IN THIS ISSUE

*St.Petersburg prepares for the visit of the French Mistral
*Gazprom blocks independent gas producer access to its pipelines
*Flu outbreak threatens to derail Ukrainian presidential election
**New in the Jamestown blog on Russia and Eurasia (http://www.jamestown.org/blog):
- Ukraine and Russia Negotiating New Inter-governmental Gas Agreement

“Wind from the West” Brings a Storm to Russian Shipyards

Jacob W. Kipp

“The Wind is coming from the west up the Gulf of Finland.” Those who have read Alexander Pushkin's Mednyi Sadnik (The Bronze Horseman) know that such winds bring with them long waves into the Gulf of Finland and powerful storms that flood St. Petersburg. In this case, the wind is a vessel, the French amphibious assault ship, Mistral, which will visit Peter’s city on November 23, according to a spokesman in Russia’s Baltic Fleet. Paris and Moscow have opened official negotiations on the Russian purchase of one Mistral-class helicopter-carrying amphibious assault ship. This vessel, will be built under the economic stimulus strategy adopted by Nicolas Sarkozy’s government at the STX shipyard in St. Nazarre, France, in partnership with the French shipbuilder DCNS (like the third Mistral-class ship now under construction). STX, one of the most advanced shipyards for building cruise ships, will bring advanced civilian technology to the project to reduce construction costs. Moscow plans to purchase one such vessel and then secure a license to build three others in Russian shipyards (RIA Novosti, November 5).

For France, the sale of the Mistral means added work to French shipyards and future profits from the licensed construction of follow-on ships in Russia. For the Russian government, it will mean the acquisition of a class of ship not presently in the Russian navy and access to innovative technologies developed by civilian ship-building now applicable to warship construction. The visit will also bring more storms of protest from Russian naval shipyards that will see much needed capital going abroad rather than into domestic construction (RIA Novosti, November 5). For an industry that had a near monopoly on all naval construction in the Soviet Union and faced hard time times after the fall of the Soviet Union, this is a bitter pill in terms of economic loss and the assault on national pride.

Critics question the rationale underlying the procurement and claim that the Mistral-class ships are not required. The arguments divide into two camps: those questioning the specific purchase of this ship for power projection missions, and those opposing naval acquisitions and questioning the Russian navy’s ability to maintain a major warship of foreign or domestic construction. In an interview in Komsomolskaya Pravda, Mikhail Barabanov, an analyst at the Center for Analysis of Strategies and Technologies (CAST) and a strong supporter of Russian domestic shipbuilding, characterized the Mistral as a “white elephant” and summarized his argument against the purchase in the following terms:

“From the standpoint of operating a single ship in the navy, radically different from domestic standards, will be nothing more than a typical “white elephant” of dubious military value. Discussion on the construction of three more Mistral ships when the navy cannot even finance the construction of corvettes, turning them into protracted procurements, just looks like a bad joke. The reduction of surface combat ships and vessels in the Russian navy is at a pace that it is not clear what ships of the fleet will protect and provide air cover for the Mistral at the time of its commissioning. Finally, it is striking that the leadership of the navy has not found sufficient funds for the domestic shipbuilding industry, already choking because of scarce public funding, but is ready to so easily dump half a billion Euros for the maintenance of the shipbuilding industry in a NATO country. Yes, even in conditions of economic crisis and rising unemployment” (Komsomolskaya Pravda, September 21).

Barabanov was addressing the age old question confronting advocates of Russian sea power: “does Russia need a navy?” If so, then it must have its own shipyards and works because as a continental power with limited maritime access, it cannot depend upon ships and technology from abroad in time of war. Barabanov is a very strong supporter of Russian naval exports, which have kept the St. Petersburg and Severodvinsk yards in operation during two decades of economic crisis. Equally, he advocates what was the Cold War model of exclusive domestic naval construction in the socialist camp. However, in the information age this resulted in Russian warships facing serious limitations in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) and electronic warfare. Events in the South Caucasus last year revealed serious shortcomings in these areas, and the ministry of defense and the General Staff seem committed to addressing these weaknesses (Nezavisimoye Voyennoye Obozreniye, January 23).

Moreover, the decision to purchase the Mistral highlights a traditional answer to Russia's problem in maintaining the competitive edge of its own naval shipbuilding industry. Autarky means isolation from global innovations in the various technologies that support systems involved in both naval and commercial shipbuilding. It is a problem that Russia has faced since the beginning of the industrial revolution, and the information age makes this challenge even more pressing.

In a recent article on Franco-Russian security cooperation, Natalia Yarmolik cited the personal initiatives of President Sarkozy and Dmitry Medvedev in enhancing the level of bilateral cooperation in search of European security. For Sarkozy, it would seem to be that his first priority is France’s recovery from the current global economic downturn, and the Mistral will mean jobs for French workers. For Medvedev, the importance of Franco-Russian dialogue on security serves as a first step toward a new security structure in Europe, which would stress common interests and exclude Russia’s isolation (Krasnaya Zvezda, October 2).

Russia's naval leadership has frequently sought foreign technology to upgrade its domestic shipbuilding, which involved buying a prototype of a particular class of warship abroad and then developing the capacity to build the same class in Russia and to apply foreign innovations to future domestic designs of other classes. This was so in tsarist Russia and in the Soviet Union before the Cold War. The strongest proponents of exploiting expertise in foreign shipyards came from Russia's leading sailors, who were aware of foreign developments and found state shipyards slow to build ships and even slower in innovations. One suspects that the current leadership of the Russian navy is trying to build a fire under its own domestic shipbuilding industry by imposing external competition upon it. It also appears that the Kremlin is gambling that the wind from the west will bring fair skies after the initial storm at home.

Gazprom Seeks “Equal Profitability,” Reluctant to Face Domestic Competition

Sergei Blagov

Russia’s relatively low domestic gas prices have been seen as encouraging high consumption rates and hindering investments in gas production. The country’s gas monopoly Gazprom has long complained about unprofitable sales and pressed the government to hike regulated domestic prices. Gazprom has insisted that its gas exports and domestic sales should be “equally profitable.” On October 27, Gazprom’s board said that the company suggested the domestic gas prices should become fully market-based from the beginning of 2011 (Interfax, October 27). In other words, the Russian gas giant appears keen to secure similar margins from foreign sales and domestic supplies.

Gazprom has argued it sells approximately half of its gas to domestic consumers, but it received only 18 percent of its revenue from the local market, while the rest came from exports. However, the proposed domestic gas price hike is expected to deal a blow to the country’s many industries, especially the petrochemical and chemical sectors. Russia’s major fertilizer producers, notably Akron and Eurochem holdings, have warned that “equal profitability” could make their exports uncompetitive.

Russian domestic gas sales still remain strictly regulated by the government. Natural gas accounted for 42 percent of its energy consumption in 1991, but the figure has exceeded 50 percent in the past three years. Gazprom has repeatedly blamed low domestic gas prices for encouraging higher consumption, claiming it had suffered losses due to domestic sales at regulated prices. Meanwhile, Gazprom’s export earnings have declined. From January-August 2009, Russia’s gas exports were around 50 percent down at 83.8 billion cubic meters (bcm), while gas export revenues dropped to $22.6 billion down from $44 billion last year, according to the Russian customs statistics.

However, in October Gazprom exported 16.6 bcm or 20 percent up year-on-year. Gazprom’s gas output reached 45 bcm in October or 20 percent up as compared to September. From January-October, Russia produced 460 bcm of gas or 17 percent down year-on-year, according to Russian governmental statistics (Interfax, November 2).

Gazprom currently buys gas from independent gas producers (IGP’s) at regulated domestic prices and sells it for export at higher international prices. Last year, the Russian Federal Anti-Monopoly Service (FAS) announced plans to draft amendments to the gas export law that would allow IGP’s to participate in natural gas exports. The FAS was to submit the draft document to the government in May 2008 and later to parliament for approval in June. However, the draft was not approved by early November 2009, presumably due to Gazprom’s continued opposition.

IGP’s have long sought better access to Russia’s gas transportation system. In January 2009, Prime Minister Vladimir Putin pledged to grant IGP’s better access to the Gazprom-controlled pipeline system. However, the cabinet appeared slow to deliver on its earlier pledges. The Russian government once again delayed approval of regulations on non-discriminatory access to Gazprom’s gas pipelines, the FAS head Igor Artemyev announced on October 29. He also said that the FAS had started a probe into Gazprom on Rosneft’s request (Interfax, October 29).

Earlier this year, the FAS imposed a 158 million ruble ($5.45 million) fine on Gazprom for its failure to allow access to Gazprom’s gas pipelines. However, a Russian court later backed Gazprom and annulled the FAS ruling. Russian IGP’s increasingly account for a larger percentage of domestic output. Russia’s second-largest gas producer, Novatek, as well as oil companies Rosneft, Lukoil, TNK-BP, and Surgutneftegaz are estimated to control nearly one third of Russia’s gas reserves. IGP’s share in total Russian output has increased from 6.4 percent in 1999 to 15 percent. The Russian governmental energy strategy until 2020 envisages raising IGP’s share in the country’s total production up to 17 percent by 2010, and 20 percent by 2020.

This year, Novatek, has reportedly increased its gas output. From January-September, Novatek produced 23.8 bcm of gas or 3 percent up year-on-year (Interfax, October 14). However, Novatek’s output was understood to remain below the company's capacity as Gazprom reduced its gas off take from IGP’s amid weakened demand.

Meanwhile, the Russian IGP’s major sales venue, Gazprom’s Mezhregiongaz (MRG) auction, still remains suspended. In September 2006, the Russian government allowed the gas auctions in a test mode, but in December 2008 the MRG halted them. In January, Rosneft reportedly claimed that the MRG auctions were blocked by Gazprom and requested the government to re-start the MRG auctions. However, the gas monopoly insisted that this was the government’s decision. On October 27, Gazprom said the government was yet to allow the resumption of Gazprom’s MRG auctions (Interfax, October 27).

Therefore, it remains to be seen whether the promised state support might help Novatek and other IGP’s to secure non-discriminatory access to Gazprom’s gas pipelines. Moreover, Gazprom insists that its gas exports and domestic sales should be “equally profitable” although the gas giant has proven reluctant to allow the domestic gas market to become more competitive.

Will Flu Spoil Tymoshenko’s Election Campaign?

Pavel Korduban

A flu epidemic which recently erupted in Ukraine may derail the presidential election campaign. As the major parties try to use the epidemic to their advantage, the situation threatens to spiral out of control because the media hype is causing panic to spread faster than the virus. This may spoil Prime Minister Yulia Tymoshenko’s election chances. Not only is her government blamed for both spreading panic and failing to contain the virus, but also a state of emergency which may be introduced would mean the postponement of the elections scheduled for January 17, 2010 at a time when Tymoshenko is especially vulnerable due to a weak economy.

The behavior of the all-news Channel 5 during the past two weeks illustrates the panic that has gripped Ukraine. All news bulletins start with calls to wear face masks and reports about the flu spreading across the country. Tymoshenko grasped the opportunity to demonstrate her energy and zeal to potential voters early in the epidemic, gathering an extraordinary meeting of her government where she threatened to introduce “special regimes” so that Ukrainians would not travel across the country “without urgent need” and to punish drugstores for high prices (Ukrainska Pravda, October 30).

As the first regions where the epidemic started were put under quarantine, people rushed to drugstores to buy medicines and to street markets to purchase food, fearing that the markets would be closed due to the quarantine. It went as far as a rumor spreading across Ukraine that mysterious planes were pouring anti-flu substances over towns at night (Segodnya, Channel 5, October 30).

While the scale of the epidemic should not be underestimated since apparently in most cases Ukrainians are facing swine flu, the media hype has been excessive. Tymoshenko had to admit that there have been less flu cases and lower mortality from flu thus far in 2009 than, for example, in 2007 (UNIAN, November 9). However, early in the current outbreak she tried to use the situation for her advantage, holding televised extraordinary meetings with government ministers and regional governors and meeting planeloads of anti-flu medicines at airports at night, for which President Viktor Yushchenko did not spare criticism (Interfax-Ukraine, Ukrainski Novyny, November 9).

The epidemic eventually placed Tymoshenko at a disadvantage as a presidential candidate who chairs the government, so it is easy for her rivals to blame her for any mistakes. Ukrainians are inclined to blame the government for the shortage of medicines and for such inconveniences as the closure of schools and kindergartens for quarantine. Tymoshenko’s rivals know this, and they are fueling the fire. The Party of Regions (PRU), which is headed by Tymoshenko’s main election rival Viktor Yanukovych, has accused her of bringing thousands of people from west Ukraine for a mass rally, at which she was nominated for president in Kyiv on October 24, knowing that the epidemic in west Ukraine was in full swing; he demanded the dismissal of the emergencies and health ministers (Ukrainska Pravda, October 30). He also accused Tymoshenko of lobbying in favor of drugstores allegedly linked to Bohdan Hubsky, a businessman from her party (Hubsky denied this) (Ukrainska Pravda, November 5).

Yushchenko accused Tymoshenko of ignoring his calls for preventive measures against swine flu and instructed prosecutors to investigate the October 24 rally (Ukrainska Pravda, November 4). He even compared the rally to the government-organized rallies in Kyiv on May 1, 1986 after the Chernobyl disaster when the ruling communists did not inform the population about the possible consequences (Channel 5, November 4).

Yushchenko is apparently considering introducing a state of emergency over the flu crisis, which would entail rescheduling the presidential election. His aide Ihor Popov opined in a November 6 article in Ukrainska Pravda that if Tymoshenko failed to contain the epidemic it might be necessary to introduce a state of emergency. Popov recalled that no election may be held under a state of emergency, so in this case the presidential poll should be postponed. He suggested that the presidential election should coincide with local elections scheduled for May 30. Yushchenko may benefit if the election is rescheduled. Opinion polls have shown that his rating is still much lower than those of Tymoshenko and Yanukovych, but recently Yushchenko's popularity has grown somewhat. As Yushchenko and Tymoshenko traditionally share the same electorate, he may take advantage of the epidemic in a last-ditch effort to increase his rating at her expense

Yushchenko is apparently undecided. On the one hand, he said in an interview on November 5 that there were no grounds for a state of emergency (Channel 5, November 8). On the other hand, his national security aide Raisa Bohatyryova backed Popov’s opinion (Channel 5, November 6). Yushchenko cannot introduce a state of emergency without parliament’s approval. He may receive it if the PRU backs him. PRU deputy Mykhaylo Chechetov suggested that the election postponement would have fatal consequences for Tymoshenko as a presidential candidate, because her cabinet would run out of money to pay pensions and wages to state employees in early 2010 (Segodnya, November 9). Chechetov may be correct, since the IMF threatened recently that it would withdraw its assistance to Ukraine until after the elections (EDM, November 4). The government has recently relied on IMF money to pay wages and pensions, as well as to pay for Russian gas.

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