Yet more Russia stuff

Chris Doss chrisd at russiajournal.com
Mon Mar 11 05:40:25 PST 2002


The Electronic Telegraph (UK) March 11, 2002 It's Russian oil that counts, not American steel By George Trefgarne

IT is funny how often we work ourselves up over a particular issue, only to discover something more important is going on behind our backs. This struck me last week as I found myself cursing President Bush and his absurd steel tariffs.

I was just about to compose a traditional eulogy to Adam Smith and his free trade apostle David Ricardo when I noticed out of the corner of my eye the oil price spurting up like a new Texan well, jumping through $24 a barrel.

The cost of the fuel that drives the world economy is twitching upwards. That is a potentially more important issue than steel, which is being overproduced by the mega-tonne, only to rust away in the scrapyards of the Far East.

Almost unnoticed, the dynamics of the world energy market have changed dramatically since the terrorist attacks on America six months ago. Russia has suddenly emerged as the new oil superpower.

So drag your eyes away from Washington for a moment, swivel round 180 degrees, and let's focus on the pepperpot towers of the Kremlin.

A pointless trade war over steel is possible. But more likely is an oil war in which the main players, battling it out for supremacy, will be Russia, Saudi Arabia and the West. The market is also worried that American designs on Iraq will further disrupt the oil supply.

For as long as anyone can remember, Saudi Arabia has been the world's biggest oil producer. It has held sway over the world through Opec, the cartel of oil producing countries.

The peak of its power came in 1973, when Egypt and Syria attacked Israel during Yom Kippur. A week later, Arab countries introduced an oil embargo to punish the West for supporting Israel.

In the few days after September 11, the oil price leapt as traders feared a re-run of the 1970s. But then a strange thing happened. The oil price fell back. Spying his opportunity, Vladmir Putin, president of Russia, decided to set his country's oil wells going like the clappers and put the market's fears to rest.

As a consequence, Russia is expected to knock Saudi Arabia off the number one spot this year, producing between 8.5 million and nine million barrels of crude a day. As a reward for this, and the use of military bases in central Asia, Washington has turned a blind eye to the butchery in Chechnya.

Of course, the gushing of the Russian geyser hasn't gone down well with the bejewelled potentates of Arabia. Throughout the winter Opec tried to persuade Russia - which is not a member - to cut production. Mr Putin responded by tricking the cartel. He promised to cut exports, not production.

But Russian exports would have fallen anyway, as the Siberian winter causes domestic demand to rise. As it turns out, the latest figures show that in February Russian production was actually up 20 per cent. Furthermore, exports have not fallen as promised and Russian oil companies have resorted to lorries and barges to evade the state pipeline company, Transneft.

Great, you cry. Serves the Middle East bully boys right. Now the Russians are on-side, we can crack open the vodka and celebrate by cruising around in a giant gas guzzler. But it is not as simple as that. Nobody can be sure what happens now.

Last week, Ali Rodriguez, the secretary-general of Opec, was in Moscow begging for production cuts again. Mr Putin replied he would make a decision this week, maybe. One theory is that the Saudis will punish Russia if Mr Putin does not agree to their demands.

They could use their special reserves to flood the market, driving the price below the level at which Russian companies can profitably produce. This was a tactic the Saudis used to undermine Venezuela in 1998.

But that seems unlikely. It is potential price rises, rather than cuts, that give the Saudis their leverage. Much depends on Mr Putin, who has manoeuvred himself into a commanding position.

He is popular in Russia. Its backward economy is booming. He has reformed the tax code, introducing a flat income tax rate of 13 per cent (yes, 13 per cent) and begun land reform. He has also, incredibly, paid back some government debt.

Mr Putin has also given his provisional backing to those who wish to reform Russia's huge but lawless oil companies. An example of this is Gazprom. Partially privatised by Putin's predecessor, Boris Yeltsin, Gazprom is the world's biggest gas company and has more oil reserves than the North Sea.

Mr Putin has used the state's 38 per cent shareholding in support of Boris Fedorov, a former deputy prime minister, now a director of Gazprom. Mr Fedorov has the backing of foreign investors, who have about nine per cent of the shares.

He is campaigning to end corruption at the company and sell off its non-core assets. These include a television station, yacht clubs, fashion chains and numerous herds of cows.

But who can be sure what Mr Putin will do now? Churchill's dictum - Russia is "a riddle wrapped in a mystery inside an enigma" - could have been coined to describe the president himself, with his curiously inscrutable face and his reliance on cronies from St Petersburg and the KGB. There can be no telling whether he is a genuine liberal reformer, or a cunning nationalist, or perhaps both.

One reason the Pentagon wants to go for Saddam Hussein is to reduce America's dependence on the Saudis by putting Iraq's oil reserves into friendlier hands. But they cannot move without Mr Putin's say so.

He is already talking about creating an "Opec for gas", based around the old Soviet Union. Alternative oil supplies from Africa or Alaska are unlikely to be much use for several years.

The best option for the West is to court Mr Putin, to try to civilise him and make it in his interest to keep the oil flowing. We could start by offering membership of, say, the World Trade Organisation (although he may not want to join an outfit that Mr Bush has treated so clumsily over steel).

There is an opportunity too for Western investors, if they can accept the risks in that cruel country, to join the Russian oil rush. But they should beware. Our new best friend Mr Putin could yet show his nasty side. If that happens, he might suddenly turn off the tap.



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