IN THIS ISSUE:

* Qaddafi cunningly outwits the Russian leadership
* Formation of “Gas Troika” unlikely to save Gazprom from falling oil prices
* Romanian leaders decisively reject participation in South Stream
* Israel to begin new UAV deliveries to Turkey

QADDAFI AND ZYAZIKOV: REALITY CHECKS FOR RUSSIA’S PETRO-POLITICS

Pavel K. Baev

The vast tent that graced the Kremlin garden over the weekend was not a part of the preparations for President Dmitry Medvedev’s address to the parliament, which is scheduled, after embarrassing delays, for November 5 (Vedomosti, October 30). It was a special arrangement for the visit of Libya’s eccentric leader Muammar Qaddafi, who insists on the protocol of his Bedouin lifestyle (Vremya novostei, www.gazeta.ru, October 31). Qaddafi stayed in Moscow for three days, and Medvedev hardly had much joy in the lengthy negotiations.

Official “non-information” about a “wide range of topics” and “new dynamism” barely cloaked the disbelief in the Russian leadership that they had fallen for the oldest trick in Qaddafi’s well-worn business book. Paying a visit to Libya in the final weeks of his presidency last April, Vladimir Putin thought that he had struck gold. Russia agreed to write off Libya’s old Soviet debt estimated at $4.5 billion (but in reality, worthless) in exchange for new contracts on building the Sirt-Benghazi railway, joint development of oil and gas fields, and arms sales. In the past months, however, Alexei Miller, the CEO of Gazprom, and Vladimir Yakunin, the head of Russian Railways, who are both Putin’s courtiers, have discovered that the documents signed were declarations of intent rather than binding contracts. The only “real thing” was the cancelled debt; and now Qaddafi wants new credits for purchasing Russian armaments, first of all the S-300PMU and Tor-M1 surface-to-air missiles (www.newsru.com, October 31). He might indeed be rather short on cash as Libya has just transferred $1.5 billion to the special fund for compensating the American victims of terrorism, prompted by the visit to Tripoli of U.S. Secretary of State Condoleezza Rice in September (www.rbc.ru, November 1).

In order to sweeten the pill for Medvedev and Putin, Qaddafi presented an offer to build a Russian naval base in Benghazi, following the recent port visits of the nuclear cruiser Petr Velikii (on its way to Venezuela) and the frigate Neustrashimy (on the way to the “pirate coast” of Somalia). The proposal might appear very exciting to those who want to demonstrate Russia’s rejuvenated military might, but there is one particular problem—the Russian Navy will not have any combat ships for deployment in the Mediterranean in the foreseeable future (Kommersant, www.grani.ru, October 31). The problem of withdrawing the naval base from Sevastopol looms large in Russian-Ukrainian relations, but the shrinking Black Sea Fleet can only linger somewhere near the home coast (Expert, October 22).

This sobering reality check now has to be made with an eye to the guidelines and priorities of Russia’s foreign and domestic policies, inasmuch as the basic premise that the overwhelming inflow of petro-rubles could only increase has suddenly been overturned. The plain fact that Russia is a country with very different state capacity when oil prices are below $70 per barrel than it was when they came close to $ 150 has not as yet been absorbed by its elite. Medvedev boldly remains in denial, arguing that the accumulated reserves would compensate for all “temporary difficulties” and that Russia would emerge from the crisis as one of the new centers in global “financial architecture” (RIA-Novosti, October 31). These reserves, however, have shrunk from $600 billion to $480 billion without any positive effect on the economy, while oligarchs, regional governors, and other clients keep asking for more money (www.newsru.com, October 31). At the Shanghai Cooperation Organization meeting last Thursday, Putin endured desperate pleas from Kyrgyzstan and Mongolia but consoled them with a lecture on “multi-polarity,” leaving it to China to open new credit lines (Rossiiskaya gazeta, October 31).

Upon his return to Moscow, Putin called a ministerial meeting on economic matters at his residence in Novo Ogarevo, where the key issue was not pumping more rubles into banks but cutting down government expenditures and investment programs (Kommersant, November 1). This return to financial discipline is partly driven by the irritation about the instant “emigration” to the West of the disbursed rescue packages that have grown to an astounding total of $200 billion. There is also, however, a suspicion maturing into realization that the fall in budget income is not a deviation but a solid trend that will last for years to come. This emerging economic pragmatism brings with it the first signs of new political realism, for instance, the release from prison after a year-long investigation of Deputy Finance Minister Sergei Storchak. The trial is still pending, but the TV channels showed his greeting by friends and family as if a hero had returned from enemy captivity (Vremya novostei, October 22).

Even more sensational was Medvedev’s removal of Murat Zyazikov, Ingushetia’s president, who was installed by Putin in April 2002 and presided over a profound destabilization of this tiny republic. Public discontent increased to the level of a latent civil war after the murder of an opposition leader Magomet Evloev last September, but Putin maintained that acknowledging his mistake and sacking a “loyalist” would be tantamount to showing weakness under pressure (Nezavisimaya gazeta, September 8; www.gazeta.ru, October 31). Medvedev’s decision, clearly forced by escalating public demands, was greeted by festivities in Ingushetia; but an even greater problem is looming after the appointment of Colonel Yunus-Bek Evkurov, an outsider with no administrative experience, as the new president. Clan struggle and massive social problems across the North Caucasus have been controlled by channeling in incalculable federal funds, but this method is no longer sustainable.

Qaddafi might have demonstrated to Putin and Medvedev in his tent that an unlimited amount of public veneration could be bought if a leader were economical with oil revenues. Russian elites, however, are committed to policies that are anything but economical, so that the extravagant squandering of the rich and powerful is camouflaged by wasteful spending to prove that the country is a “great power” and is justified by generous social programs. A dose of common sense is always helpful, but plenty of bitter medicine has yet to be swallowed, and that will take some stomach, at a time when flexible spines are the prime quality of Putin’s cadre.

THE GAS CARTEL TROIKA

Roman Kupchinsky

On October 21, with oil prices falling below $69 a barrel on fears of a world-wide recession, three countries possessing over 50 percent of the World’s natural gas reserves agreed to the creation of a semi cartel known as the “Gas Troika.”

Meeting in Tehran, Russia, Iran, and Qatar agreed to hold regular meetings in order to discuss “key issues of gas market development,” according to a statement by Alexei Miller, the head of Russia’s state-owned gas monopoly Gazprom (Moscow Times, October 22). "We have a common vision of the goals of the forum and the need to transform it into a permanent organization as quickly as possible to serve the goals of stable and reliable energy supplies in the world," the statement said.

Some gas analysts were quick to point out that Gazprom stood to gain the most in such a “Troika” and therefore agreed to a more or less permanent cartel-like arrangement. With oil prices collapsing; Gazprom’s debt increasing, and refinancing part of its debt looming on the horizon, Miller and the Kremlin are worried that world gas prices will drop in 2009 and Gazprom as well as the Russian budget will be caught in an ever-tightening vise.

In 2008 Gazprom’s profit was a record $30 billion. If oil remains at $70 a barrel in 2009, the gas monopoly’s profits will shrink by $3 to $17 billion, Mikhail Korchemkin, head of East European Gas Analysis, told the daily Kommersant on October 22. Such a scenario could have a devastating impact given that Gazprom accounts for over 20 percent of the Russian budget.

But can a cartel influence the price of gas? Iran has the world’s second largest gas reserves but is a relatively minor exporter, selling primarily to Turkey. Qatar deals mostly in LNG, the price of which is not linked to pipeline supplied gas. If Qatar were to limit sales to prop up prices, its customers would soon turn to Algeria, Nigeria, and other major LNG producers, Korchemkin wrote in Vedomosti on October 21.

Russia would also be unable to cut back on gas production in order to maintain high prices without endangering its long term (10 to 30 year) contracts with European customers.

It is also no secret that the main proponent of a “Gas OPEC” has been Iran. During the Tehran meeting, Iranian Oil Minister Qolam Hosein Nozari told a press conference that "There is a demand to form this gas OPEC and there is a consensus to set up a gas OPEC." Miller, however, avoided using the term “gas OPEC” and stressed that the “Troika” would review projects such as exploration, refining, and sales. In the past Gazprom has played down the notion of a gas cartel calling the idea “not feasible,” although Vladimir Putin had called it “interesting.”

Iran apparently would like to force its more politicized views on its “Troika” partners in order to pressure Europeans to invest in its gas industry. Earlier this year, the French energy giant Total withdrew from an agreement to develop the giant South Pars gas field. By waving the red flag of a cartel, the Iranians could well be hoping to scare the Europeans into breaking with the United States on the question of the UN boycott.

If crude oil prices continue to fall in 2009, the biggest winners in the former Soviet Union will be Ukraine and Belarus. Ukraine is presently faced with paying up to $350 per 1,000 cubic meters for Central Asian gas. If gas prices collapse in mid-2009, the price for Ukraine (depending on how the contract is formulated) could fall to about $200 per 1,000 cubic meters.

It appears that the recently created “Gas Troika” is more of a toothless pipe dream than a cartel, which will not help save Gazprom from the consequences of a world-wide recession. Gazprom and its affiliated companies have $55 billion in outstanding bonds and loans. The company announced plans earlier this year to spend some $30 billion to develop new gas fields in order to maintain production as output from its mature fields in Western Siberia steadily decreases and domestic consumption increases.

If the credit markets continue tightening and demand for gas in Europe slackens off, Gazprom might not have to invest $30 billion into new fields, but it could well take a major hit on sharply decreased revenue. A “Gas Troika” will not come to Russia’s rescue, and Putin’s gas weapon might lose much of its former clout.

ROMANIA FIRMLY ABOARD NABUCCO PROJECT, HINTS AT LEVERAGE VIS-À-VIS SOUTH STREAM

Vladimir Socor

President Traian Basescu and Prime Minister Calin Popescu-Tariceanu have ruled out Romania’s participation in Gazprom’s South Stream project. Instead, they reaffirmed the country’s full commitment to the Western-backed Nabucco project. The two leaders acted after Gazprom had hinted at the possible inclusion of Romania in South Stream, apparently tempting a few Romanian officials with that deceptive prospect (see EDM, October 21, 24, 31).

Basescu and Popescu-Tariceanu’s convergent responses reflect a top-level consensus on this issue in Romania, transcending a deep partisan divide. The president and the prime minister are long-time political rivals and confronting each other in this month’s parliamentary elections. The elections almost certainly played a role in Gazprom’s timing of its overture to Romania, but the overture has fallen flat at the political level.

“Regardless of our internal confrontations, Nabucco is our priority and Romania is firmly committed to this European project,” Basescu told a news conference. He also alluded to Moscow’s attempts to entice various countries into competing against each other for participation in South Stream: “If somebody wants to force Bulgaria’s hand, pretending to offer to build South Stream through Romanian territory, that somebody must be naïve for making such calculations” (Cotidianul, October 31).

Gazprom’s overture to Romania also triggered concern in Serbia (Politika, October 24). Bulgaria and Serbia each signed on to South Stream earlier this year and are now negotiating specific terms with Gazprom. To pressure them, the Russian company hinted at the option to circumvent them by building a pipeline through Romania.

Popescu-Tariceanu’s response focused on the imperative of diversifying gas imports:

The Romanian government’s position is clear: Nabucco is the priority. Russia is interested in preserving its status as sole supplier. Romania’s interest is a commercial partnership with Russia for gas supplies, while at the same time creating competition by finding an alternative supplier. We would certainly fall into dependency unless we pit two competitors against each other.

The National Strategy on Energy, adopted by the government, enshrines Romania’s commitment to the Nabucco project.

In the same statement, the prime minister criticized the Romania-Russia Chamber of Commerce (a business and political lobby in Bucharest) for relaying the Russian Embassy’s invitation to Romanian companies to join “reconstruction” projects in South Ossetia. The Romanian government finds such actions “inappropriate, given Romania’s engagement in Georgia’s reconstruction efforts” (Evenimentul Zilei, Romania Libera, October 30).

The president’s and prime minister’s interventions promptly squashed Gazprom’s overture and the initially favorable response by several Romanian officials, primarily Economics and Finance Minister Varujan Vosganian, who oversees the energy sector. After a preliminary discussion on October 17 in Moscow, Gazprom’s board member and strategic development director Vlada Rusakova followed up on October 29 in a semi-official setting in Bucharest with Romanian representatives (NewsIn, October 29; Business Week, October 30).

Apart from reaffirming the commitment to Nabucco, Basescu’s press conference statement alludes to Romania’s own leverage over South Stream, potentially being capable of halting that project at least temporarily. Basescu said that “If the South Stream project is implemented, it would need to cross Romania’s exclusive economic zone [in the Black Sea]. The pipeline would have to pass through it. This is an issue that would have to be negotiated” (Cotidianul, October 31).

South Stream’s manifold adverse implications can be avoided, if the project is stopped long enough to gain a new lease on life for Nabucco. This would involve opening access to Central Asian gas through direct pipelines to Europe, as well as developing Iranian gas deposits and transport outlets.

The South Stream pipeline is designed to run from Russia’s Black Sea coast to Bulgaria, and from there to ramify in several directions into Europe. The pipeline’s 540-mile (900 kilometer) section on the seabed of the Black Sea is the key to the entire project. Gazprom (with Italy’s ENI as contractor) has decided to bypass Turkey’s exclusive economic zone. Instead, that section is planned to traverse Ukraine’s exclusive economic zone for most of its length, as well as a small part of Romania’s exclusive economic zone. This situation can give both countries potentially decisive leverage over the project.

South Stream bypasses Ukraine’s gas transit system, so as to reduce the share of Russian-delivered gas to Europe through Ukrainian pipelines. Meanwhile, Romania is the only Nabucco consortium member to have turned down Gazprom’s offer to join South Stream. Both countries are interested in stopping South Stream. This pipeline, if built, would kill the Nabucco project, thus depriving Romania of alternative gas supplies and transit revenue from Nabucco. For its part, Ukraine is interested in continuing large-scale transit of Russian-delivered gas to Europe, rather than seeing part of that transit re-routed through South Stream.

The Black Sea riparian countries divide the sea into exclusive economic zones. These maritime zones are immediately adjacent to each other. Thus, construction of the South Stream pipeline on its presently designated seabed route from Russia to Bulgaria would require the consent of Ukraine and Romania.

Under international law, Ukraine and Romania cannot officially veto South Stream outright; but they can question it thoroughly; can demand extensive study of the project’s impact on environment, fisheries, shipping, and maritime safety generally; and are entitled to evaluate these studies independently and return them to Gazprom for clarifications and improvements. Romania and Ukraine are also entitled to demand modifications to the Russian-proposed route.

In the Baltic Sea in the last two years Estonia, Finland, Poland, Sweden, and Lithuania have used their rights under international law in that manner, thoroughly questioning Gazprom’s Nord Stream seabed pipeline project. As a cumulative result, Nord Stream has been temporarily halted, and its overall prospects seem increasingly clouded for intrinsic reasons also.

The Russian government and Gazprom have apparently failed to initiate consultations with Romania and Ukraine about South Stream’s seabed section. Clearly, Romania and Ukraine hold legal leverage of a potentially decisive character over seabed pipeline projects in their Black Sea exclusive economic zones.

TURKISH DEFENSE MINISTER VECDI GONUL VISITS ISRAEL

Saban Kardas

Turkey’s Defense Minister Vecdi Gonul visited Israel on October 29 and 30 to expedite the Turkish Armed Forces’ (TAF) purchase of 10 Heron Unmanned Aerial Vehicles (UAV) from Israel Aircraft Industries (IAI). He was accompanied by a large delegation that included Undersecretary for Defense Industries Murad Bayar and several military officers and civilians. The meeting also provided opportunities to discuss regional diplomacy and bilateral relations between Turkey and Israel.

In 2005 Turkey awarded a $180 million contract for the off-the-shelf purchase of 10 UAVs to IAI and Elbit Systems, which outbid offers for the U.S. Predator UAV (Zaman, October 25). In response to the acceleration of the PKK’s terror campaign, the TAF’s new counter-terrorism strategy has been centered on the effective use of intelligence (Terrorism Focus, August 12). In addition to real-time images provided by U.S. satellites, the reconnaissance missions conducted by UAVs have come to play a crucial role in the air strikes against PKK strongholds in Northern Iraq and PKK militants inside Turkey.

Despite the urgency of the TAF’s order, however, the Israeli contractor has postponed the delivery of 10 Herons to Turkey several times over the past year, citing technical failures in the camera system that will be produced by a Turkish subcontractor. In addition to accelerating domestic programs to develop national UAVs and the purchase of three Israeli Aerostar Tactical UAVs, Turkey leased Herons from Israel in 2007 (Yeni Safak, December 28, 2007). When one Heron at the TAF’s disposal crashed in July due to engine problems, Israel could not replace it because it did not have one available in its inventory (Referans, October 21). Turkey instead bought a smaller UAV called the Searcher.

The shorter range of the Aerostars has hindered the flow of intelligence for the TAF. Surveillance shortages are speculated to have played a part in the TAF’s failure to prevent the PKK attack on Aktutun outpost, which claimed the lives of 17 soldiers on October 3 (Milliyet, October 18). Domestic debate on this attack has refocused attention on the difficulties Turkey has experienced with surveillance aircraft. On the eve of the trip, Gonul was urged to put pressure on Israel to speed up the delivery of the UAVs (ANKA, October 21).

Gonul visited Israel at the invitation of Israeli Defense Minister Ehud Barak to observe the test flights of the Heron UAVs. Following the demonstrations, Gonul found the drones’ performance excellent and remarked that they would fill the requirements successfully and strengthen Turkey’s military capabilities. Reiterating the urgency of the UAVs for Turkey, Gonul noted that two of the Herons would be delivered to the TAF by the end of November and the remaining eight in early 2009 (Yeni Safak, October 31). At a meeting with Barak and Israeli Chief of Staff Gabi Ashkenazi, Gonul stated that cooperation with Israel in defense projects would not be limited to UAVs, although he declined to name any other specific projects (Milliyet, October 31).

For its part, the Israeli side also is keen on deepening its partnership in defense projects with Turkey. When Barak visited Ankara in February as Gonul’s guest, he called for greater cooperation between the two countries and emphasized that Israel did not harbor any concerns about transferring sensitive technology to Turkey (Voice of America, February 12). Barak was particularly eager to convince Turkey to purchase Israel’s Ofeq spy satellites (Jerusalem Post, February 11). Israel’s flexible attitude has definitely been welcome to Ankara, because most of Turkey’s ambitious defense procurement and modernization programs contain stringent rules requiring greater domestic contribution in production or technology transfers to Turkish companies. Given the problems that U.S. weapons producers face in obtaining Turkish defense contracts due to the Turkish procurement policy, Israel provides an alternative for the Turkish military to obtain high-tech weapons systems for its fight against the PKK and to upgrade its aging weapons systems with larger domestic input. It has been reported, however, that the TAF is close to acquiring U.S.-made Predators to meet its urgent needs but is constrained by the Turkish procurement rules (Today’s Zaman, October 29).

Vecdi Gonul also met Israeli Prime Minister Ehud Olmert and Foreign Minister Tzipora “Tzipi” Livni, both of whom emphasized Turkey’s strategic importance in the Middle East and the value they attached to maintaining bilateral relations. They commended Turkey’s constructive efforts to contribute to stability and peace in the Middle East, in particular its role in the recent Syrian-Israeli negotiations. Livni, however, used this opportunity to express Israel’s displeasure with Iranian President Mahmoud Ahmadinejad’s visit to Turkey in August, and she called on Turkey to support international efforts to increase pressure on Iran. Israel and the United States have been critical of Turkey’s warm relations with Iran at a time when they are seeking to isolate Tehran on the nuclear issue (see EDM August 14). Gonul avoided confronting his Israeli hosts but clarified Turkey’s position by maintaining that Turkey would continue to develop relations with all countries in this volatile region on the principles of nonintervention in domestic affairs and good-neighborliness (CNNTurk, October 30; Milliyet, October 31). At a meeting with Israeli President Shimon Peres, Gonul discussed possibilities for building industrial zones on the West Bank (Zaman, October 31).

Political differences aside, the two countries share a common ground: Turkey needs cooperation with Israel to fill its deficiencies in combating the PKK, while Israel views Turkey as a lucrative market for its sophisticated weapons systems. The recent visit reaffirmed both parties’ determination and ability to put an occasional divergence on regional diplomatic issues aside and maintain cooperation in mutually beneficial projects.

To view other artciles published by Eurasia Daily Monitor, The Jamestown Foundation click here