine raise domestic gas prices before qualifying for a $15 billion loan.

Yanukovych traveled to Russia on March 4, and met Russian President Vladimir Putin for several hours.  At the conclusion, the news agency Unian reported the two sides were close to a deal in which the price of gas would be lowered from $430 per thousand cubic meters (tcm) to $260 per tcm, in return for which Gazprom and Naftogaz Ukrayiny would form a joint venture that would rent the pipeline system.

No formal announcement was made, however, because the two sides remain divided on including the European Union in the joint venture.  Ukraine supports a European presence, while the Russians would prefer a bilateral arrangement.  In May, Ukrainian Energy Minister Eduard Stavytsky and EU Energy Commissioner Guenther Oettinger discussed a potential trilateral arrangement.  ""Ukraine is really trying to consider its geopolitical situation and to establish a gas hub, so we will be able to do spot purchases in central Europe," Stavytsky told reporters.  He estimated it would take $550 million to modernize the Ukrainian infrastructure.  Oettinger said he believed EU firms were willing to buy the ageing system.

The two sides have been skirmishing over the pipeline for sometime.  Ukraine has unilaterally reduced the importation of Russian gas, and in November 2012 began to import gas from Hungary to take its place.  Russia retaliated by presenting Ukraine with a bill for $7 billion for gas Ukraine was obligated to purchase.  Russia has also threatened to build a second Yamal pipeline to divert gas deliveries from the Ukrainian route.

Alexei Miller, head of Gazprom, said he was not worried about Ukrainian attempts to purchase gas from Europe on the spot market, because the spot price was rising.  "The price for Russian gas, which is being supplied to Ukraine, is significantly lower than the spot price, which has settled in continental Europe," he told reporters.  "Ukraine will not be able to bear the spot prices."

In late April 2013, the Ukrainian government introduced a bill in parliament that would allow the sale or lease of Naftogaz.  Kommersant reported Ukrainian authorities were prepared to allow Gazprom to control the main gas pipeline, while the Ukrainian East European fuel and energy company (VETEK) would run local gas distribution.  Valery Yazev, Russian State Duma first deputy for natural resources, predicted a compromise might be found.  Faced with a new arrangement with lower fuel prices, or losing the Ukrainian contract entirely, Yazev predicted Russia would reduce the gas price to $260-$280 per tcm.

In anticipation of a deal being struck, accountants performed an appraisal of the gas network, and valued it at between $26 and $29 billion.  Ukraine is ready to go the the altar, but is still waiting for a bridegroom.

Rocky Road to Yamal 2

Polish Prime Minister Donald Tusk has asserted his control over Polish infrastructure projects, by firing state officials who signed a memorandum with Gazprom without his knowledge.  The Yamal - Europe 2 gas pipeline has been on the planning books for twenty years, and and had been almost forgotten.  In the midst of Russia's latest quarrel with Ukraine over transit rights, however, Russian President Vladmir Putin revived the dormant proposal on April 3.  Putin requested Gazprom CEO Alexei Miller to take another look at the proposal, despite no additional gas supplies available to fill the pipeline.

Miller quoted a market analysis that Gazprom could transport 15 billion cubic meters of gas to Hungary and Slovakia.  He proposed construction could begin in 2018-19 after the completion of the South Stream project.  Polish Treasury Minister Mikolaj Budzanowski dismissed the possibility out of hand.  "I approach media speculation regarding a second branch of the Yamal gas pipeline with great caution, because the consent for such a project should depend on the price of the raw materials and its suppliers," he said.  "The European Union does not need more supplies of natural gas from Russia," he told Polish radio.  A separate report quotes Budzanowski in even stronger terms.  "No one, except for the Polish company and the Polish government is entitled to make decisions about transit via the Polish territory.  That's why we would like to tactfully remind that we are not going to build a new gas transportation network to Poland or the European Union on instructions from anyone, especially from Gazprom."

Polish Minister of the Economy Janusz Piechocinski recognized that the new pipeline's sole purpose was to divert gas from the pipeline that transits Ukraine, putting more pressure on that state to accept Russian demands to pay more for gas.  He said Poland should be "very careful" about getting involved in the spat over the gas price.  These cautions were echoed by Polish Prime Minister Donald Tusk.  "Poland won't participate in these political contests.  For us, gas isn't a tool to conduct politics and we very much want, in agreement with European Union laws, to keep gas issues free of politics."

With the major Polish officials all opposed to the new pipeline, it came as a shock to all when Gazprom announced that it had signed a memorandum of understanding with Miroslaw Dobrut, CEO of Polish pipeline operator Europol Gaz.  "The document envisages the implementation of the Yamal-Europe 2 project through  Poland," the Russian company stated in a press release.  It envisioned the completion of a feasibility study in six months.

The Prime Minister was furious that such an agreement could be signed without his approval.  Grazyna Piotrowska-Oliwa, head of PGNIG SA (part owner of Europol Gaz) immediately tried to backtrack.  She said Gazprom was exaggerating the significance of the memorandum, which was merely an agreement to evaluate the project.  "Nobody knows what the result of the analysis will be, whether it's going to be profitable at all," she said in a television interview.  "The memorandum does not include a decision to build the pipeline and is not a legally binding agreement or pledge to conclude any agreements or contracts."

The dominoes quickly fell.  On Friday, April 19, Prime Minister Tusk fired Economics Minister Budzanowski for failing to monitor the activities of the state-owned PGNIG.  "In my view, the oversight function was not fully implemented," he said.  Budzanowski was replaced by Wlodzimierz Karpinski, whom the Prime Minister warned about needed personnel changes in the gas  company. Ten days later, PGNIG's board let go CEO Piotrowska-Oliwa and her deputy, Radowslaw Dudzinski.

In the face of such insubordination, the Polish government was not satisfied with the personnel changes.  In June, the Treasury introduced a proposal to change the statutes under which PGNIG operates.  Under the new plan, PGNIG's management board would be required to report on any agreements with foreign entities.

The Yamal - Europe 1 pipeline was originally conceived in 1994, and began operating in 1999.  It is the main pipeline for Gazprom's Eastern European clients (Western Europe gets its gas from the Ukrainian pipeline and, more recently, Nord Stream.)  It stretches over 2,000 kilometers over Belarus and Poland.  In Poland, the pipeline is owned by Europol Gaz, which in turn is owned jointly by Gazprom and by the Polish state-controlled gas company PGNIG SA (48% each.)   Yamal - Europe 2 was proposed in 2008, but in 20009 the Russian then-president Dmitry Medvedev postponed the project, citing inadequacy of supply to meet all the Gazprom agreements with the EU.  If completed, Yamal 2 will have a 15 bcm capacity.

While Prime Minister Tusk may not have been happy with the way Yamal 2 was resurrected, there are signs that planning for the project is continuing.  Russian Ambassador to Belarus Alexander Surikov has confirmed that the feasibility study proposed in the memorandum of understanding is continuing, and will be completed by November 2013.  "Poland has confirmed its willingness to have an additional 15 billion cubic meters of gas," he said. "All these issues will be resolved...in November."

Russia Buys Bulgarian Support for South Stream

Since coming to power in 2009, Bulgarian Prime Minister Boyku Borrisov has halted every Russian energy project in his country.  Before he was even sworn in, he asked former energy minister Petar Dimitrov to halt negotiation on all energy projects.  Since then, he cancelled his country's involvement in the Burgos Alexandroupolis pipeline, and the partially completed Belene nuclear power plant (one of the largest Russian energy projects in Europe).

As Andrew McDowall reports in his Financial Times blog, however, this has not landed Bulgaria in hot water.  One day after announcing suspension of the power plant, Bulgarian Minister of economy and energy Delyan Dobrev held meetings with Gazprom chief Alexey Miller.  At the end of the meeting, the leaders announced that Bulgaria would receive a price reduction for natural gas purchases of 11.1 percent for nine months.  This is a significant saving, since Bulgaria imports 100% of its natural gas from Russia.

Prime Minister Boyko linked the price reduction to the construction of South Stream.  He said that the only condition for the price discount was "honest and open relations" between the two sides, but that Bulgaria was ready to provide "full cooperation" for the South Stream project.  "You bring in pipes, you bury them underground, you take taxes, for many years, this is budget revenue for decades.  In short, full cooperation on the project," he told Darik national radio. 

By securing Bulgaria's cooperation, South Stream can speed up its construction plans, as Russian President Vladimir Putin has ordered.

Russian Energy Policies Assessed

The Heritage Foundation's senior researcher for Russia, Ariel Cohen, recently outlined the United States' assessment of Russia's energy policy. Cohen was testifying before the US House Committee on Foreign Affairs, according to the Asia Times. Cohen said the United States believes:

1. The Kremlin views energy as a tool to pursue an assertive foreign policy;



2. Russia's is attempting to exclude the US from Central Asian and Caspian energy markets;



3. Russia is using energy to "re-engage" with India, Southeast Asia, the Middle East, Africa and Latin America;



4. Russia is forcing neighboring countries to use the Russian pipeline system for energy exports;



5. Western countries are blocked from entering into Russia's energy sector by an absence of the "rule of law;"



6. Russia is not interested in developing energy ties with the United States.

Cohen said the United States has identified a number of geopolitical concerns arising from these policies:

1. European demand for energy is projected to grow, leading to a greater dependence on Russia. This has serious implications for Russo-European relations;



2. The German decision to abandon nuclear energy and increase energy imports from Russia could eventually weaken European unity and the underpinnings of NATO;



3. Russia wants to be a part of the European energy distribution system, and the energy retail market. If successful, it raises the question of Europe being able to side with the US on key issues;



4. Russia is supporting the Shanghai Cooperation Organization (SCO) to keep the US out of the Central Asian energy preserve, and has begun discussions with Pakistan about the mechanics of building the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline Moscow is outflanking the United States in the subcontinent.

A Russian diplomat confided similar conclusions to Sentaku Magazine as reported by the Japan Times, noting that the Kremlin's strategy is to decouple Western Europe from the United States, based on its abundant natural resources. Moscow wants to create discord among NATO members and block any expansion of NATO by promoting bilateral ties with individual NATO countries.

Russia's policies are fueled by energy exports. But can Russia keep up the pace? This question needs to be divided into two subfields: oil and gas. Prime Minister Vladimir Putin argues that Russia can continue its production of oil at 500 million tons annually for decades, but it will require investments of 280 billion dollars over the next ten years, Oil and Gas Eurasia quoted the Xinhua news agency.

The Russian Ministry of Natural Resources concurred with Putin's assessment, but was more pessimistic about how long the production can last, says AFP. Russia is tapping into its existing light crude reserves in western Siberia at alarming rates while failing to replace them with new finds in regions that sit further away from Russia's industrial heartland. According to the study, oil quality was deteriorating steadily, and Russia can only sustain its current production rate for another 13-15 years. Most of the oil that Russia possesses (70%) is heavy crude that is hard to recover and cannot be used on the world market without additional processing.

Russian natural gas production has grown slowly, only 0.5% from 2001 to 2009, according to the president of Coburn International Energy Consultants, Leonard Coburn. In 2009, production fell almost 20% because of Russia's closing of the Ukrainian pipeline system for two weeks in January 2009. Gazprom, the producer of 85% of Russian gas, is delaying investments in new production, trying to husband domestic resources while purchasing gas from other countries. This strategy is being challenged, however, by Central Asian countries selling their gas to China instead of to Russia. Coburn notes that when Turkmenistan opened its gas pipeline to China in December 2009, Russian President Dmitry Medvedev immediately launched a tour of Central Asian capitals to repair relations. The establishment of a new customer for Central Asian gas was a wakeup call for the Russians, that Central Asia has the ability to maintain some independence.

Russia is also looking to China as an energy market. The International Energy Agency (IEA) told the St. Petersburg International Economic Forum that European demand for gas was stagnating, according to a Financial Times blogger. The IEA's chief gas analyst told the Forum that China would be the main driver of increasing gas demand, accounting for one third of global growth. The IEA predicted that the global growth in gas would be 2.4%, so that would mean that the Chinese would account for .8% of global growth in gas consumption.

What conclusion can we reach? Russia has a 15 year window to throw its energy weight around. After that, it gets difficult. It appears that Russia has plenty of natural gas, but the weak economic recovery and the shale revolution is slowing Europe's demand for the product. Russia needs the sale of gas to maintain its own economic recovery, and that means they will have to turn to China as a new market. American concerns are valid for the next decade but, in the long run, Russia's energy superpower status will begin to fade.

BP-Rosneft Deal a Victim of Russian Presidential Politics

Russian presidential politics may have been directly responsible for the collapse of the joint venture between British Petroleum and Rosneft. The deal, which was launched in January 2011 with great fanfare and the blessing of Russian Prime Minister Vladimir Putin, was allowed to die quietly at midnight on May 16. Members of the Alfa, Access and Renova Group (AAR) who are supporters of President Demitri Medvedev, placed insurmountable obstacles before the deal. These oligarchs, who included billionaires Viktor Vekselberg, German Khan, Len Blavatnik and Mikhail Fridman, stood to gain $32 billion if the deal were completed--and yet they refused to grant their blessing.

What happened? In January, BP CEO Robert Dudley inked a deal with his Russian counterpart, Rosneft CEO and Deputy Prime Minister Igor Sechin. Sechin is a Putin protoge. The deal proposed a stock swap: 5% of BP would go to Rosneft; and, in return, 9.5% of Rosneft would go to BP. The deal, valued between $16 billion and $18 billion, was designed to give the Russians access to BP's artic driling technology. In return, BP would have a production sharing agreement for access to the oil. At the conclusion of the ceremony, Putin told a press conference that the BP-Rosneft partnership "may become large-scale and have a serious impact on the global oil and gas industry." Later, when things turned nasty, Putin would distance himself from the project stating the government would not intervene in the controversy--but the prime minister's fingerprints were all over the deal.

It didn't work out. BP was already in Russia, in a 50-50 partnership, called TNK-BP, with the AAR oligarchs. As the former president of this partnership, Dudley should have been aware of the details governing the cooperation between the shareholders, including the granting of exclusivity for BP operations in Russia to TNK-BP. When the BP-Rosneft deal was announced, the AAR consortium promptly filed in a London court to stop the merger. According to sources close to TNK-BP, the oligarchs sought and received Prime Minister Medvedev's support for the legal defense of their interests. One of the oligarchs (Viktor Vekselberg) was involved in an innovatin hub near Moscow that was the result of a Medvedev policy initiative. Medvedev further signaled his displeasure by ordering Sechin (and other government officials) to give up corporate posts to stay in the administration. The battle over the merger became a battle between forces loyal to the Prime Minister, and forces loyal to the President.

The issue ended in an arbitration court that issued a consent order permitting the share swap to proceed, but only with the approval of TNK-BP. Without that approval, the rights to drill in the Artic would devolve onto TNK-BP (and not the parent BP corporation), with the approval of Rosneft. Rosneft officials, however, did not want to work with the AAR partners. Efforts began to purchase AAR's 50% share of the partnership. Bidding rose from $27 billion to $32 billion, but to no avail. The Financial Times quoted one observer as saying, "The feeling is they (AAR) did not want to do a deal at all. They were forwarding conditions that they knew ahead of time that BP and Rosneft could not accept."

The blame game has already begun. According to Bloomberg, President Putin blamed BP's Dudley, stating the CEO had left him "completely unaware" of a potential dispute with AAR. Medvedev, by contrast, blamed Putin protoge Sechin and the entire Putin-led government. "Those who prepared the deal should have paid more attention to the nuances of the shareholder agreement. They should have had better due diligence inside the government," he said.

How could BP have ignored its responsibilities under the TNK-BP partnership agreement? According to the managing partner of Goltsblat BLP, Andrey Goltsblat, the problem lay in the informal nature of the Russian legal and business systems. As published in Business RT, Goltsblat said, "I do believe that lawyers knew about that clause and lawyers informed BP, but unfortunately sometimes in Russia more people rely on relations with the government or with the other level of officials, rather than on the law...BP probably thought that the clause is not that important, yet, as they are dealing with the government they are told that the deal is blessed by the Prime Minister and that there shouldn't be problems to overcome that clause."

The issue now moves to the courts. The Moscow Times provided an analysis of the situation from Russian attorney Vsevolod Miller (Yukov, Khrenov & Partners). According to Miller, there would be a guarantee warranty clause in the Rosneft-BP deal, and BP would be in breach because of its probable failure to disclose the TNK-BP shareholder agreement. "Rosneft will sue BP for breach of warranty--they will sue for direct damages, which are likely to run into the millions," he said. Miller added that there were no grounds for a case against AAR (presumably because AAR was only defending its legal rights). Reuters reports that according to a source close to TNK-BP, the company is considering suing for damages of up to $10 billion.

It is still a couple of years until the Presidential contests but, if one considers this skirmish as the first Presidential primary, Medvedev has emerged in the lead.

Europe Preaches Competition to the Russians

Russian Prime Minister Vladimir Putin came to Brussels on 24 February 2011, and accused the European Union of trying to confiscate Gazprom's private property. He was accompanied by 13 members of the Russian cabinet of ministers, underlining the importance of his presentation. Putin's ire was reserved for the EU's Third Energy Package, which went into effect on March 4. The plan is designed to break-up energy monopolies and encourage competition in the European markets. Putin's response was emphatic: "We consider that the full and mechanical implementation of this package could lead to a rise in energy prices on the European energy market...The third energy package, it is quite clear, will harm the activities of our energy companies. We are talking in practice about the confiscation of property," reported Reuters. Putin separately described the rules as robbery. "Our companies, together with German partners, legally acquired distribution assets. Now they are being thrown out. What is this then? What is this robbery?" he said according to Iranian PressTV.

Under the new rules, Russia might have to sell off some of its pipeline network, to meet EU demands for the "unbundling" of energy asset ownership, including the divestment of Gazprom stock ownership in the Lithuanian gas company Lietuvos Dujos. There are a number of ways of interpreting "unbundling," but under the most severe interpretation suppliers would have to sell their gas transport businesses. Other possibilities include the suppliers maintaining ownership, but an independent operator taking over the transportation arm, or an independent board be appointed to make decisions (such as pricing) on gas transport questions.

In response to the Putin barrage, European Commission President Jose Manuel Barroso did not retreat. "We believe our third internal market energy package is non-discriminatory...What we are asking of foreign companies is to accept the same rules that we are implementing for our own companies," reported Reuters. He said that the rules would not be changed: "Thanks to Russian gas, many of our institutes work and our houses are warm. But we pay for it. We pay for it well...Let me say very frankly, we believe our Third Energy Package is fully compatible with WTO rules, is non-discriminatory and is fully compatible with our bilateral agreements...I'm sure we will find an acceptable solution, but...we have adopted the Third Energy Package. For us and for the member states, it is now binding legislation," Hurriyet quoted him as saying. Interestingly, the Russian press reported Barroso was conciliatory. According to RIA Novosti, Barroso was unusually sympathetic to Putin's presentation.

Putin's visit had been heralded in advance as confrontational. Russian Ambassador to the EU, Vladimir Chzhov, warned that the talks would be detailed but "possibly unpleasant." In addition, the president of the Russian Gas Society paved the way for Putin's visit with an in-depth analysis of the Third Energy Package. Valery Yazev, who is also deputy chairman of the Russian State Duma, told the Russian media that the new law would cause the Russian state-controlled pipeline monopoly Gazprom "direct economic prejudice...the Russian company would be deprived of the right to use a gas transport network it had been establishing in Europe for a long period of time for the purpose of achieving the same energy security the "package" talks about," acccording to the website euractiv.com. Yazev continued his verbal assault on the energy package in a video conference with the Brussels press corps in which he said the new rules would disrupt Russian investments in prospecting and building pipelines. He claimed that plans to build a second, parallel pipeline to Nordstream were being suspended, and implied the suspension was the direct result of the Third Energy package. He also implied that Russia would not be able to meet future European energy needs under the new regulations. Gazprom would have to reasses its long-term supply contracts with European customers, meaning Europe would only be able to purchase gas on the spot market. Deprived of a guaranteed income, Gazprom would pull back on investing in new oil fields so--when European energy demand returns--Gazprom would not have the gas to meet the demand. Yazev concluded his analysis with the threat of an OPEC-like consortium of gas producers that would peg the price at levels higher than Europeans would otherwise have paid. The Asia Times reports that Yazev reiterated these points in a letter to Eurogas, in which he warned that Gazprom would reorient exports toward more attractive markets if it had to relinquish control of pipelines in EU member countries.

British attorney Alan Riley analyzed the situation in the Wall Street Journal. He opined that no one in the European Union should be considering legal exemptions for Russian companies operating on EU territory, because the equal application of the rule of law is a fundamental European value. Further, Mr. Riley implies that the Russians may cave on their position, stating that Gazprom needs the EU more than viceaversa. Sale of gas to the EU represents one-third of Gazprom's production and two-third's of its revenues.

Russian Energy Minister Sergei Shmatko has proposed a compromise. "We proposed to the EU to differentiate between gas pipeline systems for the EU local market and transboundary trunks from outside...We sent our proposals and are waiting for the reply," he said according to Reuters. His call may not be falling on deaf ears, despite Barroso's strong defense. Russia already has exemptions to the law for two offshore stretches of the Nordstream pipeline, according to Radio Free Europe. Further, RFE says that due to the complexity of the new legislation, EU Energy Commission Gunther Oettinger has postponed legal action against member states who do not implement the new rules. His spokeswoman, Marlene Holzner said , "There is some discretion of maneuver within a law. It is possible under certain conditions to make exemptions, and this can be explored."

Last week, at the 27th Annual EU-Russia summit, European Council President Herman van Rumpoy confirmed that bilateral negotiations were continuing. The president struck a middle road between hard-line and conciliatory. According to CNC World, he said the EU would follow the rules, but was willing to hold "pragmatic talks" with Russia over its concerns.

Russia clearly wants exceptions made to the European law, which would allow them to maintain Gazprom's partial ownership of a number of European pipelines. This is the sort of arrangement that the Third Energy Package was specifically created to prevent. It would appear that Europe will make an accommodation, because of its growing need for Russian energy supplies.

Russia and Turkey Holding South Stream Hostage

Turkey and Russia are engaged in a game of chicken over the South Stream Pipeline. Both sides are threatening the construction of the Russian-inspired natural gas pipeline, in an effort to see who blinks first.

Turkey has signed a number of natural gas agreements over the years, and it is committed to purchase more gas than it can use. Unfortunately for the Republic, Turkey's contract with Russia is a "take or pay" contract which means it has to pay for the gas whether it is shipped or not. In addition, the long-term contract price for the gas is much higher than current spot prices. At the same time, Gazprom has been waiting for Turkey to issue the permit allowing construction of South Stream in Turkish waters of the Black Sea. "So far, we don't understand the reasons why we didn't receive the permit," said Deputy Prime Minister Igor Sechin, as reported in the Moscow Times.

According to the online newspaper Gazeta.ru, the reason is obvious: Ankara is looking to use the pipeline issue to lower the gas prices. The strategy may work, as the Moscow Times quotes President Demitri Medvedev that discounts were possible in exchange for unspecified Turkish concessions.

Russia also has hard-ball tactics at its disposal; namely, a proposal to replace South Stream with LNG shipments. According to the Sofia News Agency, Russian Prime Minister Vladimir Putin asked Russian Energy Minister Sergey Shmatko to examine building a liquified natural gas terminal in place of constructing a Black Sea pipeline. Under this scheme, Bulgaria would also have to build an LNG terminal to receive the gas shipments. According to ITAR-TASS, Shmatko said that according to preliminary assessments the most attractive option was the delivery of natural gas from the Yamal Peninsula, because much of the transportation costs would be within Russia.

Shmatko claimed that the European Commission has proposed the LNG terminal as one of many alternatives to the South Stream project. According to the Moscow Times, however, EC spokeswoman Marlene Holzner denied that the Europeans had anything to do with the idea. "This was not discussed during the meeting between the Russian government and the European Commission in Brussels at the end of February," she said.

It would appear that the threatened LNG plan is a ploy designed to pressure the Turks into granting the construction permits without reducing the price of gas deliveries. The key to this assessment is Shmatko's assertion the best option was gas from the Yamal Peninsula. Delivery costs from this area, which is snowed in for much of the year, would be excessive. AFP quotes RusEnergy expert Mikhail Krutikhin: "Has he seen the globe?...Producing on Yamal for the South Stream is nonsense...Once transported it would have the price of diamonds." Krutikhin concurred that it is a bluff: "an attempt to scare the Turks."

There is other evidence that the talk of an LNG option is bogus. According to Steve Levine in his Foreign Policy blog, South Stream pipeline director Marcel Kramer has received no new instructions, and is proceeding with his existing orders to make the $21 billion pipeline work. Further, in their March 17 summit meeting, Medvedev and Turkish Prime Minister Recep Tayyip Erdogan did not discuss the project. (Bloomberg reported that Russian Deputy Prime Minister Igor Sechin tried to dismiss the lack of discussion by claiming it was unnecessary. "Why discuss something we can do on our own?...This was resolved a hundred years ago," he said.) Finally, Shmatko himself denied Russia having any plans to abandon the pipeline. According to the RIA/Novosti, Shmatko said, "We are not wording the issue in such a fundamental way...We'll have several ready alternative routes of supplying gas directly to European countries."

Whether South Stream is ever built is a question yet to be resolved, but it is clear the LNG proposal--for the moment--is a red herring.