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Putin And The Geopolitics Of Oil

“When the Afghan conflict is over, we will not leave Central Asia. We have long-term plans and interests in this region.”
– Elizabeth Jones, US Assistant Secretary of State for European and Eurasian affairs

Vladimir Putin’s image in the West as a “stand up guy” (to use a favourite “Bushism”) has taken a pounding over the past year.  Who is the Russian President?  Is he a visceral KGB nationalist, violently opposed to American economic and political interests? Is he a recidivist Soviet-style communist only now revealing his true colours by launching an all-out attack on Russia’s most Western-investor friendly oil company, Yukos?  Or can his actions be explained as essentially defensive and reactive in response to growing American meddling in areas of traditional Russian spheres of influence?

Although Russia has experienced unprecedented liberal economic reform and stability under Putin, this has been more recently offset by concerns that his actions against Yukos, the embattled oil group, could spread to threaten private business more broadly.  Whilst there is a danger that President Putin has unleashed a veritable Pandora’s Box of extreme Russian nationalist forces of which he may ultimately lose control, it seems more rational to regard recent measures taken in respect of Russia’s oil sector as a purely defensive counterthrust to the foreign policy posture of the Bush Administration (a corollary of the latter’s increasingly unsustainable economic adventurism).  Distilled to its bare essentials, the United States no longer produces enough of what the world wants (goods and services), so it is going to war  to monopolize control of what the world needs (i.e., the supply of oil).  If true, this is a formula for perpetual war; the Russian President’s actions, therefore, take on a much less arbitrary and offensive character.

However benignly George Bush appears to regard Mr Putin since his famous gaze into the latter’s eyes (and, by extension, his soul, according to the US President), things look a bit different from the Kremlin's perspective. As Chalmers Johnson has effectively explained in his book The Sorrows of Empire, from 1945 on, the United States pursued an imperial policy based on the military base rather than the colony. The US has set up its bases around the globe - little Americas, so to speak - in other countries, got extraterritorial rights for its troops, and with its economic power at its back and close ties with local elites, gone about its global business.  This method of operating has clearly become less constrained since the break-up of the old Soviet Union and the concomitant diminution of Cold War tensions.

Clearly, one hugely important aspect of this imperial impulse has been oil.  For all of the varying rationales provided to justify its increasing militarism – the search for weapons of mass destruction, the Cold War, the more recent global “war against terror”, regime change and the spread of liberal democracy – the one consistent thread in American foreign policy during the entire post-World War II period is the politics of crude.  The Bush Administration’s conduct reflects a variant on this theme:  it has chosen to address the problem that it does not make enough of what the rest of the world wants essentially by going to war to monopolise control of the supply and distribution of what the world needs, petroleum. There are other war aims, of course, but control of the global hydrocarbon net is certainly of paramount importance.  As SRA strategist Chris Sanders notes: “Control of oil is essential to enforcing that acceptance since, the conceit of the financial markets notwithstanding, economic growth is first a function of energy availability, not interest rates.” 

But what is sauce for the goose is clearly also sauce for the gander.  Consider the following points made by analyst, David Chapman of Union Securities:

“The former Russian satellite of Georgia has become a potential battleground between the USA and Russia. The US backed a coup in Georgia under the auspices of the war on terrorism. Georgia is strategically located. The prize here is a pipeline that would connect the oil fields of Baku in Azerbaijan to Western markets through the Mediterranean. But the Russians were long established in Georgia and continue to maintain a military presence much to the chagrin of the now US government and the US backed Georgian government. Russia's hands are being seen in the ongoing conflict with the breakaway provinces of Abkhazia and South Ossetia where rebels are fighting US backed Georgian forces. They stand in the way of the pipeline.

There is a strong US military presence in the former Russian satellites of Kyrgyzstan, Kazakhstan and other states in the ‘arc of instability’ in the Caucasus. Again at stake here are the oil interests surrounding the Caspian Sea.”

Chapman concludes that Russia has consequently become increasingly concerned about the growing US military presence so close to its borders.  From this perspective, it becomes much easier to understand the tightening of controls in Russia’s oil sector, including the takeover and forced bankruptcy of Yukos who were contemplating selling to US interests.  Many of the western advisors who came into to help the management of Yukos came from, yes, Halliburton.  Yukos also made the political mistake of pushing for a normal market for oil companies and internationalized himself, spending tons of money in the US.  As the Kremlin now considers the energy sector a fundamental national interest, Mikhail Khodorkovsky, former chief executive of Yukos, was stopped cold.  Consider what might have occurred had Khodorkovsky managed to sell control of his company last July to Chevron-Texaco or Mobil, as he intended - Russia as an independent oil exporter would have been on its way to a level of independence that is less than Aramco, the Saudi oil company, notes Asia Times Online columnist, John Helmer.

Oil is clearly a strategic commodity as much to the Russians as it is to the US, which would explain the reluctance to let the Westerners get involved in what is deemed to be a hugely strategic industry. If all of this seems odd or viscerally anti-free markets to Western investors, it is worthwhile noting that national strategic considerations played a huge role in precluding the US government from sanctioning an attempted takeover of Fairchild Semiconductor by Japanese electronics giant, Fujitsu, in the 1980s.  So it’s hard to make the case that this is an action unique to Russia.

Foreign policy has become far more nuanced and subtle under President Putin.  Instead of the Red Army, the penetrating forces of Russian power in Ukraine, the Caucasus and Central Asia are now Russian natural gas and the giant gas monopoly, Gazprom, as well as Russian electricity and the huge energy company, UES — and Russian culture and consumer goods.

Gazprom is the primary provider of gas to the Eurasian states and has regained its position in markets like Georgia, where other companies had entered in the late 1990s. UES has similarly expanded its markets, especially in the Caucasus and Central Asia, where early energy sector privatizations brought in foreign investors.  It is clear that Russia will not let the US have a free hand there any longer.

For a decade Washington has backed the Turkish and Azerbaijan governments to steer the export of Caspian region crude oil away from Russia. Russia's newest riposte has been to ally the Russian and Iranian oil industries, and open up the shortest, cheapest and most lucrative oil route of all, southwards out of the Caspian to Iran.  Even if the Caspian Basin is not the Next Big Thing as some oil analysts claim, it is the world’s last large, virtually undeveloped oil and gas pipeline field that could for a time compete with the Persian Gulf in supplying crude and natural gas to Europe, East Asia, and North America.  

The biggest problem consistently faced by the five Central Asian Republics – Kazakhstan, Kyrgyzstan, Turkmenistan, Tajikistan, and Uzbekistan – is that they are all landlocked.  Oil and gas must therefore be transported through exposed pipelines in some of the most geopolitically unpleasant terrain in the world: Chechen rebels, Iranian mullahs, ongoing guerilla warfare in Afghanistan, Iraq, threaten all known paths south from Baku, the source of much of this oil. 

The pipeline race has been going on for over a decade (both Condoleeza Rice and Dick Cheney played instrumental advisory roles for Chevron during this period), and until September 11, 2001, the major concern of both the Clinton and Bush administrations in respect of Afghanistan appeared to be the Taliban’s persistent moves to block development of the proposed pipelines under American auspices.  As new Caspian oilfields come on-stream, and the volumes of crude lifted grow beyond the capacities of the Russian pipeline system to absorb, the American strategy has been to press hard to redirect these exports across land towards Turkey. The pipeline route chosen is known by its origin and destination as Baku-Ceyhan (Azerbaijan-Turkey).  In 1997, the US dispatched some 500 paratroopers from the 82nd Airborne Division to Kazakhstan to train Kazakh and other Central Asian troops.  The following year, the US did the same in Uzbekistan. 

The attacks of 9/11 clearly facilitated American moves to expand their growing military presence in Central Asia.  Approximately 150 Special Forces and ten combat helicopters were dispatched to the Republic of Georgia in February, 2002, ostensibly to help Georgian forces to fight Chechen rebels with alleged Al Qaeda connections hiding out in the Pankisi Gorge of northeastern Georgia.  But the Georgians themselves have subsequently acknowledged that American forces were also helping to guard strategic sites in Georgia, notably the oil pipelines.  Understandably, the Russians have become seriously irritated by the American military presence in an area they regard as their sphere of influence (consider the American reaction, were Russian forces operating in Mexico).  Indeed, one can trace the more overtly nationalistic stance of the Putin Administration in respect of its oil companies to that period.

Prior to the attacks of 9/11, during the whole of the Yeltsin period and the early Putin years, Russian public policy was not to attack the Baku-Ceyhan pipeline on strategic grounds.  Indeed, beginning in May 2002, Russian and US energy officials appeared to endorse public announcements from the two leading Russian producers and exporters, Yukos and LUKoil, that they were prepared to start strategic shipment of oil to the US. Russian tanker operators were skeptical from the start. Yukos led with a shipment of about 250,000 tonnes of oil which was dispatched to Houston in June of 2002 on three 80,000-tonne tankers, which transferred the cargo to a VLCC (Very large crude carrier) in the Mediterranean. But when American military involvement in the Caucasus became more prevalent, this stance changed.  To quote John Helmer of Asian Times Online:

“The data on Russian crude exports to the US confirm that the Yukos experiment has failed. Petroleum Argus reports that in the first half of this year, direct Russian exports to the US were ‘close to zero’. Indirect shipments, through Rotterdam and other markets, were ‘approximately 250 to 270,000 tonnes per month’. A Russian Energy Ministry official told Asia Times Online he lacked a precise number for total Russian exports to the US, but he acknowledged that there is no direct shipment, and the aggregate is ‘too small to report’.

Yukos sources now say they believe Yukos, now close to insolvency after being held liable for billions of dollars in unpaid taxes from 2000, and former chief executive officer Mikhail Khodorkovsky - now on trial in Moscow on multiple charges relating to his share dealings - never intended that Russia should assist the US as a strategic oil supply partner. Rather, the sources believe that Khorokovsky and his shareholding allies in the company believed the oil shipments to Houston could generate favorable publicity as they sought to sell their shares on the New York Stock Exchange, or find a major US oil producer to buy up to 40% of the stock. ‘It was a case of what the US could do for the Yukos shareholders,’ one source said, ‘not what Russian oil could for the US.’ The arrest of Khodorkovsky in October 2003 exposed how far apart these two ambitious plans were. (– “Putin’s hands on the oil pumps”, August 2004, Asia Times Online)

In 2002, however, Russia was in a comparatively weak economic position, given prevailing low oil prices and large looming debt repayments owed by the old Soviet Union in 2003 (assumed by the Russian government).  An overtly nationalist policy stance in regard to the energy sector was therefore out of the question, particularly with America flexing its considerable military might next door in Afghanistan (and to a degree far more conspicuously successful than the Russians themselves had demonstrated in the same country years earlier).  Russian tactics, therefore, were to play for time, and wait for the economics of oil transportation to tell against the US plan. So long as crude oil prices remained low, time encouraged delay in starting Baku-Ceyhan.  Obviously, this changed as oil surged throughout much of the past 18 months. Russia’s foreign exchange reserves have exploded, its balance of payments is strongly positive, debt repayments minimal.  In short, the country’s economic condition appears to be almost inversely correlated to that of America’s deteriorating finances.

Consequently, time appears to be on the side of Moscow, not Washington, which appears to have overreached again.  America’s foreign policy makers predicated their strategy in Central Asia on a weak Russia.  At $40/barrel, however, Russia is not weak, and is inevitably destined to become stronger, particularly in light of the country’s growing role as a crucial swing petroleum producer, whilst the US has become the world’s largest oil supplicant.   Although the mobilization against Iraq and Afghanistan has ostensibly given the US a renewed opportunity to expand its influence and power in the respective regions, Mr Putin’s confident assertions of his country’s own strategic interests in the “great game” of crude oil exploration and transport suggest an outcome that might very well be the opposite of what America has sought.  In any event, the geopolitics of oil today suggest a backdrop looking less like a benign, happily globalised “one world economy” dominated by America Inc and its assorted “branch plants”, and more a massive, overextended military power fighting a dangerous, and ultimately losing, battle against an angry, resistant globe, of which Russia is but one more growing manifestation.

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