Russia's Energy Weapon

In 2011 and 2012 Vladimir Putin said on more than one occasion that Russia had managed to avoid the world economic and financial crisis thanks to the policies of the Kremlin. In several respects, this was true – but not so much in the energy sector, so vital to Russian interests and the country’s budget. From the second half of 2011, Gazprom, in previous years so dominant in the “blue fuel” sector from extraction to sales to supply, began having to fight open battles rather than the behind-the-scenes ones as before.

THE STAKES OF TURKEY’S ENERGY GAME

Disputes boiled over on several fronts over gas pipeline routes, while Russia’s economic relations with Turkey, which had been improving, began to fray, a situation not helped by the turmoil of the “Arab Spring”.

In a determined effort to parade concrete economic successes before the electorate in advance of the parliamentary and presidential elections, the Medvedev–Putin leadership made several personal visits to Turkey in an attempt to lock down gas supply contracts. A few days after a Nabucco summit in Prague in May 2009 at which Ankara signed a joint statement on pipelines which avoided Russia altogether, Putin, then Prime Minister, agreed with his Turkish counterpart Recep Tayyp Erdogan to extend an 1986 supply contract due to expire in 2012.

The Kremlin simply could not stand idly by as Turkey, the third largest importer of Russian gas, courted alternative suppliers. It also managed to get Ankara, whose robustly-growing economy was undoubtedly in great need of Russian gas, to commit to a hike in imports and join a new pipeline plan, dubbed Blue Stream 2, from Novorossiysk to the Turkish Black Sea and beyond. The project, however, has still not got off the ground, meanwhile Putin’s personal offer of Russian participation in Turkish nuclear energy tenders, a joker in Russia’s pack of geopolitical playing cards is still on the agenda.

Hence, one year after the issuing of a triumphant communiqué following the Putin–Erdogan meeting in 2009, President Medvedev arrived for an official visit to Turkey in May 2010 with the relationship in worse shape with little or nothing to show for the much-heralded plans for economic cooperation. Relations then plunged when Ankara announced that due to high prices, it was no longer willing to buy gas from Russian state-owned companies, and was even floating a new pipeline plan to Europe which included Turkey as a potential transit country for Iraqi natural gas. The emergence of potential rivals to the recently launched North Stream pipeline, no matter how hypothetical, caused the furious Russians to embark on counter measures.

The response to those measures, presumably encouraged by Brussels and Washington, came at the Third Black Sea Forum for economic and energy issues in November 2011 in Istanbul. Rovnag Abdullayev, president of the Azeri SOCAR state company and no stranger to publicity, told the delegates that Azerbaijan was also planning to build a natural gas pipeline together with its close ally Turkey, called the Trans-Anatolia pipeline. It was a project that appeared to have a larger chance of taking off than the previously mentioned schemes, albeit only slightly, given both countries’ growing geopolitical importance and orientation toward the West. Even with the world economic crisis as a backdrop, its financing did not seem impossible either, presuming the western multinationals were ready to dig deep enough into their pockets when renegotiating and renewing their expiring Azeri contracts.

Whatever about the prospects of realisation of the pipelines, this was a fresh sign to Russia that Ankara and Baku were turning away from Moscow for their energy export, import and supply solutions. At the Istanbul meeting, the hosts also declared that representatives from 17 large American energy companies were arriving in Ankara to discuss investments in Turkey’s energy sector, adding that 11 of those companies were primarily interested in exploring opportunities in Turkey’s aeolian and solar energy sectors. The renewal of the Russian–Turkish gas supply contract announced in 2009, like the other plans, had silently disappeared from the discourse.

MOSCOW’S “GEORGIAN SCRIPT” THREAT

Gazprom meanwhile was massing its forces on another front that had opened up in the aftermath of the Soviet Union’s collapse. With the approach of the state Duma elections in December 2011, it was increasingly hinted at in Moscow that military intervention to tackle energy disputes around the Caspian Sea could not beruledout.Then on 20 November 2011, Turkmenistan and Azerbaijan,in furious legal dispute with each other over ownership rights in the Caspian, closed a deal, with western mediation, for transportation of gas from the most valuable sites in the Turkmen section of the Caspian via Azerbaijan to Europe as well as for the construction of a Trans-Caspian pipeline.

The next day the Kazakh president Nursultan Nazarbayev, often seen as a Moscow representative by proxy at meetings of the Soviet successor states, called the project “unclear”, but the nationalist Russian press did not pull any rhetorical punches. A pipeline which goes around rather than through Russia would fundamentally threaten the dominance of Gazprom’s supplies. What again was clearly on display was that for the Kremlin, the energy sector is much more than a question of resources: it is seen as one of, if not the only, effective tool to recover the great power status lost after the collapse of the Soviet Union. Even the usually measured Nezavisimaya Gazeta pronounced that “experts unanimously believe that ignoring Moscow’s position could lead to military action...” and just in case anyone was taking that lightly, the sentence finished: “...with a similar script as in Georgia 2008”.

August 2008 fundamentally transformed the lobbying capacity of Russia’s energy sector, particularly since July 2009, when the EU’s Third Energy Package of legislative proposals for electricity and gas markets was launched containing regulatory directives – for example, “unbundling” or the separation of companies’ generation and sale operations from their transmission networks – irreconcilably opposed to how Russia operates its petroleum and gas sector. It cannot have been a coincidence that in January–February 2011, Vladimir Putin at various forums around Europe and in western media, tried to block the Brussels measures with a mix of pledges and threats. The Russians were simply unwilling to open their state-owned energy supply system – on which their political and economic power depends – to outside competition as required by the EU regulations.

The “Georgian script” threat was not an empty one. It did not escape the notice of western governments in August 2008 that Russian tanks and warplanes were not only attacking and bombing villages in the disputed South Ossetia region, still legally in sovereign Georgian territory, but also petroleum and gas pipelines deep into Georgian territory far from the warzone.

GHOSTS OF THE PAST

Therefore while the Azeri–Turkmen alliance appeared an unrealistic flight of fancy, it still managed to conjure up spectres of such conflicts. In the twenty years since the break-up of the Soviet Union, no deal had been reached by the states bordering the Caspian – Azerbaijan, Russia, Kazakhstan, Turkmenistan and Iran – on the border delineations of some four Hungary-sized sections of the Sea. On one hand, Russia’s and Iran’s interests clashed with the claims of the Azeris and Turkmens. On the other hand, there was also a dispute between Turkmenistan and Azerbaijan over Baku’s exploration of sites considered by Ashgabat as its territory.

The states with interests in the region are also unable to agree on whether the Sea, the largest enclosed inland body of water on Earth by area, is actually a lake with its 50 large islands, five peninsulas, eight huge gulfs, S-shape, and treacherous waters, or an inland sea subject to a different set of international laws. This would determine how the waters and access to the mineral and water resources are divided up between the states which became independent in the early 1990s and Iran. Those resources include rare fish species – the Sea accounts for 90 per cent of the world’s production of the most sought-after caviar – and an estimated 10 billion tonnes of petroleum reserves.

Moving clockwise from the north, Russia has 695 kilometres of the sea’s coastline, Kazakhstan 2,320, Turkmenistan 1,200, Iran 724, and Azerbaijan 955. The three former Soviet republics want a share of the Sea’s ownership and production rights reflecting those proportions. Moscow economists, however, belligerently insist that Russia dominated the area for more than a thousand years from 880 to the peace agreements following the Second World War. This dubious claim based on historical rights is overridden though by the fact that with the fall of the Soviet Union in 1991, the agreement with Persia in 1921, then with its successor Iran in 1940 concerning the partition of the seabed and the waters as well as fishing and shipping rights became null and void.

In 2003, after a decade and a half of bargaining, Russia, Kazakhstan and Azerbaijan agreed on a 19-27-18 split of 64 per cent of the Caspian. As for Iran, this tripartite “northern alliance” recognised only the 14 percent Iran had before 1990. Tehran’s stance meanwhile was that the waters should be divided equally between the five countries, i.e. 20 per cent each, a division which implied a shift northwards of its borders by around 80 kilometres to a previous Soviet border, a shift in other words that would doubtless trigger fresh disputes or worse.

Tehran’s stubbornness is understandable, however, considering that the Alov, Araz and Sharg petroleum fields are located on that territory, on which an international consortium is extracting gas on the basis of an agreement with the Azeris. To complicate matters further, the Sharg field, as well as the Chirag and Azeri fields which hold huge reserves, are also claimed by the Turkmens who are more likely to enter into an alliance with Tehran than Baku. As long as the convoluted disputes continue, there appears to be no prospect of any petroleum or gas pipeline being built under the Caspian Sea in addition to the existing ones, namely the Baku–Tbilisi–Ceyhan, Baku–Novorossiysk, Baku–Supsa, and Atyrau–Samara pipelines.

About the region’s energy reserves and precisely where they are located, few details are known. Petroleum and gas exploration continues at 20 sites, but there are at least another 250 potential sites. Their exploration is hindered, however, by unclear legal status and estimates of commercial viability of those sites as low as 15–20 per cent. Still, reserves estimates are in the 24–26 billion tonnes of petroleum range (almost 10 per cent of the world’s annual production of 270–400 billion tonnes), and 8,300 billion cubic metres of gas.

These are quite dizzying numbers, which gave rise to the western trade press’s moniker for the Caspian Sea: “the second Persian Gulf”. According to Russian experts, however, erroneous forecasts and estimates are pedalled by the Americans with the aim of making this region threatened by ethnic and tribal conflicts and general political instability, etc. more attractive for western investors.

In Moscow they say that the real potential value of the Azeri reserves is multiplied four times by the Americans. Hence the Russians too try to play down their own outlandish forecasts, hoping that the Central Asian leaders enthralled from time to time by the siren voices of the Americans see sense. “You don’t have as much as you think”, they murmur. “Better if you give the business to us.”

The Kremlin’s misgivings are not without reason. Since Gurbanguly Berdymukhamedov was sworn in as Turkmen President, at every summit meeting he has promised fantastic riches of gas reserves to whoever his guests or hosts are at the time. At the end of 2006 in Washington, the Kazakh President Nursultan Nazarbayev launched in controversial circumstances the “Houston initiative” framework in which he promised his hosts petroleum and gas in the hope of securing 200 billion dollars of American investment in ten years.

Russia’s retaliation in the behind-the-scenes struggle with America for dominance in the Caspian Sea was not long in coming. In spring 2007 in Aktau, probably the Sea’s most polluted coastal city, President Putin pushed through a deal with the Turkmen and Kazakh Presidents in which Moscow effectively got hold of the region’s entire resources. The deal meant the natural gas would travel in a northbound pipeline owned mostly by Russians to Russian territory. Up to then Russia produced no more than 10 per cent of the region’s petroleum and 8 percent of its natural gas, so this economic and diplomatic coup by Russia fundamentally changed the ownership ratios of the Sea.

CONTEST FOR VIRTUAL GAS PIPELINES

Due to western diplomatic mediations, the Azeri and Turkmen Presidents temporarily put aside at the end of 2011 the differences that had emerged between them over the division of the Caspian Sea. They declared that since the pipelines to Europe wouldbe constructeddeep in the Turkmen and Azeri sectors, the Russians should have no say at all in the matter. The rhetoric was considerably bolstered by muscles from Brussels. Günther Ettinger, the EU Energy Commissioner, said that Moscow was putting obstacles in the way of the pipeline projects, and that Brussels would take similar steps with regard to the route of the South Stream pipeline. This was just another threat too, but such a strong statement as Ettinger’s had not been made so publically before. Moscow continued with its own threats. Mikhail Aleksandrov, the deputy department head of the body dealing with CIS (Commonwealth of Independent States) member countries and oft-quoted in the Russian press, said that for months he had been doing the rounds of officials in western embassies in Moscow so that “they would take seriously the prospect of Russian military action”.

At a lunch with the Germany ambassador, the guest from Moscow explained in the presence of the EU’s representative for Central Asia, that “Russia is ready and able to use weapons to stop the Trans-Caspian pipeline becoming reality. Not so much for economic reasons but for political and military ones”, he said. “This is why – just as we forced Georgia to make peace via military intervention – we can do the same with Ashgabat and Baku if necessary, even via air strikes. After NATO’s actions in Yugoslavia, Afghanistan, Iraq and Libya, there can be no moral or legal objections to Russia using force.”

TheTrans-Caspian pipeline remains a virtual project only though, and will be so for a long time yet, Russian military power being what it is. Russia’s Caspian Sea arsenal includes weapons and missiles that can break the speed of sound and annihilate any target from a distance of 300 kilometres. Since 2002, the “Tatarstan” guard-boat, the jewel of the Caspian Sea flotilla, has been patrolling the waters, equipped with powerful and far-reaching missiles. The flotilla also includes three Bujan-M and Grad Sviyazhsk warships, all looming menacingly in the background while the verbal wars continue.

As noted at the beginning, the Russian presidential elections of 2011–2012 and Putin’s need for international economic success breathed new life into the East– West face-off. Gazprom proved useful here when Putin announced that due to his personal intervention he was able to clinch a deal with the Turks over the route of the South Stream pipeline. Just hours later the Russian Prime Minister used this breakthrough to blackmail Kiev, when he effectively delivered an ultimatum that Moscow’s participation in the South Stream project depended on Ukraine.

Moscow had been applying huge pressure on Ukraine, of course, for many years. Now though, the Kremlin was effectively demanding for Gazprom the ownership rights of the Ukrainian gas network. The Russian ownership of the strategically important pipeline would lead to an easing of the cripplingly high import tax, established as a result of the negotiations between Putin and Yulia Timoshenko in January 2009.

The ownership of the catastrophically run-down pipeline was also a concern for Brussels whose stated aim, after all, is to increase European energy security. The Ukrainian decision-makers, squeezed and blackmailed from two sides, have been able to propose no more than the economically logical but geopolitically impossible idea of an even split between Kiev, Moscow and Brussels.

So Ukraine at the end of 2011 did not accept Putin’s proposal. It was then that the Russian Prime Minister played his joker, when he said that the construction of the South Stream would begin not in 2013 but at the end of 2012, a seemingly impossible timetable given the status of the project at that time.

Meanwhile, the Turkish energy minister Taner Yildiz, directly contradicting Putin, declared that Ankara would not take part in the building of South Stream. On 30 January 2012, his spokesperson added that the Turkish government had also decided to withdraw support from the Brussels- and Washington-backed Nabucco pipeline, the rival of South Stream.

The precursor to Yildiz’s startling remarks was that at a conference in Kiev called “Ukraine’s energy sector future and natural gas”, Richard Morningstar, chief lobbyist of the American petroleum and gas companies, expressed doubts about the expediency of both the two rivals. About South Stream, he said “only our Russian friends can know why they actually need it”.

Morningstar was the first to publically express what experts had been warning for years: Nabucco was indeed an option for the diversification of European gas supply, but where was the guarantee that the “blue fuel” would be reliably delivered by the Turkmen leadership, the Iranians whom the West was manoeuvring to destroy, and the Azeris with their impenetrable and erratic policy stances? And there was no other significant supply source.

The American said that Europe should think about gas imports from the point of view of those in need in southeast Europe. This was a legitimate request, given that during the Kremlin’s war against Ukraine Moscow turned the gas tap off in the cold of January in three consecutive years, so that downstream countries like Serbia and others were only able to keep going with the help of Hungary’s energy giant MOL.

In conclusion, it will be difficult to increase energy security in the Balkans and Central Europe if the relationship between the geopolitically-critical Turkey and the European Union further deteriorates, as has happened due to the tough line being taken by Berlin and Paris on restrictions on immigration from Turkey.

From this perspective, the fact that plans for gigaprojects have been largely replaced with smaller and more realistic gas pipelines is a positive development. Following the earlier AGRI project which involved Azeri, Georgian, Romanian and Hungarian participation, the TANAP (Trans-Anatolia project) involving Turkey and Azerbaijan was launched. In Baku they are also studying the potential for the ambitious sounding (from a political point of view) Turkish–Greek–Italian ITGI interconnector. In the history of the gas pipeline wars of the early 21st century, the signs are that we will all have to learn new sets of abbreviations.

Translation by Peter Murphy