Temper tantrum
by Jerome a Paris
Tue Jul 18th, 2006 at 08:09:45 AM EDT
It's been a bit frustrating for me to be away during the G8 summit as it was meant to discuss subjects that I know intimately (Russian gas and energy security) and that are prone to in my view erroneous and misleading coverage in the Western press. So I've decided to come out of my self imposed silence to react to a FT article, by Philip Stephens, whom I identify, rightly or wrongly, with the voice of the UK political establishment, and which I will presume reflects the common wisdom of these elites on the topic.
The west folds before Putin's bluff
Anyone who has sat around a poker table knows the feeling. You have been dealt a strong hand but the steely eyed fellow opposite keeps raising the stakes. Eventually, your nerve breaks. Even as your adversary scoops the pot you know in your heart it was a bluff. Pride demands you pretend otherwise.
Vladimir Putin is a leader who has been enjoying his winnings. For Mr Putin, the purpose of the St Petersburg summit was to reassert Russia's role as a global superpower. The task was made easy by the fact that his fellow leaders in the Group of Eight leading nations had folded their cards even before they reached the summit table. On one level, St Petersburg testifies to the inconsequential nature of the G8. On another, to the Russian president's skill in exploiting what might best be called the new international disorder.
The underlying theme is one of frustration, directed both at Putin for exerting his (undeserved) power, and our at own leaders, for failing to define and implement the energy strategy they should.
It reflects a number of assumptions and inconcistencies that I would like to flag, going throught this article line by line.
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In the absence of anything resembling a consensus on the Middle East, the leaders struggled to paper over the cracks. The Russian refusal to criticise Iran and Syria for their undoubted role in the conflagration in Lebanon sat alongside George W. Bush's simplistic mantra that all this is about the global war on terrorism. When France's Jacques Chirac said a statement released by the G8 leaders had called for a ceasefire, Mr?Bush's aides insisted otherwise. Britain's Tony Blair by and large sided with Mr Bush and Israel. The message from all this to the combatants? Keep fighting.
I won't comment much on the Middle East bit other than to note that the jab about Bush's "simplistic mantra", and putting Bush, Israel and Blair in the same bag are probably the best criticism one can hope for here.
Just as they are divided on the Middle East, so western leaders have misread Mr Putin. There was a brief moment earlier this year when it seemed that the west's democracies might at least extract a small price for their attendance in St Petersburg. There were whispers that Mr Bush might even boycott the summit. Instead, they asked for nothing and were mocked in return by their host.
Sitting alongside Mr Bush, Mr Putin quipped that he was not interested in importing Iraqi-style democracy to Russia. Asked about corruption, the Russian leader offered a barb at Mr Blair's expense. Was the British prime minister not under investigation for his role in party funding?
For the record, I personally think that Russia is a lot more corrupt, and less democratic than the countries in the West, but our own levels of corruption and contempt for democratic processes are such that we are really not in a position to give any lessons to Putin or to be righteous on this topic. I find this a pity all round, but Putin's words are sadly well deserved.
Energy security was supposed to be at the heart of the deliberations. Instead, the final communique was another badly stitched compromise. For Russia, oil and gas are the essential instruments of its return to the global stage. For others around the summit table, energy is a scarce commodity. So why argue with one of the world's biggest suppliers? Better to settle on a few rhetorical bromides.
The problem is not one of "arguing". If energy is a scarce commodity, then either we use less of it or we have to deal with those able to provide us with our needs. "Dealing with" does not mean "ordering around" or "being sanctimonious to". It means listening to that provider, and in all likelihood taking into account what is said. And if we don't like it, then we can always go back to option one: use less energy.
In this, St Petersburg could be said to have been a triumph for those who count themselves members of the realist school of foreign policy. Their argument runs roughly as follows. Mr Putin has restored internal order to Russia while soaring energy prices have filled the Kremlin's coffers. Europe is ever more dependent on Russian gas. The US needs Moscow to help curb Iran's nuclear ambitions. So why get overexcited at Russia's steady drift from nascent democracy to authoritarian kleptocracy?
While the basic "realist" argument is correct, it is presented here with several biases that significantly change it:
Europe is not ever more dependent on Russian gas. The UK is suddenly finding itself with the prospect of becoming just as dependent on Russian gas as the rest of continental Europe has been for the past 30 years. Of course the overall dependency of Europe goes up, but that comes chiefly from the UK's brutal shift from gas exporter to gas importer. While it could safely ignore energy issues before, protected by its North Sea loot, and scoff continental Europeans' focus on energy security, it is suddenly changing its tune and, frankly, overreacting badly, including the self-righteous (and counter-productive) lashing at Putin's Russia. Access to energy is NOT a basic right of countries and the UK is throwing a tantrum like a spoilt kid that suddenly has its toy taken away. The problem is that it is de facto setting policy for Europe without this having been seriously debated.
the second point is that describing the Putin years as a "steady drift from nascent democracy to authoritarian kleptocracy" is terribly disingenuous. Describing it as a "steady drift from chaotic kleptocracy to authoritarian kleptocracy" (a net positive, especially for Russians) would be more a propos. "A steady drift from cowed-impotent-and-submissive to uppity-and-impossible-to-ignore" might be an even better label from the West's leaders' perspective and explain their current annoyance...
To my mind, this is to confuse realism with capitulation. Earlier this year Russia disrupted gas supplies to Europe when it turned off supplies to Ukraine. Amid much indignation, European governments demanded Russia guarantee security of supply by liberalising its energy market. Mr Putin refused. The Europeans shrugged their shoulders.
This is a disingenuous reading of what happened. The fact is that these gas conflicts with Ukraine have been going on since 1992, and have nothing to do with the West, and are always resolved in the same way since 1993: with Russia capitulating to Ukrainians cutting the transit gas and European protesting, and immediately restoring supplies. Gazprom has always been very careful to maintain supplies to the West, and it has. In January, it restored supplies before any agreement was found with the Ukrainians. I wrote my PhD on the topic in 1995 and this year's crisis fit the exact same pattern.
Now to the assertion that Europeans "demanded Russia guarantee security of supply by liberalising its energy market". It is true that this demand has been made, but it has nothing to do with security of supply. Liberalising the energy markets (in practise, giving access to Russian oil & gas reserves to Western oil companies, and giving them rights to use the existing pipeline monopolies to export their production to Europe, both for oil and gas) would do one thing: give these Western companies a big claim on the oil & gas rent (the profit made from digging something "free" out of the ground and selling it for a profit) of Russia. It would not give them a bigger piece of the rent, as Russia would still be free to impose uniform production and export taxes, but it would set the stage for permanent negociations on these taxes. Today, prices are high and Russia's bargaining position is strong, but what about in the future? What would Russia get from opening this door today?
The argument is usually that it would spur investment and make the industry more efficient. There is a simple retort to this: Russia is investing enough today (its oil industry is still mostly private and keen to take advantage of today's prices, and Gazprom does not need more capacity today, as it exports all it can and any additional production would be wasted inside Russia where it is distributed at low prices.
So liberalisation is a self-serving demand by the West that provides little to Russia. How can we be surprised that Putin does not like such a one-sided deal?
A truly realist policy towards Russia would have two components. The first would recognise that the present regime in the Kremlin is not interested in grand bargains with the west, about energy or anything else. Nor does it want to "integrate" Russia into Europe.
I am not sure that's true. On the gas side, for instance, Russia has always been keen to set up strategic deals that secure demand for its gas and allow it to make the necessary long term investments. ExxonMobil and others sign 25 year contracts to buy gas from Qatar in order to set up the financing for the massive investments needed to build the production and transport infrastructure. Why are similar requests by the Russians seen as unreasonable? Gas is an infrastructre business with huge upfront costs and both the supplier and the buyer need the stability provided by very long term contracts/frameworks for the economics to work. I really don't understand why the eminently sensible demand by Russia is mocked by our leaders (and I am sure it isn't by the industry itself).
Mr Putin's Russia has bigger ambitions. It intends to use its new-found wealth to maximise its global influence. On the way it is also determined to re-establish its authority over its so-called near abroad - most obviously Ukraine, the Caucasus and central Asia.
I'd be curious to find a big country that does not try to "maximise its global influence". What kind of an argument is that? As to the near abroad, what would the USA had done a few years ago if the Soviet Union had set up bases in Mexico and Canada and invited them to join the Warsaw Pact?
The second component would understand that, most of the time, Mr Putin is bluffing. For all its present good fortune, Russia is a state in decline. Its almost complete economic reliance on oil and gas is reminiscent of the late Soviet era. The country's population is shrinking by more than 500,000 a year and its workforce is ravaged by ill health and alcoholism.
Russia's very real problems do not make its current possession of goods desperately sought by the West less powerful in any way. We crave energy; Russia has some; thus it has power over us. The rest has little relevance here.
Those with close knowledge of the industry say that businesses such as Gazprom, the state gas monopoly, are rotting from the inside. Gazprom is hopelessly inefficient, technologically backward and can meet its orders only by coercing central Asian suppliers. As for threats to cut off supplies to Europe, Gazprom has no other customers. Nor does Moscow possess the financial capacity or the technology to develop its vast hydrocarbon resources in Siberia.
Gazprom is not inefficient, it is not technologically backward, and it is perfectly able to develop its Siberian resources. It does not need to right now, simply because there is no further demand for its gas at interesting prices. It is exporting all that Europe will take, and any increase in production would go to the domestic market where Gazprom makes little profit. The use of Central Asian gas is a useful gambit to hide real production capacity from the Kremlin (and thus negotiate lower taxes and higher regulated domestic prices) and to hide very real scams that profit a select few in Gazprom's top management (such as the opaque contracts to Ukraine via shady third parties, that simply cannot ship gas from Central Asia to Ukraine via Gazprom's pipelines without high level consent).
What is true is that a lot of the rent Gazprom generates (because of its hold over super giant gas fields and its incredible pipeline network that give it the lowest cost of gas to Europe by far) is looted by insiders at various levels, and is reflected in higher costs. But the West's argument is that such loot should go to Western shareholders (in the form of "fair profits") rather than to Russians, in the form of subsidized gas and yes, corruption. What is the attraction of that to Russians (including to the general population, for whom access to cheap gas, and thus cheap electricity and heating, is the most fundamental service their government can provide in their cold country - and the way it is currently done, in kind, is the fairest and most effective that can be hoped for in the country)?
And it is also true that Russia is fully dependent on Europe's market for its gas (and most of its oil) sales, which makes Putin's assertions that he is looking for fair, bilateral deals all the more credible. We have to look at it from their perspective as well.
In short, Russia has none of the attributes of a 21st-century superpower. In poker terms, the country's oil and gas reserves give the Russian leader a hand equivalent to, say, a pair of sevens. But Mr Putin knows how to bluff - easy enough when your opponents have so obviously lost their nerve.
Nice try, but as long as we are desperate for more energy, then Russia having oil and gas, and the means to deliver them to us via their transport infrastructure, then Putin holds 4 aces, and has no reason to indulge our silly fantaisies that Russia should provide us with Russia's oil and gas, no questions asked.
So far, Russia (and before it, remember, the Soviet Union) has been an extraordinarily reliable supplier of gas, and I see no reason to believe that this will change. Gas infrastructure creates co-dependencies and neither party can use the mutual dependency to any lasting profit - both lose out from conflict. Russia is currently benefitting from much higher oil and gas prices, caused by our reckless push for ever more energy to be burnt, and is reacting mostly benignly to what can only be described as the self-indulgent tantrums of a spoilt kid. We have no God-given right to the energy resources of the rest of the world, and Russia, despite their supposed decline or weakness, is unlikely to have its hand forced.
It's time to drop the sanctimonious tone and speak in good faith with Russia - or to work on reducing energy demand. Why is that so hard to understand - and to do?
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