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Friday, April 08, 2005

OPI WEEKLY: A NEW DIVISION OF EUROPE: RUSSIA'S OIL DIPLOMACY AND THE WEST

Russia is undoubtedly in crisis, albeit a quiet one. Pro-democratic forces supported by the West have taken hunks out of the traditional Russian sphere of influence. However, as one of the world’s largest exporters of oil and natural gas, Russia still has a measure of geopolitical power. It will use its now-recentralized energy industry to ally with an increasingly anti-American block of European states.

A KREMLIN DIVIDED

Pro-democratic (read: anti-Russian) forces supported by the West have taken hunks out of the traditional Russian sphere of influence –the Rose Revolution in Georgia, the Orange Revolution in Ukraine, the Tulip Revolution in Kyrgyzstan, a preemptive Western slide in Moldova, an anti-government demonstration in Uzbekistan, and now unrest within Russia itself in the autonomous Russian Federation republic of Bashkortostan. There are significant political forces within Russia –the so-called “siloviki”—that consider these losses of Russian power and influence to be unacceptable and dangerous. Comprised of former KGB and Military hard-liners, they contend that President Putin, cow-towing to Russia’s economic-liberal oligarchs, has sold out Russian security.

The conflict between the oligarchs and the siloviki is not new. Putin, whose connection to the hard-liners stems from his years in the KGB, has tried to walk a fine line between the two camps since his accession to power. Increasingly, however, the siloviki have gained strength. The 2003 jailing of Russia’s then-richest oligarch, oil executive Mikhail Khodorkovsky, changes in Russia’s election laws, and the Russian clamp-down on the media are most ominous manifestations of the increased hard-line power.

Khodorkovsky, who until his arrest was Chairman of Russia’s then-largest oil company, Yukos, earned siloviki wrath when he violated the unspoken rule that had tenuously kept the peace among Russia’s power elite –i.e., that oligarchs may amass wealth and economic power, but that they were to stay out of politics, both foreign and domestic. His ensuing arrest and the progressive dismantling of Yukos has rattled foreign investors who fear that no company is safe from such treatment. Furthermore, Yukos’ primary production assets landed in the hands of a now state-controlled Gazprom, giving the government a central place in the gigantic Russian energy industry. When the dust settles, the Russian government will control one of the largest energy companies in the world.

At the same time, there has been increasing curtailments on the freedom of the press. The majority of media outlets are now state-owned, and press reporting during elections is especially constrained. Journalists who have challenged the government have found themselves in jail on bribery and libel charges.

Furthermore, Putin recently pushed through a change in Russian election law such that regional governors are now appointed by the President, instead of being subject to regularly held elections. While this change was made ostensibly to help the Russian government fight terrorism in the country –the change was made in the wake of the Belsan school massacre and the downing of two Russian airliners by terrorists—the move was clearly a power-grab by Putin.

It now remains to be seen to what ends this power is used.

GEOPOLITCS AND THE RISE OF THE HARDLINERS

The conflict between the hard-line siloviki and the oligarchs is not only domestic. The two groups have divergent perspectives on Russia’s current geopolitical situation as well. The oligarchs, intent on building their own fortunes, would like to see Putin engage the West. They argue that such engagement will secure Russian security through participation and integration in Western economic, if not political, institutions, and the resultant prosperity could make Russia once again a world power. In pursuit of such ends, Russia has completed WTO negotiations with the countries accounting for some 80 percent of Russia's trade and Russian accession into the WTO is likely to take place soon. Perhaps more important, however, Russia is also Europe’s largest supplier of oil and natural gas, thus diminishing the chance of conflict. After all, good pipelines make good neighbors.

The siloviki, however, have a very different view on how best to protect Russia’s security. For them, the “loss” of Ukraine to the pro-Western Yushchenko was nothing less than a disaster. Not only is Ukraine viewed along with Belarus as the ‘heart’ of Russia, it also is strategically key. Given the lack of natural barriers between Europe and Russia’s largest cities, Russia’s security strategy for centuries essentially has been to push its borders outward in order to keep foreign armies as far away as possible. It is no wonder that after Hitler’s armies had stood at the gates of both Moscow and St. Petersburg before they were finally repelled, Russia was so keen on keeping the Warsaw pact countries as a captive buffer from the West. The same logic explains Russia’s attachment to the largely Islamic statelets of the Caucuses and Central Asia–often referred to as Russia’s ‘soft underbelly’.

The siloviki contend that Russia must challenge the encroachment of the West into these protective regions. Indeed, following the fall of the Berlin wall the west had promised (though not in writing, of course) that no Warsaw pact country would be included in Nato, let alone countries even closer to Russia itself, or a country so strategically key as Ukraine. As these barriers continue to fall, mostly due to American influence, the siloviki feel that Russia’s very security and independence are at stake. This is a bitter pill to swallow for a country that not long ago was deemed one of the most powerful on earth and one that still has intercontinental reach with enough nuclear weapons to destroy humanity several times over.

To the consternation of the siloviki, however, nuclear arsenals don’t always translate into translate into geopolitical power, and the decrepit state of Russia’s conventional forces can hardly be exaggerated. Although ICBM’s cant travel the world around, Russia’s conventional military has little ability to project power. Indeed, the condition of the military that Russia inherited from the Soviet Union was already poor, and it deteriorated quickly from there as the Russian economy collapsed following the dissolution of the Soviet Union. Unable even to put down a relatively small and ill-equipped insurrection in Chechnya, Russia simply does not have the military capability to credibly take a stand against any modern or well-equipped army.

So as Russia’s geopolitical position and security worsens almost daily, the siloviki gain the upper hand. The oligarchs fear a political-economic retrenchment that will curtail Russia’s chances for economic development. Between the siloviki and the oligarchs, Russia seems to be stuck between a rock and a hard-place.

However, there is somewhat of a geopolitical and economic middle-ground for Russia to occupy. The West itself is becoming increasingly divided into two different and partially opposed parts, the United States and the Franco-German block of the EU. Europe’s anti-American block first consolidated in the face of the U.S. invasion of Iraq. France and Germany openly opposed the war, followed by Spain’s newly-elected socialist leader, Jose Luis Rodriguez Zapatero. The EU’s central European members, joined by Italy, came out in favor of U.S. aims.

Since then, the division of Europe has intensified. Just last month the leaders of France, Germany, Spain, and Britain held a conspicuously non-EU summit with President Putin. While these countries played down the significance of the meeting, it was a clear signal that when it came to Russia, there was a clear divide amongst EU nations. While Britain will not buy into the anti-American sentiments held by the other three, Italy seems poised to take its place, announcing recently that it will pull its troops out of Iraq in the near future. These developments are powerful signals of a Europe divided when it comes to relations with both Russia and the U.S.

GEOPOLITICS AND OIL

The most obvious motivation for the consolidation of this anti-American block of European nations is the old-fashioned realist one –to create a counter-weight to U.S. dominance of world geopolitics. This is especially true of France, which has a long history of trying to balance U.S. power on the continent.

But there are also more immediately material motivations as well. Russia is the major supplier of oil and gas to Europe. This is particularly true of Germany, which gets 31.5% of its oil and 39% of its natural gas from Russia. Furthermore, Germany’s next two most important oil suppliers, Norway and Britain, which supply 21% and 10.9% of its oil respectively, are likely to export less in the coming years as their off-shore fields become depleted.

Indeed, Germany has tacitly supported Russia’s heavy-handed break-up of Yukos and the consolidation of its energy sector in government hands. They have also sought to mute EU criticism of Russia’s recent behavior, which has come largely from the new-entrant states of central Europe. These states’ view of Russia is still defined in large part by their long and bitter past as captive Soviet satellites.

Russian gas and oil are similarly important for France: as North Sea fields give out, Russia will supply an increasingly significant portion of its energy needs. While France historically has imported a large amount of its oil from the Middle East, those supplies are no longer so secure. The current U.S. influence on Middle East politics –particularly in France’s long-time ally, Iraq—makes France decreasingly likely to rely on Middle Eastern oil and more likely to turn to Russia for steady supplies.

But the dependence goes both ways: Russia counts on energy hungry Western European countries to purchase its oil and gas. Germany purchases 18.2% of all Russian crude oil, with Italy purchasing 12.6% and France 8.6%. For a state as dominated by oil and gas exports as Russia is –oil and gas account for roughly 25% of Russia’s GDP, 55 % of its export earnings, and 40 % of its total tax revenue—these are fundamentally important relationships.

However, all is not friendly between Europe and Russia –namely, the countries between Europe and Russia through which oil and gas must transit westward. Pipelines through Central Europe –the very countries who have sided recently with the U.S. and against France, Germany, Spain, and Russia—are the main suppliers of Russian oil and gas to Western Europe. Germany has been trying to engage Russia and Ukraine in a pipeline consortium to secure these supplies, but it has been slow-going. The only alternative for Germany to such a deal would be pipeline beneath the Baltic Sea, which would nearly double the cost of transit.

The states of Central Europe, unsurprisingly, are trying to free themselves of the intense external influences that their position between Russia and Western Europe provides. Not only are the states of Central Europe of intense interest to both East and West, but also they are themselves dependent on Russia for oil and gas, not to mention the revenues that accrue from transiting the Russian exports.

Recently Ukraine announced that it will reverse the flow of oil in the Odessa-Brody pipeline. Instead of transporting Russian oil south for export from a Russian pipeline connection in the Ukrainian city of Brody to Ukraine’s Black Sea port of Odessa, it will carry oil from the Caspian Sea through Georgia to and then North from Odessa to Brody. A further agreement was then reached that will extend the pipeline to Plock, Poland and further export to the West. This pipeline currently has a maximum capacity of 900,000 bbl/d, enough supply all of Poland’s 500,000 bb/d with the rest going westward. For Ukraine and Poland, at least, this would be a great step toward energy independence from Russia.

Should the states of Central Europe achieve this measure of energy independence from Russia, they are all the more likely to identify themselves with the United States and be less beholden to Russia and the Anti-American block of EU states. This new division of Europe will place tremendous strains on both Nato and the EU.

CONCLUSION

In many ways Russia is in desperate geopolitical straits, and the foreign policy hard-liners in the country know it. Oil and gas exports and the geopolitical power they convey are one of the few traditional foreign policy tools that Russia has left at its disposal. It is also one that benefits both the hard-line siloviki and the more-liberal minded oligarchs. Cooperation between Russia and the anti-American block of EU states, Germany in particular, is likely to be an increasing facet of international politics. Such relations will also worsen transatlantic relations and further fracture an already struggling EU.

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