Page 2 of 3 Russia is key to North Korea's plight
By Leonid Petrov
self-reliant recovery for North Korea remain problematic. Although food and
energy issues are ostensibly being addressed, the denuclearized North Korea is
going to be significantly weaker and more vulnerable than before due to
changing international circumstances.
Skyrocketing oil and food prices promise to aggravate the domestic situation in
the DPRK much more effectively than any deliberate policy designed to achieve a
regime change or economic system collapse. To remedy this situation, the North
faces the dilemma of either reneging on the six-party talks
agreements or changing its position on energy security.
Russia's energy policy
The most significant issue involving Russia in Northeast Asia is its abundant
oil fields and natural gas reserves. The Asian financial crisis that devalued
the Russian rouble and the dramatic rise in the price of crude oil and natural
gas in the early 2000s has given Russia newfound economic muscle.
State-controlled Gazprom is the third-largest corporation in the world in terms
of market capitalization and it will grow even stronger, as many experts
predict, while the industry is being swiftly re-nationalized. "Russia's economy
is about oil," explains Natalia Orlova, chief economist at the Moscow-based
Alfa-Bank. In 2006, oil and gas were estimated to account for 65% of Russia's
exports and 60% of federal tax receipts, making it the world's largest gas
exporter and second-largest oil exporter after Saudi Arabia. In 2007, Russia's
foreign exchange reserves swelled to $476.4 billion, more than in the entire
Euro zone.
Russia's energy holdings provide Moscow with powerful leverage on the
international stage, a status not seen since the end of the Cold War.
Expectations about east Siberian energy reserves have risen, especially after
April 2006, when Russia started building the $12.5 billion
Taishet-Skovorodino-Kozmino oil pipeline.
A series of disputes over what route the pipeline would take preceded the final
decision. Initially, China's Daqing was considered as the destination for a
shorter and cheaper private-owned pipeline. This plan was lobbied by the then
powerful Yukos chief executive officer, Mikhail Khordokovsky. Nevertheless, the
Kremlin and state bureaucracy promptly interfered, sending the beleaguered
oligarch to jail and reconfiguring the whole deal in favor of running the pipe
to the Pacific coast of the Russian Maritime province.
Russia's primary goal is to develop its sparsely populated Far Eastern region,
which consists of nine territories that are extremely heterogeneous in
political, social and economic terms. Each of the nine members of the Russian
Federation essentially has its own political system, its own business elites
and enjoys a certain degree of autonomy, making the coordination of common
goals for the region very difficult. Thus, development projects that would
bring benefits to the greatest number of such provinces are currently in
Moscow's interest. Still, it was primarily the international policy factor that
played a major role in influencing the final decision to end the oil pipeline
on the Russian coast of the Pacific Ocean.
In a sideline meeting at the 2005 Asia-Pacific Economic Cooperation forum in
Busan, South Korea, Russia's then-president Vladimir Putin met with
then-Japanese premier Koizumi Junichiro and officially offered the Eastern Sea
(Sea of Japan) as the destination for the pipeline in question. Koizumi
reportedly reciprocated by saying that Japan would back Russia's bid to join
the World Trade Organization. To keep China happy, it was also decided that the
branch pipeline would extend from Skovorodino to Daqing.
Although the pipeline's first stage (Taishet-Skovorodino) was due to be
completed in 2008, a corruption scandal and environmental concerns postponed
the estimated date of completion to 2009. Construction of the 2,100 kilometer
second stage from Skovorodino to the Pacific Ocean will start after the launch
of the first stage and, therefore, cannot be commissioned before 2015 or even
2017. In the meantime, extracted oil will be delivered to consumers by railway.
Russia's natural resources have already become a crucial factor for regional
economic development. Along with the opening access to Siberian oil, China and
Japan are vying for Russian natural gas reserves. Indeed, the mood at a
September 2006 multinational energy conference in Seoul - "Toward Regional
Energy Cooperation in Northeast Asia: Key Issues in the Development of Oil and
Gas in Russia" - would testify to this.
Answering a multitude of questions from Chinese, Japanese and South Koreans
regarding where exactly its gas would be going in East Asia, Gazprom counselor
Alexey Mastepanov did not stop repeating that "Gas must be produced only after
it is sold". The problem, however, remains in negotiating a suitable price,
which until now has stopped the construction of the new gas pipeline from
Russia and opens opportunities for competitors in Central Asia.
Such a pragmatic approach to energy cooperation with neighbors also suggests
that any cooperation between Russia and North Korea will be based on a purely
economic level. Deputy director of the Russian Ministry of Industry and Energy,
Igor Scheulov, confirmed that Russia maintains regular contact with the DPRK
concerning energy cooperation at both the corporate and government levels. A
large pipeline project was supposed to send natural gas from the Kovyktinskoye
field in Irkutsk province through China to South Korea. One of the routes under
consideration would have gone through North Korea and it was envisaged that
Pyongyang would receive free natural gas in lieu of a pipeline transit fee.
Nevertheless, despite enthusiasm for the idea, it seemed fairly clear that
running a pipeline through an impoverished and rapidly nuclearizing North Korea
was a risky business. Due to both cost and security concerns, the DPRK was left
out in the results of a November 2003 preliminary feasibility study conducted
by Chinese, Russian and South Korean companies. Tentative agreement was reached
on a pipeline route that would go from Irkutsk through China to the port of
Dalian and under the Yellow Sea (West Sea) to South Korean Pyeongtaek. North
Korea would be bypassed out of fear that Pyongyang might have too much control
over the supply of gas to the South.
When the consolidating Gazprom Corporation took control over this project in
2005, it suddenly started changing the conditions of the proposed deal.
Reserving the gas from Kovykta for domestic use, the Russian side offered China
and South Korea the natural gas from the still underdeveloped Chayandinskoye
field in Sakha. In that case, the pipe route would pass through Khabarovsk and
Nakhodka, approaching the Korean Peninsula from the east. On learning this
news, the South Korean Kogas Corporation refused to sign the deal as it would
have been much costlier and, ultimately, devoid of economic sense. The poor
level of customer service by the state-owned Gazprom and the low demand for
liquefied natural gas in South Korea (only 13% of all energy consumption) were
blamed for the failure of this project.
The prospects for the export of Russian electrical power to the countries of
Northeast Asia, as well, depend as much on political will and stability in the
region as on the state of North Korea's power grid infrastructure. At present,
the Far Eastern division of the Russian government-controlled RAO Unified
Energy System is considering several different projects, which are aimed at
helping North and South Korea to satisfy their energy needs.
According to one plan, Russia will direct electricity from Bureyskaya
Hydropower Plant via the DPRK to South Korea. The high-voltage (500 kilovolt)
electrical power transmission lines can be fixed very high above the ground to
make any illegal tapping into or interruption of electricity by the North
unlikely. Neither will South Korea be able to exert any pressure on the DPRK:
power allocated for the North will go along a separate line because the
electrical grids in the two Koreas are technologically different. Another plan
suggests that Russia will be able to provide 800 MW of electric power to North
Korea in lieu of the energy promised by South Korea to that country.
Earlier projects which would have connected the Russian energy network with the
two Koreas failed because South Korea did not want to be in a position of
dependency on oil or gas being piped through the North. The tense international
atmosphere surrounding North Korea's nuclear ambitions continues to badly
affect the prospects of successful implementation of Russian energy in
Northeast Asia. Certainly, a trilateral agreement would be needed to realize
this. In the meantime, RAO Unified Energy System is exploring the more stable
markets of northeastern China and Japan.
Russia cooperation with North Korea
Since the early 2000s, overall relations between Russia and the DPRK have been
improving. The DPRK's importation of refined oil from Russia saw its first
increase in 2002-2003 (from $20 million to $96 million) and was caused by the
beginning of the US-DPRK nuclear confrontation and the subsequent demise of the
international Korean Peninsula Energy Development Organization project that was
to construct a light water reactor nuclear power plant in North Korea.
During 2004-2005, petroleum trade between Russia and North Korea grew from $105
million to $172.3 million. Until the six-party talks produced their first
results, in the list of Russia's exports to the DPRK, oil products dominated at
63%. Rampant corruption in both countries also let a trickle of Russian oil to
be smuggled to North Korea unaccounted for.
In 2006, Russia was the DPRK's third-largest trading partner after China and
South Korea and absorbed 9% of the total $3.18 billion spent by the North on
imports (approximately $286 million). The Kremlin's approval of international
sanctions against the former communist ally was accompanied by the curtailment
of trade with
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