IN THIS ISSUE:
* Economic expert irritates Kremlin by describing how sinking Russian economy could spark social instability
* Murky German Gazprom subsidiary expands its web of business activity to Italy
* Azerbaijan quietly backs Nabucco with deeds not words
* Turkey hosts Armenian foreign minister and sets in motion the Caucasus Stability and Cooperation Platform

Mismanagement of Russian Economy Could Lead to Social Unrest

Yuri Zarakhovich

The standard Kremlin spiel on Russia’s economic crisis is that it is all America’s fault. President Dmitri Medvedev said in his Address to the Federal Assembly of the Russian Federation on November 5: “…the U.S. economy…pulled financial markets all around the globe [down] with it in its fall...They did not listen to the numerous warnings from their partners (including from us). As a result they have caused damage to themselves and to others” (www.kremlin.ru/eng/speeches, November 5).

Prime Minister Vladimir Putin said on October 1 that the irresponsibility of America’s financial system was to blame for the global economic crisis. The Times quoted Putin as saying, “Everything happening now in the economic and financial sphere began in the United States. This is not the irresponsibility of specific individuals but the irresponsibility of the system that claims leadership” (www.business.timesonline.co.uk).

Not so, counters Yevgeni Gontmakher, a Russian economist and social issues expert, who was once an advisor to President Boris Yeltsin, and later the deputy social development minister, and chief of the Social Development Department of the cabinet staff under President Vladimir Putin (www.biografija.ru/show_bio.aspx?id=27465). Currently the director of the Social Studies Center of the Institute of Economics of the Russian Academy of Sciences, Gontmakher’s view of Russia’s crisis differs greatly from the official version.

“Russia’s crisis has nothing to do with the U.S. or global recession,” Gontmakher told Eurasia Daily Monitor on November 12. “Assertions that the U.S. has crippled us are pure propaganda. Whatever is happening over here, we have done with our own hands.” Gontmakher believes that “Russia’s systemic crisis resulted from the state’s polices adopted as of 1999,” when Putin rose to power. “These policies unhinged Russia’s economy long before Global recession started.”

Gontmakher points out that while the state has been stomping out the political opposition, it has also driven small and medium businesses into the grave. “Business doesn’t breed in captivity,” he quipped. The state also tightly controls big business. Foreign investors were given some serious lessons, when the state took over the Shell-led Sakhalin-2 project (The Washington Times, December 22, 2006); eased out the owner of Heritage Capital Investment Group, William Browder (www.business.timesonline.co.uk, April 4); and brought the stock market down by $58 billion overnight, when Putin publicly promised “to clean up” the Mechel Coal and Steel concern (Kommersant, July 26).

A Siberian analyst Dmitry Tayevsky, who writes for the Irkutsk www.babr.ru portal, says that the root of the current crisis in Russia reflects "not economic problems but serious administrative miscalculations" (www.babr.ru/?pt=news event=v1&IDE=48608).

The prominent economist Andrei Illarionov, once Putin’s top economic advisor but now a strong critic, told the VOA Russian Service in an October 20 interview, entitled “Catastrophe, Stage 1,” that under the guise of “fighting the crisis” the Kremlin would be seeking “almost monopolist control over the economy the same as it has already grabbed a political monopoly and wiped out any unwelcome opposition” (www.voanews.com/russian, October 20).

Russia’s current economic scene appears dismal. The RTS, Moscow’s main index of shares, dropped from nearly 2500 in May (www.rosfin.ru/news76795.html) to 692 by November 25 (RBK TV, November 25). The ruble-denominated MICEX dropped from 1839 on May 14 (www.lenta.ru/news, May 14) to 595 on November 25 (RBK TV, November 25).

“Our stock markets are dead as a doornail,” commented Gontmakher. With Russian Urals oil vacillating under $50 per barrel these days, there is no hope of quickly replenishing the diminishing state currency reserves, which have dropped from $597.5 billion on August 8 (www.bankir.ru/news/newsline, August 14) to $453.5 billion by November 14 (www.news.yandex.ru).

Top Russian economists recently looked at five possible scenarios, Gontmakher says. All of them, except modernization and immediate reform, would lead to a catastrophe. This single solution that could still save this country is not, however, in the cards under the conditions of the existing state, which is afraid of losing its monopoly of power. “The consequences will be dire,” Gontmakher says. He believes that the country may pass the point of no return sometime in 2009.

Experts see a very serious possibility of an abrupt collapse of the living standard and economic disintegration leading to social unrest, eventually followed by political upheaval.

Gontmakher’s story in the daily Vedomosti (November 6) was pointedly titled “Novocherkassk-2009,” in an allusion to the major workers riots on June 1 and 2, 1962, in the city of Novocherkassk, which were suppressed by the Soviet Army; 23 people were killed and dozens jailed in the unrest (see V.A. Kozlov, Massovye Besporadki v SSSR pri Khrushcheve I Brezhneve [Mass Riots in the USSR Under Khrushchev and Brezhnev], Sibirski Khronograph, Novosibirsk, 1999). The article raised quite a commotion by drawing a picture of a shaky social peace collapsing once the 1962 situation starts repeating itself with prices and tariffs increasing drastically, wages dropping, workers laid off in droves, and food disappearing from the shelves because of collapsing imports and inadequate domestic production. “Either we finally take an effort to reform, or else we will enter a crisis that cannot be resolved within the framework of the current constitutional order,” the story concludes. On November 22 Rosomsvyaznadzor, the government’s media watchdog, issued a warning to Vedomosti that Gontmakher’s article could be seen as inciting extremism (www.polit.ru/news, November 22). Both Vedomosti and Gontmakher protested against the admonition.

As Tayevsky put it, “There will not be a crisis in Russia. There will be something immeasurably worse. But decent words for what it will be have not yet been devised, at least in the Russian language."

Berlusconi, Centrex, Hexagon 1 and 2 and Gazprom

Roman Kupchinsky

Sergio Berlusconi, the billionaire Italian Prime Minister, arrived in Moscow on November 6 to meet with Russian President Dmitry Medvedev and sign an Italian-Russian deal that will involve Russia in constructing third and fourth generation nuclear reactors in Italy. The head of Russia’s Rosatom (the state nuclear energy corporation), Sergei Kiriyenko, stated after the signing ceremony, "Italy faces the task of returning to a leading position in the European nuclear power industry" (Moscow Times, November 7).

Expanding the Russian-Italian energy relationship has always been a priority for governments led by Berlusconi. In November 2007 Eni, Italy’s major gas company, signed a 50-50 percent agreement with Gazprom to build the controversial $10 billion South Stream pipeline, seen by the Russian leadership as a means of torpedoing the Nabucco pipeline, a project intended to diversify gas supplies to Europe. The gas relationship between Eni and Gazprom has not, however, always been transparent and in recent years has come under scrutiny by Italian parliamentarians.

In May 2005 Eni signed an agreement that would have allowed Gazpromexport, headed by Gazprom deputy CEO Alexander Medvedev, who is also allegedly one of the “unseen cardinals” of the murky Centrex Group in Europe, to participate in selling Russian gas to Italian domestic consumers. Almost immediately the contract came under investigation by a commission of the Italian parliament, Bloomberg reported on October 18, 2005.

The commission discovered that a Viennese company called Central Energy Italian Gas Holding (CEIGH), a part of the Centrex Group, was to play a major role in the lucrative contract. The investigation also revealed that a prominent Italian businessman named Bruno Mentasti-Granelli, known to be a close friend of Silvio Berlusconi, owned 33 percent of CEIGH through two companies, Hexagon Prima and Hexagon Seconda, both registered at the same address in Milan. Russian state-controlled Gazprom held 25 percent of the shares of CEIGH through ZMB, the German-registered subsidiary of Gazpromexport, while Vienna-based Centrex Europe Energy and Gas AG held 41.6 percent. Italian lawmakers promptly blocked the agreement, accusing Prime Minister Silvio Berlusconi of having a personal interest in the contract through Granelli’s participation.

Is it possible that Gazpromexport’s Alexander Medvedev did not know that Berlusconi’s close friend, Granelli, owned 33 percent of CEIGH? Did (now-president) Dmitry Medvedev, the chairman of the board of Gazprom at the time, not know? After talks in Moscow on October 20, 2005, Gazprom CEO Alexei Miller and Paolo Scaroni, Eni’s chief executive, declared under pressure from the Italian media, that the agreement had been cancelled. The joint press release stated that the two officials had “agreed to remake the earlier achieved accords on gas and consider possible cooperation in oil projects and in oil supplies in Europe” (Kommersant on-line, October 21, 2005).

Why CEIGH, a company created to sell Russian gas in Italy, was registered in Vienna remains a mystery. Why was ZMB, a fully owned subsidiary of Gazprom Germania, involved in a scheme to sell Russian gas to Italian consumers? What role did the mysterious Austrian-based Centrex Group, the parent of CEIGH, play in this arrangement? Centrex, after all, sent its profits to an off-shore company named Siritia Ventures in Cyprus, which then forwarded the earnings to another shady company, OOO Rubin, a business with a phony address in an apartment block in Moscow.

According to Austrian public documents, the shares of Central Energy Italian Gas Holding in October 2005 were split up between Centrex Beteiligungs GmbH, Vienna (located at Wiedner Haupstrasse 17), which owned 19,301 shares valued at €100 ($126) each; Hexagram Prima S.R.L., Milan, (Via Fatebenefrattelli 20), 5,001 shares; and Hexagram Seconda S.R.L. (located at the same address), 4,998 shares (Bericht Des Aufsichtsrates der Central Energy Italien Gas Holdings AG mit dem sitz in Wien, 4 June 4, 2007). According to Italian company records, both companies are owned by Granelli, although his name does not appear on the CEIGH registration documents (Prospeto Cerveu Hexagram Seconda S.R.I., January 21).

One of the former directors of CEIGH, Robert Nowikovsky, has been alleged by a Russian website to be a close friend of Gazprombank Chairman Andrei Akimov, who, along with Alexander Medvedev, have long been suspected of having been KGB agents in Vienna (Novaya Gazeta, January 16, 2006). Why was Nowikovsky involved with Centrex and CEIGH in the first place? Who brought him into the picture and why?

Nowikovsky, according to Stern Magazine (September 13, 2007), is the owner of “RN Privatstiftung,” which held one fifth of the shares in Centrex until March 2006. He was also involved when the IDF fund was set up in Vaduz, Liechtenstein, in 2004 by Hans Baumgartner, a Swiss lawyer and board member of the shady Swiss company RosUkrEnergo.

IDF soon established a fund for shareholders in Centrex. The value of the shares, with a minimum investment of one million dollars, has skyrocketed since 2004. The authorities in Vaduz, however, refuse to reveal the names of the shareowners.

According to the Stern article, state prosecutors in Israel and Vienna are currently investigating an alleged illegal payment of 4.5 million dollars made by a company associated with Nowikovsky in 2002 to the sons of Ariel Sharon, who was then Israeli prime minister. The payment was allegedly made together with another Viennese businessman, the secretive billionaire Martin Schlaff.”

The official Centrex subsidiary in Italy is Central Energy Italia S.P.A. based in Milan. The Centrex Group website, however, does not provide any indications that its Italian branch is in any way affiliated with Gazprom.

This subterfuge suggests that the Italian Prime Minister is deeply indebted to Moscow and will play the role of a loyal puppet, similar to that played by former German Chancellor Gerhard Schroeder and former EU Commissioner Romano Prodi, who have been promoting the Kremlin’s energy, and possibly other, interests in their home countries and in the EU in any which way they can.

Azerbaijan Quietly Lending Impetus to Nabucco Project

Vladimir Socor

Presidents Ilham Aliyev of Azerbaijan, Gurbanguly Berdimukhamedov of Turkmenistan, and Abdullah Gul of Turkey met on November 28 and 29 in Turkmenistan to discuss trilateral cooperation with a focus on natural gas deliveries. The presidents held bilateral talks in Ashgabat before meeting in the trilateral format in the Caspian port of Turkmenbashi (www.day.az, Anatolia news agency, Turkmen Television, November 28, 29).

Azerbaijan had initiated this meeting as part of its efforts to support the Nabucco pipeline project for Caspian gas to Europe. To avoid irritating Moscow, however, none of the participants mentioned Nabucco at in public level in connection with this trilateral event. “The goal is not to discuss specific projects,” according to the cautious official line (Turan, November 27).

Berdimukhamedov alluded to the trans-Caspian project by declaring after the summit that the Caspian basin could provide an energy bridge from Asia to Europe; that a “partnership based on the three countries’ huge economic and geopolitical potential” in a new cooperation format had been discussed; and that Turkmenistan shared the view that it was necessary to diversify the partners and routes for gas development and export (Turkmen Television, November 29; Turkmen government website, November 30).

Russia continues to have a near-monopoly of Turkmen gas exports, but this situation could change as a result of two recently converging factors. First, the European Union and parts of the U.S. government finally seem to realize that energy infrastructure projects of strategic scope make subsidies from Western governments and institutions necessary. And, second, vast reserves of Turkmen gas have been confirmed by the most recent audit and open the prospect of full-capacity supply to Nabucco (and not only that) from Turkmenistan from the second half of the next decade onward (see EDM, October 15).

This will, however, additionally it will be necessary shielding Turkmenistan from Russian intimidation (something the West failed to work out with the former Turkmen president), as well as forming a consortium for field development in Turkmenistan. The current Turkmen president displays great caution toward Russia. The issue of gas deliveries to Europe was barely mentioned publicly during Berdimukhamedov’s recent visit to Germany and Austria, the latter having initiated the Nabucco consortium (Turkmen TV, Turkmen government website, November 14-17; Handelsblatt, November 14, 16; Die Presse, November 18). The Turkmens showed similar caution during the discussions at the Baku energy summit on November 14, which helped paved the way for Azerbaijan to promote the trilateral summit in Turkmenistan.

While Brussels and Washington have backed Nabucco mainly at the rhetorical level until now, Azerbaijan supports the project through deeds rather than words. Azerbaijan’s role is crucial as the designated supplier of gas for Nabucco’s first stage and as a transit country for Turkmen gas in the project’s second stage. The latter will require a trans-Caspian pipeline from Turkmenistan to Baku and link-up with the existing Baku-Tbilisi (Georgia)-Erzurum (Turkey) pipeline.

Baku’s quiet, unpublicized support is keeping the Nabucco project afloat until the European Union and the United States step in with the necessary investments and political clout. Meanwhile, Azerbaijan is resisting Russia’s offer to buy preemptively all of Azerbaijan’s available export volumes of gas from 2009 onward. The Kremlin and Gazprom have made that offer repeatedly to Baku during this year.

The proposal looks tempting to Azerbaijan on three counts: a) Russia would pay European netback prices (European market price minus cost of transportation) for Azerbaijan’s gas; b) with Nabucco unable to start construction and Turkey seeking extra profit from the project at Azerbaijan ’s expense, Russia can immediately provide a northward outlet for Azerbaijan ’s gas exports through an existing pipeline; and c) Moscow is hinting at possible concessions (at least on paper) to Baku’s position on the Karabakh conflict, if Azerbaijan modifies the Western orientation of its foreign policy and energy exports.

Nabucco would be dealt the terminal blow, if Azerbaijan were to accept Moscow’s offer of a preemptive wholesale purchase of its gas. Baku is aware, however, that acceptance would compromise its energy partnership with the West and mortgage its national independence. During the energy summit he hosted on November 14 in Baku, President Aliyev commented informally on this issue: “From a business point of view, the [Moscow-proposed gas trade] agreement should be signed and everything be given to Russia. But there are other goals and values that override a good business proposal” (as cited by his Lithuanian counterpart, Valdas Adamkus, BNS, November 14).

Azerbaijan’s leadership has reaffirmed its strategic choice in favor of supplying Nabucco and the Turkey-Greece-Italy pipeline with gas. Moreover, this month Azerbaijan signed a five-year agreement to supply Georgia with gas (see EDM, November 17), thus in effect turning down Moscow’s proposal to buy all of Azerbaijan’s available export volumes. The same resolve is clearly seen in Azerbaijan’s efforts to connect Turkmenistan with the Nabucco project through a trans-Caspian pipeline.

The Turkey-Greece-Italy Interconnector (TGI), which went into operation earlier this year reaching Greece, fully relies on Azerbaijani gas. TGI is slated to reach a throughput capacity of 8 billion cubic meters annually, far more modest than Nabucco’s planned second-stage capacity of 31 billion cubic meters per year. President Aliyev and Industry and Energy Minister Natiq Aliyev discussed the Greece-Italy link of TGI during their visit to Italy on November 26 and 27. Italy’s Edison company is involved in building that link across the Adriatic seabed and using the gas in Italy for generating electricity (www.day.az, Turan, November 26, 27).

Armenian Foreign Minister Visits Turkey, Reaffirms Determination for Dialogue

Saban Kardas

Turkey, Azerbaijan, and Armenia continue to take steps toward resolving their problems through diplomatic channels. High-level meetings coinciding with international gatherings have become an ordinary development, showing the confidence and progress gained so far.

Armenian Foreign Minister Edward Nalbandian visited Turkey on November 24 to discuss the details of Armenia’s assumption of the rotating presidency of the Organization of Black Sea Economic Cooperation (BSEC). During his trip to the BSEC’s permanent secretariat in Istanbul, Nalbandian also had dinner with his Turkish counterpart Ali Babacan. The two ministers discussed the progress in Turkish-Armenian talks, which had been taking place at lower levels since the historic meeting between the presidents of the two nations in Yerevan and the trilateral meeting between the foreign ministers of Turkey, Armenia, and Azerbaijan in New York in September (Anadolu Ajansi, November 24).

Nalbandian emphasized that there were no major obstacles to the normalization of bilateral relations and called for “opening a new page.” He repeated the Armenian position that diplomatic relations between Turkey and Armenia should be resumed without any preconditions and that Turkey should open the border. Babacan emphasized that Turkey sought a permanent solution with Armenia. He noted the importance of settling the Karabakh dispute and called for accelerating the Armenian-Azeri dialogue (Milliyet, November 25; Today’s Zaman, November 30).

Nalbandian was asked by Turkish journalists, “What makes you so optimistic, despite the fact that the parties are maintaining their positions?” He responded by saying that negotiations were continuing on a “constructive, sincere, and open” basis. He noted that the momentum for solution was there and the parties should take advantage of it (Zaman, November 25). Reflecting the same spirit, Babacan said that all three parties should make the best use of the window of opportunity made possible by the trilateral dialogue. “If the window is closed, it may be difficult to reopen it,” said Babacan (Hurriyet, November 26).

The intention to normalize relations is definitely there, but why did Babacan emphasize the need for urgency? On the Armenian side, there is definitely a desire to end the severe economic problems caused by negative relations with Turkey and Azerbaijan. It hopes to settle bilateral disputes and open the country to the outside. Nonetheless, Sarkisian’s approach in favor of a diplomatic solution has increasingly come under criticism by nationalist forces at home and from the Armenian diaspora (EDM, November 25). Failure to deliver acceptable solutions might alienate those elements supporting dialogue.

On the Turkish side, uncertainty about the incoming American administration’s policy on the Armenian issue create an urgency to address the problem. If Turkey can resolve the bilateral problems through diplomatic dialogue with Armenia, it could successfully undermine the Armenian diaspora’s efforts to influence the Obama administration against the Turkish interpretation of the Armenian genocide (Radikal, November 25).

Nalbandian and Babacan decided to maintain high-level meetings between the foreign ministers with the participation of Azerbaijan whenever possible. Commending Turkish President Abdullah Gul for his “wise” decision to visit Armenia in September, Nalbandian announced that Armenian President Serzh Sarkisian would travel to Turkey in October 2009 to attend the next soccer game between the national teams of the two countries (Hurriyet, November 25). Diplomatic sources also disclosed that Nalbandian had invited Babacan to attend the next BSEC ministerial meeting scheduled to be held in Yerevan in April 2009. Although the Turkish side has not officially accepted the invitation, observers expect Babacan to attend this meeting (Zaman, November 27).

A new occasion for holding talks between Turkey, Azerbaijan, and Armenia might be provided by another international gathering later this week. The foreign ministers of Turkey, Armenia, and Azerbaijan will be attending the forthcoming Ministerial Council meeting of the OSCE in Helsinki on December 4 and 5.

The involvement of Azerbaijan is becoming increasingly crucial for Turkey’s own rapprochement with Armenia (Anadolu Ajansi, November 25). For Ankara, having Azerbaijan on board is crucial because it seeks to obtain approval from Baku for Turkey’s normalization with Armenia, such as opening the border or establishing diplomatic relations. For Armenia, maintaining this dialogue is necessary to resolve its bilateral disputes with Azerbaijan, which remain a major obstacle to comprehensive peace in the region. Thus, Turkey is working to normalize its relations with Armenia on the one hand and mediate between Azerbaijan and Armenia on the other.

On December 1 Babacan is on an official visit to Baku at the invitation of his Azerbaijani counterpart Elmar Mammadyarov to discuss bilateral relations as well as the details of his meeting with Nalbandian. Babacan is expected to explore the possibility of arranging a three-way meeting in Helsinki. Before departing for Baku, Babacan told reporters that the foreign ministers of Armenia and Azerbaijan would meet with the co-chairs of the Minsk group in Helsinki, following which he would meet his counterparts individually. He did not, however, announce a tripartite meeting yet (Ihlas Haber Ajansi, November 30).

The Babacan and Mammadyarov meeting focused on energy cooperation, regional developments, the Caucasus Stability and Cooperation Platform (CSCP), the opening of Baku-Tbilisi-Kars railway, and Azerbaijan’s problems with Armenia. They discussed Karabakh issue in detail, and Mammadyarov clarified Baku’s policy on this dispute. During the joint press briefing following the meeting, Babacan reemphasized the urgency of solving the Karabakh problem now, and underlined the connections between solving Azerbaijan-Armenian problems and Turkish-Armenian problems. Although diplomatic observers had expected Babacan to discuss trilateral consultations in Helsinki, no such meeting was announced (www.ntvmsnbc.com; Cihan Haber Ajansi, December 1).

As the noted Turkey analyst Cengiz Candar observed, the OSCE meeting would bring together not only the three countries but also other players that had attempted to mediate between Armenia and Azerbaijan. If the Helsinki talks could achieve progress in the Karabakh issue, it could pave the way for concrete steps toward normalization between Ankara and Yerevan in 2009 (Radikal, November 25).

Turkey has also used this diplomatic traffic to begin setting in motion the Caucasus Stability and Cooperation Platform (CSCP) that would bring together Turkey, Russia, Georgia, Azerbaijan, and Armenia. Since proposing the organization in the wake of the Russian-Georgian war, Turkey has conducted several meeting
s with the respective parties to ensure their participation. Babacan told reporters that representatives from the five countries would convene for the first time during the OSCE meeting in Helsinki. The members of the group will use the opportunity to specify the goals, principles, and mechanisms of the CSCP (Cihan Haber Ajansi, November 30).

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