The following series of articles clearly show that the newly projected Military aggression of and return to Soviet-era strong-arm tactics by the lingering Putin Government that has apparently decided to limit and curtail economic and political freedom, the rule OF law, recognized and enforced private property rights, and further development of technologies and the sciences for the benefit of Russia's citizens, both within and outside Russia's borders, resting instead on traditional forms of political intimidation and a passing period of petrodollar power: 1) will unfortunately cause Russia to fall further behind in ensuring indigenous scientific and technological development, broad diversified domestic economic growth, modernization, greater societal well-being and improved standards of living (e.g., due to a devalued national currency and higher domestic interest rates) for the Russian people; and 2) will unfortunately undermine Russia's ability to secure critically needed foreign direct investment, know-how, international scientific and technological cooperation, and the political respect of the global community. Why would the current Russian Government be so short-term minded such that it is willing to risk all of the domestic and international economic, scientific, technological, political and human progress that has been made during the past 18 years? Why would the current Russian Government be willing to cause the Russian people who deserve much, much more, to suffer once again?
Russia Claims Its Sphere of Influence in the WorldBy ANDREW E. KRAMER
MOSCOW — President Dmitri A. Medvedev of Russia on Sunday laid out what he said would become his government’s guiding principles of foreign policy after its landmark conflict with Georgia — notably including a claim to a “privileged” sphere of influence in the world. [??]
[PERHAPS LAW PROFESSOR PRESIDENT MEDVEDEV IS NOT FAMILIAR WITH THE FAMOUS SMITH BARNEY SLOGAN OF AN EARLIER ERA: "AT SMITH BARNEY, WE DON'T MAKE MONEY, WE EARN IT." DEAR PRESIDENT MEDVEDEV, THE SAME APPLIES TO THE INFLUENCE AND POLITICAL POWER OF A NATION - A NATION DOESN'T CLAIM/MAKE A 'PRIVILEGED' SPHERE OF INFLUENCE & POWER IN THE 21st CENTURY - YOU MUST EARN IT OVER TIME.]
Speaking to Russian television in the Black Sea resort of Sochi, a day before a summit meeting in Brussels where European leaders were to reassess their relations with Russia, Mr. Medvedev said his government would adhere to five principles.
Russia, he said, would observe international law. It would reject what he called United States dominance of world affairs in a “unipolar” world. It would seek friendly relations with other nations. It would defend Russian citizens and business interests abroad. And it would claim a sphere of influence in the world.
In part, Mr. Medvedev reiterated long-held Russian positions, like his country’s rejection of American aspirations to an exceptional role in world affairs after the end of the cold war. The Russian authorities have also said previously that their foreign policy would include a defense of commercial interests, sometimes citing American practice as justification.
[A NATION'S DEFENSE OF ITS COMMERCIAL INTERESTS IS NOT UNUNUSUAL. HOWEVER, PLEASE EXPLAIN HOW AMERICAN PRACTICES UNDERMINE RUSSIAN COMMERCIAL INTERESTS].
In his unabashed claim to a renewed Russian sphere of influence, Mr. Medvedev said: “Russia, like other countries in the world, has regions where it has privileged interests. These are regions where countries with which we have friendly relations are located.”
Asked whether this sphere of influence would be the border states around Russia, he answered, “It is the border region, but not only.”
[ALL NATIONS HAVE INTERESTS. ABOUT WHAT INTERESTS DO YOU SPEAK, PRESIDENT MEDVEDEV? AND HOW ARE OTHER NATIONS WORKING AGAINST THEM??]
Last week, Mr. Medvedev used vehement language in announcing Russia’s recognition of the independence of South Ossetia and Abkhazia. Though he alluded in passing to respecting Georgia’s territorial integrity, he defended Russia’s intervention as necessary to prevent a genocide.
Mr. Medvedev, inaugurated in May, was an aide to Vladimir V. Putin, the former president and now prime minister.
Mr. Putin appeared on Russian television on Sunday from the nation’s far east, where he was inspecting progress on a trans-Siberian oil pipeline to China and the Pacific Ocean, a clear warning to Europe that Russia could find alternative customers for its energy exports. He was later shown in a forest, dressed in camouflage and hunting a Siberian tiger with a tranquilizer gun.
[IN THE SHORT TERM, MR. PUTIN, YOU WILL LIKELY BENEFIT FROM THE FOOLHARDY ENERGY & CLIMATE CHANGE POLICIES AND OTHER STRATEGIC MISCALCULATION OF THE EUROPEAN UNION TO RELY ALMOST ENTIRELY ON RUSSIAN NATURAL GAS. IN THE LONG TERM, HOWEVER, YOUR GAME OF ENERGY ROULETTE, EXTORTION & ATTEMPTED MARKET MONOPOLIZATION WILL UNDERMINE RUSSIAN INFLUENCE and TRIGGER THE RAPID DEVELOPMENT OF ALTERNATIVE and RENEWABLE ENERGY TECHNOLOGIES and SOURCES WITHIN EUROPE AND BEYOND. THE WIDE DEPLOYMENT OF SUCH NEW TECHNOLOGIES and THE REFOCUSING ON ALTERNATIVE ENERGY SOURCES WILL ULTIMATELY REDUCE THE ECONOMIC & STRATEGIC VALUE OF RUSSIA'S PETROLEUM & NATURAL GAS EXPORTS and INCREASE THE ENERGY INDEPENDENCE AND ECONOMIC FREEDOM OF BOTH THE EAST & WEST.]
Leaders of the 27 members of the European Union, who will meet in an emergency session on Monday, were considered highly unlikely to impose sanctions or go beyond diplomatic measures in expressing disapproval of Russia’s conflict with Georgia.
The members in Eastern Europe have tended to be more wary and more confrontational toward Russia, while Western European countries have tended to be more concerned with not jeopardizing energy imports from Russia.
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http://www.nytimes.com/2008/08/29/world/europe/29policy.html?_r=1&oref=slogin
Russia Deal May Fall, a Casualty of Conflict
By PETER BAKER
New York Times
August 29, 2008
WASHINGTON — Just three months ago, President Bush reached a long-sought agreement with Russia intended to open a new era of civilian nuclear cooperation and sent it to Congress for review. Now, according to administration officials, Mr. Bush is preparing to scrap his own deal.
The imminent collapse of the nuclear deal, once a top Bush priority, represents the most tangible casualty so far of the deteriorating relations with Russia following its brief war with neighboring Georgia. With Vice President Dick Cheney heading to Georgia next week, Mr. Bush is also poised to announce about $1 billion in economic aid to the country, the officials said.
Unlike more symbolic actions being discussed in Washington, like throwing Russia out of the Group of 8 industrialized nations, canceling the nuclear pact would involve concrete consequences potentially worth billions of dollars to Russia. Yet it also would mean unraveling an initiative that was critical to Mr. Bush’s vision of safely spreading civilian nuclear energy around the world, a program that relied in part on Russian involvement.
The agreement would have reversed decades of bipartisan policy and allowed extensive commercial nuclear trade, technology transfers and joint research between Russia and the United States. It also would have cleared the way for Russia to import, store and possibly reprocess spent nuclear fuel from American-supplied reactors around the world — a lucrative business for Russia and a way for the United States to build nuclear plants while keeping radioactive waste out of less reliable hands.
The pact already faced deep skepticism in Congress because of Russia’s resistance to tougher action against Iran over its nuclear program. But it might have cleared the legislative review process if not for the clash between Russia and Georgia. Now Bush administration officials have concluded it will not survive a Congressional vote, and say that withdrawing it would send a signal to Moscow yet preserve the possibility of resubmitting it to Congress next year if tensions ease.
“The administration is just about at the point of making a decision to pull it,” said a senior administration official, who requested anonymity to discuss internal deliberations. “We’re getting pretty close to that.” The official added that an announcement by the president “could happen any time soon.”
Other officials cautioned that Mr. Bush had made no final decision and might wait to see what came out of a meeting of European Union heads of state on Monday. The White House press secretary, Dana M. Perino, said there would be consequences for Russia but declined to discuss them. “We just aren’t there yet,” she said. “It’s premature to say.”
But some experts on Russia and on nuclear proliferation said Mr. Bush had few options. “This agreement is probably going to be the first casualty of Georgia,” said Robert Nurick, a nonproliferation specialist at the Monterey Institute of International Studies. “Whatever you may think of the merits, there’s no point in bashing your head against the wall.”
While Mr. Bush ponders his options, Senator Barack Obama of Illinois, the Democratic presidential nominee, and his running mate, Senator Joseph R. Biden Jr. of Delaware, met separately on Thursday with a Georgian delegation visiting the party convention in Denver.
“He wanted to show solidarity and show that he’s engaged on this very important foreign policy issue,” said Michael McFaul, an Obama adviser.
Meanwhile, Cindy McCain, the wife of Senator John McCain, the presumptive Republican nominee, visited Georgia this week as part of a humanitarian mission.
At the White House, the nuclear pact and the economic package are at the top of a menu of options being debated by senior officials. Officials said they were still finalizing the aid package, which they estimated would be in the $1 billion range. Other ideas include rebuilding the shattered Georgian military and aggressively investigating Russian business transactions in the West in search of corrupt practices, officials said.
John P. Hannah, the vice president’s national security adviser, would not discuss administration plans, but told reporters on Thursday that in Georgia Mr. Cheney would deliver “a clear and simple message that the United States has a deep and abiding interest in the well-being and security of this part of the world.”
The nuclear deal was broached by Mr. Bush during a July 2006 visit to Russia, and the two governments spent two years shaping a formal agreement before signing it in Moscow in May on the day before Vladimir V. Putin, who is now prime minister, stepped down as president. The United States already has similar agreements with Europe, China, Japan and other countries.
The pact does not require Congressional approval but must be reviewed on Capitol Hill for 90 legislative days before it can go into effect. Congress could block the deal with majority votes in both houses or it could proactively approve it without waiting for the clock to expire.
Senator Biden, chairman of the Senate Foreign Relations Committee, had introduced a bipartisan measure to approve the deal, and his House counterpart, Representative Howard L. Berman of California, had pushed through committee a measure approving it with conditions. But now neither predicts it will pass. “Even before Georgia, there were real issues,” Mr. Berman said. “This came along, and there’s just no appetite for it now.”
The issue prompted an intense debate within the administration, with some advocates of the agreement arguing for just leaving it alone because the 90-day period would probably not be completed this year, anyway, requiring the clock to restart next year.
“At the moment, people are worried that the current crisis in Georgia will make it harder to insulate the nonproliferation cooperation from the wider difficulties in the relationship,” said Robert J. Einhorn, a former assistant secretary of state for nonproliferation.
Critics of the agreement, though, said the president should not only withdraw it but also vow not to resubmit it next year. “Without taking these actions, the administration’s tough talk should be viewed as white noise,” said Henry D. Sokolski, executive director of the Nonproliferation Policy Education Center, based in Washington.
Steven Lee Myers contributed reporting.
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http://www.forbes.com/markets/2007/08/24/germany-russia-lukoil-markets-equity-cx_vr_0824markets15.html
Forbes.com
Russian Energy Roulette
By Vidya Ram
Forbes.com
Russian Energy Roulette
By Vidya Ram
08.24.07
LONDON - Russia is making steady inroads into the European energy market, but not just through state-owned Gazprom. Lukoil, the country's largest private oil company, has also been steaming ahead there. But news that Russia's oil supply to Germany has fallen by a third is fueling concerns that Europe's reliance on Russia, and companies like Lukoil, is very risky business.
The operator of the Schwedt refinery in eastern Germany, PCK Raffinerie, confirmed that its supply of oil from Russia has been disrupted since July. The causes of the decline are yet unclear: PCK has not offered a reason but has simply said it is in talks with its suppliers.
The refinery is jointly owned by BP, Royal Dutch Shell, Total and Agip, and processes approximately 10 billion tons of oil a year - nearly 10% of Germany's total capacity.
Sergei Grigoriev, a high-ranking executive at the Russian state-controlled pipeline operator Transnet, which transports the gas, blamed Lukoil and some of the country's other smaller companies. He denied claims that ongoing repairs to the Druzhba pipeline, which carries gas through Belarus and into eastern Germany, was the cause of the troubles.
He told Dow Jones newswires that Lukoil might be looking for new markets. Lukoil was not reachable for comment.
There may be a lot of truth to what Grigoriev said. One analyst, who spoke on condition of anonymity, told Forbes.com that the disruption was caused by Lukoil's plans to build its supplies to the east - particularly in the direction of China - its focus on supplying oil to Europe via its port city of Primorsk. By supplying oil by sea rather than through pipelines, Lukoil can charge a $2 premium per barrel.
The analyst added that there was no reason for Europe to panic, since Lukoil could continue with its usual supplies for the rest of the year.
Germany can also take some comfort from the fact that the refinery managed to scramble supplies from the North Sea. Nevertheless these latest developments highlight the potential of dangers of relying on Russia for its energy resources. Till now many of Europe's fears have been focused on Gazprom, and the impact that Russia's troubled relations with Ukraine and Belarus could have on energy supplies. When Russia cut off gas supplies to Ukraine, delivery to Germany was affected, as the country continued to siphon off gas intended for western markets.
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http://www.atimes.com/atimes/Central_Asia/HJ24Ag01.html
Russian energy roulette spooks Japanese
LONDON - Russia is making steady inroads into the European energy market, but not just through state-owned Gazprom. Lukoil, the country's largest private oil company, has also been steaming ahead there. But news that Russia's oil supply to Germany has fallen by a third is fueling concerns that Europe's reliance on Russia, and companies like Lukoil, is very risky business.
The operator of the Schwedt refinery in eastern Germany, PCK Raffinerie, confirmed that its supply of oil from Russia has been disrupted since July. The causes of the decline are yet unclear: PCK has not offered a reason but has simply said it is in talks with its suppliers.
The refinery is jointly owned by BP, Royal Dutch Shell, Total and Agip, and processes approximately 10 billion tons of oil a year - nearly 10% of Germany's total capacity.
Sergei Grigoriev, a high-ranking executive at the Russian state-controlled pipeline operator Transnet, which transports the gas, blamed Lukoil and some of the country's other smaller companies. He denied claims that ongoing repairs to the Druzhba pipeline, which carries gas through Belarus and into eastern Germany, was the cause of the troubles.
He told Dow Jones newswires that Lukoil might be looking for new markets. Lukoil was not reachable for comment.
There may be a lot of truth to what Grigoriev said. One analyst, who spoke on condition of anonymity, told Forbes.com that the disruption was caused by Lukoil's plans to build its supplies to the east - particularly in the direction of China - its focus on supplying oil to Europe via its port city of Primorsk. By supplying oil by sea rather than through pipelines, Lukoil can charge a $2 premium per barrel.
The analyst added that there was no reason for Europe to panic, since Lukoil could continue with its usual supplies for the rest of the year.
Germany can also take some comfort from the fact that the refinery managed to scramble supplies from the North Sea. Nevertheless these latest developments highlight the potential of dangers of relying on Russia for its energy resources. Till now many of Europe's fears have been focused on Gazprom, and the impact that Russia's troubled relations with Ukraine and Belarus could have on energy supplies. When Russia cut off gas supplies to Ukraine, delivery to Germany was affected, as the country continued to siphon off gas intended for western markets.
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http://www.atimes.com/atimes/Central_Asia/HJ24Ag01.html
Russian energy roulette spooks Japanese
By Hisane Masaki
Asia Times Online
October 24, 2006
TOKYO - The imbroglio over the huge Sakhalin-2 oil-and-gas project in Russia's Far East involving two Japanese firms has cast a cloud over resource-poor Japan's new national energy strategy. It has also served as a fresh reminder that Japan's economic power seems to have lost much of its luster, at least in the eyes of the Russians.
Last month, the Russian Natural Resources Ministry froze a key environmental permit for the project off the coast of Sakhalin Island, citing problems with conservation. The decision drew immediate protests from Japan and the European Union. Prime Minister Shinzo Abe, who was still his predecessor Junichiro Koizumi's chief cabinet secretary, said a major delay to Sakhalin-2 could hurt diplomatic relations.
[CONSIDERING RUSSIA'S NEWLY CLAIMED 'PRIVILEGED SPHERE OF INFLUENCE', IT IS NOW CLEAR HOW RUSSIA INTENDS TO USE INTERNATIONAL LAW - TO INTIMIDATE OTHER NATIONS AND TO SECURE AN ENERGY MONOPOLY AT THEIR EXPENSE.]
Japan's ambassador to Moscow, Yasuo Saito, was blunter. He criticized the "unilateral" Russian decision as "lacking transparency". The British government said it was "deeply concerned".
The project is operated by an international consortium called Sakhalin Energy, in which Royal Dutch Shell has a 55% stake. Japanese trading firms Mitsui and Co and Mitsubishi Corp hold shares of 25% and 20%, respectively.
Natural gas taken from two fields off the northeast coast of the island will be transported through an 800-kilometer pipeline to Prigorodnoye, in the island's southernmost part, where it will be liquefied and shipped to Japan, South Korea and the United States.
To be sure, even before Moscow began looking into the environmental problems surrounding Sakhalin-2, Russian and foreign environmental groups had raised strong questions about the project. But the stunning Russian move is widely believed to be a veiled ploy to pressure Sakhalin Energy to reshape the original 1990s deal to the Kremlin's benefit.
With prices for crude oil and other natural resources rising or at least stuck at high levels, the Russian administration of President Vladimir Putin has been promoting a strategy to place energy under national control. The major oil company Yukos, which was hostile to the government, was charged with tax evasion and eventually forced to dissolve.
Sakhalin-2 is the only wholly foreign-funded project among major resource development programs in Russia. There has therefore been growing discontent in Russia over the project, with some saying it is based on an "unequal treaty" that bars Russian companies from taking part, and which severely restricts the country's share of the profits.
Russia's gas-export monopoly Gazprom agreed last year to acquire a 25% stake in Sakhalin-2 in exchange for ceding to Royal Dutch Shell a stake in its big gas field in western Siberia. But talks stalled after the Sakhalin-2 operator announced it would double costs to US$20 billion because of higher steel prices and the weaker US dollar. There were also plans in effect for Mitsui and Mitsubishi to transfer a combined total of 5 percentage points of their stakes to the Russian company.
Putin acknowledged on Friday that the conditions of the contract, known as a production-sharing agreement, and increasing costs for Sakhalin-2 are disadvantageous for his country because Russia cannot receive any profits until the project operator recoups the investment cost.
In what appears to be the latest in a series of Russian efforts to take greater control of domestic energy resources, Gazprom said this month that it will develop the giant Shtokman natural-gas field in the Barents Sea alone, a disappointing move for five foreign companies, including US oil majors Chevron Corp and ConocoPhillips, that had been on a short list to partner with Gazprom on the $20 billion project, one of the world's largest undeveloped gas fields.
Optimism on both sides
In what was seen by some as a conciliatory tone, however, Russian Natural Resources Minister Yuri Trutnev gave Sakhalin-2's operator a month - until the end of October - to come up with plans to rectify what they called major environmental violations before a possible shutdown of the $20 billion operation. The plans will be submitted to the minister this week.
Royal Dutch Shell's chief executive said that the company has fully addressed all ecological issues and is seeking dialogue with the Russian authorities. "Although the project has faced significant environmental challenges, we firmly believe these have been fully and transparently addressed," Jeroen van der Veer told an investment advisory council chaired by Russian Prime Minister Mikhail Fradkov.
[REALLY?]
"This project is 80% complete now with all LNG [liquefied natural gas] pre-sold under long-term contracts ... We are confident that all remaining issues can be resolved through our ongoing, constructive and fair dialogue with the Russian government."
Trutnev said that if the company's plan is acceptable, the development won't be stopped, and noted that he had received assurances from the Royal Dutch Shell head that the energy giant is working to resolve the problems. Trutnev praised the company for taking a more constructive approach to Russia's environmental concerns than has been the case to date.
"My meeting ... with van der Veer represents a 180-degree about-turn," Trutnev said. "He talked about existing violations, about ecological standards and how they have already started improving the situation." Trutnev noted, however, that "absolutely any sanctions" are possible if the proposals prove unsatisfactory. Trutnev's ministry will announce the results of its environmental probe into Sakhalin-2 as early as this week.
Japanese Minister for Economy, Trade and Industry Akira Amari also expressed optimism recently about the fate of Sakhalin-2. Amari said he thought there would be a resolution between the operator Sakhalin Energy and the Russian government over the recent problems. "One way or another, Sakhalin-2 will be resolved," Amari said. "The basic contract hasn't been nullified." Amari said he thought Sakhalin Energy would be able to convince Moscow of its efforts to deal with the environmental issues.
The Sakhalin-2 project is expected to turn out 9.6 million tons of LNG a year from 2008. Eight Japanese companies, including Tokyo Electric Power Co, Tokyo Gas Co and Chubu Electric Power Co, have agreed to purchase 4.73 million tons per year - equivalent to 8% of Japan's LNG imports in fiscal 2005. The initial impact on Japan of a delay in imports from the project might be limited. But if there were a prolonged suspension, the impact could be far-reaching.
Japan is the world's largest LNG importer, purchasing 58 million tons of LNG from abroad in 2005, of which 25% was from Indonesia. Most of Indonesia's long-term LNG supply contracts with East Asian countries, such as Japan, China, Taiwan and South Korea, start expiring from 2010. Indonesia is poised to cut in half its Japan-bound exports of gas when long-term contracts expire in 2010 to boost the availability of natural gas for domestic industries amid decreasing natural-gas production at home.
If imports from Sakhalin-2 are delayed for an extended period, affected Japanese companies would need to find alternative suppliers. It remains to be seen, however, whether Japan will be able to secure the same volume it has been importing up until now, as countries with large energy demands, such as China and India, are increasing their imports of LNG. In 2010, China and India are expected to need an additional 5 million tons and 8 million tons, respectively, compared with current levels.
The island of Sakhalin also started producing and exporting crude oil in 1999, with exports to Japan beginning in 2001. In 2005, the area provided Japan with 10.89 million barrels, accounting for about 1% of the country's crude-oil imports. The new pipeline, scheduled to start operating in late 2007, will allow crude oil to be exported year-around, instead of only in summer at present.
Headwinds against Japan's energy security
The Sakhalin issue has come at an awkward time for Japan, which adopted this year the "New National Energy Strategy". The new strategy reflects growing Japanese concerns about energy security in the medium and long terms amid high oil prices and an intensifying global rush for oil, gas and other resources, led by China and India.
Japan imports almost all of its oil, about 90% of which comes from the volatile Middle East. Japan is also the world's largest LNG importer. Japan is struggling to diversify the suppliers of oil, gas and other energy resources. The new strategy, adopted in late May, also calls for, among other things, increasing the ratio of oil developed and imported by domestic companies - from 15% to 40% of total imports by 2030.
But this 40% target for "Hinomaru oil" has become even more difficult to achieve following Japan's recent agreement to give up its controlling interest in the $2 billion development of Iran's massive Azadegan oilfield amid tensions over Tehran's nuclear program.
After days of hectic haggling, Japan's Inpex Corp, a core firm of Inpex Holdings Inc, and National Iranian Oil Co reached a basic agreement early this month on a major cut in the largest Japanese oil and gas developer's stake in the oilfield, in southwestern Iran, to 10% from 75%. Inpex Corp will also return its status as operator of the project to the state-owned Iranian oil company. Still, Inpex Corp is expected to maintain the right to import crude oil from the field in the future with the 10% stake.
Meanwhile, Russia's energy-resource nationalism could spill over into another major project on Sakhalin - the $12.8 billion Sakhalin-1 project, managed by an international consortium led by US oil major ExxonMobil Corp. The project cost is now said to have increased to $17 billion.
Russia's environmental watchdog, Rosprirodnadzor, reportedly plans to check the project to determine whether it complies with environmental-protection laws after finishing such a check on Sakhalin-2. Other consortium participants include Tokyo-based Sakhalin Oil and Gas Development Co (SODECO), owned by the Japanese government and private sector, and Russia's state-owned oil firm Rosneft. The Russian firm has a 20% stake in the project.
In yet another blow to Japan's energy security, exports of natural gas from Sakhalin-1 could all go to China. ExxonMobil, which holds the right to decide which parties receive natural-gas exports, reportedly concluded this month a provisional contract with China's state-run China National Petroleum Corp (CNPC) on the import via a pipeline of about 6 million tons (in liquefied conversion) of natural gas to be produced at Sakhalin-1. ExxonMobil and CNPC reportedly plan to conclude a formal contract a year later.
The Sakhalin-1 development started on the condition that all of the 6 million tons of natural gas for export purposes - the amount excluding that to be taken by Russia - would be exported to Japan. SODECO reportedly agreed to the provisional contract on the condition it receives 30% of proceeds from exports to China. SODECO is jointly funded by Japan Petroleum Exploration Co, Japan National Oil Corp, Itochu Corp and Marubeni Corp. SODECO owns the right to acquire 30% of resources available from the project. Japan's imports of oil from Sakhalin-1, which began this month, will not be affected, but no natural gas may be exported to Japan.
Meanwhile, Japan and China have lobbied for alternative routes for a pipeline from eastern Siberia's oilfields to Pacific Rim nations. Russia has played the two energy-hungry Asian nations against each other. Japan failed to gain a guarantee that Russia will give priority to building a "Pacific route" from Taishet near Lake Baikal to Perevoznaya Bay near Nakhodka on Russia's Pacific coast via the halfway point at Skovorodino, near the Russia-China border, rather than to building a "China route" heading to Daqing, northeastern China, from Skovorodino.
[CHINA SHOULD BE AS WARY OF RUSSIAN ENERGY ROULETTE POLICIES AS JAPAN.]
Russian state pipeline monopoly Transneft is building the pipeline in two stages. It expects to finish the first stage at Skovorodino in 2008. Construction work on the first stage linking Taishet and Skovorodino began in late April. No date has been set for the second stage. There are strong expectations that imports of oil from eastern Siberia through the proposed pipeline to Russia's Pacific coast, if and when they go into full swing, will help diversify oil sources and contribute to stable oil supplies to Japan in the long term.
Tokyo has been asking the Russian government to sign an intergovernmental agreement pledging that it will build the entire route of the projected 4,188km pipeline. But Moscow has rejected the Japanese request and said its priority now is to explore and develop the untapped reserves of eastern Siberia to provide the oil to fill the pipe. Although Inpex Corp and trading houses have been considering joining the Siberian project, they are waffling in view of the lack of a Russian government guarantee that Moscow will build a pipeline that could deliver oil up to the Russian Pacific coast - and then to Japan.
Japan on the diplomatic defensive
Japan once controlled the lower half of Sakhalin Island. After World War II this territory, and the string of islands to the south called the Kurils, was ceded to the Soviet Union. Tokyo no longer has territorial claims on Sakhalin, but sovereignty over the Kurils has been in dispute for decades.
Not so long ago, it was thought that Japan's trump card in the ongoing negotiations was its ability to develop the rich resources of the Russian Far East. However, what the Japanese government officials have long taken for granted as a negotiating chip - Japan's economic power - seems to have lost much of its luster, at least in the eyes of Russian leaders. For Russia, the strategic significance of Japan has declined.
The current situation is a stark contrast with just about a decade ago when Putin's predecessor Boris Yeltsin made what the current Russian government now thinks were too many concessions on the territorial row, driven by the need to seek Japanese help in turning around the then ailing Russian economy.
While Japan's economic power has been relatively on the decline after the burst of the asset-inflated "bubble economy" of the late 1980s, the Russian economy has been barreling ahead in recent years, thanks to high prices of crude oil, the country's main export item. Russia, the world's second-largest oil producer, has posted robust economic growth, and its gold and foreign-currency reserves have hit record high levels.
[YES. BUT, THE RUSSIAN GOVERNMENT'S NARROWLY FOCUSED POLICIES HAVE FAILED TO CREATE A BROAD, DIVERSIFIED and SCIENTIFICALLY & TECHNOLOGICALLY ADVANCED ECONOMY.]
These days, the attraction of the Russian economic magnet for Japan seems even stronger than that of the Japanese one for Russia. Japan's direct investment in Russia jumped more than sevenfold in fiscal 2004, which ended in March 2005, to $51 million, from fiscal 2003, although the figure represented a still minuscule 0.1% of the country's overall direct investment abroad.
[PERHAPS JAPANESE COMPANIES SHOULD RETHINK THEIR FOREIGN DIRECT INVESTMENT IN RUSSIA???]
The two biggest Japanese auto makers, Toyota Motor Corp and Nissan Motor Co, have decided to build assembly plants in St Petersburg. In the energy sector, too, Japanese companies are investing billions of dollars to help extract oil and natural gas in nearby regions of Russia, including the Sakhalin-1 and Sahkalin-2 projects.
Many analysts say, however, that if Russia courts foreign capital in rough times but then twists the law to its own ends in good times, foreign companies, including Japanese ones, will become reluctant to invest in the country. It will not be in the interests of Russia in the long term, they say.
There is growing international distrust toward Moscow, particularly with regard to energy security. At this July's Group of Eight summit in St Petersburg, where energy security was high on the agenda, Putin failed to dispel the distrust. In January, Russia temporarily stopped gas supplies to Ukraine in a price dispute. All of this has stirred considerable alarm among European countries that depend heavily on oil and natural gas supplied by Russia.
In St Petersburg, the G8 leaders agreed on an action plan to bring greater stability to energy markets. The program will promote development of more transparent and predictable energy markets and support energy-saving programs. If Russia wants to attract more foreign investment in its energy sector, it needs to win the confidence of potential investors, many analysts say.
On the oil pipeline linking eastern Siberia with Russia's Pacific coast, some Japanese government officials, concerned about the future possibility of a sudden halt to supplies as happened to Ukraine, have begun to ask: Will the pipeline actually contribute to ensuring Japan's energy security?
Prime Minister Fradkov is expected to visit Tokyo by the end of the year. Topping his agenda will be energy issues, including Sakhalin-2 and the Pacific-route oil pipeline. Fradkov's Japan visit will be preceded by a meeting of the trade and economic committee between the two governments, co-chaired by Japanese Foreign Minister Taro Aso and Russian Energy and Industry Minister Viktor Khristenko.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is yiu45535@nifty.com.
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http://www.marketwatch.com/news/story/russia-sees-massive-capital-outflow/story.aspx?guid=%7B51AE8E9D-A929-4101-9DFD-EAA36957E9D5%7D
Russian reserves fall sharply on war with Georgia
By Polya Lesova,
Dow Jones MarketWatch
NEW YORK (MarketWatch) -- Russia's foreign exchange reserves fell by $16.4 billion during the week after the military conflict with Georgia broke out, suffering one of the biggest weekly declines since the 1998 financial crisis.
Russia's international reserves dropped by $16.4 billion to stand at $581.1 billion during the week from Aug. 8 to Aug. 15, according to figures released Thursday by the central bank of Russia.
This is the largest weekly drop in reserves since the 1998 Russian crisis, with the exception of one week in June 2006 when Russia paid a part of its Paris Club debt, according to Danske Bank.
"The drive of this decline is portfolio outflows," said Lars Christensen, chief analyst at Danske Bank. "The move since the beginning of the conflict is almost entirely driven by rising geopolitical tensions and investors taking off the bet on the Russian economy."
"It's pretty clear that we're back to the worst geopolitical tensions since the end of the Cold War," Christensen said.
"It's pretty clear that we're back to the worst geopolitical tensions since the end of the Cold War." — Lars Christensen, Danske Bank
Fighting between Russian and Georgian forces broke out on Aug. 8 over the breakaway region of South Ossetia and hostilities quickly spread to Georgia proper. Last week, Georgian and Russian leaders agreed to a peace plan mediated by European diplomats.
However, tensions between Russia and the West have continued to escalate, especially after the United States signed a deal with Poland to position missile interceptors on Polish soil. Russia warned that this could fuel an arms race and said its response will go beyond diplomacy.
"So long as Russia remains confrontational, investor sentiment will remain poor towards Russian equities, the ruble and fixed income markets," said Paul Biszko, senior emerging markets analyst at RBC Capital Markets.
"No one clearly wants to buy the sell-off yet," Biszko said. "People are waiting to see how the conflict evolves and whether it blows up into a more serious issue."
Since August 7, Moscow's benchmark RTS stock index has fallen 7.6%. The index's market capitalization has declined by $12 billion to stand at $144 billion in the same period, according to data from the website of the Russian Trading System.
Year to date, the RTS index has fallen 25.7% compared with a 23% decline in the MSCI Emerging Markets index.
Even before the war with Georgia, investor sentiment toward Russia was already damaged by Prime Minister Vladimir Putin's call for an investigation of steel company Mechel (MTL: Mechel MTL 24.89, -0.21, -0.8%) , which wiped out billions of dollars of its market capitalization, as well as by the ongoing dispute between BP PLC (BP: 56.90, +0.10, +0.2%) and their Russian partners in their joint venture TNK-BP.
U.S. dollar appreciation and falling gold prices together contributed roughly $5.5 billion to the decline in Russia's foreign exchange reserves in the week ending Aug. 15, wrote analysts at Goldman Sachs New Markets Economic Research.
"But even so, we estimate that there was roughly a $15 billion capital outflow last week," the Goldman Sachs analysts said.
The first two days of the war in South Ossetia triggered a sharp depreciation of the ruble against its dollar/euro (55%/45%) dual currency basket. That depreciation was stopped only by central bank interventions.
"We now have an idea of the magnitude of those interventions," the Goldman analysts said. "The size of the outflow is also an indication of the sheer magnitude of long ruble positioning."
Polya Lesova is a New York-based reporter for MarketWatch.
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http://www.salon.com/wires/ap/business/2008/08/22/D92NG3P02_russia_investment_worries/index.html
Georgia, Khodorkovsky case hurt Russia sentiment
However, tensions between Russia and the West have continued to escalate, especially after the United States signed a deal with Poland to position missile interceptors on Polish soil. Russia warned that this could fuel an arms race and said its response will go beyond diplomacy.
"So long as Russia remains confrontational, investor sentiment will remain poor towards Russian equities, the ruble and fixed income markets," said Paul Biszko, senior emerging markets analyst at RBC Capital Markets.
"No one clearly wants to buy the sell-off yet," Biszko said. "People are waiting to see how the conflict evolves and whether it blows up into a more serious issue."
Since August 7, Moscow's benchmark RTS stock index has fallen 7.6%. The index's market capitalization has declined by $12 billion to stand at $144 billion in the same period, according to data from the website of the Russian Trading System.
Year to date, the RTS index has fallen 25.7% compared with a 23% decline in the MSCI Emerging Markets index.
Even before the war with Georgia, investor sentiment toward Russia was already damaged by Prime Minister Vladimir Putin's call for an investigation of steel company Mechel (MTL: Mechel MTL 24.89, -0.21, -0.8%) , which wiped out billions of dollars of its market capitalization, as well as by the ongoing dispute between BP PLC (BP: 56.90, +0.10, +0.2%) and their Russian partners in their joint venture TNK-BP.
U.S. dollar appreciation and falling gold prices together contributed roughly $5.5 billion to the decline in Russia's foreign exchange reserves in the week ending Aug. 15, wrote analysts at Goldman Sachs New Markets Economic Research.
"But even so, we estimate that there was roughly a $15 billion capital outflow last week," the Goldman Sachs analysts said.
The first two days of the war in South Ossetia triggered a sharp depreciation of the ruble against its dollar/euro (55%/45%) dual currency basket. That depreciation was stopped only by central bank interventions.
"We now have an idea of the magnitude of those interventions," the Goldman analysts said. "The size of the outflow is also an indication of the sheer magnitude of long ruble positioning."
Polya Lesova is a New York-based reporter for MarketWatch.
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http://www.salon.com/wires/ap/business/2008/08/22/D92NG3P02_russia_investment_worries/index.html
Georgia, Khodorkovsky case hurt Russia sentiment
By EMILY FLYNN VENCAT Associated Press Writer
Aug 22nd, 2008 LONDON -- Denial of parole for a jailed Russian oil tycoon and tension between Russia and the West over Moscow's military clash with Georgia are giving global investors increasing reasons to worry whether the country is the right place to be.
The refusal Friday by a Siberian court to grant early release for former Yukos head Mikhail Khodorkovsky came as investors were already pulling money out because of falling oil prices, the spreading global credit crunch and fears of political meddling in business.
The dollar-denominated MICEX index of leading Russian stocks has dipped 4 percent since the start of hostilities in Georgia on Aug. 8, and interest rates on some Russia bonds have risen compared to U.S. Treasuries, indicating greater perception of risk.
"Unknown political risk and constant negative headlines are not likely to induce investors to buy," investment bank Troika Dialog said in a report earlier this week.
Khodorkovsky was imprisoned for eight years in 2005 on a fraud and tax conviction; the subsequent demand for huge back taxes led to the effective renationalization of Yukos, which was taken over by the state oil company Rosneft.
His ongoing incarceration is a "completely political decision" that further illustrates the extent to which Russia's leaders interfere with business, said Ben Yearsley, investment manager at Hargreaves Lansdown Stockbrokers.
Georgia added to the sense of uncertainty that was already weighing on stocks even before the clash broke out. Investors were being scared off by new fears that politics could disrupt business, as a dispute between oil major BP PLC and Russian billionaire shareholders over the BP-TNK oil joint venture chilled the investment climate after the venture's CEO was forced out of the country over immigration issues.
[READERS MUST CONSIDER THE EXTREME ONGOING BUSINESS CORRUPTION WITHIN RUSSIA, AND THE RUSSIAN GOVERNMENT'S JUSTIFIED EFFORTS TO CURTAIL IT, ESPECIALLY WHERE IMPORTANT NATIONAL ASSETS WERE SOLD (PRACTICALLY GIVEN AWAY) TO CERTAIN 'FAVORED' BUSINESS INTERESTS & INDIVIDUALS AT 'INSIDE' & OTHER THAN MARKET-LEVEL PRICES, WITHOUT TRANSPARENT AND ACCOUNTABLE BIDDING RULES & PROCESSES IN PLACE.]
Then, Prime Minister Vladimir Putin accused Russian mining company Mechel of price fixing, causing Mechel's shares to plummet.
As a result of this cocktail of factors, major funds have started reining in investment, as suggested by a recent drop in foreign currency reserves and the stock market dip.
Elena Shaftan, head of Jupiter's Emerging European Opportunities fund, which has around 600 million pounds ($1.1 billion) under management, said fears over the Mechel case combined with falling commodities prices — Russia is the world's largest single oil producer — caused the fund to reduce its exposure to the country from 70 percent to just 45 percent earlier this month.
"We were concerned that the declining oil price and the Mechel case would put pressure on the margins of companies and hence their earnings," she said.
Maxim Osadchiy at Moscow-based Antanta Pioglobal investment bank said that all markets in Russia are seeing capital flight. "Foreigners are selling out bonds, which is seen from bigger spreads and stocks, which is clear from declining benchmarks," Osadchiy said.
The interest rate gap, or spread, between Russian government eurobonds has risen from 157 basis points over U.S. Treasuries on Aug. 8 to 183 basis points, indicating higher risk premium.
Still, many economists and investors believe that Russian market jitters will pass soon, especially since the country is still enjoying strong economic growth of 8 percent even as many world economies are on the brink of recession.
Some think the uncertainties may mean the country also offers a good deal compared to other emerging economies. Whereas Chinese companies usually trade for around 16 times earnings, Russian companies tend to trade at just 7 times earnings.
"We believe the market has overreacted somewhat" to the Georgia-Russia conflict, said Ivan Tchakarov, Russia economist at Lehman Brothers. "While many investors were plainly shocked by the escalation of the conflict with Georgia, we think that those bold enough to increase their Russia exposure at this time of perceived elevated political risk may be rewarded."
Ghadir Abu Leil-Cooper, manager of Baring Asset Management's Russia fund, agreed: "Although volatility can be unwelcome in the short term, it is precisely at times such as this that active managers can take advantage of market inefficiencies."
"We believe the long-term investment case for Russia is compelling," she added.
The reality is that Russia has less reason to worry about courting foreign money now than after its embarrassing 1998 financial collapse. A decade ago, when Russia relied on the West for loans and needed to attract foreign private investment for economic growth, the country's rulers might have worried more that a war and overt political interference with business might scare these investors off its soil.
Today's Russia is in a position to dictate its own terms. Flush with wealth from exporting oil and gas, Russia is a net investor into the rest of the world, the economy is growing faster than 8 percent a year, and it boasts foreign-exchange reserves of $600 billion.
[RUSSIA'S ECONOMY IS NOT WELL DIVERSIFIED, NOR IS THERE A MIDDLE CLASS TO SPEAK OF. FURTHERMORE, RUSSIAN WEALTH HAS NOT BEEN SPENT ON FURTHER DEVELOPING RUSSIAN SCIENCE & TECHNOLOGY THAT CAN BE COMMERCIALIZED TO TAKE ADVANTAGE OF THE MARKETS AND TO IMPROVE THE WELL-BEING OF RUSSIA'S CITIZENS.]
———
Associated Press writer Nataliya Vasilyeva in Moscow contributed to this story.
Salon provides breaking news articles from the Associated Press as a service to its readers, but does not edit the AP articles it publishes.
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NEWS ANALYSIS; U.S. Sees Much to Fear in a Hostile Russia
By PETER BAKER
New York Times
August 22, 2008
The president of Syria spent two days this week in Russia with a shopping list of sophisticated weapons he wanted to buy. The visit may prove a worrisome preview of things to come.
If Russia's invasion of Georgia ushers in a sustained period of renewed animosity with the West, Washington fears that a newly emboldened but estranged Moscow could use its influence, money, energy resources, United Nations Security Council veto and, yes, its arms industry to undermine American interests around the world.
Although Russia has long supplied arms to Syria, it has held back until now on providing the next generation of surface-to-surface missiles. But the Syrian president, Bashar al-Assad, made clear that he was hoping to capitalize on rising tensions between Moscow and the West when he rushed to the resort city of Sochi to meet with his Russian counterpart, Dmitri A. Medvedev.
Associated Press writer Nataliya Vasilyeva in Moscow contributed to this story.
Salon provides breaking news articles from the Associated Press as a service to its readers, but does not edit the AP articles it publishes.
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NEWS ANALYSIS; U.S. Sees Much to Fear in a Hostile Russia
By PETER BAKER
New York Times
August 22, 2008
The president of Syria spent two days this week in Russia with a shopping list of sophisticated weapons he wanted to buy. The visit may prove a worrisome preview of things to come.
If Russia's invasion of Georgia ushers in a sustained period of renewed animosity with the West, Washington fears that a newly emboldened but estranged Moscow could use its influence, money, energy resources, United Nations Security Council veto and, yes, its arms industry to undermine American interests around the world.
Although Russia has long supplied arms to Syria, it has held back until now on providing the next generation of surface-to-surface missiles. But the Syrian president, Bashar al-Assad, made clear that he was hoping to capitalize on rising tensions between Moscow and the West when he rushed to the resort city of Sochi to meet with his Russian counterpart, Dmitri A. Medvedev.
The list of ways a more hostile Russia could cause problems for the United States extends far beyond Syria and the mountains of Georgia. In addition to escalated arms sales to other anti-American states like Iran and Venezuela, policy makers and specialists in Washington envision a freeze on counterterrorism and nuclear nonproliferation cooperation, manipulation of oil and natural gas supplies, pressure against United States military bases in Central Asia and the collapse of efforts to extend cold war-era arms control treaties.
''It's Iran, it's the U.N., it's all the counterterrorism and counternarcotics programs, Syria, Venezuela, Hamas -- there are any number of issues over which they can be less cooperative than they've been,'' said Angela E. Stent, who served as the top Russia officer at the United States government's National Intelligence Council until 2006 and now directs Russian studies at Georgetown University. ''And of course, energy.''
Michael McFaul, a Stanford University professor and the chief Russia adviser for Senator Barack Obama, the presumptive Democratic presidential nominee, said Russia appeared intent on trying to ''disrupt the international order'' and had the capacity to succeed. ''The potential is big because at the end of the day, they are the hegemon in that region and we are not and that's a fact,'' Professor McFaul said.
Russia may yet hold back from some of the more disruptive options depending on how both sides play these next few weeks and months. Many in Washington hope Russia will restrain itself out of its own self-interest; Moscow, for instance, does not want Iran to have nuclear weapons, nor does it want the Taliban to regain power in Afghanistan. Dmitri Rogozin, a hard-liner who serves as Russia's ambassador to NATO, told the newspaper Izvestia this week that Moscow still wanted to support the alliance in Afghanistan. ''NATO's defeat in Afghanistan would not be good for us,'' he said.
Moscow may also be checked by the desire of its economic elite to remain on the path to integration with the rest of the world. The main Russian stock index fell sharply in recent days, costing investors $10 billion -- many with close ties to the circle of Prime Minister Vladimir V. Putin.
Still, although the confrontation over Georgia had been building for years, the outbreak of violence demonstrated just how abruptly the international scene can change. Now Russia is the top focus in Washington and some veteran diplomats fret about the situation spiraling out of control.
''Outrage is not a policy,'' said Strobe Talbott, who was deputy secretary of state under President Clinton and is now the president of the Brookings Institution. ''Worry is not a policy. Indignation is not a policy. Even though outrage, worry and indignation are all appropriate in this situation, they shouldn't be mistaken for policy and they shouldn't be mistaken for strategy.''
For Washington, there are limited options for applying pressure. Senator John McCain, the presumptive Republican presidential nominee, wants to throw Russia out of the Group of 8 major powers. Such a move would effectively admit the failure of 17 years of bipartisan policy aimed at incorporating Russia into the international order.
Yet Washington's menu of options pales by comparison to Moscow's. Masha Lipman, an analyst at the Carnegie Moscow Center, said ''there's a lot more'' that the United States needed from Russia than the other way around, citing efforts to secure old Soviet nuclear arms, support the war effort in Afghanistan and force Iran and North Korea to give up nuclear programs. ''Hence Russia has all the leverage,'' she said.
In forecasting Russia's potential for causing headaches, most specialists look first to Ukraine, which wants to join NATO. The nightmare scenario circulating in recent days is an attempt by Moscow to claim the strategic Crimean peninsula to secure access to the Black Sea. Ukrainian lawmakers are investigating reports that Russia has been granting passports en masse to ethnic Russians living in Crimea, a tactic Moscow used in the Georgian breakaway republics of South Ossetia and Abkhazia to justify intervention to protect its citizens.
Arms sales, as Mr. Assad's visit underscored, represent another way Russia could create problems. Israeli and Western governments have already been alarmed about reports that the first elements of the Russian-built S-300 antiaircraft missile system are now being delivered to Iran, which could use them to shoot down any American or Israeli planes that seek to bomb nuclear facilities should that ever be attempted.
While Mr. Rogozin expressed support for assisting NATO in the war in Afghanistan, other officials have warned darkly about cutting off ties with NATO. The two sides have already effectively suspended any military cooperation programs. But Russia could also revoke its decision in April to allow NATO to send nonlethal supplies overland through its territory en route to Afghanistan.
Russia could also turn up pressure on Kyrgyzstan to evict American forces that support operations in Afghanistan and could block any large-scale return to Uzbekistan, which expelled the Americans in 2005. ''The argument would be, 'Why help NATO?' '' said Celeste A. Wallander, a Russia scholar at Georgetown's School of Foreign Service.
Even beyond the dispute over Iran, Russia could obstruct the United States at the United Nations Security Council on a variety of other issues. Just last month, Russia vetoed sanctions against Zimbabwe's government, a move seen as a slap at Washington.
''If Russia's feeling churlish, they can pretty much bring to a grinding halt any kind of coercive actions, like economic sanctions or anything else,'' said Peter D. Feaver, a former strategic adviser at the National Security Council.
Russia could also accelerate its withdrawal from arms control structures. It already has suspended the Conventional Forces in Europe treaty to protest American missile defense plans and threatened to pull out of the Intermediate-Range Nuclear Forces treaty. Renewed tension could fray a recently signed civilian nuclear cooperation agreement and doom negotiations to extend soon-to-expire strategic arms control verification programs.
''Ironically, since the collapse of the Soviet Union, there's always been the concern about Russia becoming a spoiler,'' said Ms. Stent, of Georgetown, ''and now we could see the realization of that.''
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Oil, Interrupted - Europe Grapples with Russia-Georgia Woes
SPIEGELOnline
By Jack Ewing and Mark Scott
With Anna Smolchenko in Moscow and Kerry Capell in London.
08/12/08
Companies hope for a swift resolution, but with energy supplies at risk, the fighting might spur the West to seek other gas and oil sources.
If armed conflict in Georgia proves short-lived, the effect on economic relations between Russia and Europe could be limited. That, in any event, is what European business leaders fervently hope. For companies such as carmakers Daimler, Renault, and Fiat, fast-growing Russia has become an increasingly important market, helping to compensate for slowing sales in Western Europe. "I don't think the conflict will have big consequences, at least if it doesn't escalate," says Martin Hoffmann, a Russia expert for the Federation of German Industries.
But Russia's willingness to use force to pursue its interests will certainly give companies pause about investing there in the future. And it will give impetus to efforts by European countries to become less dependent on Russian energy. "The main problem for Russia is that investor perception, which was already low, will deteriorate even further," says Katinka Barysch, deputy director of the Centre for European Reform, a London think tank.
Denying Any Lasting Effect
Investor nervousness was reflected in the Russian stock market, which plunged Friday then recovered after Russian President Dmitry Medvedev said the conflict was nearing its end. Most affected were energy shares such as Rosneft, Gazprom, Lukoil, and Inter RAO, an electricity generating outfit with plants in Georgia. "The very fact of the conflict is not putting investors in the mood to invest in Russia," says Alexander Petrov, an analyst with Univer investment group.
But it’s Georgia, not Russia, that appears to be the biggest economic loser so far. The escalation of the hostilities has already led to a downgrade of Georgia’s sovereign debt rating by both Fitch and Standard & Poor's.
Russia, meanwhile, will have to deal primarily with political damage—and officials in Moscow insisted the fighting would not have a lasting effect on the economy. "The events themselves of course have an influence [on the outflow of capital] but they can't significantly change the fundamentals," Finance Minister Alexei Kudrin told reporters.
[THIS IS NOT CERTAIN; IN FACT, IT IS UNLIKELY, IN THE LONGER TERM THAT RUSSIA'S ECONOMY CAN WITHSTAND THE PSYCHOLOGY OF NEGATIVE WORLD MARKET PERCEPTIONS. WITH CAPITAL FLIGHT, A DROP IN FOREIGN DIRECT INVESTMENT & INTERNATIONAL TRADE, A DEVALUATION OF THE RUBLE AGAINST THE U.S. DOLLAR AND THE EURO, & THE RESULTING INCREASE IN DOMESTIC INTEREST RATES DUE TO MARKET PERCEPTIONS OF INCREASED POLITICAL & ECONOMIC RISK, WITHOUT ANY CHANGE IN CURRENT RUSSIAN DOMESTIC POLICIES, THERE ARE LIKELY TO BE SIGNIFICANT CHANGES IN THE FUNDAMENTALS OF THE RUSSIAN ECONOMY - ALL WITHOUT ECONOMIC SANCTIONS BEING IMPOSED BY FOREIGN GOVERNMENTS.]
Even if the conflict widens, it's unlikely that Western countries will try to impose economic sanctions on Russia—a step that would have major consequences for their own economies.
German exports to Russia rose more than 50 percent in the first half of 2008, to $290 billion, an indication of how important a market Russia has become. "Russia is a very strong country in terms of economic development," says Christian Dreger, an economist at the German Institute for Economic Research in Berlin. "It helps compensate for weaker growth in other regions."
[THIS WILL ONLY CONTINUE AS LONG AS THE MARKET BELIEVES THAT CONTRACTS WITH RUSSIAN FIRMS WILL BE HONORED AND THAT ASSETS WILL NOT BE EXPROPRIATED BY THE RUSSIAN GOVERNMENT.]
But Russia's integration into the world economy will suffer a setback. "The country is trying to enter the World Trade Organization, and this armed conflict with Georgia will make that process even more difficult," says Carlo Gallo, an analyst with consultant Control Risks Group. "The conflict with Georgia empowers the hardliners [in Russia]. Economic reform in Russia will be delayed."
Alternatives to Russian Gas
The fighting also drives home how dependent Europe is on Russia for energy, particularly gas. As a result, Europe, already a leader in wind and solar energy, is likely to increase its investment in alternative energy.
And the crisis could give new life to other projects designed to weaken Russia's energy grip on Europe. For example, Germany, which has no port to receive liquefied natural gas, might finally push through long-delayed plans to build one. An LNG port would allow Germany to import gas from countries not connected to the region by pipeline. "Russia is an immediate neighbor. You can't wish it doesn't exist," says Friedemann Müller, a senior fellow at the German Institute for International & Security Affairs in Berlin. "I don't think Europeans will say we don't want to have to do anything with this country. But Europeans will think we trusted too much that Russia would become more like a Western country."
Other projects, though, could suffer a setback. A gas pipeline called Nabucco, for instance, is aimed at diversifying Europe's supplies by linking the Caucasus with Austria, Bulgaria, and Turkey. But the conflict highlights the volatility of energy supplies from the Caucasus, which are crucial to making Nabucco a reality. "There's no doubt that what's happening has increased the investment risk within Georgia and the region," says Nick Butler, director of the Centre for Energy Studies at Cambridge University's Judge Business School and former strategy chief at oil giant BP. "This is one more step by the Russians trying to increase their power among their former satellites. That raises questions over further [foreign] investment in Georgia, as well as countries like Azerbaijan and Ukraine."
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http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/11/cnbp111.xml
BP on alert as Russian jets attack pipeline in Georgia
By Jonathan Sibun
UK Telegraph
Last Updated: 12:27am BST 11/08/2008
BP, which employs hundreds in Georgia, owns a 30pc stake in the Baku-Tbilisi-Ceyhan pipeline, the world's second longest. It carries more than 1pc of the global oil supply or 1m barrels a day from Azerbaijan to the Mediterranean and was attacked unsuccessfully by Russian jets on Saturday.
Local reports recorded 51 missile strikes that left craters less than 100 yards on either side of a pressure vent.
A BP spokesman said that, after thorough checks, the company had "disclosed no bombing in the vicinity of the BTC line".
He said the pipeline was in any case out of action after a fire broke out on the line in Egypt last week. It has still not been put out and oil has been diverted along the Western Route pipeline, he said.
More on oil
Georgia has been calling for international help and could be keen to heighten fears about any threat to the pipeline, given the potential impact on the West's oil supplies.
The spokesman said BP had only "two handfuls of Brits" working in Georgia but that the company would follow embassy advice on whether to keep them in there. The Foreign Office last night warned of "escalating violence" and advised British citizens to leave as soon as possible.
HSBC is another UK company operating in Georgia. The bank opened its first office in the capital Tbilisi in June with a staff of 44.
At the time of the opening, Tony Turner, the bank's chief executive in the country, said the company had plans to open more branches. "With GDP growth in excess of 10pc, strong FDI [Foreign Direct Investment] inflows and a series of highly successful structural reforms in place, we believe Georgia offers some of the best growth opportunities in the CIS region."
Analysts warned of the impact of the war on Georgia's drive to attract foreign investment. Paul Stevens, of think-tank Chatham House, told Sky News: "The conflict is going to cause people to think twice about investing in the oil industry in the Caspian region."
Opec nations earned as much in the first half of 2008 as they did in the whole of last year, thanks to record oil prices and production. Members of the Saudi Arabia-led oil exporters’ cartel made $645bn (£335bn) between January and June, just below the record $671bn earned in 2007, according to the US department of energy.
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http://www.businessweek.com/magazine/content/08_34/b4097000700662.htm?chan=top+news_top+news+index_news+%2B+analysis
Georgia: A Blow to U.S. Energy -
Georgia: A Blow to U.S. Energy -
The plans of the U.S. and Western oil companies for expanded pipelines in the Caspian region may well be a casualty of Russia's attack
by Steve LeVine
Business Week
August 13, 2008, 7:21PM EST
The sudden war in the Caucasus brought Georgia to heel, reasserted Russia's claim as the dominant force in the region, and dealt a blow to U.S. prestige. But in this part of the world, diplomacy and war are about oil and gas as much as they are about hegemony and the tragic loss of human life. Victory in Georgia now gives Russia the edge in the struggle over access to the Caspian's 35 billion barrels of oil and trillions of cubic feet of gas. The probable losers: the U.S. and those Western oil companies that have bet heavily on the Caspian as one of the few regions where they could still operate with relative freedom.
At the core of the struggle is a vast network of actual and planned pipelines for shipping Caspian Sea oil to the world market from countries that were once part of the Soviet empire. American policymakers working with a BP-led consortium had already helped build oil and natural gas pipelines across Georgia to the Turkish coast. Next on the drawing board: another pipeline through Georgia to carry natural gas from the eastern shore of the Caspian Sea to Austria—offering an alternate supply to Western Europe, which now depends on Russia for a third of its energy.
But after the mauling Georgia got, "any chance of a new non-Russian pipeline out of Central Asia and into Europe is pretty much dead," says Chris Ruppel, an energy analyst at Execution, a brokerage in Greenwich, Conn. The risk of building a pipeline through countries vulnerable to the wrath of Russia is just too high.
The Russia-Georgia war thus may have dealt a blow to 15 years of American economic diplomacy. Back in the mid-1990s, Clinton Administration officials looking at a map of the recently dismantled Soviet Union grasped a singular fact about its southern perimeter: The newly independent countries there were overflowing with oil and natural gas but had to ship it via Russia to reach customers. Without pipelines of their own, the Caspian states would never fully develop their energy industries, or be politically independent of Russia. The lack of pipelines also curbed the export potential of companies like Chevron, which owns half of Tengiz, the giant Kazakhstan oilfield. After first resisting, BP (BP) and Chevron (CVX) backed the American pipeline strategy.
Moscow's Anger
Georgia was a key transit point for any line to the West. John Wolf, a former U.S. ambassador and now head of the Eisenhower Fellowship program in Philadelphia, was in the thick of the bargaining and arm-twisting that created the so-called East-West Energy Corridor. Wolf recalls powwowing with the leaders of Azerbaijan, Georgia, and Turkey on the construction of what would become the 1,000-mile-long Baku-Ceyhan, the Caspian's first independent oil export pipeline. These leaders knew they risked provoking Russia's wrath but figured the gamble was worth it, Wolf says. Now almost 1 million barrels a day normally course through the pipeline. For Georgia, it's not the fees it collects from pipeline transit—about $60 million annually—that are important. Instead, the pipeline's presence signaled Georgia's stability and encouraged a flood of foreign investment.
That stability, of course, has proved illusory. Yet the Russians won't interfere with the Baku-Ceyhan pipeline directly, analysts say. Moscow's strategy depends on not spooking the Europeans, who might then be encouraged to back the construction of other non-Russian energy pipelines. Since there have been no confirmed attacks on the pipelines running through Georgia, no European leader has called for a reconsideration of energy policy.
Besides, the Russians may not need to shut down the Baku-Ceyhan line to win the advantage in the energy wars. "There's no doubt that what's happening has increased the investment risk within the region," says Nick Butler, a former senior executive at BP who directs the Cambridge Centre for Energy Studies at the University of Cambridge's Judge Business School. Already, on Aug. 12, BP shut down a secondary oil pipeline that ends at Georgia's Black Sea port of Supsa, saying there could be a risk of attack on the line.
Russia's Pipeline Plans
Both Chevron and ExxonMobil (XOM) had also planned to ship hundreds of thousands of additional barrels a day along the route traversing Georgia. Now that may be subject to change. "Do you want to put more eggs in the South Caucasus basket?" asks Edward C. Chow, a former Chevron executive and now a senior fellow at the Center for Strategic & International Studies in Washington." And if you do, are there certain accommodations that need to be made with the Russians to protect them?"
What about the White House's plans for a pipeline to ship natural gas to Europe? The proposed pipeline's success depends on Turkmenistan, which has the fourth-largest natural gas reserves on the planet, an estimated 3 trillion cubic meters. The Turkmen are cautious: Under former President Saparmurat Niyazov, they refused to defy the Russians and support the construction of the Baku-Ceyhan pipeline. "[Niyazov] thought about it and probably decided he didn't want to wake up dead," says former U.S. diplomat Wolf.
The assault on Georgia may make the Turkmen even more wary of the new pipeline. Instead, they may end up cutting a deal with the Russians, who are vigorously pursuing new gas pipelines of their own in a bid to dominate energy in the region. "A new Iron Curtain," says analyst Ruppel, "is descending around the periphery of Russia."
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