Ajmal Sohail's blog

Does it worth Germany and France taking refuge into the arms of Russia and China?

July 23, 2019
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Let’s begin with the assertion of veteran German diplomat Wolfgang Ischinger, The longer Donald Trump stays in office, the higher the risk that anti-American forces will gain the upper hand in Germany and push it into the arms of Russia and China, Wolfgang Ischinger said in an interview. The chairman of the Munich Security Conference and former ambassador to Washington was speaking to Reuters days before the publication of his book "World in Danger", in which he urges Germans not to giving up on the United States because of Trump, while also pressing them to accept more global responsibility. The longer Trump remains in office, the harder it will be to stand up to those in this country and elsewhere in Europe who has been arguing since the Vietnam War that we need to cut the cord with America the bully," Ischinger said.

“It would become much harder for the German government to stay the course and defend this relationship," he said. "And the forces calling for a closer relationship with countries like Russia or China might be emboldened."

Against this backdrop, some German politicians are urging the government to seek closer ties with Moscow and Beijing - two authoritarian powers whose values diverge from the liberal democracy that Germany has built in the seven decades since it rose from the ashes of World War Two with American help. Chancellor Angela Merkel, a strong believer in the transatlantic relationship, has resisted.

It's also no secret that French President Emmanuel Macron wants a Grand Army of the EU and a single EU Finance Minister to further integration of the EU into the United States of Europe.

He and German Chancellor Angela Merkel have been championing these two things since the day after Macron took office. They are both pushing hard for the EU to conduct independent foreign policy, framing Trump's belligerence as the catalyst for its need now.

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Source: media.spokesman.com

So, I’m not surprised in the wake of Merkel’s garden summit with Russian President Vladimir Putin that both of these policy initiatives are being pushed now. Just days ago Heiko Mass met Sergey Lavrov, calling on the normalization of relations between Berlin and Moscow. He stated solutions to the urgent issues of the world politics are hard to be found without “the constructive participation of Russia”. Almost the same message conveyed By President Macron thru a telephonic conversation with president Putin this week.

Both Merkel and Macron are in trouble politically. Their approval ratings are dropping. Both have seen cabinet defections. So, they need political wins and rapprochement with Russia is something very much desired by many European nations, like Italy, and necessary to gain some economic momentum after four years of ruinous sanctions.

Macron now openly engages the idea of a security framework with Russia; with the same Russia that sometimes ago Macron was pulling diplomats from over the poisoning of Sergei and Julia Skripal.

To be honest, Trump was right to point out at NATO Summit the fundamental hypocrisy of spending billions on NATO to defend Germany while Germany is building a gas pipeline with Russia, Nordstream 2, to run its economy and resell gas around Europe.

He is also right to state that, Europe’s defense isn’t our responsibility anymore. He’s saying you don’t get to have your Iranian oil and hollow out our economy at the same time.

European independence on foreign and energy policy out from under the umbrella of the U.S. and into an agreement with Russia, as Macron said.

Is it viable to join hands with China?

President Xi Jinping’s trade infrastructure project could be hitting significant bottlenecks as some countries begin to sound alarms regarding the massive debt loads their governments are incurring.

Chinese, trade initiative, which needs more than $26 trillion of infrastructure investment by 2030 to keep regional economies expanding. The project includes railways, power plants, ports, highways and other projects across the world, with Beijing providing billions of dollars in credit to drive these schemes.

Major governments including the United States, Japan and India have expressed grave concern Beijing is trying to construct a new economic system that will erode their influence.

Xi said countries that joined Chinese trade initiative had exceeded $5 trillion, with outward direct investment surpassing $60 billion.

Already, some Chinese-led projects have experienced high levels of complaints that they are too expensive and give little work to local contractors. In response, some governments including Thailand, Tanzania, Sri Lanka and Nepal have halted, scaled back, and or renegotiated projects with Beijing.

In August, Malaysia’s Prime Minister Mahathir Mohamad canceled various projects including a $20 billion rail system he said his country could no longer afford.

Recently, Pakistan’s new Prime Minister, Imran Khan, has vowed more transparency amid fears about the country’s ability to repay Chinese loans related to the China-Pakistan Economic Corridor.

Last year, Sri Lanka had to sell its controlling stake of Port of Hambantota to a Chinese state-owned finance firm after it almost defaulted on a $1.5 billion loan from Beijing.

Mohamed Nasheed, the exiled leader of the opposition in the Maldives, warned China’s debt-fueled projects in the Indian Ocean archipelago amounted to a “land grab” and “colonialism,” with 80 percent of its debt held by Beijing.

“China does not have a very competent international bureaucracy in foreign aid, in expansion of soft power,” Anne Stevenson-Yang, co-founder and research director at J Capital Research, told AFP.

“So not surprisingly they’re not very good at it, and it brought up political issues like Malaysia that nobody anticipated,” she said.

“As the RMB (Yuan) becomes weaker, and China is perceived internationally as a more ambiguous partner, it’s more likely that the countries will take a more jaundiced eye on these projects.”

The Center for Global Development, a nonprofit think tank based in Washington, D.C. that focuses on international development, discovered “serious concerns” about the sustainability of the sovereign debt in eight countries receiving infrastructure project funds from Beijing.

Those were Pakistan, Djibouti, Maldives, Mongolia, Laos, Montenegro, Tajikistan and Kyrgyzstan.

For example, a $6.7 billion China-Laos railway project represents almost half of the Southeast Asian country’s GDP, according to the study.

In Djibouti, the International Monetary Fund (IMF) warned that the African country faces a “high risk of debt distress” as its public debt soared from 50 percent of GDP in 2014 to 85 percent in 2016.

Foreign ministry spokeswoman Hua Chunying denied that Beijing is strategically implanting huge amounts of debt in its trading partners to eventually expect default and acquire the country’s assets for pennies on the dollar.

“It’s unreasonable that money coming out of Western countries is praised as good and sweet, while coming out of China it’s sinister and a trap,” she said.

Stevenson-Yang said China’s loans are recorded in dollar terms, “but in reality, they’re lending in terms of tractors, shipments of coal, engineering services and things like that, and they ask for repayment in hard currency.”

Five years into China’s debt-fuelled “trade initiative” across many countries in the Eastern Hemisphere, it seems as a handful of governments are mounting complaints against Beijing for inducing a debt trap that strips their countries of its critical assets.

Is Russia a feasible partner?

In order to prove the case one has better shuffle the most recent history of the Russian conduct towards its both adversaries and friends.

1. In the case of counter terrorism

But before any such cooperation becomes a reality, it is important to think seriously about whether it is merited. And once we examine Russia's actual record concerning terrorism, the basis for such cooperation evaporates. Additionally, through Iran and Syria, its proxies, Russia is a principal purveyor of arms to Hamas and Hezbollah. Indeed, after the attacks in Paris, Russia reaffirmed its earlier position that Hamas and Hezbollah are not terrorists.

In other words, Russia uses terrorism as a legitimate weapon with which to advance its interests. When it comes to Middle Eastern terrorists, it reserves for itself the right to determine who is "good" or "bad." In fact, Moscow facilitated the movement of terrorists from the North Caucasus to Syria and Iraq, thus "exporting" its terrorist problem to those countries only then to intervene against them to assert its antiterrorist credentials.

Furthermore, Russia has not shown itself to be a reliable partner in anti-terrorism campaigns. Russia's recent attacks in Syria have not, for the most part, been directed against ISIS. Instead, Moscow has targeted pro-Western opponents of President Bashar al-Assad's rule, causing over 120,000 Syrians to become refugees. Similarly, its past approach to intelligence cooperation with the United States is hardly a basis on which to build in the future. For example, when US authorities made inquiries to Russian intelligence agencies about the Tsarnaev brothers, who were responsible for the 2013 Boston Marathon bombings, those agencies stonewalled US investigators. Considering that those agencies and their leaders believe that the United States is Russia's principal enemy, there is little basis for believing that genuine intelligence cooperation is likely or will be effective. These statements urging cooperation between Russia and the United States confirm that in the wake of mass terror events, too many responsible policymakers or commentators lose their reason and are, in fact, terrified. This, after all, is what Vladimir Lenin (who systematically employed terror) meant when he observed that the purpose of terrorism is to terrify. But it also testifies to the abiding unwillingness or inability of many elites to think seriously about the challenges Russian policy presents to the West. There is little doubt that Putin has exploited the attacks in Paris and elsewhere to present Russia as an indispensable power in the war against terrorism, at a time when it is not primarily targeting terrorism in its combat operations in Syria. This is no basis for a strong, effective operation. Indeed, Moscow's real objective is to force the West to give up on trying to isolate it in retaliation to ongoing Russian aggression in Ukraine and to use the possibility of "cooperation" in an anti-terrorist campaign to induce the West to accept Moscow's gains and claims vis-a-vis Ukraine. But an anti-terror coalition whose purpose, intended or not, is to legitimize war and terrorism has no basis for existing and would be opposed to American interests. It cannot be allowed. When it comes to terrorism, we should take to heart the observation of Israeli Prime Minister Benjamin Netanyahu that one cannot distinguish between good and bad terrorists. Russia cannot run with Hamas, Hezbollah, and the Houthis in Yemen, while simultaneously joining with the West to hunt them and the Sunni terrorists of ISIS. And we should demand of Western pundits and policymakers that they think more seriously and soberly about the real challenges that Russia and Putin present to us. Harvard historian Niall Ferguson wrote years ago that Russia is the only power that has no vested interest in the stabilization of the Middle East. Unfortunately, its recent behavior in the Middle East confirms the validity of Ferguson's observation. And its pretense that it is a genuine partner in an anti-terrorism alliance has as much credibility as its previous guarantees to its neighbors and partners. While ideally such an alliance would be eminently desirable, strategy must be founded on a real, factually-based foundation. And Russian cooperation is simply not part of that foundation.

2. The case of economic cooperation and trade

Under President Putin Russia’s energy influence reached unprecedented heights. Several factors combined to produce this result. First, the world market for oil and gas greatly favored Russia and other producers in 2000–2008. These products became both valuable and rare, ideal preconditions for the use of any form of economic linkage, as noted in the theory section above.

While prices have moderated in the current worldwide recession, a return to the era of ‘cheap oil’ as in the 1990s is unlikely. Second, the Putin administration moved to take control of the country’s oil and gas sector. This allowed Russia to harness its potential economic power for state purposes, a crucial condition which was largely lacking in the late Yeltsin years. Third, Russia moved aggressively to increase its control over oil and gas assets outside its borders, notably the pipelines which carry its products to the world. In sum, Russia is now much freer to use its oil and gas to either impose painful cost or offer lucrative benefits to states which it seeks to influence.

A key factor in the rise of Russia’s ‘energy power’ was the state of the world market in oil and gas during Putin’s reign. Supplies were tight worldwide, meaning that Russia’s customers had few alternatives to buying from Moscow. States could not easily evade Moscow’s energy sanctions or impose counter-sanctions.

For example, the EU would have found it virtually impossible to boycott Russian oil or gas to express its distaste with Putin’s foreign policy or his increasingly autocratic actions at home. Also, prices soared to record highs after Putin became President in 2000, with oil reaching almost $150 a barrel by mid-2008. This turnaround from the Yeltsin years allowed Russia to rake in massive profits from oil and gas sales. This in turn allowed the Kremlin to pay off Russia’s foreign debts, which loomed so high under Yeltsin that they prevented Russia from fully using its petro-power, as was noted above. Today, while the recession has cut into Russia’s financial reserves, it remains far more solvent than in the 1990s.

If a country such as Belarus threatens to temporarily suspend Russian oil or gas shipments through its pipelines, Russia can shrug off the threat. It knows that it can afford a temporary drop in revenue, unlike in the Yeltsin years.

The tightness in world markets allowed Moscow to retain and expand its dominant market shares among its energy customers--and also to reel in new customers, such as China and Japan. For example, Belarus obtains essentially all of its natural gas from Russia—99%. The Baltic States depend on Moscow for about 89% of their gas supplies, Georgia for 88%, and Ukraine for 69%. Even some Western customers have similarly high levels of dependence, such as Austria (72%) and Greece (85%).

These underlying conditions—high prices, tight supplies, large market shares—all meet the preconditions noted in the theory section for the use of economic power. Yet another condition had been allowed to slip away in the Yeltsin years: state control of resources. As noted above, almost all of Russia’s oil reserves were privatized in the Yeltsin years. Even mighty Gazprom was being considered for privatization. Under Putin this laissez-faire approach ended abruptly.

The prime example of this, of course, is the treatment of Yukos, considered by many to have been the best-run private oil firm in Russia. Mikhail Khodorkovsky, the founder of Yukos, was apparently targeted because he directly threatened Putin’s control of the energy industry. Seemingly unaware of the looming danger, he was moving confidently forward in several areas which angered Putin. He was planning to acquire another large Russian oil company, Sibneft, thus taking a leading role in the oil sector.

To finance such expansion, he was considering selling a large stake in Yukos to Western investors. And he was openly backing anti-Putin political forces in Russia itself. The result is well known: Khodorkovsky was arrested on what were widely regarded as bogus tax charges and eventually sentenced to eight years in a Siberian prison. More seriously, his firm was destroyed. The Russian government demanded higher and a higher payment for ‘back taxes,’ and Yukos went bankrupt and was forced to sell its assets. In a farcical ‘auction’ held in December 2004 the largest share of Yukos’ oil assets were transferred to the state-owned Rosneft.

More quietly, the Kremlin then continued to consolidate its role in the oil sector. In late 2005, state-owned Gazprom purchased privately-owned Sibneft for $13.1 billion, eventually renaming its acquisition ‘Gazprom Neft’ [oil]. In this case, the sale was regarded as essentially voluntary, with a fair market price being paid. The owner, Roman Abramovich, was seen as having cleverly cashed out before the state raised pressure on him.

Yet tougher tactics remained possible, as the case of a smaller firm, Russneft, clearly shows. In the summer of 2007, its owner, the oligarch Mikhail Gutseriev, initially refused pressure to sell. The government swiftly responded with questionable tax allegations, like those used against Yukos. Gutseriev folded, selling to a Kremlin-approved buyer, aluminum magnate Oleg Deripska. Then he made the mistake of publicly denouncing the sale as unfair and forced. A warrant was issued for his arrest, but he had prudently left the country.

Despite the growth of Rosneft and the creation of Gazprom Neft, about 60% of Russia’s oil resources remain in private hands. However, the remaining private firms have clearly understood Putin’s message. All now back Putin and Medvedev in domestic politics and eagerly follow their line in foreign policy questions. This is the price of doing business in today’s Russia.

As noted above, part of the reason for Putin’s administration to target Yukos was fear of the firm’s efforts to court foreign investors. Clearly, Moscow could not control the Russian oil sector if large, independent foreign firms either owned Russian energy companies or ran oil fields directly. Putin moved aggressively to try to squeeze foreign companies out of their majority holdings in the energy sector.

A prime example of Russia’s new energy xenophobia was the treatment of the joint venture known as Sakhalin-II, controlled by Shell, which had been created in the more flexible Yeltsin years. Huge political pressure was brought to bear on Shell in late 2006. A key component of this was the assertion by the Russian environmental agency that the project could damage the environment. Given the dismal record of both Soviet and Russian oil exploration in this area—with their projects falling far below Western environmental standards—this claim was met with universal disbelief. Mysteriously, once the company agreed to sell majority control of its project to Gazprom at the end of 2006, the environmental objections vanished.

To defend its ‘Petro-Power,’ Russia strives to keep as many of its partners as possible in a state of energy dependence, a dependence which can be manipulated as Russia chooses. A key component of this strategy is the control of pipelines and other energy facilities in neighboring countries. Russia aims to control pipelines in Poland, Belarus, Ukraine and the Baltic states which take Russian oil and gas to other countries. If it cannot control these transit routes, it will try to bypass them, for example with the new Nord [North] Stream pipeline through the Baltic Sea, running directly from Russia to Germany. At the same time Moscow controls pipelines through its own territory which carry oil and gas from the Caspian and Central Asian countries, and works hard to ensure that these countries cannot find alternative export routes.

One of the tactics Russia has used to control pipeline routes is one mentioned above—the use of fabricated ‘environmental’ arguments. For example, a trans-Caspian pipeline has been proposed, which could allow Central Asian gas to reach the West via Azerbaijan and Georgia, bypassing Russia. Not surprisingly, the Russian environmental agency immediately denounced it as a looming threat to marine life. Oddly enough, the much longer Nord Stream trans-Baltic pipeline, which the Kremlin favors, was quickly approved by the same agency as posing no threat to the sea at all.

3. ‘Petro-carrots’: oil and gas as economic incentives

In this section one side of Russia’s energy power will be examined—its use as a form of ‘positive linkage,’ or incentives. As we shall see, oil and gas allow Russia to ‘buy off’ foreign companies and individuals. More importantly, the Kremlin can manipulate whole countries. As in the days of the Warsaw Pact, loyal allies are rewarded with ample amounts of subsidized energy, at great cost to Moscow.

Today, of course, the recipients are different, since most of Central Europe has entered the EU and NATO and is no longer allied to the Kremlin. Thus, as we shall see, major recipients of petro-carrots have recently included the Ukraine, Belarus, and several small secessionist enclaves in Moldava and Georgia. While this aid has not always succeeded (notably in Ukraine at the time of the Orange Revolution), it has helped to keep pro-Kremlin leaders in power in Belarus, Abkhazia, South Ossetia, and the Trans-Dniestr region. This influence in what Moscow tellingly calls the ‘near-abroad’ is highly important, since it sustains Russia’s ambitions to remain a major power.

Russian generosity to the Ukraine under President Leonid Kuchma was a clear case of using oil and gas pricing to favor a client state. Kuchma, who led the Ukraine from 1994 to 2005, was quite friendly to Russia, signing a “Treaty of Friendship, Cooperation and Partnership” with Moscow, designating Russian as an official language, and siding with Russia on many foreign policy issues.

Not surprisingly, these policies were rewarded by the Kremlin with subsidized oil and gas sales. Throughout Kuchma’s time in office, Moscow kept gas prices frozen at about $50 per thousand cubic meters (TCM). In fact Kiev paid far less than even that, because much of the supply was simply given to Ukraine as ‘transit fees’ for gas being sent on to Western Europe. Also, Ukraine was allowed to fall far behind on even the limited payments it did owe, piling up a large debt to Russia. The political nature of these subsidies became only too clear after the pro-Western ‘Orange Revolution’ of 2004, when Kuchma was succeeded by Viktor Yuschenko. As we shall see in the next section, oil and gas ‘carrots’ suddenly became ‘sticks’ in Moscow’s fight against Yuschenko.

Another prime example of a country favored by Russian oil and gas incentives is Belarus. Clearly, Russia was not rewarding Belarus for political or economic reforms; under the dictatorial President Lukashenko, Belarus has remained a Soviet-era remnant in the region. Yet Lukashenko has consistently backed Moscow in foreign policy, to the extent of pursuing for years the hope of creating a new federation with Russia. Thus the Kremlin has ensured the Belarus would be favored with extremely cheap gas. In 2006, Belarus paid only $47 per TCM, at the same time Russia was demanding $230—almost five times more--from the new pro-Western Ukrainian government.

The country’s feeble, still largely state-run economy even has difficulty paying for the extremely discounted gas it receives. Until recently, Russia has been willing to overlook this. During the Yeltsin era, for example, Belarus was able to ‘pay’ its debts by such measures as giving up its claims on joint Soviet-era assets in Russia (1993) and giving up claims for “damage caused by Soviet troops in Belarus” (1996). Both of these claims were rather far-fetched, since Belarus had seized Soviet facilities on its own territory and damage from the Soviet-era military was hardly Yeltsin’s responsibility alone.

Putin gradually increased the pressure on Belarus to pay somewhat fairer prices for its energy, although the country is still subsidized. Russia increased prices for its allies, such as Belarus and Armenia, but raised prices for more hostile states—such as Ukraine, Georgia and Moldova—by far more. Thus a ‘price scissors’ was created, which allows Moscow to benefit in two ways. First, it greatly increases its overall revenue, as all customers pay more. Second, the price differential allows it to punish its enemies and reward its friends at the same time. It is hard for Belarus to complain about having to pay $100 per TCM for its gas when Georgia is paying more than twice as much.

The massive price differentials and generous treatment of Belarussian debts have been instrumental in keeping the country afloat economically, and thus in keeping Lukashenko in power. The policy must therefore be scored as a significant success for Moscow. The West has long tried to sponsor opposition movements in Belarus, as in the 2006 presidential election when the ‘Zubr’ movement united behind the pro-Western candidate, Alexander Milinkevich. Yet Lukashenko’s claim to have created “stability”—thanks in large part to low unemployment, subsidized food and energy—helped ensure that his opponent’s support remained limited. He would likely have won reelection even without the paranoid police tactics and electoral cheating which he used to ensure overwhelming victory. Energy incentives helped to ensure that there would be no ‘Orange Revolution’ in Minsk.

In addition to the generous petro-subsidies offered to compliant neighbors like Belarus, Moscow has also cleverly used incentives to support several pro-Russian enclaves in less compliant states. Moldova, for example, has long been a thorn in Moscow’s side, with its nationalistic policies alienating the Russian minority there. In response, Russia has supported the breakaway ‘Trans-Dniestr Republic,’ run by Russian-speakers.

Like Belarus, it has preserved the symbols and style of the old USSR. Also like Belarus, this tiny ‘republic’ has been unable to pay for even its subsidized gas—yet Moscow has remained tolerant. By March 2007 the ‘republic’ had accumulated $1.3 billion in debt to Gazprom, which it announced it simply would not pay. Yet the gas kept flowing.

Similarly, subsidized oil and gas has been provided to two breakaway regions of Georgia, a state which has been a major target of Russian oil and gas sanctions. South Ossetia and Abkhazia, both backed by Russian ‘peacekeeping troops,’ have carved out de facto independence from Georgia, and their defiance allows Moscow to increase military and political pressure on the Georgian leadership. Moscow has spent lavishly to support them. For example, Gazprom plans to spend about $600 million building new pipelines and gas infrastructure in South Ossetia, a region with about 70,000 inhabitants.

Clearly, this is a politically-motivated investment. All of these enclaves—the Trans-Dniestr Republic, Abkhazia, and South Ossetia—are impoverished, backward areas which could not survive economically without Moscow’s help. The fact that all of them remain in existence, years after the collapse of the USSR, must be credited in part to Moscow’s ‘petro-carrots.’

Another aspect of Russian oil and gas power is its potential use in ‘bribing’ individuals and corporations. By offering corporations shares in oil and gas fields, pipelines, and other projects, Russia can win influential allies abroad.

In recent years Russia has been careful to keep majority control of such projects in its hands. Yet with energy prices high, foreign firms seem willing to accept minority stakes—as Shell did when it was forced to cede control of the Sakhalin-II project.

Other Western companies have been just as vulnerable to the lure of investing in Russia’s lucrative energy sector—on Russia’s terms. Germany’s energy partnership with Russia, for example, has deepened as German companies have signed on as minority shareholders in a number of deals.

One of the 11 members of the Board of Directors of Gazprom itself is now Burckhard Bergmann, head of the German gas firm E.ON Ruhrgas AG (www.gazprom.com). His company and BASF each own a minority stake in Nord Stream AG, the Gazprom-controlled company which is to build a controversial pipeline under the Baltic Sea to bring Russian gas to Germany. Similarly, Gazprom signed a deal with Eni, the Italian energy giant, to build a “South Stream” pipeline, directed toward Italy and Austria. The EU had been striving to control such deals, uniting its members behind an ‘Energy Charter’ which would regulate the West European market and limit Russian dominance. Yet the lure of quick profit was too tempting. Most companies are well aware that if they do not accept Moscow’s terms, their competitors will.

This enhances Russian bargaining power. Oil and gas profits can also be used to win over politically important individuals. Saddam Hussein was widely reported to have used this tactic after the first Gulf War, when his regime covertly gave oil export permits to individuals who were helping Hussein politically and economically. Such permits, allowing the export of steeply discounted oil, could then be resold to oil dealers at a large profit.

Some have seen similar implications in Russia’s attempts to involve prominent Westerners in running state-controlled oil and gas companies. The most well-known case is that of Gerhard Schröder, which has been very controversial in Germany. The former German Chancellor had long favored close ties with Russia, specifically pushing hard for close energy ties.

He played a key role in negotiating the controversial Nord Stream project. Over a month after his defeat in the September 2005 German election, in one of his last acts in office as a lame duck, Schröder approved a billion Euro German government loan guarantee for the project. Within days of his departure from office, Schröder was suddenly named Chairman of the Board of Nord Stream AG, the joint Russian-German company which is to build and operate the pipeline. The appointment led to widespread anger in Germany, where it was seen as a scandalous conflict of interest, and the EU launched an investigation into the loan guarantee deal.

In the wake of this success, President Putin reportedly attempted to score another personnel coup in late 2005, offering the chairmanship of the state-owned Rosneft oil company to Donald Evans. Evans had left office only months before as U.S. Secretary of Commerce. He was well-known as one of President Bush’s personal friends, having been close to him since they both lived in Midland, Texas, and serving as chair of his 2000 presidential campaign committee. Clearly, Moscow hoped that by hiring Evans Russia could influence the President. Perhaps sensing that the job offer would embarrass Bush, Evans eventually declined.

4. ‘Petro-sticks’: oil and gas as economic sanctions

In contrast to Russia’s generous treatment of its political allies, those who oppose the Kremlin have faced economic punishment. This has included punitive price hikes and even oil and gas embargos. These tactics became obvious to the world at the start of 2006, when Russia cut off gas shipments to the Ukraine and Georgia. Ukraine faced another punitive gas cutoff at the start of 2009.

The Baltic States have also been targeted. However, ‘petro-sticks’ have also been used in many more subtle ways, as we shall see, through measures such as punitive price increases and demands for debt payment. While these pressure tactics have not always brought immediate compliance with Moscow’s wishes, they have had the dual effect of weakening Russia’s opponents and setting an example pour encouragement des autres.

The Ukrainian case is one of the most well-known examples of Russian oil and gas sanctions. This is true not only because the Ukraine is an important state in its own right, but because cutting off Russian gas to that state can have a major impact on broader world markets. The main Russian gas pipeline to Western Europe runs through Ukraine, meaning that Kiev can easily react to any Russian supply cuts by reducing or stopping the flow to the rest of Europe. Under President Yeltsin this threat was enough to tie the Russians’ hands, forcing them to compromise repeatedly with Kiev on gas supplies and pricing.

As one author put it, voicing the common view in the late 1990s, any Russian threat to cut supplies was “not really credible,” because Moscow needed the transit route as much as Kiev needed Russian gas. Under Putin, this relatively benign policy ended—to the consternation of both the Ukrainians and Western Europe.

In late 2004 the Ukraine was convulsed by the dramatic dispute between presidential candidates Viktor Yanukovich and Viktor Yuschenko. Yanukovich, the designated successor of the incumbent president, Leonid Kuchma, was considered friendly to Moscow, and the Kremlin made its support for him clear. When Yanukovich was proclaimed the winner in a fraud-tainted vote in November 2004, Moscow rushed to accept his victory.

The subsequent “Orange Revolution” by supporters of the pro-Western Yuschenko, which eventually succeeded in forcing a new election, was roundly condemned by Moscow. Yuschenko’s victory in the second contest seemed to push the Ukraine out of the Russian orbit. Even worse, he succeeded due to a popular uprising backed by the West. Such a “color revolution” (first seen in Serbia with the overthrow of Milosevic, then later in Georgia, Kirghizstan and Lebanon) seemed to Moscow to be a possible model for an uprising against Putin himself. As such, it could not be tolerated.

Accordingly, during the tense electoral campaign the Kremlin and its surrogates openly brandished the ‘gas weapon.’ As the leader of one pro-Moscow Ukrainian organization said, “What else but gas could convince the people of Ukraine that it’s better to be a friend of Russia than the EU and NATO?”. It was made clear that a vote for Yuschenko was a vote for winters with no heat, shuttered factories, and economic collapse.

After Yuschenko’s final victory at the end of 2004 these threats began to be put into action.

Ukraine’s 2005 gas contract with Gazprom had already been signed. But it soon became clear that after that the country would face a harsh price increase. Gazprom claimed, unconvincingly, that this was simply part of a natural increase to reach world market prices (WMP)—i.e., the prices paid by Western European states. Somehow, though, this need to increase the gas price had never been noticed under Kuchma, when prices held steady at about $50 per TCM for many years. Now, suddenly, Moscow demanded an almost five-fold increase to West European levels—about $235 per TCM. In addition, Gazprom suddenly demanded payment of Ukraine’s accumulated debt for gas service. If successful, Gazprom’s demands would have bankrupted Ukraine.

Matters came to a head at the end of 2005, when the annual gas contract expired and the two sides could not reach a new agreement. To the world’s surprise, at the start of 2006 Gazprom quickly began to shut off the gas flow to the Ukraine. Even some commentators on Russian state-owned television were quite open in stating that “the gas cutoff is retribution for the Orange Revolution”. Moscow ignored Kiev’s threats to retaliate by cutting the flow on to Western Europe. That region’s supplies, too, fell greatly in the next two days, before normal shipments were restored on January 3.

In the end, the Kremlin did not achieve a complete victory. It was, however, able to force the Ukraine to agree to double the price it paid for gas, to about $100 per TCM. This imposed a massive economic drain on the Yuschenko regime. The price also had the virtue of still being below the WMP, which would allow the Kremlin to easily justify future price increases. Yuschenko and the Ukraine were thus effectively held hostage, never knowing when the next economic blow would fall. And the price increase had a political effect; with rising economic discontent, President Yuschenko’s party did less well than expected in the March 2006 parliamentary elections, stalling the progress of his Orange Revolution.

Predictably, Russian meddling continued after 2006. Every action of President Yuschenko was met with more threats of gas supply cuts, price increases, or new debt repayment demands. The pattern was the same in the fall 2007 parliamentary elections in Ukraine, which brought Yuschenko’s ally Julia Timoshenko into power as Prime Minister. Again, the Kremlin tried to induce voters to favor her opponent, Yanukovich, with thinly veiled economic threats. When that failed, Gazprom again stepped in, cutting Ukraine’s gas supplies in early 2008 in yet another dispute over debt repayment—which was widely seen as punishment for Timoshenko’s victory. Finally, at the start of 2009 Gazprom again cut off gas shipments, again greatly reducing supplies sent to Western Europe for several days.

As the victories of Yuschenko and Timoshenko show, the Kremlin’s pressure tactics do not always appear to work immediately. However, when Moscow is defied there is a price to pay; the Ukrainian economy has suffered a real drain thanks to Gazprom. As David Baldwin notes in his classic work Economic Statecraft, the success of sanctions cannot be measured only by whether they immediately bring political victory. One must also count the costs imposed as a success, since they weaken the opponent.

Gazprom’s price increases also have the added virtue of simultaneously strengthening the Kremlin—quite directly, since Gazprom is state-owned.6 Additionally, the Ukraine’s economic problems have imposed a political cost on Yuschenko and his pro-Western allies, weakening both political support and their ability to implement their campaign promises. Every Ukrainian hryvnia sent to Moscow for gas is one that cannot be spent on popular programs such as health, education or public works.

Furthermore, as noted above, the Kremlin successfully showed its resolve by ignoring Ukraine’s efforts to disrupt gas flows to Western Europe. For years ‘transit states’ such as Ukraine, Belarus, and Poland had felt immune from Russian sanctions, believing that they could live without Russian gas better than Russia could live without West European hard currency from gas sales.

But now the slight rising oil and gas prices had enabled Moscow to pay off its debts and build up huge currency reserves, freeing it to use its resource leverage more aggressively. This is an important lesson for the future: when push comes to shove, the Kremlin will cut Western Europe’s energy artery to achieve its political goals. This lesson has struck home in Western Europe, with leaders throughout the EU now following every energy dispute between Russia and its neighbors with obvious concern.

The EU has been pushing Russia to accept an “Energy Charter,” pledging to forswear politically-motivated embargoes, yet Moscow has steadfastly refused.

In the future, Ukraine’s limited leverage as a transit state looks likely to decline further, as Russia finds alternative ways to reach its wealthy Western customers. As noted , the new Nordstream pipeline will link Russia to Germany under the Baltic Sea and the South Stream route will cross the Black Sea to connect Russia directly to Bulgaria and thus to Southern Europe.

If anything, the position of other lands targeted by Russian ‘petro-sticks’ is even weaker than that of Ukraine. The Baltic States and Georgia, for example, are quite small and thus cutting off their oil and gas costs Moscow almost nothing. These states also have less control over the transit of Russian oil and gas to other countries than does Kiev. Accordingly, Russia has felt free to use its petro-power against them rather openly.

The Georgian case is similar to that of the Ukraine in that Russian sanctions were triggered by a ‘color revolution’—the ‘Rose Revolution’ of November 2003, which overthrew President Shevardnadze and led to his replacement in early 2004 by Mikheil Saakashvili, supported by the West. As in the Ukrainian case, Russia soon began to threaten Georgia’s gas supplies. In this case, though, the Kremlin seems to have resorted to more direct measures than a gradual reduction in gas pressure. On January 22, 2006, just days after the flow of gas to Ukraine was resumed, both gas pipelines to Georgia were suddenly severed by a series of carefully coordinated bomb blasts. At the same time, the electric lines supplying Georgia were also cut. To this day the Kremlin denies any complicity in the affair, but many observers have their doubts.

Here again, while the Saakashvili government did not immediately fall or begin to follow Moscow’s line, Georgia paid a heavy price. Moscow was able to force Georgia to agree to massive gas price hikes, from about $63 per TCM in 2005 to $110 in 2006. Finally, in 2007, Georgia became the first ex-Soviet state to pay full WMP for its gas—$235 per TCM. When added to other Russian sanctions—such as refusing to buy Georgian wine and produce on ‘health and safety’ grounds and expelling thousands of Georgian guest workers as ‘illegal immigrants’—the damage to Georgia’s economy has been considerable. The weak economy has in turn put Saakashvili on the defensive politically.

In November, 2007, in the face of widespread protests, he was forced to declare a temporary state of emergency, which simultaneously weakened his regime and undercut his democratic credentials. As noted above, Georgia has been further weakened by Russia’s generous subsidies to the breakaway regions of South Ossetia and Abkhazia, which could not survive without Russian support.

Another interesting case of Russian ‘petro-power’ is the sanctions against the Baltic States, which have long angered Moscow with their pro-Western orientation. Russia now seems willing to use its resources to punish these states for any kind of economic or political defiance, no matter how small. In July 2006, for example, Russia shut down the oil pipeline which supplied the Mazeikiai refinery in Lithuania.

This installation is crucial to the region, since it supplies the rest of the Baltic States. It is also the largest source of revenue for the Lithuanian government. Formally Russia blamed an “oil leak” for the shutdown; a leak which it claimed would somehow take up to two years to repair. Interestingly, this technical problem appeared only after Lithuania had agreed to sell the refinery to a Polish company, PKN Orlen, rather than accepting rival Russian offers. Fortunately Lithuania was able to retool the refinery to run on oil delivered by sea. However, shortly afterward the facility was hit by a major fire, whose origin remains unexplained.

Political defiance, too, is now speedily answered by the Kremlin. In May 2007 Estonia took a small but symbolic step. It decided to move an old Soviet war memorial from the center of its capital, Tallinn, to a more remote park. Both Moscow and the local Russian minority saw this as a slap in the face to the Red Army, whose troops had liberated Estonia from the Nazis. Many Estonians clearly saw the ‘liberation’ more as a new enslavement. The dispute quickly escalated, and Russia announced that oil shipments to Estonia, normally delivered by rail, would unfortunately be stopped—allegedly due to “maintenance work”.

In the end, the embargo lasted only two weeks, but was quite costly, since all freight shipments were stopped, which affected coal and many other products as well. Russia’s economic actions were accompanied by attacks on Estonia’s embassy in Moscow and by a new tactic—a cyber-assault on a variety of Estonian websites.

The Baltic cases were a shock to the West. Unlike Ukraine and Georgia, Estonia and Lithuania are members of both NATO and the EU, so Russia’s economic sanctions against them were a slap at both organizations. The thin fig leaf of “technical problems” was convincing to no one.

In all, it is clear that in recent years Russia has begun to use its ‘petro-power’ with new confidence. It openly rewards its friends and punishes its enemies, with carefully calibrated tactics which escalate from threats to price increases to outright embargos. As shown in this section, these tactics may not always ‘work’ immediately, in the sense of bringing political compliance. But they always inflict costs on Moscow’s opponents, both economically and in increased political instability. And as Baldwin reminds us, if economic sanctions “increase a target country’s cost of noncompliance” they are having an important effect.

Conclusion

As this paper has shown, Russia’s ‘petro-power’ has become an increasingly clear threat to all the states which buy Russian oil and gas. This is obviously especially true for the small, poor, highly dependent states of what Russians call the ‘near-abroad’—the former Soviet states. As we have seen, Russia has used its influence both to reward its friends and punish its enemies, seeking to regain its influence over the region. It has shown it can be successful, and even when it is not it can impose high costs on those who dare to defy it.

Yet the impact of Russia’s actions extends far beyond Russia’s immediate neighbors. For example, Western Europe now has great cause for concern. Although it is less dependent on Russia than the former Soviet states, Moscow’s willingness to ruthlessly use its ‘petro-power’ has led to much worry among EU states—and, as we have seen, to increasing efforts to persuade Russia to sign an Energy Charter restraining its influence. Other countries, such as the U.S., also have reason to be concerned about Russia’s oil wealth.

While the U.S. does not depend directly on Russian oil and gas, it has many allies that do. Russia also exerts some influence on global prices, especially in today’s unsettled, nervous ‘seller’s market.’ It has recently tried to enhance this leverage by creating an organization of natural gas exporters, modeled on OPEC. Any decision by Moscow to limit production would immediately cause world prices to jump.

Finally, the U.S. and others around the world are also concerned about another facet of Russia’s ‘petro-power’: the huge war chest of oil and gas revenue that Moscow has accumulated. By early 2008 Russia held over $157 billion in its ‘Stabilization Fund,’ one of a number of ‘sovereign wealth funds’ which have emerged in recent years worldwide. Disturbingly, these sovereign wealth funds are often held by countries which are undemocratic and have limited commitment to free markets.

Also, more and more, countries with regional or worldwide geopolitical ambitions control large wealth funds. For example, Russia, Venezuela and Iran rank among the top wealth fund holders. And this new wealth is clearly based on oil and gas; of the 19 top fund states, at least 13 had wealth based mainly on that source.

According to the assessments of Counter Narco-terrorism Alliance Germany (CNT-alliance), the surging price of oil and gas has driven a fundamental reallocation of global wealth. This can be seen in the fact that oil exporting states had a collective balance of payments surplus of $88 billion in 2002 and $571 billion in 2006, an increase of almost five times in only four year.

Despite the current decline in oil prices, projections for the longer-term future are even more sobering.

A recent report projected that sovereign wealth funds could expand from $2.5 trillion in 2007 to $27.7 trillion in 2022. Thus, as the world warily watches the rise of politically ambitious ‘petro-states’ like Russia, there is reason for concern.

And all countries, not just Estonia or Belarus, should be aware of the cynic’s version of the golden rule: “He who has the gold makes the rules.” Hence, Counter Narco-terrorism Alliance Germany, urges Germany and France not to giving up on the United States because of Trump, rather push for counter balance for both Russia and China otherwise Germany and France would be treated as Ukraine and Laos whom Russia and China conducted.

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  1. In your opinion, what are the US long-term goals for Russia?
    U.S. wants to establish partnership relations with Russia on condition that it meets the U.S. requirements  
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