I rather liked the following piece.
(I must admit somewhat guiltily that this Russia-Ukraine gas spat did cause we to feel some vicarious "Rah! Rah! Go, Russia! We're No. 1!" base patriotism.)
OPINION: Russia's foreign policy - managing energy security Contributed by Roland Nash, Head of Research, Renaissance Capital
MOSCOW, Jan 10 (Prime-Tass) -- The international community is up in arms about heavy-handed Russian policy on energy; President Putin is accused of abusing state power to squash a political opponent who is lauded in the West; a conspiracy theory evolves arguing that the mess shows that Putin is either losing control or capable of major errors in judgement; another conspiracy theory emerges suggesting that it is all about gain for a few shadowy figures around the Kremlin; poor old Andrei Illarionov is demoted after being roundly ignored by the Kremlin there is a certain sense of deja vu as Russia returns this morning from its long New Year break into 2006.
Gazprom’s decision to cut off gas supply to Ukraine is being portrayed in the West as a self-defeating abrogation of international responsibility. Cutting gas supplies to Europe for the first time in 40 years in order to project influence over puny Ukraine seems a ridiculous poke in the eye to the G7 just as Russia finally takes over as president of the G8. And from the West’s perspective, it clearly is a ridiculous policy – you invite the poor neighbour over for yuletide dinner only for him to spend the evening whacking Tiny Tim with the Christmas lights. The outrage and confusion is remarkably similar to that of the international investor community this time last year as we watched in disbelief as the Kremlin temporarily destroyed the equity market by carving up YUKOS.
But from Moscow, given the objectives of the Kremlin and the policy instruments available, the decision seems a lot more comprehensible. Russia was invited to become a member of the G8 not on merit as a rich country, but because the West wanted to bring Russia into the fold, to tie her as rapidly and securely as possible into the set of Western designed international institutions in which the world largely operates. This policy makes total sense from a Western perspective. Unfortunately, Putin has made it abundantly clear that he has no intention of playing by the Western rules. He does not see it in Russia’s best interest to align directly with the West, any more than it is in Russia’s interest to stand directly in opposition to the West. Russia is delighted to be president of the G8, and will use the opportunity to push its own interests as hard as possible.
Shutting down gas to the Ukraine achieved three objectives. First, one year on from the Orange Revolution, Russia showed as plainly as possible that it is simply unrealistic for an economically weak Ukraine to escape from Russia’s sphere of influence into that of Europe. There might have been some muted protest from Germany and the UK, but if it comes to the choice between Russian gas and Ukraine’s European aspirations, then it’s always going to be Auf Wiedersehen Ukraine.
Second, just as Russia focuses the G8 on energy security, Putin has illustrated why its position is at least as powerful as any other around the table. The argument has been made that there is a symbiotic relationship between energy producer and energy supplier – Russia needs the consumer just as much as Europe needs the producer. But this seems to be somewhat unimaginative rhetoric. It is difficult to envisage a scenario when Europe will unilaterally stop buying gas from Russia. Russia, on the other hand, has shown it can turn off gas supplies simply because of an unpaid gas bill. As the G8 focus on energy security, Russia has shown where the balance of power lies.
Finally, Russia has established credibility that it is indeed willing to use energy for foreign policy initiatives. By throwing the switch for a couple of days when most of the world was focused elsewhere, Russia has shown that its threat to energy supplies is not empty. The Kremlin’s determination to gain control over Russia’s hydrocarbons has not simply been about access to revenue flows, but also to gain power that they are not afraid to use.
Some have argued that Gazprom’s decision will force Europe to look elsewhere for its energy. But where? Alternative energy will, presumably, become important one day, but similar commitments following the OPEC stand-off in the seventies have done little to undermine the dominant position of the Middle East in oil. There has been speculation that Europe will now accelerate pipeline access from other countries, but the only current plan under review is the Nabucco pipeline, which originates in that haven of western-friendly stability, Iran. And even if Europe were somehow to decrease its reliance on Russian gas, there are plenty more markets for Gazprom to the east.
Whatever Europe would like to think, it will be forced to rely on Russian gas for the foreseeable future. Putin undeniably injected some uncertainty into the European gas market, but, as OPEC has shown since proving its energy muscle in the seventies, this is far from necessarily being detrimental to the interests of an energy producer. Russia doesn’t want to buy friends with its energy potential, it wants to buy influence. Establishing credibility that Russia is willing and able to play the gas card will not win many friends in the West, but, whatever the current rhetoric, it has forced the West to take notice about the origin of much of its energy.
Oh, and entirely incidental to these other objectives, Gazprom got higher prices for its gas.
None of this looks particularly positive from a Western perspective. It shows that, despite the best efforts of the last 15 years, Russia’s interests are not aligned with those of the West. It illustrates the institutional weakness that often forces Russia to resort to heavy handed policy in foreign affairs as well as domestic policy. It indicates again the primacy of the state in much of the economy. There will presumably be a small number of well-connected individuals who will gain through exposure to RosUkrEnergo, the intermediary between Gazprom and the Ukrainian Naftogaz.
But as with the YUKOS affair a year ago, it is vital to remember that domestic opinion is very different from that in the West. Putin is not popular despite destroying YUKOS or threatening energy security in Europe, but because he’s willing to exercise the power of the state in ways that are sometimes detrimental to the interests of the West, either of investors or of governments. Putin’s popularity has been boosted by bullying Ukraine and the furor in the West, just as it was improved by effectively renationalizing Yugansk and sending Mr Khodorkovsky to Siberia.
This is not to say that Russia pursues policies just because they irritate Western interests (although sometimes it seems that way). Policies are followed based on the best interests of Russia as seen from a small and somewhat isolated clique in the Kremlin and given the institutional capacity available. Very often these interests coincide with those of the West, and indeed, Putin remains more closely aligned with Europe than with any other major power bloc. But Russia is the only European country with the history, geography, resources and willingness to follow a genuinely independent foreign policy. For much of the last fifteen years, Russia has been economically ham-strung. A combination of the oil price and Putin’s recreation of a powerful state has meant that Russia is once again able to assert itself on the global stage. The controversy over gas supplies in Europe and the alignment of Ukraine is a result of that new found assertiveness. It may look ugly in western eyes, but that’s as irrelevant to Russia as Moscow’s opinion over NATO expansion is to Washington.
In the summer of 2004, I was lucky enough to be on a conference call between an astute portfolio investor and one of Russia’s best Kremlin political strategists. The investor wanted to know what on earth the state had planned for YUKOS. The Kremlin strategist, with admirable honesty, said that YUKOS would be destroyed and its assets absorbed by the state. The investor went understandably apoplectic and asked the strategist whether the Kremlin had any idea what the destruction of YUKOS would do to Russia’s stock market and its international reputation. The strategist replied that the Kremlin knew that the stock market would tank and that the West would fume. But he also said that the Kremlin knew that after the storm, ‘the West will do what is best for the West, and the stock market will rise again. We both want trade, and our stocks are cheap.’.
After the West has vented over the temporary shut down of gas, Russia will chair the G8 and all sides will sit down to discuss how best to ensure energy security. Russia will not have made any friends through Gazprom’s recent decision, but it has established the importance of its position and the potential influence of its energy policy.
The joys of Russian finance continue. May I take this opportunity to wish everybody a successful and happy 2006? With Gazprom rocketing through fair value, the Norilsk-Polyus split carving out a company of possible interest to the Kremlin, a whole swathe of IPOs looming, domestic financial markets booming, oil companies once again leading the charge in the equity market and our end-2006 RTS target of 1500 already looking low, 2006 looks set to be a fascinating year.
Nu, zayats, pogodi!
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