IN THIS ISSUE

* TNK-BP Kovykta project license under threat of revocation
* Russia strengthens deterrence against China
* Tensions rise between Moscow and Tbilisi
* Ukrainian government appoints a new intelligence chief
** Visit the Jamestown blog on Russia and Eurasia (http://www.jamestown.org/blog):
- A New Russian Invasion of Georgia: is it so Unrealistic?

“Gross Expropriation” or a Softer Approach at Kovykta?

Vladimir Socor

The Russian government seems to envisage two options for disposing of TNK-BP’s giant Kovykta gas project in Siberia: coercive re-nationalization with compensation for the capital already invested, or without compensation. The state regulatory apparatus claims that the license holder is violating the Kovykta license terms. A three-year harassment campaign seems to be entering an endgame, pending a top-level decision about selecting a Russian state company to take over the project.

On March 17, Russia’s Natural Resources Minister Yuri Trutnev ruled out compensation to TNK-BP for the capital invested. “Receiving compensation after non-fulfillment of license terms is impermissible,” Trutnev stated. He would only allow something like a fire-sale of the property in place to a new owner, when this becomes known (Interfax, March 17).

Deputy Prime Minister Igor Sechin, however, recommends that the decision must “not involve a gross expropriation,” but rather take into account the investments already made at Kovykta. Sechin also suggests deferring a final decision until the gas market demand picture becomes clearer (Interfax, March 11, 17).

Located in eastern Siberia’s Irkutsk oblast, the Kovykta field holds an estimated 2 trillion cubic meters of gas. TNK-BP has invested almost $700 million in the Kovykta project thus far. However, it has yet to become a commercial development.

Formally, RUSIA Petroleum is the license-holding company (“mineral resource user” [nedropolzovatel]) in the Kovykta project, and TNK-BP holds a 63 percent stake. TNK-BP itself is a parity joint venture of BP in Britain with the Russian TNK (formerly Tyumen Neftegaz company) currently controlled by the Russian tycoons Mikhail Fridman, Viktor Vekselberg, and German Khan. A further 25 percent stake in RUSIA Petroleum is held by the Regional Electricity Generating Company (“OGK-3”), controlled via the Interros conglomerate by another Russian oligarch, Mikhail Potanin. The Irkutsk Oblast administration holds an 11 percent stake in the Kovykta project.

The project had been intended mainly for exporting gas to China. However, Gazprom thwarted that goal in 2007, so as to retain a monopoly on future Russian gas exports to China. Thanks to its full control over Russian gas export pipelines, Gazprom made clear that it would deny pipeline access to this competitor. Without such access, the project could not move toward full-scale commercial production. Gazprom then pressed to take control of Kovykta, while Russian government authorities held the license holding company responsible for breaching the field development and production schedule (EDM, February 22).

Moscow authorities also claim that the license holder failed to supply 9 billion cubic meters (bcm) of gas per year for the needs of Irkutsk oblast from 2006 onward. However, that amount far exceeds the level of demand in Irkutsk oblast; and a local distribution infrastructure would have had to be created first by Russian authorities. Apparently, Gazprom had simply intended lifting off a large part of that volume from the transmission pipeline for export as Gazprom gas.

The Russian Mineral Resources Oversight Service (RosNedra) threatened to revoke the license in 2007, on the pretext that field development and production were lagging below the levels stipulated in the license and contract. Under pressure, TNK-BP agreed in principle to sell its Kovykta stake to Gazprom for a sum in the range of $700 million to $900 million. However, the agreement was not enforced.

TNK-BP had reserved an option to retain or regain a minority stake in Kovykta; but Gazprom turned that option into a further means of pressure, this time on BP. In return, it asked for a stake in BP’s liquefied natural gas (LNG) project on Trinidad & Tobago. That project supplies the United States market, which Gazprom was until very recently trying to enter. That goal became moot, however, since the US became self-sufficient for gas in 2009.

In February 2010, Gazprom announced that it does not need to include Kovykta’s gas resources in the export programs for China, or other countries in the East Asia-Pacific region. Coincidentally, or otherwise, Russian state oil company Rosneft has suddenly evidenced ambitions to enter the natural gas business through a major project. Rosneft’s subsidiary, Rosneftegaz, is expected to seek a controlling stake in Kovykta (Kommersant, February 12; Interfax, February 4, 15).

This apparently helped spur Trutnev’s natural resources ministry to join its own subordinate agency, the Natural Environment Inspectorate (RosPrirodNadzor), for what it terms an “extraordinary round” of inspections at Kovykta in February and early March. The agency and then the ministry have recommended that RUSIA Petroleum, the formal license holding company, be stripped of the license (Interfax, March 11, 17).

If the license is revoked, the Kovykta deposit would be transferred into state ownership, in the legal category of “unallocated mineral reserves” (deposits unlicensed for development). As a strategic deposit, Kovykta can then be allocated to a Russian state company for commercial development.

Officially, the decision on the license is mainly up to RosNedra. In practice, however, the ultimate decision is likely to be made at the top of the government and in the Kremlin.

Russia Looks East and Sees Storm Clouds

Jacob Kipp

(Part One)

As Roger McDermott has already noted (EDM, March 16), Army-General Makhmut Gareev, the President of the Russian Academy of Military Sciences, recently addressed what he called the “eastern vector” of Russian national security in an interview with Krasnaya Zvezda (Krasnaya Zvezda, March 5). He noted the increasing importance of the Asia-Pacific region to the global economy, the flow of capital to the region, and its emergence as a geopolitical center of gravity. While recounting the US and NATO involvement in Afghanistan after 9/11, and critically assessing the performance of NATO forces there, Gareev turned his attention to what he sees as the single most important shift: the transformation of NATO into a global presence with significant military influence in the South Caucasus, Central Asia, and the Asia-Pacific region.

This shift in the country’s center of attention from Europe to the east has implications for Russia and China. Gareev admits that the NATO presence in Afghanistan does serve Russian interests. With regard to NATO, he points to other threats by non-military means to undermine Russia’s position by subversion and information warfare in the form of the so-called “color revolutions.” He noted that Russia’s national security strategy states that the government will give priority to non-military means, and then highlights that the state lacks the ability to adequately coordinate it. Gareev sees NATO’s expanded military presence as an emerging threat to China. Given the timing of the article, coming only a few days after NATO emissaries had raised the challenge of China in discussions with senior officials in Moscow, one could conclude that Gareev is predicting greater tension between NATO and Beijing. Such a shift of attention also means that Moscow can assume NATO is not seeking conflict with Russia in Europe, which he calls NATO’s rear. The problem of NATO-China tension is that it affects a region where Russia is itself weak. Since the end of the Cold War, Russia has been able to assume a benign security environment in the Far East at a time of its own internal weakness in the same region. The globalization of NATO means increased tension in a region where Russia has limited military capabilities. The deployment of naval, air, and ground forces to the South Caucasus, Central Asia and Asia-Pacific region in the context of increased economic rivalry with China and rising regional tensions, would fundamentally alter Russia’s security environment, as Gareev explained.

Tensions between Washington and Beijing are followed closely in Moscow. The recent visit of senior US officials to Beijing was presented as an effort to reduce tension after the flare-up over the sale of aircraft to Taiwan. Beijing has not supported new sanctions against Iran and is concerned about deteriorating economic relations with Washington. It has also responded coolly to the demarche by US Secretary of State Hillary Clinton’s demands regarding internet censorship and Google’s problems in China. Russian commentators believe that the Chinese government wants more than atmospherics and expects real changes in US policy toward China (Kommersant, March 3). Russian media noted in the announcement by the Chinese government that it would increase its defense budget by only 7.5 percent, as opposed to the recent rate of 10 percent annually. However, commentators see the published Chinese defense budget as hardly reflecting the real level of expenditure, and suggest that the current reduction in the rate of growth is both a response to the global economic crisis, where the military will have to tighten its belt along with everyone else, and a signal to the rest of the world that China is engaged in an arms race (www.gazeta.ru, March 5).

Aleksandr Khramchikhin provided a much more in-depth analysis of the Chinese defense budget, and sees China continuing to make gains against the United States because of the great asymmetries in Chinese military procurement. Moreover, he sees US military sales to Taiwan as more symbolic than real in their contribution to that country’s defense capabilities. The Obama administration does not want a confrontation with China. He categorizes the current tension between Washington and Beijing as not serious, because the Obama administration, in fact, fears such a confrontation. The new defense budget in this context, even with a lower rate of increase, is a “budgetary warning” to Washington and elsewhere about the shifting strategic balance in the Asia-Pacific region (Nezavisimoe Voennoe Obozrenie, March 9).

Tensions on the Korean Peninsula continue to receive extensive coverage in the Russian military press. The current “Key Resolve/Foal Eagle” exercises being conducted by US and South Korean forces triggered predictable protests from Pyongyang, which characterized the exercise as a “serious provocation.” However, Russian commentators see the current situation as an exchange of threats between the two sides. Viktor Ruchkin states that the core activities of the exercise involve the use of US and South Korean Special Forces for the location, seizure and destruction of WMD systems. The North Korean response at this time of leadership transition, harvest failure and currency crisis has been particularly strident even for Pyongyang. The People’s Army not only raised its alert level, but also instructed its forces to be ready to answer any preventive strike. It announced the creation of a new command for its medium range missile forces, which include weapons with a range of 3,000 kilmeters, capable of striking targets in Japan and American bases in Guam. Ruchkin did not speculate on whether North Korea has achieved the capability of arming such missiles with nuclear warheads, which would give added weight to the seriousness of the current level of tension. The North Korean government did warn that in the face of military provocations and sanctions it would end its participation in the Six-Party Talks and seek to strengthen its nuclear deterrent (Krasnaya Zvezda, March 13).

During the same period, Lieutenant-General Vladimir Chirkin, the recently appointed commander of the Siberian Military District, announced the deployment of two brigades to the Chinese border near Chita. Chirkin stated that the brigades were deployed there to counter the presence of 5 People’s Liberation Army (PLA) combined arms armies across the border. From 2003 to 2007 Chirkin commanded an army in the Siberian military district. On the rationale for the deployment, Chirkin stated: “We are obligated to keep troops there, because on the other side of the border are five Chinese armies and we cannot ignore that operational direction.” He added that the defense ministry intended to develop an army headquarters for command and control of the brigades (Voenno Promyshlennyi Kuryer, March 3).

In a related report, Chirkin described the PLA forces across the border as composed of three divisions and 10 tank, mechanized, and infantry brigades, which he said were not small, but also “not a strike force.” As to the role of the new brigades, Chirkin characterized them as part of a deterrent force aimed as a friendly reminder to Beijing: “. . . despite friendly relations with China, our army command understands that friendship is possible only with strong countries, which can quiet a friend down with a conventional or nuclear club” (Argumenty Nedeli, March 4-10). The Siberian Military District is actively preparing for this summer’s Vostok-2010, which will test the combat capabilities and combat-readiness of Russia's “new look” forces. In preparation for that major exercise, the Siberian Military District will conduct exercises to ensure that rear services will effectively support the combat units (Buriatiia, February 20).

Moscow Exploits TV Invasion Hoax to Isolate Georgia

Pavel Felgenhauer

On March 13, the pro-government, Imedi TV broadcasted what appeared to be a documentary report about a new Russian invasion that led to President Mikheil Saakashvili’s assassination. The program caused widespread public panic despite the Imedi anchor’s announcement (immediately after reporting Saakashvili’s death) that the events took place in the future –on June 7, 2010– the opening day of the soccer World Cup in South Africa (Kommersant, March 15).

The narrative of the Imedi program accused the Georgian opposition of organizing street protests in Tbilisi to protest against alleged fraud in local elections scheduled for May 30. Unknown gunmen opened fire on opposition demonstrators in Tbilisi, causing casualties. The enraged opposition called on the international community to intervene, to oust the “Saakashvili tyranny.” The incident in Tbilisi was then followed by an ambush in the South Ossetian capital, Tskhinvali, that killed the separatist leader, Eduard Kokoiti. Moscow allegedly announced it had proof of Georgian security services’ involvement in the “terrorist attack.” Pro-Russian opposition figures led by the former parliamentary speaker, Nino Burdzhanadze, traveled to Tskhinvali and accused Saakashvili of killing Kokoiti. Russian and Georgian armed forces were mobilized. A hastily organized pro-Russian “people’s government” led by Burdzhanadze declared the “Saakashvili regime” illegal. President Dmitry Medvedev allegedly announced: “Since the Saakashvili regime began open terrorism against South Ossetia, this international criminal must be stopped. I have ordered a military operation, and call on the Georgian people not to resist the troops that bring them freedom.” Russian tanks, advancing from their forward base in the Akhalgori region of South Ossetia, entered Tbilisi. Several Georgian army battalions were reported to have switched sides. Saakashvili was reported as killed. The West did nothing, but issued halfhearted protests (www.apsny.ge, March 17).

EU officials and Western ambassadors in Tbilisi denounced the Imedi hoax as an unwelcome provocation that does not help to build stability in the region (RIA Novosti, March 16). The Georgian authorities denounced Imedi for provoking a panic. However, Saakashvili announced that the narrative was not unrealistic and “our enemy may be preparing something similar” (Kommersant, March 15). The Russian foreign ministry accused Saakashvili of approving the Imedi broadcast, and being paranoid as well as raising tension, “undermining security and stability in the region.” Russian officials declared that Georgia is now internationally isolated (www.mid.ru, March 15).

Burdzhanadze, who was portrayed as pro-Russian, reacted angrily and accused Saakashvili of masterminding the deception to undermine his political opponents. Burdzhanadze visited Moscow this month to meet with Russian Prime Minister, Vladimir Putin, and other officials. Burdzhanadze announced that Georgia is isolated internationally, and Putin is better than Saakashvili, because he told her the brief Russian-Georgian war in August 2008 “was a tragedy for both nations.” According to Burdzhanadze, Saakashvili is creating conditions for a new war and only dialog with Moscow may prevent it, but no one will talk with the present regime (RIA Novosti, March 15). Burdzhanadze has adamantly denied that she is pro-Russian, but her public statements seem to be fully in line with those coming from Moscow.

Moscow and Tbilisi have been constantly exchanging accusations. The Chief of Russian military intelligence (GRU), Lieutenant-General Alexander Shlyakhturov, supported by the foreign ministry, accused Georgia of preparing a new war (ITAR-TASS, November 5, 2009). The First Deputy Defense Minister and Chief of the General Staff, Army-General Nikolai Makarov, has announced that “Georgia’s military might is constantly growing” and is already greater than in August 2008 (Interfax, November 11, 2009). The Georgian Defense Minister Bacho Akhalania, confirmed: “Today our armed forces are better ready to defend the country than a year ago, and will be even stronger in six more months” (Civil Georgia, November 14, 2009). The Russian interior ministry has accused Georgia of training terrorist groups to destabilize the situation in the North Caucasus (RIA Novosti, January 15). The Federal Security Service (FSB) has accused Georgian special services of organizing bombings of railroads, electric power lines, and gas and oil pipelines in Dagestan (ITAR-TASS, February 3).

Snow avalanches in winter, mudslides in the spring, or rain in the summer are elements which separate South Ossetia from Russia. The Akhalgori region is only 50 kilometers of relatively good road from Tbilisi, while a very bad dirt track hastily built by the Russian military connects it to Tskhinvali. After Russian forces seized full control of Abkhazia and South Ossetia, plans were announced to drastically improve the transportation infrastructure, connecting these separatist regions with the North Caucasus; but the great mountains are a formidable barrier. High-level corruption in Abkhazia, Russia, and South Ossetia are an additional hazard, and from August 2008 to January 2010 little has been done to improve the roads or to repair the overall infrastructural collapse in Abkhazia or South Ossetia. New plans have been announced to spend 15 billion rubles ($500 million) to renovate the Soviet-built Roki tunnel that links South Ossetia to Russia and turn this connection, officially known as the “Transcaucasian highway,” into an “all-seasons road.” However, that work is not planned to begin until 2011 (RIA Novosti, January 10).

This precarious situation may partially explain Russian as well as South Ossetian paranoia – constant accusations that the Georgians are “preparing a new aggression.” In Abkhazia, the situation is more stable, but in South Ossetia, for at least six months each year, the Russian military consider themselves to be cornered. It would seem prudent from the perspective of Russian military and political planners not to sit passively waiting for the Georgians to choose the time and weather conditions to launch an attack, but to take the initiative and mobilize air, land and sea forces in advance; deploy and prepare to fight at a time and place of Russian convenience. In the current environment, with a pro-Russian government in Ukraine, the price of oil has reached over $80 a barrel, Saakashvili is seemingly isolated and the West is –in many some people’s opinion– apparently impotent. When everything is ready, including propaganda ploys to explain to the world why Russia was compelled to use force, a series of provocations may ignite a war that could allow Russian forces to break out of the seclusion of the South Ossetian and Abkhazian enclaves to dominate once again the entire former Soviet South Caucasus.

Gas Lobby Takes Control of Ukraine’s Security Service

Taras Kuzio

On March 11, the Ukrainian parliament appointed Prime Minister, Nikolai Azarov, and a new Security Service (SBU) Chairman, Valery Khoroshkovsky. As Ukrayinska Pravda (February 24) warned: “An additional bonus for the Liovochkin-Firtash group could be the appointment of Khoroshkovsky as the head of the SBU or interior minister, for which they are actively lobbying.” The Head of the Presidential Administration, Serhiy Liovochkin, has close ties to the gas lobby, formed while he served as a senior adviser to President Leonid Kuchma. Another representative, Yuriy Boyko, was appointed Minister of Fuel and Energy in the Azarov government.

An extensive Ukrayinska Pravda investigation (July 30, 2008) was entitled “Khoroshkovsky as a mask for Firtash?” Dmytro Firtash owns 45 percent of the opaque gas intermediary RosUkrEnergo (RUE), with 5 percent owned by another Ukrainian, Ivan Fursin, and 50 percent by Gazprom. RUE was established in 2004 by Kuchma and the then Russian President Vladimir Putin.

RUE was removed from the Ukrainian-Russian gas trade by the 2009 gas contract signed between Prime Ministers Yulia Tymoshenko and Putin. From 2004 to 2008, RUE had the support of not only the gas lobby in the Party of Regions, but also President Viktor Yushchenko whose brother, Our Ukraine deputy, Petro, is a gas trader.

Yushchenko intervened in the summer of 2005 to halt the arrest of Boyko for abuse of office when he headed Naftohaz. The arrest was ordered by the then-SBU Chairman, Oleksandr Turchynov, the head of Tymoshenko’s 2010 election campaign. The 2006 gas contract that reconfirmed RUE’s role was signed by the head of Our Ukraine, Yuriy Yekhanurov, a Yushchenko loyalist during the latter’s term as Prime Minister.

Khoroshkovsky’s appointment is controversial for three reasons:

First, it cements the gas lobby’s control of the Ukrainian president’s domestic and foreign policies.

Second, Khoroshkovsky is a billionaire and his appointment makes a mockery of the separation of business and politics. The Head of the Parliamentary Committee on National Security and Defense and former Defense Minister, Anatoliy Grytsenko, said that Yanukovych’s government appointments showed that he was disinterested in separating business and politics (Radio Svoboda, March 11).

It is doubtful, Grytsenko believes, that these billionaires would first and foremost defend state interests and undertake reforms. Ukrayinska Pravda (March 12, 13) ran two lengthy articles on the large number of oligarchs appointed to the Azarov government, presidential administration and security forces. Azarov responded to journalists’ questions on Khoroshkovsky by saying, “The state of his wallet should not be the basis for accusations leveled against him” (www.pravda.com.ua, March 11).

On March 4, 2009, First Deputy SBU Chairman Khoroshkovsky ordered an Alpha Spetsnaz unit to raid Naftohaz, in an operation that was widely condemned as directed against the Tymoshenko government. Khoroshkovsky was acting on behalf of Firtash, incensed that 11 billion cubic meters (bcm) of gas in storage, worth $2 billion, that RUE claimed belonged to it, had been expropriated by Naftohaz and Gazprom.

Firtash is seeking shares in the revived proposal for a gas consortium as compensation for the gas (EDM, February 14). The consortium was first unveiled in 2002 by Kuchma and Putin.

Yushchenko, who has always been a critic of the 2009 gas contract, gave his support to the 2009 SBU raid. Parliament was incensed: 391 voted to establish an investigative commission and Grytsenko demanded Yushchenko replace Khoroshkovsky. First Deputy Prime Minister, Turchynov said, “We will not tolerate corrupt practices in the energy sector. The days of shadowy intermediaries are over” (www.pravda.com.ua, March 6, 2009).

Khoroshkovsky’s appointment ignored his rejection by a majority vote in parliament’s committee on national security and defense. Grytsenko said that the head of a law enforcement organ could not be a leading businessman, with media resources, as this was an obvious conflict of interest (www.grytsenko.com.ua, March 11). Grytsenko told parliament that the SBU chairman should be a “person who has a view of its perspective and development, who professionally understands the sphere and which does not lead to conflict in ethical and corporate standards.”

In addition to RUE, Khoroshkovsky and Firtash are business partners in Ukraine’s most viewed television channel, Inter. Khoroshkovsky is President of Evraz Holdings, and the head of the oversight board of the Ukrainian Independent TV-Corporation that owns Inter. Firtash owns 61 percent of the media corporation, according to Ukrayinska Pravda (July 30, 2008).

In the first half of the 2010 election campaign, Inter had given former parliamentary speaker, Arseniy Yatseniuk, wide visibility as a candidate. He was then seen as Tymoshenko’s main rival for the “Orange” vote and Inter’s coverage aimed to undermine Tymoshenko’s election.

Grytsenko had earlier condemned Yushchenko’s appointment of Khoroshkovsky as SBU First Deputy Chairman in January 2009. His appointment was widely seen as Yushchenko using the SBU against Tymoshenko who had removed Khoroshkovsky as head of the Customs Service where he had served in 2007-2009. Grytsenko has long been critical of the continued “politicization” of the SBU, whose practice of interfering in domestic politics under Kuchma did not end under Yushchenko. This practice could continue under Yanukovych, but with different nuances.

On the same day that he was appointed, Khoroshkovsky told journalists that the SBU would cut back on its work in the secret Soviet archives (www.pravda.com.ua, March 11). That same day, President Yanukovych issued decree 312 to remove Volodymyr Viartovych as the Director of the SBU’s Department of Archives (www.president.gov.ua, March 11). One of the first steps Yanukovych took when the archive was transferred to him was to remove the large 1933 famine (holodomor) section, established by his predecessor.

A court rejected a private complaint filed against the Donetsk newspaper, Rodnoe Pryazovie, for publishing an article on November 25, 2009 claiming that holodomor was not “genocide” against Ukrainians (www.pravda.com.ua, March 12). The complaint was based on an October 2006 law on the famine lobbied by Yushchenko, backed by the unveiling of SBU archives and voted through by Our Ukraine, the Yulia Tymoshenko bloc and Socialist Party.

The Party of Regions and Communist Party did not vote for the 2006 law and their critical views of Yushchenko’s holodomor campaign as “genocide” is now official policy, as both factions are members of the ruling coalition underpinning the Azarov government. In August 2009, a letter from Russian President Dmitry Medvedev to Yushchenko strongly condemned Yushchenko’s international and domestic campaign to portray the holodomor as “genocide.”

Khoroshkovsky’s, Boyko’s, and Levochkin’s appointments testify to the fact that Yanukovych has sanctioned the gas lobby and RUE is back in business, signaling a possible resurgence in corruption.

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