Sunday, July 5, 2009

Russian Natural Gas Python Seeks to Squeeze the Economic Life Out of Europe Gazprom Seeks Global Deals to Build Gas Grid Encircling Europe

By Stephen Bierman



July 3, 2009

OAO Gazprom, the Russian company that ships a quarter of Europe’s gas, is seeking supply deals in the Caspian, Africa and around the world to anchor its lead in areas where European buyers may turn to rival producers.

We would like to make the company global in terms of upstream presence,” Boris Ivanov, head of Gazprom EP International BV, said at the Gas Exporting Countries Forum in Doha, Qatar. “We are trying to position Gazprom in the areas where we think we need to be strategically present, like North Africa, West Africa, Latin America and Asia.”

Gazprom, the world’s largest gas exporter, is facing moves from European Union countries to diversify supplies as nations seek to cut reliance on Russia. By forging partnerships and snapping up production assets in gas-pumping nations, the company can add alternative sources of fuel while stamping out competition for customers in Europe, its biggest export market.

“The criteria are very simple: the availability of hydrocarbon reserves, proximity to the markets where we can bring it and, since our projects are time-consuming and capital- intensive, a friendly relationship with the host governments,” Ivanov said June 30.

Gazprom held talks in Algeria last month on developing the trans-Saharan pipeline from Nigeria, where it has agreed to bid for gas fields through a new joint venture and build a link to the north of the country. In the Caspian region, Gazprom signed a “milestone” deal to buy gas from Azerbaijan, threatening European plans to add the country as a source of supply.

Global Gazprom Grid

“Russia/Gazprom is now involved in all of the major gas- producing countries that can supply Europe,” Chris Weafer, chief strategist at Uralsib, said by e-mail. “In political terms the Iron Curtain is gone. In energy terms, it is being replaced with a Gazprom gas grid that may stretch unbroken from Nigeria via North Africa, the Gulf and Central Asia all the way to the Arctic Circle.”

[See Reticulated Python Fact File, accessible at: "The name "Python" can be traced back to Greek mythology. 'Python' often depicted as a "serpent" was the earth-dragon of Delphi which was consequently slain by Appollo. "Reticulatus" refers to the complex "netlike" geometric patterns that extended dorsally along the snake's body...These snakes are powerful constrictors and possess no venom... "; See also Terry Judd, Aggressive Python Killed by Trooper, Muskegon Chronicle (Aug. 19, 2008) accessible at: ].

Russia, holder of the world’s largest gas reserves and a recent entrant to the market for liquefied natural gas, met fellow members of the Gas Exporting Countries Forum this week in Doha to discuss a joint budget and appoint senior officials. Consuming countries have voiced concern that the forum’s members will club together to decide investment and output, modeling the group on the Organization of Petroleum Exporting Countries.

A “gas OPEC” would be the “final part of that jigsaw,” Weafer said, referring to state-owned Gazprom’s plan to have a role in all the biggest gas-producing nations. Russia has said the aim of the gas exporters group isn’t to fix prices.

Reciprocal Deals

Russia has been able to use access to its own ample hydrocarbon resources as a negotiating tool in talks with governments and energy producers overseas. Deputy Prime Minister Igor Sechin said June 19 that foreign oil producers seeking to operate in Russia should offer Russian companies participation in projects abroad in exchange.

The following week, the government invited Royal Dutch Shell Plc, the European oil producer that operates from Canada to West Africa, to cooperate in developing Gazprom’s Sakhalin-3 and Sakhalin-4 offshore deposits in the Russian Far East.

“Russia is bartering with Shell to get into its existing Nigeria business and ramp up Africa quickly,” Weafer said. “Sakhalin-3 and 4 are signs of goodwill.”

Gazprom is also contending with competition from producers of liquefied natural gas, a business untapped by the Moscow- based company until this year, as a gas surplus in the U.S. forces LNG exporters to seek EU markets for their fuel.

Divert LNG

Trinidad & Tobago has said it reduced its proportion of LNG shipments to the U.S. to 39 percent this year from 69 percent in 2008 as a result of falling prices there. Exports to Europe from the Caribbean nation grew 50 percent in the first quarter from a year earlier, according to International Energy Agency data.

The increase in Europe-bound cargoes followed a payment dispute between Russia and Ukraine in January that cut supplies through that country for two weeks and prompted calls in the EU for swifter diversification of energy routes.

The growth in U.S. gas supply has been led by so-called unconventional resources, fuel that’s difficult and costly to extract. Rising production of gas from shale, for example, has reduced U.S. dependence on LNG imports, leaving Trinidad & Tobago looking for alternative markets, Energy Minister Conrad Enill told reporters at the Gas Exporting Countries Forum.

Qatari Expansion

Qatar, the world’s biggest producer of LNG, is also encroaching on Gazprom’s traditional markets. The Persian Gulf state, poised to more than double LNG output to 77 million tons by 2011, has signed its first accord to ship the fuel to eastern Europe, which depends on Gazprom for most of its gas supply.

Qatar signed a contract this week to send 1 million tons of LNG to Poland, which gets more than two-thirds of its gas from the former Soviet Union. Qatar will deliver the LNG, or gas that’s been cooled to a liquid for shipment by tanker, by 2014.

Gazprom’s Ivanov dismissed suggestions that an increase of suppliers may threaten the company’s position in Europe.

“In terms of the European market, the more real suppliers that are present on the market - not the brokers, not the mediators - companies and countries with equity gas, the more stable the market is,” he said. “LNG, of which Qatar has plenty and is planning to increase production, is an important part of the energy balance in Europe. We don’t think of it as a threat or hostile.”

Gazprom in February entered the increasingly global market for LNG by opening Russia’s first liquefaction plant on Sakhalin Island, in partnership with Shell. Prime Minister Vladimir Putin on June 27 invited The Hague-based Shell to participate in the Sakhalin-3 oil and gas venture and also plans LNG projects in the Arctic Yamal peninsula with the Anglo-Dutch company.

Putin-Obama-Medvedev Menage a Trois

Russia Presents Test for Obama

By Michael A. Fletcher and Philip P. Pan

Washington Post

July 5, 2009

President Obama is scheduled to leave Washington tonight on a week-long trip that will help determine whether his personal popularity and fresh policy approaches can yield concrete results on difficult issues including arms control, missile defense and nuclear nonproliferation.

After seeking support for U.S. policies from allies in Europe and appealing for a new relationship with the Muslim world in Cairo on previous trips, Obama arrives in Moscow tomorrow for his first foray into high-profile, nuts-and-bolts negotiations with the leader of a nation that might be deemed an unfriendly rival.

On Wednesday, Obama will travel to L'Aquila, Italy, where he will meet with leaders of the world's major industrial powers. Climate change and the continued shaky global economy

are expected to dominate the agenda. He is also to meet with Pope Benedict XVI.

On Friday, Obama will go to Ghana, where he is expected to highlight that nation's burgeoning democratic tradition and to deliver a speech on his administration's goals for the developing world.

Shortly after taking office, the Obama administration made clear that it wants to "reset" relations between the United States and Russia, which had deteriorated under President George W. Bush. During Obama's first meeting with Russian President

Dmitry Medvedev, in London in April, the two agreed to a broad statement of cooperation on numerous issues.

Both the White House and the Kremlin hope to build on that with a summit in Moscow, and agreements on subjects including Afghanistan and nuclear proliferation are expected to be unveiled. But fundamental differences remain on key issues that have strained U.S.-Russian relations.

Medvedev wants U.S. pledges to scrap a missile defense system in Eastern Europe and to rule out military alliances with the former Soviet republics of Georgia and Ukraine. Obama wants Russia to back tough sanctions against Iran if diplomatic efforts to curb its nuclear program fail. Neither president has indicated any willingnes

s to yield.

"We're not going to reassure or give or trade anything with the Russians regarding NATO expansion or missile defense," said Michael McFaul, special assistant to the president and senior director for Russian and Eurasian affairs. "We're going to define our national interests, and by that I also mean the interests of our allies in Europe with reference to these two particular questions."

Sergei Prikhodko, Medvedev's c

hief foreign policy adviser, struck a similar tone. "Saying that it will be easy to move forward would mean deluding ourselves," he told reporters. "The domestic agendas of both leaders and their agendas in dealings with allies do not always coincide. Sometimes, they contradict each other directly or indirectly. But the question is . . . whether we want to expand mutual understanding or focus on defending our own positions on sensitive issues."

Obama is scheduled to meet on Tuesday with Prime Minister Vladimir Putin, whom analysts called the preeminent power in Russian politics. Obama told the Associated Press last

week that the former Russian president must move beyond a Cold War approach to relations with the United States.

The willingness of Obama and Medvedev to compromise will be tested when they discuss a treaty to replace the landmark START I nuclear arms control pact, which expires in December.

The United States and Russia control more than 90 percent of the world's nuclear weapons. After three months of talks, negotiators have agreed to modest reductions below the limits of 1,700 to 2,200 warheads established by the 2002 Treaty of Mosc

ow. But they remain deadlocked on how to count and limit the number of "delivery systems," or missiles and heavy bombers, that each nation can keep.

Medvedev publicly declared two weeks ago that no treaty is possible unless "the United States lifts Russia's concerns" about its plans to build a missile defense system in Poland and the Czech Republic.

Obama has not decided what to do about the system, said a senior administration official, speaking on the condition of anonymity because he did not want to discuss internal deliberations publicly.

The United States is reviewing other options for missile defense and has tried unsuccessfully to engage the Kremlin on the issue, he said. "We're serious about cooperation on missile defense with the Russians," he said. "But the sense is the Russians are still nervous and don't trust us."

Russian officials have publicly endorsed the idea of cooperation on missile defense, but have called on Obama to abandon the Polish-Czech plan first and emphasized they want to be included from the ground up, beginning with joint assessment of threats. The two sides have discussed opening a Moscow-based joint data exchange center.

Obama hopes to gain Russian cooperation on other topics, including energy efficiency and climate change. Russia is one of the world's largest energy producers, but it is also a leading emitter of greenhouse gases, behind the United States and China, according to the Center for American Progress.

The summit is expected to produce a deal allowing the United States to ship weapons to Afghanistan through Russia. The two sides may also agree to share intelligence and fight Afghanistan drug trafficking. Officials said the sides are also working to revive a pact on civilian nuclear energy cooperation that the Bush administration suspended after Russia's war last year with Georgia, and to strengthen military ties, also downgraded after the war.

Some business deals, including one involving Boeing, are also expected, analysts said, but they could be overshadowed by disappointment over Putin's decision to withdraw Russia's application for World Trade Organization membership last month.

Obama also is scheduled to deliver a speech in Moscow in which aides say he will try to dispel the feeling in Russia that America's self-interest lies in a weak Russia.

"This is not 1974. This is not just where we go do an arms control agreement with the Soviets, but that we have a multidimensional relationship with the Russian government and with the Russian people," McFaul said.

Russia Reconsiders WTO Accession at National Level; Favors Customs Union Approach Instead

CIS remains key priority of Russia, says Putin

China's People Daily Online


June 29, 2009

Countries of the Commonwealth of Independent States (CIS) are pivotal political and economic priority of Russia, said Russian Prime Minister Vladimir Putin on Sunday.

"Cooperation is profound. We have common transportation and energy networks and speak Russian," Putin was quoted by the Itar-Tass news agency as telling leaders of political groups in Russia's State Duma, the lower house of parliament.

The CIS, an alliance of 11 former Soviet Republics, groups Russia, Belarus, Kazakhstan, Kyrgyzstan, Azerbaijan, Armenia, Moldova, Tajikistan, Uzbekistan, Ukraine and Turkmenistan. Georgia withdrew from the bloc due to the South Ossetia conflict last year.

Putin also said that entering the World Trade Organization (WTO) remains on Russia's agenda, but "the customs union of Belarus and Kazakhstan has come to the forefront."

Russia, Belarus and Kazakhstan agreed on June 9 to start new talks on WTO accession as a single customs union, and thus suspend individual talks.

Russia, which has been seeking WTO membership for more than 15 years, is the largest economy remaining outside the global trade watchdog.

Putin also recalled the recent Yekaterinburg summits of the Shanghai Cooperation Organization (SCO) and BRICs (Brazil, Russia, India and China).

"We will build up cooperation in these formats," he said.


Georgia's parliament formally puts end to CIS membership

Yhiah News Agency

RIA Novosti

June 12, 2009

The parliament of Georgia unanimously passed on Friday decrees on the formal withdrawal of the former Soviet republic from the Commonwealth of Independent States (CIS), RIA Novosti reported.

Georgia notified the CIS executive committee of its desire to quit the Russian-dominated organization on August 18, 2008. The move came after a five-day war with Russia over the Georgian breakaway republic of South Ossetia.

"Georgia has already withdrawn from the organization... Therefore, today we are wrapping up this process by the proper decree formally and legally," parliament Speaker David Bakradze said after the first parliamentary session in two months amid mass opposition protests in Tbilisi.

The CIS currently comprises Russia, Georgia, Belarus, Kazakhstan, Kyrgyzstan, Azerbaijan, Armenia, Moldova, Tajikistan and Uzbekistan. Ukraine is a founding and participating country but technically not a member state. Turkmenistan holds associate status.

Following a CIS foreign ministers` meeting in Kyrgyzstan last October, Russian Foreign Minister Sergei Lavrov said Georgia`s withdrawal would change nothing and Tbilisi`s participation in the post-Soviet alliance had been malign in recent years.


Analysis: Implications of Georgia leaving C.I.S.


United Press International (UPI).com

June 9, 2009

WASHINGTON, June 9 (UPI) -- Georgia hopes to continue its free-trade arrangements with members of the Commonwealth of Independent States after its withdrawal from the organization takes place on Aug. 18. Given the aftereffects of its ill-advised five-day military clash with Russia last August, that may prove to be a forlorn hope, as the confrontation reminded the other Caucasian former Soviet republics of Azerbaijan and Armenia that Moscow is determined to protect what Russian President Dmitry Medvedev has labeled its "privileged interests" in the former Soviet space.

Georgian President Mikheil Saakashvili's determined attempts to bring his country into NATO have increasingly soured relations between Washington, Brussels and Moscow for the last several years, as the Kremlin has repeatedly stated that neither Georgia nor Ukraine should be admitted to the alliance. Heightening Moscow's fears of being outflanked in the Caucasus, from May 21 to June 1 NATO staged its Cooperative Lancer 2009 exercise at Georgia's Vaziani military base, with about 700 soldiers from 13 NATO member nations participating alongside Georgian troops.

The West can hardly feign disinterest, as the crown jewel of Western efforts to bring Caspian oil westwards for export, the $3.6 billion, 1,092-mile, 1 million-barrel-per-day Baku-Tbilisi-Ceyhan pipeline, opened in May 2006, carries Azeri crude from Azerbaijan's Caspian offshore Azeri-Chirag-Guneshli fields to Turkey's deepwater Mediterranean terminus at Ceyhan, crosses 155 miles of Georgian territory and contains two of the line's eight pumping stations.

On June 8 Interfax news agency reported that Georgia's Economic Development Ministry's Department for Foreign Trade Policy head Marina Machavariani told reporters that Georgia hoped that its current free-trade arrangements with C.I.S. member states would remain intact following Georgia's withdrawal from commonwealth. Attempting to soften the prospect of significant damage in its relationships with the C.I.S. after that date, Machavariani observed that there are international regulations allowing use of mechanisms of free movement of goods between Georgia and certain countries, commenting, "To date, Georgia has already signed bilateral free trade agreements with eight C.I.S. countries. With Azerbaijan and Ukraine, which are GUAM (Georgia, Ukraine, Azerbaijan, Moldova) member states, Georgia also has free economic zone agreements." Machavariani concluded by noting that the GUAM nations account for up to 65 percent of all Georgian exports.

What Machavariani's optimism glosses over is that Ukraine has significant issues with Russia that dwarf its commitments to Georgia. Kiev suffered a brief "gas pipeline" war with Moscow in early January, which forced Ukrainian President Viktor Yushchenko's government into a humiliating climb-down on pricing.

Another prickly issue irritating Russian-Ukrainian relations is the status of Sevastopol, the finest natural harbor on the northern shore of the Black Sea and currently jointly shared by both the Ukrainian navy and Russia's Black Sea Fleet. Last but not least, Yushchenko's government is embroiled in a bitter fight for political survival, with some recent political polls giving Yushchenko a dismal 5 percent approval rating. In sum, the above issues hardly incline Ukraine further to antagonize Russia by broadening its contacts with Georgia following its withdrawal from the C.I.S., an organization in which Ukraine remains a member.

Azerbaijan also has less than perfect relations with Tbilisi, despite being conjoined by the BTC oil umbilical cord. The Russian-Georgian military confrontation inflicted significant fiscal "collateral damage" on Azeri oil exports, as all its westward export routes were closed.

On Aug. 5, 2008, two days before the outbreak of hostilities between Georgia and Russia, there was an as yet unexplained explosion on the BTC segment at Yurtbasi village in eastern Turkey. The cause of the explosion remains unclear, although Ankara initially suspected that it might have been a terrorist attack by the Kurdish separatist Partiya Karkeren Kurdistan, or Kurdistan Workers' Party. BTC operator BP declared force majeure, and the pipeline only resumed operations on Aug. 25.

Seeking an alternative route, BP switched to the recently reopened 550-mile, 140,000-bpd Western Route Export Pipeline, better known as the Baku-Supsa line, which opened in 1999 and was running at about 90,000 bpd. Because of the worsening military conflict, on Aug. 12 BP announced that it was suspending shipments through Baku-Supsa, as well as the South Caucasus Pipeline, which transports natural gas from Baku to Turkey via Tbilisi. Completing the lock-in of Azeri oil exports, the fighting caused authorities to suspend seaborne shipments from Georgia's Black Sea ports of Batumi (200,000 bpd) and Poti (100,000 bpd), both supplied by rail. Poti was closed Aug. 8 following reported Russian airstrikes. Adding to the grim picture, authorities also ceased exports from Kulevi, Georgia's third Black Sea oil terminus, which opened in 2007 and is capable of shipping 200,000 bpd.

For Azerbaijan the conflict was an unmitigated financial disaster, as the country's oil sector receipts account for almost half of all government revenues, with oil exports generating around 90 percent of total export revenues. Between the BTC explosion and the military clash, Azerbaijan had been blocked from shipping approximately 17 million barrels of crude, while the U.S. Department of Energy estimated that Azerbaijan's final cost for the lost shipments surpassed $1 billion.

Georgia suffered lost revenue from the confrontation as well: In 2007 BTC fees generated $25.4 million in transit revenues, and before hostilities erupted Saakashvili's government had estimated BTC transit payments for 2008 at about $45 million.

For the remaining members of the C.I.S. then, the choices are stark -- continue relations with Georgia after Aug. 18 as before, thereby tacitly approving Tbilisi's confrontational posture vis-a-vis Moscow and risking Russia's wrath, or pay heed to Medvedev's "privileged interests" in the Caucasus. While little is clear in that part of the world, last year's military clash has given former Soviet states significant food for thought about what happens to former Soviet republics that ignore Moscow's concerns and stray too far westwards. Accordingly, it would seem unlikely that C.I.S. nations are likely to follow Saakashvili's lead or conduct "business as usual," unless Tbilisi somehow repairs its unraveled relationship with the Kremlin first.

Tuesday, February 3, 2009

Vlad's Bad Gas Economically Asphyxiates, Silences and Chills Europeans, But They Continue to Tolerate It!

Europe’s dependence on Russian natural gas is considerable. Countries in Central Europe, such as Slovakia, the Czech Republic, Hungary, Germany and Austria, are extremely dependent on Russian natural gas imports, as is Turkey. Germany receives 43 percent of all the natural gas it consumes from Russia; Turkey receives 66 percent of its natural gas from Russia. At the moment, the Soviet infrastructure links the Russian Tyumen, Timan-Pechora and Ob Basin fields with European consumers, as well as the natural gas fields in Turkmenistan, Uzbekistan and Kazakhstan.

[See: Global Market Brief: Skyrocketing Natural Gas Prices and Europe's Economy, at: ].


Both Sides Lose in the Gas War

January 23, 2009

By Yevgeny Kiselyov

It is too early to tell if the gas wars between Russian and Ukraine have ended for good. Although it would seem at first glance that the conflict was put to rest when Prime Minister Vladimir Putin and Ukrainian Prime Minister Yulia Tymoshenko signed a 10-year gas delivery agreement on Monday in Moscow, it didn't take long for Ukrainian President Viktor Yushchenko's camp to protest the pact.

Yushchenko supporters claim that Tymoshenko didn't have the authority in the first place to negotiate gas prices and sign an agreement with Putin. They accuse Tymoshenko of trading away Ukraine's national interests, including the claim that she supports Gazprom's purported plans for taking ownership of Ukraine's entire gas transport grid. Andrei Kislinsky, the deputy chief of staff in Yushchenko's administration, announced that Tymoshenko and the Kremlin have already created a working group to work out the details of this project. Tymoshenko's main objective in meeting Putin, they assert, was to demonstrate her unconditional loyalty to the Kremlin in exchange for the Kremlin's unconditional support for her in the Ukrainian presidential election in late 2009 or early 2010 (the exact date hasn't been set yet).

It is even possible that on Friday, Ukraine's National Security Council, with Yushchenko as chairman, will declare the gas agreement Tymoshenko signed with Moscow null and void.

It is well known that deliveries of Russian gas were conducted through RosUkrEnergo, a highly controversial intermediary, for the last three years. The company is registered in Switzerland, with a 50 percent stake held by Gazprom and 50 percent owned by private Ukrainian businessmen [!!!] who purportedly profited by manipulating gas supplies and paid big kickbacks to high-ranking officials in Kiev and possibly elsewhere.

RosUkrEnergo has been a major point of contention among feuding political groups for a while; in fact, Tymoshenko made the issue a theme in her 2007 parliamentary election campaign, vowing to eliminate RosUkrEnergo from the transaction. In addition, allegations are occasionally made that Yushchenko has financial ties to RosUkrEnergo.

During the three-week conflict, Gazprom CEO Alexei Miller made a statement implying that Yushchenko had lobbied for RosUkrEnergo's interests and initiated the gas conflict with Moscow when he understood that Tymoshenko was serious about liquidating RosUkrEnergo. Now, as a result of Monday's agreement, RosUkrEnergo has been definitively removed as the middleman. It is difficult to imagine that Yushchenko will simply forgive Tymoshenko for her aggressive moves.

It might seem that Russia came out on the losing end of the gas war.

First, Russia lost because it suffered a huge blow to its reputation as a reliable gas supplier to Europe.

Second, Europeans are seriously looking for other suppliers and routes to import gas. For example, an increasing number of German officials are beginning to question if the heretofore celebrated Nord Stream pipeline project, which would pump gas directly from Russia to Germany across the floor of the Baltic Sea, would make Germany too dependent on Russia. [YA THINK??]

The gas war even damaged relations with Russia's traditionally strong European allies such as Serbia, which were without gas for three weeks. Serbs were burning Russian flags, something that just a couple of weeks ago nobody could imagine would ever happen. Even Austria, which has been a loyal buyer of Russian gas since 1968 when it became the first West European country to sign an agreement with Moscow, has started looking for alternative suppliers.

On the other hand, Moscow achieved at least part of what it hoped to accomplish in its conflict with Kiev. Although the Kremlin wasn't able to drive a complete wedge between Ukraine and Europe, the political elite in Kiev, who set their sights high on becoming integrated with Europe politically and economically, suffered a serious blow when Ukraine earned a reputation as an unreliable partner. But Moscow's largest battle gain was destabilizing Ukraine's internal political situation. Kiev's opposing political groups have again locked horns and are bogged down in another serious confrontation.

The Ukrainian media are already discussing the question: Did Moscow offer to support Tymoshenko in her presidential bid? If so, what did she offer the Kremlin in return? Perhaps a rejection of Ukraine's aspiration to join NATO or an extension of the contract for Russia's Black Sea Fleet that is set to expire in 2017?

In reality, these theories should be treated with skepticism. After all, Tymoshenko has no intention of committing political suicide by risking the alienation of the roughly half of Ukraine's voters located in the western part of the country, for whom a pro-Russia policy is absolutely unacceptable. Moreover, she is a quintessential politician -- which is to say an opportunist above all. She might have made various promises to Putin and President Dmitry Medvedev, but it would be naive to think that she would necessarily make good on all of them.

As is often the case, the Kremlin does not have a backup plan if things go wrong. What if the majority of European countries take Kiev's side in its ongoing battle with Moscow? What if Yushchenko follows through and annuls the gas agreement Tymoshenko signed with Putin?

Beyond the gas conflict, what if the global economic crisis cripples Russia worse than it ever expected? What if oil prices fall to $10 per barrel in 2009? What if the ruble exchange rate reaches 50 to the dollar? What if Putin's and Medvedev's ratings fall? If any one of these events were to happen, the Kremlin would have a lot more to worry about than Yushchenko and Tymoshenko. In this case, the Kremlin would quickly forget about its obsession to punish Yushchenko for all of his sins, including his 2004 Orange Revolution, NATO aspirations and arms shipments to Georgia in the August war.

Yevgeny Kiselyov hosts a political talk show on Ekho Moskvy radio and is chief editor of TVi, a new television channel in Ukraine.


Russia, Ukraine sign gas deal, end standoff

By Nataliya Vasilyeva, with contributions from Yuras Karmanau and Maria Danilova in Kiev, Ukraine.


January 19, 2009

MOSCOW -Russia and Ukraine signed a deal Monday that restores natural gas shipments to Ukraine and paves the way for an end to the nearly two-week cutoff of most Russian gas to a freezing Europe.

The agreement was signed by the heads of Russia's state-run natural gas monopoly Gazprom and the Ukraine's gas company Naftogaz. The signing was witnessed by Russian Prime Minister Vladimir Putin and Ukrainian counterpart Yulia Tymoshenko.

Putin said Gazprom had received orders to resume shipments bound for Europe, which had been cut since Jan. 7 as Moscow and Kiev argued over 2009 gas prices and allegations that Ukraine was stealing gas destined for Europe.

Ukraine disputed this, claiming that Russia was not sending enough "technical gas" to push the rest further west.

Officials say the restored gas shipments could take up to 36 hours to cross Ukraine and reach European customers.

Europe gets about 20 percent of its total gas needs from Russia via Ukrainian pipelines, and the cutoff hit hard at some countries, such as Bulgaria and Slovakia, that rely almost entirely on Russia for gas.

The confrontation has deeply shaken Europeans' trust in both Russia and Ukraine as reliable energy suppliers, as more than 15 nations have been forced to scramble for alternative sources of energy. The dispute was further complicated by geopolitical struggles over Ukraine's future and over lucrative export routes for the energy riches of the former Soviet Union.

Tymoshenko and Putin negotiated a preliminary deal for Ukraine to get gas with a 20 percent discount from this year's average European price, which Russia says is $450 per 1,000 cubic meters. That would double the price Ukraine paid in 2008.

However, natural gas prices for Europe are expected to fall sharply later this year, due to the fall in oil prices. By midsummer, Ukraine could be paying as little as $150 for 1,000 cubic meters, said Ronald Smith, a strategist at Moscow's Alfa Bank.

Ukrainian Parliament Speaker Volodymyr Lytvyn said Monday, citing Naftogaz and Russian officials, that the average price Ukraine will pay this year will be around $240 to $250. He did not elaborate.

Russia won a key principle, however, that Ukraine must pay more for its energy supplies. Russia also won't have to pay higher transit prices to Ukraine to use its pipelines.

Putin said in 2010, Ukraine will have to pay full price for Russian gas, and Russia will pay market prices for transit.

In the long term, it is not clear how Ukraine will pay for the huge amount of Russian gas needed to run its outdated factories and heating systems.

Ukrainian opposition leader Viktor Yanukovych said any gas price higher than $250 would be mean a "collapse" of the economy, which is already coping with a collapse of the national currency, a drastic fall in exports and a shaken banking sector.

Germany could hold key to gas deal


January 16, 2009

As Germany prepares to welcome Russian Prime Minister Vladimir Putin, the BBC's Berlin correspondent Steven Rosenberg considers how Germany could broker a deal to end the energy dispute between Russia and Ukraine.

Of all the countries in the European Union, it is Germany which has the best relations with Russia. And which, perhaps, is best placed to help negotiate an end to the gas crisis.

The two countries are major trading partners. They are even building a pipeline together - North Stream - which will bring Russian gas to Europe under the Baltic Sea, bypassing Ukraine.

Moscow claims this route will ensure there are no further interruptions to Europe's energy supplies.

Vladimir Putin is best friends with the German chairman of the pipeline consortium - former Chancellor Gerhard Schroeder.

What is more, Mr Putin speaks fluent German from his days as a KGB spy based in Dresden. (Angela Merkel speaks fluent Russian - so no language barrier there.)

But as the energy dispute between Moscow and Kiev drags on, the Germans are growing increasingly frustrated with the Russians.

Prior to Mr Putin's visit to Berlin, Chancellor Merkel warned the Kremlin its credibility as an energy supplier was on the line. She promised to pass that message on personally to Mr Putin during his visit to Germany.

Embarrassed and annoyed by the images of Europeans shivering without Russian gas, the Germans have been threatening to diversify their energy sources.

"Within the European Union, the subject of energy security is now very important," Guenter Gloser, Germany's minister for Europe, said.

"We need to be independent of those supplying our energy - so we need more energy efficiency, we need more renewable energies like solar projects and we need a range of energy partners - not just Russia."

That is easy to say - and it has been said many times before, not only by Germany, but by other EU countries.

History repeating itself

The last time Russia turned off the gas taps to Ukraine in 2006, causing temporary gas shortages further west, European leaders vowed that never again would they allow energy disputes to the east to leave Europe freezing.

The phrase "energy security" became the rallying cry of the EU.

There were calls to boost solar energy, wind power, and make plans to import liquid gas by sea. Anything to ensure that Europe would not be too dependant on the Russians and get caught out twice.

But three years on, it has happened all over the again.

Another dispute between Russia and Ukraine - and once again Europe is freezing. The EU is facing accusations it was too complacent and too divided over European energy policy.

"The usefulness of a crisis is that it forces you to look into the mirror," chief correspondent of Die Welt newspaper Michael Stuermer said.

"That didn't happen. This present crisis could be seen on the radar over the last three months. The signals were coming all the time. I don't think the German government or the EU Commission took note of the seriousness. We didn't learn much from the crisis of 2006."

Micahel Stuermer believes the latest row could nudge the EU to come up with a "coherent energy strategy".

Considering that the European Union currently gets a quarter of its gas from Russia, it is difficult to imagine such a strategy excluding Russia.


Gas-starved EU nations seek end to energy crisis

Associated Press

January 14, 2009

MOSCOW -- The leaders of several gas-starved European nations traveled to Ukraine and Russia on Wednesday, pressing them to restore supplies as the EU threatened both with legal action for halting energy deliveries in the midst of winter.

But Ukraine's natural gas company said for a second straight day it would not send Russian gas along to Europe. It claimed that Russia's gas monopoly Gazprom was trying to force it to cut service to parts of Ukraine in order to send the gas along.

For his part, Russian Prime Minister Vladimir Putin accused Ukraine of holding European nations hostage and insisted the EU should not accept Ukraine's claims. He spoke as met with the prime ministers of Slovakia, Bulgaria and Moldova at his residence outside Moscow.


"No matter what papers others provide, I'll burn them in the oven," he told the visitors. "We opened the tap, and are ready to supply gas, but on the other side, the tap is closed.

"Nobody, no transit country, has the right to use its transit location to take other customers hostage," Putin declared.

Slovakian Prime Minister Robert Fico said "Ukraine is losing the trust of European partners because of its behavior."

"The most unpleasant part is that millions of Europeans feel like hostages and are truly suffering," added Bulgaria's Sergei Stanishev.

With no end to the politically charged dispute in sight -- despite a weekend agreement that sent teams of EU monitors out to pumping stations to keep tabs on the gas flows -- the EU was fed up.

European Commission President Jose Manuel Barroso warned Gazprom and Naftogaz, Ukraine's state-run gas company, that he will urge European energy companies to sue them unless they move quickly to restore gas supplies.

"If the agreement is not honored, it means that Russia and Ukraine can no longer be considered reliable partners for the European Union in matters of energy supply," Barroso told the European Parliament.


Gazprom stopped sending gas into Ukraine's pipeline system on Jan. 7, alleging that Ukraine was siphoning off supplies destined for Europe. Ukraine has denied the charges, claiming that Russia has not sent enough so-called "technical gas" to pump the rest of the gas west to Europe.

Gazprom cut off all gas supplies to Ukraine itself on Jan. 1, amid a clash over what price Ukraine should pay for gas in 2009.

The dispute has affected millions of people, mostly in eastern Europe and sent at least 15 European nations scrambling for heat. Thousands of businesses have had to shut down or cut production, forcing workers into involuntary layoffs.

Russia opened a tap to Ukraine on Tuesday after the hard-won EU deal to monitor gas flows, raising hopes across Europe.

But Ukraine's gas company Naftogaz did not deliver the gas to Europe, saying Gazprom demanded that it use a technically arduous route which would force Ukraine to halt supplies to a large swath of its own territory. Ukraine uses Russian gas, but also produces natural gas on its own and has large stockpiles of the fuel.

Naftogaz head Oleh Dubina said Gazprom made the same request again Wednesday -- and he would not agree to halt supplies to Ukrainian consumers.

"Unfortunately, we answered the same way: we cannot leave our regions without gas," Dubina told reporters.

Gazprom has rejected the claim, saying the route was fine.

Earlier in Kiev, Fico urged Ukrainian Prime Minister Yulia Tymoshenko to hold talks with Putin to resolve the dispute as soon as possible.

"We ask for talks between the prime ministers of Russia and Ukraine. This is an issue that is very important for us," Fico said.

Russia and Ukraine are deeply at odds over what Ukraine will pay for Russian gas in 2009. Ukraine last year paid $179.50 per 1,000 cubic meters of gas and its president said Tuesday that Ukraine will pay no more than $210 in 2009.

Russia wants Ukraine to pay market price for gas, about the $450 that European customers pay.


Gas Woes Threaten Economies [and damage relations that Russia has with certain countries”]

By Gordana Filipovic

Moscow Times

14 January 2009

-- A weeklong cut in gas supplies has prompted concern that some Balkan countries already hit by the world financial crisis could see dimmer economic prospects and lower job numbers as a result.

Supplies to Europe have been cut off for almost a week in freezing temperatures after Russia turned off the tap to Ukraine in a long-running feud. Even though a deal was reached Monday, the second in two days, gas supplies still failed to restart on Tuesday.

The Balkans took Europe's biggest hit, with hundreds of thousands of households initially losing heat and dozens of businesses forced to halt production.

Analysts said it was premature to assess the impact on growth, but lower industrial output for the month of January was possible. The midterm outlook depends on global economic conditions and the impact of falling global demand.

"Given lower demand, many firms have piled stocks in the last few months, and I don't think demand or sales will suffer," said Raiffeisenbank analyst Zdeslav Santic in Zagreb.

"But some producers, like those of construction materials, may be forced to reduce or stop production, which would lead to job losses," he said.

The economic impact could become more visible if the latest deal in restoring gas supplies hits a snag, especially for countries with little or no reserve, said Vladimir Gligorov of the Vienna Institute for International Economic Studies. "Croatia has had its own reserves to rely on at the time of crisis, Bulgaria may not have sufficient gas reserves, but they've got the European Union to turn to for assistance and Serbia has no reserves and no one to turn to," Gligorov said.

With politicians focusing on restoring heat to households, some factories reliant on natural gas have halted production. After a few days, Hungary and Germany agreed to sell some gas to EU-hopeful Serbia, where drugs company Hemofarm, owned by Germany's Stada, and fertilizer manufacturer Azotara suspended production.

The gas disruption has hurt the backbone of Bulgaria's industry, where steelmakers, chemical and fertilizer producers as well as food processors use natural gas. The national employers' organization has estimated daily losses at 500 million levs ($367 million), but direct losses were lower, at around 13 million levs a day, Economy Minister Petar Dimitrov said.

Neighboring Macedonia's main steel exporter halted work.

In Croatia, steel mills, sugar plants, chemical industry and construction material producers have been the most exposed as they rely on gas, the Croatian Chamber of Commerce said.

Incidentally, the gas outage even caused Sarajevo's eternal flame -- a monument to victims of World War II -- to go out last week.

The flame came on again
when Hungary started shipping gas to Bosnia.

But a major impact on the Balkans' economic growth is seen as unlikely.

"The gas crisis is likely to have a modest measurable impact on growth in the first quarter, and the impact will be more sizable if the shutoff continues beyond this week," said Richard Segal, a UBA Capital analyst based in London.


Rhetoric versus reality. Russian threats to European energy supply

By Andreas Goldthau

Energy Policy (36), 2008

As more than 50 per cent of overall European imports originate from Russia, fears have been expressed that the Kremlin could use energy resources as a foreign policy tool. A thorough assessment of domestic consumption, production and investment volumes however reveals that Russian supply will have difficulties in matching growing domestic and European demand. Hence, as the author argues, the threat to European gas supply does not lie in geopolitics, but rather in a lack of investment in the Russian upstream sector.


Europe's dwindling gas reserves

by Wendy Braanker

Radio Netherlands Worldwide

[Netherlands does not import any Russian gas. Not yet. According to the President of the board of Dutch company Gasunie, Marcel Kramer, if it does happen, it will be an extremely small amount. The Netherlands has enough gas reserves for around 30 years in its gas fields near Slochteren in the north of the country.]


Gas will eventually run out in Europe, not this year, not next year but soon. Delegates to a European gas conference currently being held in Amsterdam have concluded that the only way to solve the gas problem is for Europe to strengthen ties with countries such as Russia and Iran. However, not everybody is happy with that conclusion.

Europe depends on Russia for a quarter of its gas imports. Delegates to the Amsterdam gas conference, called Flame, concluded that the demand for gas will only increase, while European gas reserves are dwindling.

In an address to Flame, Professor Jonathan Stern from the Oxford Institute for Energy Studies said:

"The amount of gas extracted from within Europe will start to diminish around 2015. And that will cause problems... we will have to increase our imports from other countries."

Strengthen ties

European Union countries have to compete with the United States and Asian countries for gas supplies and the demand for gas has sharply risen throughout Asia and in the US. Solar and wind energy can meet some of Europe's energy needs but more time is needed if alternative energy is going to be a substitute for gas.

Professor Stern says the lack of alternative energy sources necessitates stronger European ties with Russia and energy producing countries in the Middle-East, and he comments: "It's irrelevant if we agree or disagree with the Russians, the Iranians or another possible gas exporters".

The professor of energy studies says Europe needs to stop telling other governments how to run their countries:"

That's the reason why dialogue between Europe and those countries is so problematic."

Power politics

In other words: European politicians and companies have to stop trying to force their way of doing things on gas exporting countries. Because of the increased profits generated by gas exports, these countries have increased their political power. And it is precisely the political power wielded by Russian President Vladimir Putin which is causing concern among European politicians and companies.

There is criticism from another corner as well. This week, Italian human rights activists - they are not the first - called on Italian Prime Minister Romano Prodi not to forget human rights in his trade discussions with Russian President Putin. However, energy is sure to play an important role in the talks between Mr Prodi and his Russian counterpart. Italy's energy giant En is on the point of signing a contract with Russia's state energy company Gazprom.

Soothing words

Gazprom, the world's largest gas company, was also at the Flame conference in Amsterdam and it tried to persuade Flame delegates that the Russian state-owned company is a trustworthy partner. [REALLY???] Sergei Korovin, Gazaprom's vice-president of international affairs and head of international projects, says as the world's largest gas producer and exporter, Gazprom will continue to operate in a responsible manner on the national and international gas market. Soothing words from Gazprom, probably aimed at calming fears that many companies have about investing in Russia ever since Gazprom forced Shell Oil to halve its share in a large-scale gas project on the Sachalin peninsular in December 2006. Shell was financially compensated for giving up 50 percent of its stake in the project [EXPROPRIATION OF FOREIGN ASSETS] but oil and gas companies want to build up their own reserves in order to guarantee a secure future. Money is not as important.

However, not dealing with Russia is not an option according to dozens of speakers at the Flame conference. Europe needs Russian gas. There are no alternatives.


Europe’s Worsening Energy Crunch

Clean Beta

July 25, 2008

The European Union produced 9% less energy in 2006 than it did in 1997. Meanwhile, consumption rose by 7% and net imports rose by 29%. In 1997, the energy dependence rate stood at 45%. A decade later, it stands at 54%, according to the Statistical Office of the European Communities.

In 2006, the EU imported 2.4% of its total energy supply (1,010 million tons-of-oil-equivalent, or TOE) than the previous year. Oil and gas accounted for about 60% and 26% respectively of all imports. Russia was the primary supplier of crude oil and natural gas were Russia (33% of oil imports and 40% of gas imports in 2006).

Despite reduced energy consumption in 2006, energy production fell 2.3%, which drove up net imports by 2.4% in 2006 and the energy dependence rate to 54% from 53% in 2005.

Finland consumed roughly 10% more energy in 2006 than the preceding year. For the five largest energy consumers, which accounted for nearly two thirds of total consumption in the EU, consumption moved +0.5% in Germany, -1.2% in France, -1.6% in the United Kingdom, -0.6% in Italy and -0.5% in Spain.

Europe has actually gotten more dependent on energy imports in the past few years, especially in Cyprus, Malta, Luxembourg and Ireland. The countries with the least dependency on energy imports were: Poland (20%), the United Kingdom (20%), the Czech Republic (28%) and Romania (29%). More importantly, Denmark has achieved the unthinkable and become a net exporter of energy.

The lion’s share of Europe’s energy imports are oil and gas, which accounted for 60% and 26% respectively of net imports last year. Russia was the largest supplier of crude oil and natural gas, providing nearly a third of oil imports and more than a third of natural gas imports in 2006.

Wednesday, January 7, 2009

Although Russia's Economy is in Better Shape than in 1998, It May Still Adversely Impact Global Financial Markets

Why Russia's Woes Should Worry You

As financial markets and governments worldwide hope for a brighter year, one big country's troubles threaten to send the global economy tumbling into a deeper hole.
By Jim Jubak

MSN Money
Is there some wild card out there that could make the global economic mess even worse?

For months now, my attention has focused on Russia. The country is big enough, and its problems serious enough, that it could take the global crisis to a new level of danger.
The good news is that Russia is in much better shape than it was the last time it shuddered into crisis, in 1998. The bad news is that Russia's current problems bear an eerie resemblance to those that took the country into default, led to the fall of a once-popular political leader and forced the U.S. Federal Reserve to organize a bailout in order to prevent a panic in the global financial markets.

Let me quickly summarize the last crisis:
  • In 1998, a worldwide financial crisis that started in Asia led to a collapse in demand for oil, natural gas and nonferrous metals, which formed the foundation of the Russian economy.
  • The prices of oil and other commodities plunged, which left banks that had made huge loans to oil or mining companies (or to investors who had pledged shares of those companies as collateral) teetering on the edge of insolvency.
  • Despite government efforts to defend the ruble, the Russian currency went into free fall.
  • The Russian stock, bond and currency markets collapsed when domestic and overseas investors delivered a devastating "no confidence" vote by refusing to buy ruble-denominated bonds despite yields of more than 200%. Russian stocks lost 75% of their value from January to August.
  • With inflation running at better than 80% and food prices up 100%, Russians took to the streets in protests that eventually brought down the government of Boris Yeltsin.
  • Russia then defaulted on its ruble and dollar debts, leading to the failure of the Long-Term Capital Management hedge fund after losses of $4.6 billion in less than four months. To prevent a panic in the financial markets, the Federal Reserve stepped in to organize a bailout of the fund.

So here we are in 2009, and a worldwide financial crisis has led to a collapse in demand for the oil, natural gas and nonferrous metals that still form the basis of the Russian economy. Share prices on Russian stock markets have headed south with a vengeance. Shares of Gazprom (OGZPY, news, msgs), the leader of Russia's oil and gas industry, dropped more than 70% in 2008.

On Sept. 16, the government suspended trading on Russia's stock exchanges for an hour after the worst one-day fall since -- you guessed it -- 1998. Despite words from the finance minister assuring investors that there was no systemic crisis, trading had to be suspended again Sept. 17 and 18. The Russian stock market fell 19% on Oct. 6 and an additional 14% on Oct. 9.

Banks that had made huge loans with shares of energy and mining companies as collateral teetered on the brink of insolvency, as they had in 1998. However, in the 1998 crisis, the Russian government lacked the financial resources to act. As 2009 begins, the country's coffers are full after a decade of climbing energy prices. Russia's reserves stood at $600 billion in August, so the government has been able to move aggressively.

In September, the government lent the country's three biggest banks $44 billion. That same month, the government injected $20 billion into the financial markets and then lent an additional $110 billion to the country's banks. October brought $36 billion more in loans to banks.

To head off runs on those and smaller banks, the government raised the limit for deposit insurance to $25,000. As in the U.S. crisis, even after an injection of liquidity from the government, Russia's banks refused to lend to each other. Interest rates on interbank loans climbed to 23%. Nine banks had failed by the end of November. The government allowed others to keep operating, even though they were insolvent.

War on 3 fronts

But keeping the domestic banking system from insolvency is only one front in the war. At the start of the crisis, Russian companies owed $450 billion to overseas investors. With the Russian stock market falling and the ruble down 20% since August, many of those overseas investors have demanded their money back. The government has authorized state loans of $50 billion to make up for overseas loans that come due and where overseas investors refuse to roll them over. That's clearly a stopgap measure, however.

And let's not forget the ruble. On Dec. 29, the Russian currency traded at 41.6 rubles to the euro: That's the lowest value ever for the ruble against the euro. Against the U.S. dollar, the Russian currency is doing better: At 29.3 rubles to the dollar, the ruble is cheaper against the dollar than it's been since 2005. But the ruble was down almost 40% in 2008 against its official dual currency basket of 45% euros and 55% dollars.

The big worry is that Russia won't have enough in the bank to win a war being fought on these three fronts. Reserves that stood at $600 billion in August were down to $450 billion as of Dec. 19. Spending to control the economic, financial and currency crisis is accelerating. In the week that ended Dec. 19, for example, the central bank spent $7 billion to buy rubles to slow the currency's decline. Reflecting those fears, Standard & Poor's has downgraded the country's long-term sovereign credit rating to negative from stable.

And it looks like spending on social programs is just starting to climb. Failing companies have stopped paying wages. Inflation -- the government hopes for inflation of just 13% in 2009 -- eats away at already meager payments to pensioners. A falling ruble makes anything imported more expensive. Efforts to end domestic subsidies for energy eat into already strained family budgets. The last time around, the government threw money into pensions, subsidies and pay packages to keep protests down to acceptable levels. I don't think it will be different this time.

The good news

Ending Russia's crisis doesn't require a 180-degree turn in the economy, the Russian stock market or the ruble. What's important is the pace of the fall. If the ruble declines in a slow and measured fashion, if the economy looks like it's headed for a recession instead of a deep plunge into panic, and if stocks fall slowly enough that the stock market can stay open, the crisis will be manageable. And Russia will remain one of a very large group of countries coping with a global economic and financial crisis rather than becoming a wild card with problems big enough to threaten the global economy.

Because the speed of the decline is critical, the first quarter of 2009 poses the greatest risk. If the crisis in Russian financial markets, Russian banks and the ruble turns into a rout in the first quarter, then Russia's problems are on the way to becoming the world's problems. Watch the ruble: Some currency experts think there's a chance it could fall 20% to 30% in the first quarter of this year. That would constitute a rout.

I don't think that will happen. Russia's reserves, though not infinite, remain hefty. The country may not be making as much at energy and mining as it did when oil was $147 a barrel, but the country continues to run a trade surplus that adds to reserves. And Prime Minister Vladimir Putin went into this crisis with a far stronger grip on power than Yeltsin had in 1998.

Underinvestment likely to cost

However, even if Russia dodges a bullet, its crisis could have a huge effect on the global economy -- especially on the global energy economy.

Gazprom and Rosneft (RNGZY, news, msgs), Russia's other national energy champion, have underinvested in energy production during the boom years for oil and natural gas. At the beginning of the boom, young fields produced huge amounts of oil and natural gas with relatively small investments. But now many of these fields are aging and need billions of investment dollars to keep production from falling. Gazprom's budget for capital investment is set at $32 billion, which is about five times the company's capital budget in 2004.

It's hard to see how Gazprom and Rosneft, which has its own portfolio of capital projects, will be able to fully fund their ambitious production and pipeline expansion plans if Russia continues to divert billions to stabilizing its banks, supporting its currency, propping up its stock market and increasing social spending to head off a rising tide of protest.

Looking at the silver lining

Before the global financial crisis, projections from organizations such as the International Energy Agency suggested that current underinvestment in energy production would lead to a supply crisis in the next five to 10 years. The global economic slump, which has decreased demand for oil and natural gas, has put off that crisis by at least two years.

But by creating more competition for limited supplies of global capital, by raising the cost of capital, by pricing out some sources of energy and by making it harder for some companies and countries to raise all the capital they need, the current slump all but ensures that the supply crisis, when it finally comes, will be more painful than projected earlier.

And that's the best-case scenario now playing out in Russia.