Tuesday, May 02, 2006

Bloomberg Columnist Matthew Lynn - Resistance is Futile

Bloomberg.com: Bloomberg Columnists

Column today from Bloomberg's Matthew Lynn which suggests it is time for Europe to embrace Gazprom, rather than defend themselves from the state-created and state-owned Russian natural gas giant. His key points:
First, its resources are too big to ignore. Of course, Europe could develop alternatives. It could push for nuclear, wind or water power. It could reopen coal mines. The trouble is, all that costs a lot of money.
Next, the threat of energy blackmail is overblown. Let's say Gazprom buys Centrica, and maybe some gas retailers in Spain or Germany, as well. After paying for the acquisitions, what would be the point of turning off the supplies? Gazprom is no more likely to stop providing gas than BP is to shut down its filling stations. Or Saudi Arabia to stop selling oil.

Of course, Gazprom is effectively a state-run company. It doesn't do much without the government's approval. And yet, it is hard to take European complaints about that seriously. It isn't as if governments in the region never meddled in the affairs of their companies. BP didn't get the nickname Blair Petroleum by accident. Energy and politics have been mixed up for more than a century. There is little chance of disentangling them now.

Relying on Russian gas is no worse than relying on Middle Eastern oil. And the more closely Gazprom is knitted into the western European economy, the more dependent it will become on keeping it healthy for its own survival. The more Europe embraces Gazprom, the less of a threat it will be.
Perhaps Mr. Lynn hasn't been paying attention. When the Russian president laughs and smiles on New Year's Day that he is shutting off the gas from the state-controlled Gazprom to Ukraine, and state-controlled TV camera's show the staged event of workers turning knobs to turn off supplies in a symbolic gesture ... you have created a situation which never existed with other utility suppliers.

Perhaps Mr. Lynn should read Masha Gessen's most recent column regarding how politics and economics mix in Russia:
... I found it instructive to read the how: the discussion that preceded the Duma’s vote on the ban the week before last.
Russia’s head hygienist, Gennady Onishchenko, declared that wines originating in Moldova and Georgia contained traces of harmful pesticides and could no longer be sold in Russia. The discovery of the pesticides came at a convenient time to punish Georgia and Moldova for recent political actions and statements that Moscow views as disloyal or hostile. The ban on wine imports, instituted last month and later extended to include brandies and sparkling wines, dealt a huge blow to both countries’ economies as well as to Russian wine importers.

Last week a resolution supporting the ban came up for discussion in the Duma. It was introduced by a United Russia deputy, who made the following statements. Many Russians deaths — roughly 13 percent of the total number — are caused by poisoning by low-quality alcohol. Onishchenko has checked Georgian and Moldovan wines and decided that they are the culprit. The Duma should support Onishchenko.

None of the study results cited by the United Russia representative were distributed among the deputies. And if I were a Duma member, I’d be surprised that relatively expensive imported wines are the cause of alcohol poisoning, which, common sense would suggest, is far more likely to stem from cheap vodka. One of the deputies was surprised, and did ask for documents. The United Russia presenter responded that the Duma had no reason to doubt Onishchenko’s word. It was, then, a matter of trust and loyalty.

Several deputies immediately affirmed their loyalty to and trust in the country’s top hygienist. Then another deputy, an agronomist by training, stood up and, in a roundabout way, suggested that Onishchenko may not be entirely trustworthy, since he claims to have found traces of pesticides that haven’t been used in decades, and indeed have never been used on grape plantations. He got no response at all.

A short while later, a deputy representing the Rodina faction took the floor. “The executive branch made decisions on Georgia and Moldova at the same time,” he noted. “It’s as if the stuff of winemaking went bad in both countries at the same time. And at the same time brandies and mineral water went bad as well. Isn’t that strange? Of course it’s strange. Why are we voting on a resolution that’s all made up of strangeness? ... And no one is even asking us to do this.” This was an important point. There was no indication that the consumer protection service or customs service actually needed a Duma resolution to maintain the ban. But the Duma seemed to need to prove its loyalty and trust to the executive branch.
Perhaps we should point to more examples of how economics and heavy-handed international politics are mixed in Russia. For example, Russia™ is so determined to bypass naughty neighbor's Poland and Lithuania that they are planning to spend over $6 billion to attempt an undersea pipeline. This is $6 billion more than it would cost to build a more conventional pipeline across neighboring countries. Why spend this kind of money to construct something that might not even be feasible? If you ask Poland, it is so Russia can exert economic pressure - in effect, Russia will be able to shut off natural gas to Poland without affecting Germany and other parts of Europe.
"The Russian ambassador to Belarus said last week when the Baltic pipeline is built, Gazprom will be able to cut off Belarus without cutting off Germany. That means Poland too."
One wonders what Germany would think if Denmark, Netherlands, Belgium or France worked out a similar deal with Russia. "Hey, for $10 billion you can have your own gas pipeline, too!"

Europe already has an unprecedented reliance upon imported natural gas and oil. While many newspapers are fond of citing the US reliance upon imported oil - as a percentage of consumption, Europe is far, far more dependent upon imports, having essentially no natural resources.

Articles by Matthew Lynn and others seem to believe that Russia is equally dependent upon exporting to Europe, as Europe is dependent upon natural gas imports. If only that were so - recent remarks from Gazprom CEO Alexei Miller suggest otherwise. Buy our gas - or else - was the message. And while Alexander Medvedev tried to withdraw from such statements, there has always been an element of Russian character and politics that was willing to cut off the nose, to spite the face - in order to demonstrate resolve, strength, and character.

Before Europe continues down this path, perhaps they should ask Moldova about the costs of dependence upon Russian trade. Perhaps they should ask Ukraine. And ask Poland. And ask Georgia. The Russian government has made it clear - the price tag for Gazprom gas will be more than euro's - it will include an oath of fealty.
One of the major factors we use to judge the relations another country has with Russia, Russians and the Russian-speaking population language, one of the most important factors is their attitude towards the Russian language. We consider it this way now, and I am confident that it will remain this way in the future. For precisely this reason attitudes towards Russian language determine the essence of relations that a country has towards Russia in a historical perspective. And it is here that we can see if there is an element of strategic partnership or not, if our relations have a tactical character, are transitory, or are calculated to resolve today's problems.


RC Administrator said...

Whilst I realise that this premise might sound absurd now (it did sound even more absurd back in 2001 though), but the threat of armed conflict on European soil cannot be underestimated.

This goverment is not goint to change. Russia is not going magically to start resembling European values and middle classes (the carrier of democratic values apparently) is unlikely to ever become legitimate. There are no smart people in charge of things, there are no smart decisions (only the minimum of competence brought on by status). For anyone who has dealth with high-ranking officials will know that. It's like a big time-bomb.

W. Shedd said...

I believe that Russia has a right to protect it's best interests - both economic and political. Every sovereign nation does the same, in varying manners. Certainly historically, the Russian people have demonstrated great resolve in doing just that. But neither should the nations that trade with Russia, nor those who observe such matters, be blind to how those interests are often expressed or served.

Blogs and columnists are very fond of pointing towards the US as a possible source for future petroleum wars. European dependence on imported petroleum is no less and cooperation on energy related issues among the EU appears unlikely. Germany is certainly not expressing any unity towards Poland or other EU states by agreeing to spend billions to secure it's own energy future, while foresaking that of its EU partners.

While there is always the possibility for war in Europe, I think it is more likely that political influence will be won and loss on the petroleum trade battlefields.