DARIA SOLOVIEVA ON THE FOREIGN ENERGY POLICY OF THE PUTIN REGIME

The following article is republished from the American online journal 'World Politics Review'(www.worldpoliticsreview.com), with the kind permission of the author, Miss Daria Solovieva. We present it here without further comment, for your edification:

Russia Continues to Wield Energy as Tool of State Power, by Daria Solovieva

"President Bush's meeting with Vladimir Putin last week found U.S.-Russian relations in a far different state than six years ago, when President Putin was the first leader to call the Oval Office and pledge his support following September 11. While there is yet no real basis for proclaiming a new Cold War, a long list of thorny issues includes sanctions against Iran, location of the proposed U.S. missile defense system, and the unresolved question of Kosovar independence.

Perhaps the most important recent change U.S.-Russian relations, however, is Russia's much greater reluctance to support the Bush administration's Middle East and Europe policies. Russia's new assertiveness is largely the result of the financial stability brought about by its booming energy sector. With 60 percent of Russia's federal budget coming from oil and gas revenues, energy policy has for years been at the center of Putin's plan to reclaim Russia's global power status.

In recent months, the Putin administration has further tightened state control of Russia's oil and gas industry and has demonstrated increasing willingness to use the country's energy resources as an instrument of power in foreign policy.

In a landmark deal June 22, ending years of speculation and negotiations, the British-Russian venture TNK-BP sold its 62.9 percent stake in Russia Petroleum to Russia's state-controlled natural gas monopoly Gazprom. Rosnedra, the Russian licensing agency, had been threatening for months to revoke TNK-BP's license to develop the Kovykta natural gas field, threats that were apparently used as a pretext for facilitating state ownership of the British-Russian firm's largest natural gas project in Russia.

The licensing agency claimed the Kovytka field should have been producing 9 billion cubic meters of gas per year under the licensing terms, while TNK-BP produced less than 2.5 billion cubic meters. Meanwhile Gazprom is the only company in Russia legally allowed to export gas.

While TNK-BP President and CEO Bob Dudley was characteristically optimistic, calling the new agreement an "important development in the future growth of TNK-BP," President Putin's remarks were dismissive of TNK-BP's claims regarding the Kovytka gas field license. "I am not even going to mention how they acquired the license," he said June 4. "Leave it to the conscience of those who got the license in the early 1990s."

Last year, Royal Dutch Shell PLC came under similar pressure following charges of environmental violations and eventually ceded control of the giant Sakhalin-II oil and gas venture to Gazprom. Gazprom now holds 50 percent of the shares in Sakhalin-II, while Shell, Mitsui, and Mitsubishi own 27.5 percent, 12.5 percent, and 10 percent, respectively.

Moscow has also been seeking an increasing energy presence in the former Soviet sphere and Europe, the latter of which receives 40 percent of its natural gas from Russia. Russia is likely to remain Europe's most important supplier, according to the World Energy Council.

In a steady expansion over the last year, Gazprom has secured several new long-term (up to 25 years) bilateral agreements that undercut attempts to decrease Europe's enduring dependency on Russian gas supplies.

Gazprom's separate agreements with German energy supplier E.ON Ruhrgas, Gas de France, Hungary's MOL and Eni of Italy also undermine attempts to agree on a common European policy towards Russia and its gas supplies. Germany presents another potential problem for developing a common policy, as Burckhard Bergmann, chairman of the board at E.ON, which has recently agreed to build a $12 billion natural gas pipeline in the North Sea, has a seat on the board of Gazprom.

In March, Putin signed agreements with Greece and Bulgaria to build an oil pipeline circumventing the congested Bosporus Straits. Greece was quick to propose that Gazprom also build a gas pipeline along the same route.

The May 21 approval of the second leg of the Baltic Pipeline System (BPS-2) was another effort in a series of successful Russian moves aimed at further securing energy transit routes outside Russia and ensuring Europe's continued dependency on Russia's natural gas supplies. The Baltic Pipeline System will run from Unecha in western Russia to the Russian port of Primorsk on the Baltic Sea, bypassing current gas export routes through Belarus.

While Russian leaders and an overwhelming majority of the population embrace Putin's energy policy as a sign of Russia's resurgence as a global power, others see the country's dependency on the oil and gas sector as increasingly problematic.

Andrei Illarionov, Putin's former economic advisor, has harshly criticized the government for failing to use economic stabilization as a foundation for liberalization.

Gazprom's predominant position in the Energy sector poses several risks for the Russian economy. The U.S. Energy Information Administration estimates that the Russian gas sector has not been as successful as its oil industry due in large part to Gazprom's inability to modernize its aging fields. In addition, insufficient export pipelines, export restrictions and crippling state regulations hamper the gas sector. The Russian government and Gazprom both estimate steep declines in Russia's natural gas output between 2008 and 2020.

As many European leaders, including outgoing Prime Minister Tony Blair, have warned recently, Russia's statist economic policies may deter future foreign investment in Russia. ExxonMobil CEO Rex Tillerson said last month that his company needs "more clarity about how the Russian government will treat foreign companies" before it will undertake further projects there.

Meanwhile, Putin supporters argue that Russia's foreign policy is merely aimed at strengthening Russia's economic dynamism and addressing the poor management and corruption that characterized the Yeltsin years. The refrain of the Putin presidency has been the argument that short-term curbs on market freedoms and increased state intervention will lead to greater economic stability and eventually create a favorable investment climate.

At the St. Petersburg Economic Forum on June 8, Putin again asserted that argument, promising the "most favorable climate" for foreign investment" (www.worldpoliticsreview.com).

Daria Solovieva is an executive support officer at CHF International, a non-profit emergency management and disaster relief provider in conflict zones worldwide.