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Sunday, February 20, 2005

OPI WEEKLY: RUSSIA'S RECENT PAST: TWO STEPS BACKWARDS AND ONE STEP EAST

Since the dissolution of the Soviet Union some 15 years ago, Russia has balanced uneasily between east and west, guided haphazardly by tumultuous forces within. Vladmir Putin, however, has slowly but surely harnessed those forces. Now, as world politics becomes decreasingly obsessed with al Qaeda and bloodshed in Iraq, less acute but no less important developments are taking place. Between East and West, large-scale strategic shifts seem to be occuring.

Unsurprisingly, Russia is at the center of these shifts. The former superpower, no longer large enough either military or economically to be a pole unto itself, is still large enough to form a key strategic ally for either east or west. Although Putin largely has been seen as a pro-Western leader, political and economic developments over the past year have signaled a transition in Russia that may lead it into less cooperation and more balancing of Western power, and perhaps even an alliance with China, its gigantic neighbor to the east.

PUTIN'S SOVIET SLIDE

In a single, strikingly anti-democratic move last year, Vladmir Putin consolidated Russia’s political power in the office of the President. Under the fairly transparent guise of better combating terrorism in the wake of the shocking Belsan school massacre last September, Putin decreed that regional governors would no longer be directly elected, but rather would be appointed by the President. Although Putin had been successful in any case at manipulating regional elections in his favor, he –or whomever may hold his office in the future—will now choose the regional leaders as a matter of law. This constitutes a reversal of much of the political decentralization of power that has taken place since the end of the Soviet era.

Having achieved a sweeping consolidation of power in the political realm, Putin has now made major strides towards a reconsolidation of Russia’s economic power in state hands as well. The beginning of this process was in the destruction of Russian oil major Yukos and its head, Mikhail Khodorkovsky. It became clear to Yetsin that Russia’s major energy concerns –which together account for almost 25% of Russian GDP—had become large and powerful enough to form a threatening base for a political rival such as Khodorkovsky. The arrest and imprisonment of Khodorkovsky in late 2003 on charges of tax evasion, it seemed, was meant to deter any other of Russia’s ambitious oligarchs from acting on similar political ambitions.

Putin, however, decided instead to solve the problem once and for all, forcing Yukos into bankruptcy and engineering the transfer of its major production assets to state oil company Rosneft. Russia then completed the purchase of Rosneft by gas giant Gazprom via a share swap. When all the dust settled, the Russian state owned a majority stake in Gazprom, now the worlds largest gas supplier and also the second largest oil producer in Russia. Combined with the ownership of the nations electric and nuclear power facilities, the Russian state is a true behemoth in an economy dominated by energy.

In a final move to make sure that a preponderance of Russian power remains in Russian hands, Putin made one final but important change in the Russian political-economic landscape. On Feb. 10 the government announced that firms or consortiums that are more than 50 percent foreign owned would be barred from bidding on natural resource projects of any type. Specifically mentioned in the decree was the Sakhalin-3 oil project, which is expected to yield 4 billion barrels of oil and 26 Tcf of natural gas. ExxonMobil and Texaco had been awarded development rights on the project until those agreements were annulled last year.

Unsurprisingly, these moves have strained diplomatic and private sector relations with the west. The investment climate in Russia remains uncertain as investors wait to see if Putin is done centralizing and nationalizing or if the recent trend will continue. Western responses ranged from Europe’s ‘concern’ to the outright criticism of Russia’s anti-democratic behavior many in the U.S.

RUSSIA'S (UN)DIPLOMTIC TURN

While many in the west were willing to brush off the un-democratic political developments in Russia, Russia
’s heavy handed –albeit unsuccessful- intervention in the recent Ukrainian elections turned into a major diplomatic fracture with the West. In addition, Russia continues to anger Washington in particular with its support for Iran and Syria, two of Washington’s thorniest foes. Syria has been routinely accused by the Bush administration of harboring Iraqi insurgents and is now the chief suspect in the murder of former Lebanese Prime Minister Rafik al-Hariri. The latter issue has even caused a rift with France, Russia’s most enthusiastic supporter in Europe.

Russia’s cooperation with Iran, thought well-known and long-standing, has become increasingly problematic. Russia oopenly assists Iran in the development of its nuclear program. Although both Iran and Russia claim the program is for energy purposes only it has refused to replace heavy-water reactors with light-water reactor when doing so would still allow for energy production but make it clear that weapons grade plutonium is not the purpose. Consequently Iran will soon have the ability to produce enough weapons-grade plutonium to make it a nuclear nation. Russia however continues its support for the rouge nation, despite the recent threat by several U.S. lawmakers to push for Russia to be suspended from participation in the G8.

Given all these difficulties with the west, what lies ahead? Will Russia work hard to repair relations with Europe and the U.S., or will it look elsewhere for political and economic allies? If its recent recalcitrant support for Iran and Syria is any indication, the latter it seems will be the case. Could all this portend a strategic shift that will end up consolidating a loose anti-western alliance of Russia and China and their various smaller strategic allies? Maybe so.

A TRIANGLE TO THE EAST: RUSSIA, CHINA AND IRAN

In many way both Russia and China are similarly situated somewhere between statism and capitalism. They share the need to transform their political and economic situations while still retaining centralized political power over large, disparate, and administratively dysfunctional political institutions. And they have a dissimilarity that also makes them attractive to each other: China desperately needs oil while Russia has a lot of oil to sell. Russia is second only the U.S. among the world’s oil consumers, while Russia runs a close second to Saudi Arabia among the world’s largest oil exporters.

Earlier this month Russia and China announced that Russian oil shipments to China would dramatically increase this year from the current 3 million tons to 15 million tons per year by 2006 and to continue with sharp increases in the following years. In order to do that, Russia will build out the Zabaikalsk railway that connects the two nations and which, in the absence of a pipeline, has been the only way to bring Russian oil south. Such a quick agreement is striking given the difficulty that the two countries had in negotiating much smaller oil shipments during the Yukos affair. Furthermore, Russia is likely to announce soon that they will build, with Chinese help no doubt, a pipeline extension south to China from their already planned pipeline from East Siberia to Russia's port of Nakhodka on the Sea of Japan.

However, as a help as the pipeline extension would be, it will still not account for all of China’s voracious energy needs. In order to maintain its energy security China has been slowly but surely bolstering its relations and gathering oil concessions in north Africa, the Persian Gulf, and even has had some discussions with traditional U.S. supplier Venezuela.

And then there’s Iran.

Late last year China’s Sinopec signed a $70 billion deal with the Iran to import 250 million tons of liquefied natural gas over 30 years from Iran and develop the giant Yadavaran oil field. China already imports 13% of its crude oil from Iran.

The Chinese deal with Iran, however, brings us full circle again to Russia. China and Russia consider themselves impervious to the sanctions and criticisms that come along with association with Iran. Many Western and Western-aspiring nations such as India have avoided lucrative economic and diplomatic oppotunites because of the pariah status held by Iran in the West. The Iran-Libya Sanctions, for example, prevent many countries from helping Iran develop its potentially enormous energy industry.

China and Russia, should they choose to form a strategic alliance, may thus have a willing partner in Iran that could serve the very impotant function of balancing American power in the Middle East -something both Russia and China would be very keen to do. For its part, Iran will certainly take all the help in can get to influence Iraqi politics in its favor, not to mention support for its nuclear aspirations.

Such an alliance, stretching from the edge of Western Europe, eastward to Japan, and encompassing the Middle East could well form a worth adversary to the U.S. and West.

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