Tuesday, Apr 27, 2004
Russia's economic diplomacy
By Vladimir Radyuhin
Moscow is using energy, the most powerful weapon at its disposal, to build its economic and political clout.
RUSSIA'S UAZ Automotive Factory has set up a joint venture with an Indian company to assemble famous Ural off-road trucks and buses in West Bengal; two Russian power firms tied up with India's Soma to build a hydropower station in Arunachal Pradesh; Silovye Mashiny corporation signed a contract to supply Russian electric turbines to NTPC (National Thermal Power Corporation). These are but a few recent examples of growing interest Russian business takes in Indian and other foreign markets.
Encouraged by Russia's re-emergence as a global political player and boosted by five straight years of economic growth after a decade of decline, captains of Russian business have entered the path of international expansion.
The Norilsk Nickel giant last month laid out $1.16 billion to buy a 20 per cent stake in South African gold miner, Gold Fields, which has 4.3 million ounces of annual gold production and 84 million ounces of mineral reserves. A month earlier, Tatarstan's Tatneft oil major snapped up Turkey's Tupras, which controls 87 per cent of the country's refining capacity, for $1.3 billion.
More investment projects are in the pipeline. Russia's natural gas monopoly, Gazprom, has teamed up with GAIL India Ltd. to develop offshore gas fields in the Bengal basin, the Russian premium telecom corporation, Sistema-Telecom, is ready to sink $1 billion in Indian mobile telephone industry, while the aluminium giant, RusAl, is waiting to pounce on the National Aluminium Company (NALCO) when its disinvestment plan is reactivated.
The President, Vladimir Putin, told the nation that Russia was still facing a win-or-die battle it had fought in the Cold War, even if the rules of the game had changed.
"There is a tough, competitive battle going on in the world," Mr. Putin told the country in his annual teleconference in December. "As different from the past, this battle has moved from the realm of military conflict to economic competition." Accordingly, Mr. Putin has recast Russia's foreign policy priorities, charging the Foreign Ministry with the overriding task of helping Russian business abroad. The move has won the praise of Russian businessmen.
"I think there is a gradual revolution taking place in foreign economic relations," said Mr. Kakha Bendukidze, co-owner of Silovye Mashiny, which won the electric turbine tender in India earlier this year. "There is a growing recognition in the Foreign Ministry and in the Economic Development and Trade Ministry that they need to support Russian businesses abroad, including attempts to make investments outside Russia."
For the first time in more than a decade the Russian Government has set aside a modest $500 million in state guarantees in this year's budget to support exports. In a more significant move, a new law will come into force this summer that simplifies rules for transferring cash out of the country for investment purposes.
The first stage in Mr. Putin's global expansion plan is to win back the former Soviet states. As the U.S.-led NATO moves troops to Russia's borders, Moscow is pushing to reassert its domination in neighbouring markets. It wields the most powerful weapon at its disposal, energy, being either the sole supplier of oil and gas to ex-Soviet republics or providing the only route for their energy exports to outside markets.
The state-controlled electricity monopoly, United Energy Systems (UES), has brought under control four-fifths of Armenia's hydroelectric power capacities and bought up most of Georgia's energy facilities. The UES has acquired stakes in electricity assets in Kazakhstan, is about to buy major stakes in 10 of the 27 Ukrainian energy companies, and plans to participate in the disinvestment of power assets in Moldova. In Kyrgyzstan, UES has set up a joint venture with two local companies to build a cascade of two hydropower stations on the Naryn River in the mountains that will meet the electricity needs of Kyrgyzstan and other Central Asian states.
"We have very aggressive plans that cover most countries of the CIS (Commonwealth of Independent States)," the UES chief , Anatoly Chubais, said in a recent interview.
Russia's Gazprom controls practically all natural gas flows to and from former Soviet republics. Even energy-rich Azerbaijan imports from Russia over half of its gas needs to the tune of 4.5 billion cubic metres. Earlier this month, Gazprom signed a deal with Uzbekistan to develop a major gas field in that Central Asian republic that could entail an investment of $1.4 billion in Uzbekistan's energy sector. In January, Russia's oil major, Lukoil, signed an accord for the investment of $3 billion into joint development of Kazakhstan's oil and gas fields in northern Caspian.
Russia's aggressive economic expansion is reflected in growing mutual trade with the Commonwealth of Independent States (CIS), which unites 12 out of 15 former Soviet states. Russian trade with CIS registered a 30 per cent hike last year, increasing at a higher pace than with other countries. This helps Russia resist Western attempts to weaken its positions in the former Soviet Union. Earlier this month, Kazakhstan's Ambassador to Russia said his country planned to increase oil exports to and across Russia from the current 20 million tons a year to 250 million tons by 2020. In other words, Kazakhstan will pump all its oil exports through Russian pipes, making the U.S.-pushed $3.6-billion Baku-Tbilisi-Ceyhan (BTC) pipeline a profit-losing project, as Azerbaijan admittedly does not have nearly enough oil to fill the pipe.
Russia's Minister for Industry and Energy, Viktor Khristenko, described the Russia-driven integration of energy systems in the former Soviet states as "an instrument of solving political issues in the CIS."
Ukraine's political elites may have declared a strategic choice in favour of Europe, but the country's economic interests push it towards Russia. According to some information, Russian investors control about 80 per cent of Ukraine's oil refineries, practically all non-ferrous industry, a quarter of privatised electricity companies, half of cell phone operators and 30 per cent of dairies. By the time Ukraine is ready to join NATO and the European Union, most of its industry will belong to Russian business.
Russian expansion into neighbouring economies has been a major factor behind Moscow's successful efforts to push reintegration plans in the former Soviet Union. Even Ukraine, which had long rejected these plans, signed last September a common market pact with Russia, Kazakhstan and Belarus which envisions a customs union, free movement of goods, capital and labour, and unification of tax, monetary and foreign trade policies.
Winning commanding heights in former Soviet economies gives Russia a stepping-stone to expansion beyond the former Soviet borders.
"We are not going to confine our expansion to the CIS," Mr. Chubais said last week. Having restored unified electricity grids with the former Soviet republics, the company now plans to buy assets and export electricity to a total of 12 countries from Norway in the north to Slovakia in the west, Iran in the south, and China in the east.
Energy is the driving motor of Russian expansion. LUKoil, Russia's second biggest oil producer, won the rights in January to develop a potentially huge gas field in Saudi Arabia in a tie-up with Saudi Aramco. The deal strengthened newly emerging links between the world's two biggest oil producers that could give Russia greater leverage in global energy markets.
Gazprom, which is the major supplier of natural gas to Europe, is in talks with Ukraine, Germany, France and Italy to set up a gas transportation consortium that will help consolidate Europe's dependence on Russian energy. The energy tool has helped Russia win important trade concessions from the E.U. ahead of its expansion into Eastern Europe next week.
As one analyst put it, "In the old days of the former Soviet Union, Russia's political clout was measured by the 14,000 nuclear missiles it had pointing west; now it's measured by the pipelines it has pointing west."
Russian business has even made first inroads in the U.S. market. LUKoil has bought 2,100 gas filling stations in the East Coast and plans to bring up the number to 3,000 stations, while the steel giant, Severstal, has purchased the Michigan-based Rouge Industries for $286 million.
A World Bank report released earlier this month concluded that Russia's 23 largest business groups control more than a third of its industry. This is an upshot of Boris Yeltsin's corruption-ridden privatisation deals of the 1990s. However, rather than reverse privatisation or break up monopoly groups, Mr. Putin has instead used them as locomotives of Russia's expansion to global markets under government control. Oversees acquisitions may eventually transform Gazprom, LUKoil, Norilsk Nickel and other Russian industry tycoons into multinational corporations. This fits into Mr. Putin's strategy of building up Russia's economic clout globally and in the former Soviet Union, and convert it to political clout.
Copyright © 2004, The Hindu.