Cheney puts Moscow to the hardness test By M K Bhadrakumar
Addressing a gathering of leaders from the Baltic states and eastern and
southeastern Europe in the Lithuanian capital Vilnius last week, US Vice
President Dick Cheney harshly criticized the Kremlin for rolling back human
rights and backsliding on democracy as well as using energy as a weapon to
browbeat Russia's neighbors.
"No legitimate interest is served when oil and gas become tools of intimidation
or blackmail, either by supply manipulation or attempts to monopolize
transportation," Cheney told the
gathering, in remarks intended to be heard in the Kremlin.
He alleged that the Russian government had "unfairly and improperly restricted
the rights of her people" and had taken other actions that might adversely
affect relations with other countries. "Russia has a choice to make," Cheney
warned, "None of us believes that Russia is fated to become an enemy."
Such harsh public denunciation of Russia by a top US government official is
unusual. The media speculation, therefore, was swift, characterizing Cheney's
Vilnius speech as a modern-day version of Winston Churchill's famous "Iron
Curtain" speech 60 years ago. Yet there was something contrived about Cheney's
outburst.
Cheney, the ex-boss of Halliburton, the realist par excellence, does not
usually lose sleep over lofty ideals of democracy and freedom. All roads, in
his straightforward world view, lead inevitably to Mammon.
Moscow seems to have chosen to take Cheney's speech in its stride. When asked
how Cheney would compare to Churchill, Foreign Minister Sergei Lavrov was
dismissive: "I would rather not compare these politicians or give this sort of
ratings." A middle-level Kremlin functionary said Cheney's speech was
"completely incomprehensible". [1]
Moscow apparently chose not to "revive the escalation mechanism", as the
influential president of the Politika Fund, Vyacheslav Nikonov, put it. "Once
this mechanism is set in motion, it's unclear how it can be stopped, and then
the Cold War may start looming somewhere on the horizon," Nikonov said.
Cheney was putting Moscow to a "hardness test". To what extent will Moscow
accommodate US business interests in the Russian energy sector? Will Moscow
persevere, no matter what it takes, with efforts to be an influential player on
the world stage? Will it persist in its present course of broadening and
deepening its strategic partnership with Beijing? Will it continue establishing
energy cooperation bilaterally with the European capitals as if the
trans-Atlantic alliance didn't exist? Finally, what should be the limits of
Russia's "Eurasian" options?
Cheney's speech exhibits a high degree of exasperation in Washington that
Moscow has somehow outmaneuvered it in recent years. The central issue is
certainly energy, a subject close to Cheney's heart. Some major decisions are
in the pipeline, as it were. For the Bush administration with its close ties
with the US oil industry, this is a truly defining moment.
The single most important issue awaiting a decision by Putin concerns the
Shtokman gas fields in the Barents Sea. It will be by far Russia's biggest
energy deal for a while. The gas fields hold 3.6 trillion cubic meters of
natural gas, which is equivalent to about seven times the entire annual
consumption of the European Union member countries and which is estimated to
supply Russia's exports to the United States for 50 years.
The first phase of the project itself would cost US$12 billion to $14 billion.
The gas from the deposit will be pumped through the North European Gas Pipeline
to Europe, but Russia is prepared to supply liquefied gas to the US as well
provided agreeable conditions can be negotiated. The Americans are extremely
keen to get the gas.
Moscow is to award a minority stake to one or more foreign partners to be
picked from a short list that includes Chevron and ConocoPhillips of the United
States, Norsk Hydro and Statoil of Norway, and Total of France. The foreign
companies are vying with one another to offer competitive terms to Moscow.
The Russian side is seeking reciprocal rights for Gazprom to expand into the
foreign markets. The retail market for energy in the US or Europe can be highly
lucrative. (According to a study undertaken by Goldman Sachs, the retail price
for gas in France is 1.9 times that of the wholesale price. The corresponding
ratio is 6.7 times in Denmark. On the average, European end users currently pay
more than $500 per 1,000 cubic meters of gas for what costs their distributors
about $230.)
The French and Norwegian bidders for Shtokman are inclined to offer reciprocal
business for Gazprom. (German companies offered similar reciprocal deals for
Russia in the North European Gas Pipeline project.)
Gazprom is seeking a similar reciprocal deal from Chevron. Russia maintains
that "security of demand" is to be guaranteed on par with "security of supply"
because the cost of energy production and transport is constantly escalating.
The "asset swap" that Russia is offering to its energy customers in essence
involves giving its European (and US) partners access to its upstream reserves
in return for Russian companies participating in European downstream and power
generation.
But the United States remains wary of granting any foothold to Russian
companies in the US downstream market. (In any case, the US Congress would
unlikely favor any such proposal.) Thus the US would rather like the EU to take
a unified position - and has raised the supposed risk of "excessive" energy
dependence on Russia. The European Commission has lately proposed a single
EU-Russia framework agreement under which Gazprom would have to sell its gas at
the EU border.
But this is easier said than done. Putin sarcastically referred to the paradigm
when he said recently in Tomsk, "We keep hearing the danger of becoming
dependent on Russia, and about the need to restrict the access of Russian
companies ... When they [foreign companies such as Chevron] come here, it is
called 'investment' and 'globalization', but when we plan to go somewhere, what
is it? It is called 'expansion of Russian companies'. We need to agree on
common rules of the game."
Washington is annoyed that Moscow has not caved in despite high-level US
political intervention, and is holding back a decision on the Shtokman gas
fields. Meanwhile, the recent agreements between Gazprom and its German
partners and likely progress in the Russian moves to acquire energy assets in
Italy, the Netherlands, Britain, Hungary and other countries in Europe are
further strengthening Russia's negotiating hand.
Equally, Washington apprehends an incremental erosion of its trans-Atlantic
leadership if Russia continues to firm up energy cooperation at the bilateral
level with the European countries. This would have serious consequences for the
United States' global domination. The Vilnius forum itself was a hasty attempt
at establishing US leadership over an increasingly disparate, quarrelsome
flock.
Not only that: at some point, European countries may actually begin to resent
the United States' intrusive attitude on issues concerning their energy
security. European opinion itself is far from consensual either. In an
interview with Financial Times recently, Wulf Bernotat, the chief executive
officer of Eon (Germany's largest gas and electricity company), pointed out,
"Russia has a pipeline system geared entirely toward the West. They make their
money exclusively from exports; they don't make any in Russia itself. So they
need the exports to be profitable to be able to finance the investments needed
to maintain such a high level of production ...
"They [Russia] have got the stuff we want and need. I find the Gazprom supply
debate completely exaggerated and overblown. It is, to be frank, absolute
nonsense."
A second concern of Washington's "energy dialogue" with Moscow involves
Russia's growing cooperation with China. The March report of the Task Force of
the Council on Foreign Relations (CFR), the influential US think-tank, on the
directions of US-Russian relations had an intriguing passage: "The future
policy and development of Russia and China will determine whether the group of
the leading world powers is divided into two blocs based on differences in
political regime ... or even into two military blocs. So far it is still a long
way to such a development of events, but there are certain aspects of
Russian-Chinese relations that in the event of a rapid expansion of cooperation
would bolster these tendencies."
The CFR report was so paranoid about Russia-China cooperation that it urged
Washington to "point out to the Russian leadership the advantages of membership
in a 'single club' of great powers, as well as the threats that would arise if
it were divided".
The heart of the matter is that so long as China remains critically dependent
on energy supplies from the Persian Gulf region, it will remain vulnerable to
US pressures. Washington calculates that the long supply routes through the
Strait of Malacca can be easily throttled, thus bringing China's economy to its
heels if it chooses to do so at any given point.
In the overall US geostrategy, therefore, China must be prevented from
obtaining oil bypassing the Malacca transit zone. China can break out of this
extreme vulnerability to US blackmail only if it succeeds in lining up
alternative sources of energy transiting through territories that are beyond
the United States' reach.
Three such potential sources exist - Russia, Central Asian countries, and Iran.
Washington had assumed that for a variety of reasons, there were insurmountable
obstacles to any meaningful advancement of Sino-Russian cooperation. In
retrospect, Washington grossly miscalculated by subscribing to its own
propaganda about the inherent contradictions in a Sino-Russian rapprochement.
But there is a realization now, bordering on disquiet, in Washington that
Russia and China have reached a level of mutual understanding on regional and
international issues that may have already begun to work against US global
domination.
This is particularly evident in the field of energy. Russia is keen to secure a
toehold in the lucrative Chinese market, so much so that that its oil-pipeline
company Transneft is considering forthwith supplying 1.3 million tons oil from
West Siberia through Kazakhstan (the Atasu-Alanshankou pipeline) to China
pending the construction of Russia's own Pacific oil pipeline. (The thesis of
US strategic "experts" was all along that Russia and China would compete over
energy.) Russia's No 1 oil company Rosneft is getting ready to enter the
Chinese retail market.
China is rapidly expanding its energy cooperation in the Central Asian region -
another energy source that lies far beyond the long arm of US geopolitical
manipulation. Meanwhile, the Financial Times recently reported that Iran is
also entering as a protagonist in the game. The FT report warned: "Analysts are
concerned that an overall hardening of US policy towards Moscow could drive
Russia and Iran, which together hold nearly half the world's gas reserves, into
an energy-based alliance. A senior financier told the FT that Iran, which is
competing with Gazprom to provide gas to the Caucasus, was considering a switch
in policy by selling its gas to Russia through Central Asia because the US was
blocking its access to Europe and India."
Now, that's just a step away from Iran linking up with the Chinese market via
Central Asia. With the Iran-Pakistan-India gas pipeline in the doldrums because
of US pressure, Iran is at liberty to focus on China as its principal Asian
market for natural gas.
If the US had not been foolish enough to torpedo the EU-3 (Britain, France and
Germany) efforts aimed at striking an agreement on the Iran nuclear issue, that
would have led to an improved energy dialogue between Europe and Iran - making
Iran a rival to Russia on the European gas market. Today, on the other hand,
Russia (and China) is likely to seize the initiative - though Iran's own
preference would have been Western Europe. As Iran would see it, an agreement
with Western Europe would have obtained for it a broad political and economic
rehabilitation in the international community.
There was a time not too long ago when Gazprom wanted to enter Iran's gas
fields, but Tehran balked, and began insisting that any Russian-Iranian
cooperation should also include transit projects. Iran is an ambitious country.
But the situation is radically different today because of shortsighted US
policies toward Iran.
The specter that is now haunting the US is the likely admission of Iran as a
full member in the Shanghai Cooperation Organization. Will that happen at the
forthcoming SCO meeting on June 15? Possibly. The only counter that US would
have is to go ahead and militarily occupy Iran.
The third big "happening" on the Russian energy front that Washington finds
disconcerting is the expected $20 billion initial public offering of Rosneft,
Russia's state-owned oil company, through the London Stock Exchange. The deal
could turn out to be the biggest IPO in history.
The Wall Street Journal reported, "Advisers including Morgan Stanley and
JPMorgan took Rosneft president Sergei Bogdanchikov to London in February for a
presentation. So many fund managers and analysts turned up that some had to
stand through lunch."
The Journal commented: "The offering, which could come as early as July, would
be much more than a financial triumph for the Kremlin ... a resounding
endorsement of the Kremlin's drive to retake control of the strategic energy
sector in a country that is the world's top producer of natural gas and No 2 in
oil. At a time of soaring oil prices, President Vladimir Putin sees Russia's
energy wealth as a critical source of international influence.
"Less than a decade ago, Russia defaulted on tens of billions of dollars in
foreign debt, decimating investors' holdings and leading many never to return.
Now, the Russian stock market is one of the world's best performers."
Washington has gone ballistic. American billionaire-financier George Soros (who
also funds "color revolutions") warned foreign investors to steer clear of the
flotation. Buying the Rosneft stock, Soros warned, would legitimize Putin's
"authoritarian regime" - and "cement" the West's growing energy dependence on
Russia. The paradox is that Rosneft's IPO is a positive sign that Russia wants
to integrate with the West. But the US does not want this sort of "integration"
of Russia with the Western world.
Again, Morgan Stanley Investment Bank just reported that the cost of one share
of Gazprom is due to touch $140. That means the total exchange capitalization
of Gazprom will add up to $330 billion. This comes on the heels of the
emergence of Gazprom as one of the three largest companies in the world - even
ahead of Microsoft.
Meanwhile, Russia has offered to pay back the entire foreign debt of the old
Soviet Union (amounting to $29 billion) to the Paris Club within this year by
itself. According to the estimates of the Goldman Sachs Investment Bank, in the
next 20 years Russia is sure to emerge as the economically most powerful
country in Europe, with a gross national product of $3 trillion.
Clearly, Russia's "globalization" is proving successful on several fronts.
Washington must feel vindicated. But it isn't the sort of "globalization" that
the administration of US president Bill Clinton had in mind when it encouraged
Boris Yeltsin's Russia to "globalize". When Washington said Russian economy
must "globalize", it actually meant Russia must surrender its sovereignty over
economic policies and allow "asset-stripping".
Why is the US so upset over the Rosneft IPO or Gazprom's success story? First
and foremost, that has a crucial bearing on the legislation in the pipeline in
Russia regarding foreign investment. Russia's critical need of investments in
the oil and gas industry does not need reiteration. The US had expected that
the need of foreign investment alone would eventually prompt Russia to transfer
mineral resources to foreign partners to exploit - in effect, by abandoning
Russia's sovereign rights. But Russia's oil and gas industry is increasingly
finding itself in a position to mobilize investment capital on its own terms.
Second comes the issue of extraction. The growth in Russia's oil and gas
extraction has slowed down considerably recently. For meeting the requirements
of the growing domestic market as well as for fulfilling the export commitments
to Europe (and Asia-Pacific), Russia simply has to concentrate on boosting
extraction. This means active incorporation of deposits in East Siberia and the
Far East - requiring huge inputs of capital.
A third aspect regards technology. Russia clearly needs Western partners in
carrying out extraction involving high technology in difficult conditions. A
fourth aspect concerns transport links. The old pipeline system of the Soviet
era needs to be replaced, and new lines laid both toward Europe and toward the
Pacific.
All these factors affecting the future growth and development of Russia's
energy industry are interconnected, and a holistic approach toward them becomes
possible only if the industry generates sufficient levels of surplus capital
for making investments.
Thus, from the US perspective, its calculations of gaining control over
Russia's energy reserves are proving to be a pipe dream. Washington puts the
"blame" for this squarely on Putin. The slide began with Putin's crackdown on
Yukos and the "oligarchs" - at a moment when US oil majors were hardly inches
away from capturing the heights in Russia's energy industry.
Cheney's diatribe in Vilnius last week bears testimony to the degree of
frustration in Washington that it has been badly outmaneuvered. Putin depended
on Russia's intellectual reserves rather than resort to grandstanding, while
steering Russia's transition to an influential and energetic state. The
transition was hardly noticeable.
Yet Moscow continues to prevent manifestations of "anti-Americanism" in its
policies. Washington, for its part, must somehow keep an extended (and
increasingly unwieldy) Euro-Atlantic alliance afloat (under its leadership, of
course) despite Moscow's point-blank refusal to lend itself to an enemy image.
Note
1. The following is an official translation of comments by Minister of Foreign
Affairs of the Russian Federation Sergei Lavrov to the Russian electronic media
regarding US Vice President Richard Cheney's remarks in Vilnius.
I
think that a person who holds such a high government post [Cheney] should have
the full amount of objective information, but everything indicates he was let
down by his assistants or advisers. Thus, for example, we read that opponents
of reform in Russia "are seeking to reverse the gains of the last decade". I
think there is no need to explain to the Russian people in detail what kind of
gains those were, when the country had actually found itself on the brink of
disintegration. What the Russian leadership is doing now is to ensure that
Russia is preserved as a unified, integral, strong state in the interests of
its citizens.
Or take the statement that no legitimate interest is served when oil and gas
become tools of intimidation or blackmail. We have heard such remarks from the
lips of politicians lower in rank, but the US vice president surely has to have
the information that over the last 40 years our country, either the USSR or the
Russian Federation, has never breached any contract for the supply of oil and
gas abroad. It is obvious that this information somehow failed to be conveyed
to the vice president likewise.
As to the charges that Russia's government has taken actions that "undermine
the territorial integrity of a neighbor", what is there to say? In the early
1990s it was at the cost of Russian peacekeepers' lives that the bloodshed was
halted both in Georgia and in Moldova, thus saving the territorial integrity of
these states. Not to remember that is, I would say, sacrilegious.
Where I can agree with Mr Cheney is that he would like to see the world as a
community of sovereign democracies. Russia wants to be and is becoming a
sovereign, strong and stable democracy and expects that as such it will
perceived in the world arena as an equal partner without whose involvement not
one global problem can be solved today.
I think that such remarks will not undermine the efforts which we together with
the US, together with Europe and together with other leading countries have
been making in order to build a just world without conflicts where all
countries will be able to develop in the conditions of stability and democracy;
for democracy is needed not only within a state, but also on the international
scene. Let us not forget about this.
M K Bhadrakumar served
as a career diplomat in the Indian Foreign Service for more than 29 years, with
postings as ambassador to Uzbekistan (1995-98) and to Turkey (1998-2001).
