On his return from a trip to Paris last week, Russian President Dmitry Medvedev
held a meeting with Deputy Prime Minister Igor Sechin, who supervises the
energy sector, and expressed satisfaction about world oil prices, which are
expected to stay above US$80 per barrel.
Not that Medvedev needed that information, which is just a wishful estimate,
but he obviously wanted to show that he could summon one of Prime Minister
Vladimir Putin's closest minions and make him say "Yes, Mr President. We will
do this without fail." Russia's feeble economic recovery remains so dependent
on petro-revenues that it is imperative for Medvedev to demonstrate that he
is keeping the oil and gas industries under control.
Addressing French business leaders, Medvedev ventured a proposition that
"economic growth fueled by commodities exports, if it has not already exhausted
its potential, is no longer so relevant for us whatever the case today". He
maintains the emphasis on "modernization", but this course is floundering
because even the stubbornly optimistic Anatoly Chubais, who now manages the
Rosnano high-tech corporation, cannot mobilize sufficient investment power.
Some adventurous Western money has returned to take its chances on the Russian
stock exchange, yet the outflow of direct foreign investments continues. This
trend could only be reversed if the Russian energy sector begins to generate
massive profits again, though such a perspective remains in the
"too-good-to-be-true" category.
The oil industry is actually performing above expectations, but Gazprom, the
country's gas monopoly, faces serious problems and has not - despite a cold
winter - restored its pre-crisis levels of production. The company has finally
admitted that its position on the pivotal European market is weakening while it
renegotiates long-term deals with its key counterparts, relaxing the
"take-or-pay" condition and accepting spot-market prices for a part of the
contracted volumes.
Germany's E.ON was the first company to receive this preferential treatment,
but now every consumer is demanding better terms. The inevitable result of this
uncharacteristic flexibility is a fall in profits, while the Finance Ministry
(supported by Sechin) demands more taxes from Gazprom.
Reluctantly, making one concession after another, Gazprom's management finds
itself in the unfamiliar and uncomfortable territory of a "buyers' market",
where its long-cherished principle of "security of supply" becomes nonsensical.
Any other energy giant in such a crunch would have concentrated on investing in
core assets and cutting down on operational costs; Gazprom is doing exactly the
opposite. An investment decision on the off-shore Shtokman project has been
postponed indefinitely, the work on developing the flagship Yamal project on
the Bovanenkovskoe gas field faces delays, yet the luxurious "Millerhof" palace
outside Moscow, linked by some Russian newspapers to Gazprom chief executive
officer Alexei Miller, has been decorated. What makes this self-destructive
business strategy possible is the significant increase in prices for domestic
customers, who are now paying more than US consumers for gas, but this trend
cannot be sustained.
The key issue that Gazprom faces now, however, is not Shtokman or energy
efficiency, but the Ukrainian dilemma. Viktor Yanukovych, Ukraine's newly
elected president, is keen to normalize relations with Russia, which for him
means first of all to renegotiate the deal that resolved the gas crisis of
January 2009 and secure a significant cut in gas prices, because his budget
deficit is too deep, even by Greek standards.
Paying a visit to Moscow last week, Yanukovych was eager to make every possible
reconciliatory gesture, but the only trump card he could play was control over
Ukraine's gas infrastructure. Selling the proposition for organizing an
international consortium with Gazprom's participation would not be easy,
particularly with Yulia Timoshenko leading the opposition camp, but it does
make solid economic sense.
What constitutes the second horn of this dilemma for Gazprom is that the
modernization of Ukraine's gas infrastructure would make the South Stream
project redundant, because all the additional volumes that Southern Europe
needs could be delivered without constructing a hugely expensive pipeline
across the Black Sea.
Gazprom is committed to the Nord Stream project in the Baltic Sea, which will
inevitably require more funding than currently budgeted, so canceling the
hugely expensive South Stream might help to balance its books. The problem is
that Putin continues to negotiate arrangements with potential partners, most
recently Croatia, as if the South Stream is a done deal.
Medvedev, with his eight years of experience as the chairman of Gazprom's
board, may understand the internal intrigues in this leviathan company even
better than Putin, and he knows who benefits from the deeply corrupt business
of pipeline construction. He has to make sure that the decision to cancel the
South Stream mega-project is his victory shared with Yanukovych and the
European Union partners, who could find it opportune to postpone the Nabucco
enterprise planned to take gas from the Caspian to Europe while bypassing
Russia. Any disagreement with Putin is certain to be sharp, but insightful
oligarchs now find it possible to mention casually that the prime minister has
incomplete and distorted information.
Putin is certainly a grandmaster of bureaucratic infighting, but he may take
his position of power too much for granted. His recent demand to increase
pensions by 6.5% was too populist even for veteran Finance Minister Aleksei
Kudrin, who duly - and in vain - pointed out the deepening red ink in the
federal budget. Public support for Putin's paternalist rent-distribution model
remains strong, and the understanding that petro-prosperity is over will emerge
only slowly, despite Medvedev's efforts at mobilizing elite groups to become
stake-holders in modernization.
The only issue that makes Putin nervous is the "Yukos versus Russia" case that
finally opened last week in the European Court of Human Rights, in which the
now-defunct oil company is claiming US$98 billion in damages against the
Russian government. Unlike the openly farcical process against former Yukos
boss Mikhail Khodorkovsky and associate Platon Lebedev in Moscow, the
international proceedings could put Putin on the spot, and he knows that he
might be personally incriminated.
Medvedev needs a series of strong moves in the not-great but still crucial
energy game, however, he has to time it precisely.
Dr Pavel K Baev is a senior researcher at the International Peace
Research Institute, Oslo (PRIO).
(This article first appeared in The Jamestown
Foundation. Used with permission. Copyright 2010 The Jamestown
Foundation.)
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