ON RUSSIA"S FOREIGN ENERGY POLICY
PRESENTATION AND DISCUSSION
The Hague, Café Brasserie Dudok", January 17th, 2006
Piet Bukman: This problem we are to discuss today is intertwined with the specific gas transit role that Ukraine is playing between Russia and Central and Western European countries, some of them being to a large extent dependent on Russian gas without having realistic alter-natives.
That all generated and still generates concern and uneasiness in this part of the world, and that"s at least explainable. Therefore, we all need to get more infor-mation and a better view on Russia"s foreign energy policy. That is, evidently, of vital interest for the countries concerned, and even more for Europe as a whole.
So, Mr. Inozemtsev will not be surprised when I say that all of us are very, very glad for your acceptance of our invitation to address this gathering as to the background of Russia"s foreign energy policies and their relation to foreign po-licy in a more general sense.
Mr. Inozemtsev was born in 1968 in Gorky, now Nizhniy Novgorod. Upon com-p-leting his secondary education he entered the economics department of Moscow State University, where he graduated with honors in "89. In 1993 he became vi-ce-president of the Moscow-Paris commercial bank, and in 1996 he founded the Center for Post-Industrial Research at which serves now as scientific director. Since 2002 he is also chairman of the board of advisers of the Russia in Global Affairs journal.
So, Mr. Inozemtsev, it may be clear, even more, it is crystal clear, that you are well equipped to share ideas and to discuss very relevant problems with us this evening. In front of you there is a very interested group of people.
Vladislav Inozemtsev: Thank you so much, Mr. Chairman, for your presen-tation. I"m really glad to address this audience today, speaking as a Russian scientist and ex-plaining some elements of Russia"s foreign policy - especially foreign energy po-licy - and staying today here in the Hague because I should say that one of my ancestors was of Dutch origin, and in 1707 he went to Rus-sia to serve in Peter the Great"s Navy. So, it"s very interesting to me to speak here to this respected audience. And if you take around 20 minutes for my pre-sentation, I will touch mostly general questions, mostly political questions, and then, I think, in a discu-s-sion that will follow we all can address some particular aspects of recent ten-sions between Russia and Ukraine and between Russia and some other East European countries, caused by this gas transit problem.
I want to start by saying that in recent years Russia became more and more an economy which is highly dependent on its energy sector. From my point of view it"s not good because in the Soviet times the decline of the Soviet power, the decline and even the decomposition of Soviet economy, had started when the huge oil and gas fields in Siberia were found and explored, and when the Soviet economy became very dependent on oil and gas exports, and with it on their price fluctu-ations. Everybody knows now that the crash of the Soviet economy in the late 1980s and early 1990s was also due to declining global oil prices. So, the high dependence on oil and gas exports is really bad for the Russian economy, and it was bad at every point of Russian history.
But the problem today seems to be even more grave because if, for example, in 1997 or 2000 the dependence of the Russian economy on oil and gas was con-sidered to be a bad thing, today Mr. Putin, Russia"s president, declares that his aim is to turn Russia into an "energy superpower". So the exploration of oil and gas fields and export of natural resources is becoming a national priority, which it has never been before. And this is, I believe, the first thing one should take into consideration while speaking about Russia"s foreign energy policy. Today Rus-sia, which for decades relied on its military power, on its ideology that was bold-ly supported around the world, establishes itself as an energy superpower. This, I think, is a vision which does not correspond - and can not correspond - with Russia"s global ambitions because no state specialized in production of energy has ever become a global superpower. There were only Third World nati-ons who relied on fuel extraction and energy exploration.
The second problem which I should raise is that the rest of Europe, as Mr. ?? said, was for years dependent from the supply of Russian (or, earlier, Soviet) oil and, and this situation goes back to the 1970s, when huge pipelines from Wes-tern Siberia were built to Europe (to Germany, first of all). And since that time on Europe depends on imports of fuel, i.e., gas and oil, from Russia.
Today Russian gas composes around 40 percent of European gas imports, or 19 percent of all gas consumed inside the European Union"s 25 member nati-ons. Russian oil import is about 24-25 percent of all European oil imports, and so 14.5-15 percent of European oil consumption. This is a substantial share of the market, so this is why Europe feels itself dependent on the Russian oil and gas supply.
The third point that should be mentioned when speaking about Russia"s energy policy towards Europe is that Russia prefers not to join some very important international treaties in the energy field. For example, in 1994 a special Energy Charter was signed, as well as a special treaty which was designed as a sup-plement to it. Russia signed both the same year, but it hasn"t ratified them so far. And also, Russia hasn"t signed the Transit Protocol, which aimed to regu-late the oil and gas transit within Europe. This is why there is a lot of problems now in relations between Russia and post-Soviet republics of Central Asia.
Also we can see that from 2003 Mr. Putin"s government has taken course to a wide re-nationalization of the Russian oil and gas industry. The role of the state is strengthening everywhere, and it started with the YUKOS affair and an aucti-on sale of Yuganskneftegas, which was YUKOS"s main production department. Then we witnessed the acquisition of Sibneft by Gazprom, and so everyone can see that the state sector is growing in the Russian energy industry.
So, those are the main points we should take into consideration while speaking about European-Russian relations in the energy sector. And to explain how Rus-sia"s foreign energy policy may look like in coming years, one should think about the nature and basic features of Russia"s new power elite, Russia"s new ru-ling class, of the bureaucracy that has been holding power since 2000. One should bear in mind what are its origins and what is its worldview.
After Mr. Putin was appointed to Russian presidency, and than formally elected in March of 2000, his team was permanently reshuffled, so now it is composed entirely of people with their background in intelligence services, in the former Soviet or new Russian army, KGB and the so-called "power structures". All these pe-ople which are called "siloviki" are now responsible for the most important de-cisions made inside the Russian government and presidential administration. They want to strengthen Russia"s position on the global scene (and this is very good), to re-establish Russian sovereignty (and this also seems to be good). But it should be mentioned that the worldview of those people is deeply influenced by the notion of conflict, of the struggle of interests, and many contemporary problems are seen by them as problems arising from political moves of the Western coun-t-ries, of the United States and European nations, which, as they believe, want to curb Russia"s growing influence. All this makes Russian foreign policy a kind of foreign policy which looks for conflicts and wants to withstand these conflicts, to force Russia"s interests in its near-abroad to withstand the European interests in the post-Soviet sphere.
So, now this confrontational mode of thinking can be found virtually in all sphe-res of Russian politics and it completely dominates the Russian public sphere. And another main point is that after several years of these new policies of re-nationalization many of government officials now see the state property as their own possession, and many people from the government and from presi-dential administration are now sitting at the boards of biggest corporations like Gazprom, Rosneft and Transneft, and so there is a huge contradiction between their interests as policymakers/ and their interests as business people. This par-ticular moment has now an enormous influence on Russian foreign policy in the energy sphere, and we will see this on the Ukrainian example.
So, trying to secure its presence (and even quasi-dominance) on the European markets, Russia made a number of efforts in recent years to gain control over the pipeline systems in neighboring countries. The first step was made in 2003, when Gazprom took over the control of major export pipeline in Belarus, which goes through Poland to Germany. Then, after escalating conflicts with the Polish government, the Russian leaders decided to launch the construction of the so-called North-European pipeline, which goes under the Baltic Sea surface, to fa-cilitate the direct supply of Russian natural gas to Germany. At the same time a new pipeline, called Blue Stream, was put into operation, delivering gas to Tur-key. And in this case the conflict with Ukraine may be seen as another step in the same direction because one of the aims, one of the purposes of Gazprom was - and still is - to gain control over the Ukrainian pipeline network.
So, what does Russia want under current circumstances? It wants its share of gas supply into Europe to grow. One of the declared aims of Putin"s administrati-on is to make this share as big as 80 percent of all gas imports into the EU, and so to secure that about 50 percent of all European gas consumption will be con-trolled by Russia by the year 2025. And Russia wants to have no problems with transporting its gas into Europe, no problems like those with Ukraine or Poland, which can be avoided through the construction of the North-European pipeline. And so, Mr. Putin wants to establish Russian dominance on the energy markets in Europe to make Russia a new "economic powerhouse".
I should say that I do not agree with this strategy because I think that if this goal is achieved, Russia will get into economic stagnation. When relying on the oil and gas extraction, the government has no need to elaborate, to foster the de-velopment of the industrial sector, to mobilize the entrepreneurial activity in the country. Money is now flowing into the country, the government is running huge budget surpluses. And as the economy shrinks just to the energy sector, the Russian leadership is free to do nothing at all to improve the domestic eco-nomy. I do not think that this is a way forward for Russia. Maybe, of course, in the future the money that Russia gets nowadays through its energy exports will turn into a source of development for the whole Russian economy - but even in this case today Russia"s economy should not be reduced only to the energy sec-tor. Unfortunately, the government doesn"t know how to make the economy mo-ving ahead - it just declares that the general economic outlook is "very positive", that the taxes are paid in full, that the budget surplus is growing, that the ruble is stable, and so there is nothing to worry about.
And all these trends may show that in forthcoming years, if these processes are to continue, Russia"s economy will become more isolated from the European eco-nomy. Now I am not speaking about the energy sector, but about the econo-my as a whole. Energy export will be as high as it is now, maybe even higher, but the country will go into economic isolationism, maybe into some kind of po-litical isolation. Even today the Russian government doesn"t want to be learned from outside, from the United States or Europe, about how it should run its do-mestic affairs. All these problems (e.g., that surround the law on non-govern-mental organizations, which Mr. Putin has signed recently) can be explained through the fight of the Russian government for more "independence", but un-fortunately, the government thinks that such an "independence" is equal to do-ing everything it wants. And this is - I think - a very dangerous trend.
So, what may be my advice for European politicians and policymakers? I be-lieve that the problems caused by the cut-off of gas supply to Ukraine on Ja-nuary, 1st should initiate some debates aimed on rethinking the policy of energy dependence from Russia. I"m not trying to say that Russia will not fulfill its obli-gations - for Europe, Russia for a long time has been a reliable partner and it still remains a reliable partner. But while rethinking this energy relations, one should realize that today it is not Europe which is dependent from Russia, but Russia is much more dependent from Europe. However, this point needs some explana-tions.
Today exports of raw materials accounts for 76 percent of all Russian exports. Out of this, around 80 percent are oil, natural gas and heating oil. So oil and gas account for around 60 percent, i.e. more than half of all Russian exports. More than 80 percent of Russian export shipments of oil and gas go to Europe. So, if Russia cuts its supply of energy to Europe, EU nations will lose only around 25 percent of their gas supply, but Russia will lose half of its exports. Since this can result in financial collapse and, maybe, even in political turmoil in Russia, it will never happen. In economic terms it"s impossible for the government to cut Rus-sia"s oil and gas supply to Europe.
Also I should say that many people in Moscow are speaking about switching the main direction of Russian oil and gas exports from the West to the East, from Euro-pe to East Asian countries, presumably to China and India. This idea was put forward in 2001 by former YUKOS owner and CEO, Mr. Khodorkovsky, who ar-gued that time in favour of building a gas and oil pipeline to China. Today, Mr. Khodorkovsky is in a jail close to the Chinese border, but the problem remains the same. The government overtook his plan, and the construction of the eas-tern pipeline began in January 2005 when Mr. Fradkov signed a special decree on this matter. The completion of this project, however, can"t be expected befo-re 2011-2012, and the pipeline may be put in operation not earlier than by 2015.
So, Europe remains - and will remain - the major destination for the Russian oil and gas exports. And Europe must feel itself much less de-pendent from Russia than it seems now, first of all - I should repeat - because Russia itself is highly dependent from Europe as its main export destination.
While taking this into consideration I think the Europeans should not be worried about the current situation. But they should not allow their dependency from Russian gas and oil to grow unless they have real and effective means to influence Russia"s political decisions. If the European Union, for example, ma-kes some steps towards integrating Russia politically into EU structures, or may-be, if Russia becomes an associate member of the European Union or joins the EU free trade zone (as Turkey did some time ago), all this can change, and in this particular case it may be a good option for Europe to rely more heavily on Russian oil and gas. But today, when Europeans can"t influence Russian inter-nal policies, when President Putin and his government control all the political institutions in Russia, both legislative and executive, and nobody can influence their decisions, it"s too dangerous to increase dependency on Russian supplies.
I also expect more conflicts between Russia and post-Soviet republics caused by these oil and gas problems. Russian government eagerly uses the supply of gas and oil as an instrument of exerting some political pressure on some post-Soviet countries. Without that one cannot explain why the prices for those co-untries differ so much from one to another. For example, before January 1st, the-re was the price of US$50 per 1,000 cubic meters of gas for both Byelarus and Ukraine, and for Moldova, Georgia and the Baltic nations it was about $80. Now it is set at $46.5 per 1,000 cubic meters for Byelarus, at $110 for Georgia, $120 for the Baltic countries and $120 for Moldova. For Ukraine the offer was as high as $160, and later even $46.5 per 1,000 cubic meters, but after the "gas war" waged from January 1st until January 4th, it was finally settled at $95 per 1,000 cubic meters. But no one can explain the nature of this difference in pricing.
So, from the Ukrainian example we can clearly see that there are some political factors involved. Under such circumstances Europeans should - if, of course, they want to influence the Russian government in all these conflicts - to become more effective in supporting those countries that seek closer economic and poli-tical ties with Europe. They should elaborate some kind of agenda for coope-ration with countries being now in the center of the conflict, first of all with Uk-raine and Moldova. And while Ukraine and Moldova have clearly expressed the-ir pro-EU course, I believe the European Union should help them to go through the painful transitional period caused by adjusting their economies to higher gas prices. Maybe it may take a form of some credit lines or standby loan facilities issued by European bank for development and cooperation, or something like this. And this will make it easier for the East European countries to adopt these price hikes.
I should specially say about the oil and gas issue between Russia and Europe. I think it is a bilateral issue. It"s a problem which dominates now Russia-EU re-lationship. It"s not a "global energy problem", but a small part of it, since only Russia and Eastern European countries and, more generally, Russia and Eu-rope, are involved. The issue doesn"t affect the United States of America which is not a part in this conflict. So, I would suggest that Condoleezza Rice and ot-her American officials should better stay out of it, because all their rhetoric about the situation in Ukraine actually has a very bad response inside Russia and may lead to outcomes that differ greatly from what Americas want to achieve. I think that all these issues should be settled without any U.S. interference, because they are actually the issues that exist between Europe and Russia.
I will briefly comment on the Ukrainian situation and then we will go to questions and answers. So, I would say that in general the price hike for Russian gas sup-plied to Ukraine which came into effect on January 1st, may be seen as econo-mically motivated. It was not a political question in its essence, it was mostly an economic one, since Russia wants to get a fair price for its resources. But it was another part of the problem. As one may know, the trade in gas and oil between Russia and Ukraine during all post-Soviet years was based on barter, on com-modity exchange between these countries and was a source of enormous bri-bery and money-laundering. A lot of money was appropriated by companies that were established only for processing these financial transactions arising from oil and gas trade between Russia and Ukraine.
Another part of the problem was that the both Russian officials and Gazprom"s management want to pocket some dozens of millions of dollars, and this was - and still is - the main purpose to introduce "RosUkrEnergo" company into the current deal. "RosUkrEnergo" is nothing more than an intermediary company. So, main underlying problems were "economic", but, of course, there were ele-ments of political stand-off as well. Those came first of all from Mr. Putin himself. President Mr. Putin, should I say, never admits his mistakes; it seems he belie-ves that he can"t make any mistake at all. But a lot of mistakes were made during the Orange revolution, and Mr. Putin remembers this very well. So, it was his revenge for all the humiliation of December, 2004 that influenced his political decision.
Another factor was the successful auction sale of Krivorozhstal in October which made it technically possible for Ukraine to pay higher prices for Russian gas. And there were political moves by Yushchenko and Voronin, who established a Community of democratic states in December. And of course, it was Ukraine"s will to join NATO and the European Union. So, it was not a political motivation, it was an economic motivation, but with a huge political element. And this political element caused all this hysterical propaganda that surrounded the conflict.
Also I should say that during the Russian-Ukrainian conflict it became clear that Russia was not the only supplier of gas to Ukraine because 65 percent of all gas which was supplied to Ukrainian customers was actually not Russian but Central Asian gas, originating from Turkmenistan, Uzbekistan and Kazakhstan. So, the relationship between Russia and Ukraine where not the relations between the supplier and a mere transit country, but rather the relations between two transit countries. Russia itself had with the Central Asian republics the very same re-lations that Ukraine had with Russia. And because of this one may assume that the conflict is far from over because in the same way as Russia wants to raise prices for its gas, Central Asian republics also want to raise prices. And now, with the price on the Russian-Ukrainian border fixed, the second stage of this drama will begin with the price hikes on the Central Asian-Russian borders. As we know, next week President of Turkmenistan arrives in Moscow to negotiate all these problems with Mr. Putin.
And the last point is that of course all the secrecy which surrounds the conflict make it clear that one of the major obstacles of Russian political elite and busi-ness people is to get some financial benefits from the problem while being com-pletely hidden from the scene. The intermediary company which was introduced in the deal, "RosUkrEnergo" is a company which nobody knows exactly to whom it belongs. It"s not transparent at all. Fifty percent is owned by Gazprombank. Today or yesterday it was announced that these shares were sold by Gazprom-bank to Gazprom, so to say, were taken out from one pocket and put into ano-ther. The other half is controlled by Raiffeisen Bank of Austria, which acts only as the agent representing an undisclosed beneficiary owner. But there is no secret that many people currently on the board of Gazprombank were employed in Austria during the Soviet times, and have good business ties there. So I beli-eve "RosUkrEnergo" is a company that serves in particular the interests of some high-ranked officials, presumably even in the Kremlin but particularly inside Gaz-prom. And all this shows that in Russia political interests and business interests now became intertwined. This is also not a good thing.
So, I think I should stop here because I have spoken for more than 30 minutes. Maybe it was too little time for this discussion, but I think many problems will be touched during the discussion.
Applause
Piet Bukman: Thank you very much for this address to this interested audience. The applause is a sign of our appreciation. Thank you. I think your lecture, your speech was very interesting not only because the facts are important - they cer-tainly should be - but also because your opinions and views were enriched with your advice to the government of your own country and the governments of the member countries of the European Union. So, thank you for your overall view on the problem and on its possible solutions.
You answered very many questions I suppose, but some questions are left. So, I ask members of the audience to put questions.
Q: I used to work in the oil industry for about 20 years. I wonder what is your as-sessment of the role Western companies may play in the development of Rus-sian oil and gas fields. What can be the role of big oil companies in fostering the relationship between Russia and Western Europe. And also (inaudible)...
Q: My name is (inaudible)... and I work for NGO (inaudible). My question is a sort of follow-up to the first question. You showed us that in Russian energy the-re is a merger of politics and corporations and companies. Do you think that it"s that makes a difference for your companies to deal with free market economies or with countries where there"s much state companies? Which companies - pri-vately owned, public, or state-owned - are now in better positions to negotiate their projects with the Russian government? Do you think state companies are better positioned because the Russian minister wants to discuss with a Eu-ropean minister rather with an CEO?
Q: Can you come back to Russian-Ukrainian relations and try to explain what the political side of the problem was (inaudible)...
Vladislav Inozemtsev: Thank you so much. These are very interesting questi-ons. I will begin with that one about international oil companies and their opera-tions in Russia. I should say that it was very difficult for international companies to operate in Russia in the oil and gas sector and I think it will be even more problems they will face in the future. This is because the majority of Russian oil and gas fields are located in distant regions of Eastern Siberia and Far North, so the one and only possibility to transport this fuel to Central Russia or to main seaports is to use the pipeline system constructed in the Soviet times. But today there are no private pipelines in Russia. The whole pipeline system is controlled by the government: the gas pipelines through Gazprom and the oil pipelines through Transneft. And this makes it very difficult for the foreign companies to compete with Russian ones. For example, look on the experience of Novatek which was an independent gas producing company. Even French business pe-ople expressed some interest in it, and Total wanted to buy, 25 percent plus one share stake in the company. The deal failed because this company was im-mediately denied the possibility to transport its gas and recently 50 percent of its stake was bought by Gazprom at a bargain price.
So, there exists a very little space for private initiative in the oil and gas sector today. I don"t think that we will see presence of any Western oil company except BP, which joined its efforts with TNK, Tyumen Oil Company, several years ago. I think BP will remain the only one Western company which owns a controlling stake in a Russian oil enterprise.
I think that the European Union should negotiate with Russia as a unique - and unified - political body. Today Gazprom"s European counterparts are huge ener-gy corporations like Gaz de France, E.On or ENI, or others, but at the Russian side there is no any independent oil and gas producer, none of them in the gas sphere, in particular. So, if Russia considers its gas export as a state affair, as a governmental priority, I believe some body, some commission, or agency should be established at the pan-European level in order to coordinate the approach of all European gas companies towards Russia because otherwise it will be much easier for Russians to force some independent Western companies to comply with their conditions.
I think if one realizes that gas export is becoming the state affair in Russia, it shoud not be established a state affair in Europe, but it must be elevated to the topic which must be extensively discussed at the national levels, or even supra-national level.
As the question about the merger of politics and corporations in Russia and about how Europeans should deal with this is concerned, I think that the very phenomenon is quite unique in Russia. Everybody knows that corporate misdo-ing and bribery exists in many countrues, including Europe as well as the United States. But in each such case there are people from the government that take money for some kind of political decisions they make or advocate. But in Russia the situation is completely different because the people who make decisions in the government are themselves top officials in the state-owned corporations. They are CEOs, or chairmen, or chairmen of the board in biggest state compa-nies, such as Rosneft, where Mr. Sechin, the deputy head of presidential staff, in the Chairman of the board, or Gazprom, where Mr. Medvedev, first deputy Pri-me minister, is serving in the same position.
So, this is not a classic bribery or money laundering. There is the situation when state companies are in a possession of bureaucrats, while not in their property. This is a very interesting situation which, I think, is unique to Russia.
In this case I don"t think it does matter who is a counterpart from the European side, a minister or a businessman. Maybe it"s better to deal from the position of a businessman, not the position of a state official because those people who are responsible for the deals like the Ukrainian one feel themselves the state"s per-sons, if they usually behave as business people.
Then, the reason behind the conflict with Ukrainians. I already said that it was mainly an economic issue and I believe it was predominantly an economic issue. It was economic by essence and political by form. Of course, Mr. Putin wanted some revenge for his fault in 2004, when Orange revolution succeeded. But this is only one element of the problem, but not its major cause.
I completely agree with the person who asked this question that all these mo-vements Mr. Putin did this December in rising price to Ukraine, in disrupting gas supply to Europe may result in big problems for Russian gas exporters, who can lose their credibility abroad. But I should say that there are too many moves by the Russian government taken without any care about these issues, but aimed at what can be named as immediate moral satisfaction. And some of the moves Mr. Putin made, I think, were of this particular kind.
Q (posed by someone associated with the Institute of Foreign Affairs in the Ha-gue): I was interested in the remark you made about the link with China and it was my impression maybe your assessment was in a way too modest. You said basically that you don"t feel that pipelines will be built to China in the near future and that security of supply for Europe will still be in the focus of Russian expor-ters. But there are very aggressive purchasing programs of the Chinese state oil company... It takes over oil companies from Africa to South America and so on, and so I wonder whether your assessment is really too optimistic for Europe and whether the Chinese are not going to pay any price and invest heavily in these pipelines and that Mr. Khodorkovsky"s project will be realized in the shorter term that we think?
Q: I have two questions, in fact. First, what"s your assessment of the American role in the play on the political theatre in the Caucasus and Ukraine. And the second question concerns Siberia. What"s, in your opinion, the future of Siberia? It"s the last treasure of the world. It has all the gas and natural resources but somehow the Russian government does not seem to be able to encourage their people to stay there, live there. The demographic situation is disastrous. It"s less than 30 million people living there now. And the number is diminishing. At the same time, the neighbor has 1.5 billion inhabitants and they don"t seem to need encouragement to go there because I spent some time in the Siberian city of Krasnoyarsk two years ago and already one-tenth of the population was Chine-se, without official permission. Thank you.
Q (posed by someone associated the Foreign Office): It really pointed out ??? but also there were fairly short economically driven or ??? That the question: the situation that you see in the long term, any development towards more, longer vision because it"s ??? but being a super power it also obligations to work on stability which, I think, would also be beneficial for Russia in the long term as well.
Vladislav Inozemtsev: Okay, the first question was about China and Chinese presence on the world markets. Of course, in recent years, first of all in the year 2005 Chinese demand was one of the major factors effecting the world markets of oil and other raw materials. We all have seen the surge in metal prices cau-sed by extensive demand from China. But, speaking about the Chinese invest-ment into the Russian oil enterprises and the Russian oil industry, one should remember that there"s no, there"s really no foreign investment into the Russian oil exploration except that by British Petroleum which bought Tyumen Oil Com-pany, and the Sakhalin project involving Shell, and some minor projects.
In recent months the Russian government adopted new regulations which aim at pushing not even the Western investors by also the Western specialists and managers out of the Russian oil industry because there are dozens of special pro-visions to be met by foreigners to be allowed to work as the top officials of Russian oil com-panies...
And as for the Chinese investors, there were some attempts by Chinese to buy controlling stakes in Russian oil companies. The last was, I think, one-and-a-half year ago, when China National Petroleum Corporation (CNPC) wanted to buy a controlling stake in Slavneft company which was them privatized. The Chinese offered the best price, but on bureaucratic grounds their bid was rejected and they were not even allowed to participate in the auction.
The same thing was repeated when two state corporations of China and India, CNPC and Indian National Gas Corporation, were interested in participating in the auction at which Yuganskneftrgaz, the main production unit of YUKOS was sold in December of 2004. And in this case their applications were also declined and they again were not allowed to participate. So, even if Chinese want to pay very high prices for Russian oil fields, I think they will not be allowed to purchase them under the current government because Mr. Putin wants to secure his own control over the sector.
The second question was about American role in the Caucasus and about Si-beria. In the Caucasus, I think, it"s a big role, of course, and the United States provides a huge financial support for the Georgian government, but I should say that Georgians who are very thankful for American support, are looking on Euro-pe rather than on the U.S. If one comes to Tbilisi and goes to its streets, over all government buildings two flags are flying: one is the flag of Georgia and the ot-her is the flag of the European Union. When asked why, people reply that this is their dream, this is the way they see their future.
So, American role is big, but I am not sure it may be decisive in the region. But now, of course, it really makes much more difficult for Russia to interfere in the affairs, for example, of Georgia.
As Siberia is concerned, it"s a very interesting question. Maybe, the strategy which aims to make Russia a new energy superpower will affect somehow all this region and there will bring more investment into it, but I am far from sure about that. And you are completely right: now there are less and less Russian people living the region and there is a lot of immigrants from China. The Rus-sian government does not respond to this in any way because now there exists an influential Chinese lobby in the Russian government and all of its structures - in the State Duma, in the presidential administration, and so on. Anybody who wants to publish some article critical to Chinese foreign policy or Chinese eco-nomic ambitions, will face difficulties with this in Russia, because it"s an official course, the official direction of Russian foreign policy to be very pro-Chinese.
The majority of Russian people say they feel some danger coming from China, with the billions of inhabitants, with its political and military power, but today the Russian government is not concerned with this. I do not know what will happen with the Siberian region 20 years from now. So this is a good question. And I think it should be preoccupation of our government - but it isn"t.
The third question was about, as I understood, about other directions in Russia"s foreign policy and about if it"s possible for Russia to base its capacity of a global player only on its energy potential. I think this is impossible. And I think Russia"s role in world affairs has decreased in recent years. And it is decreasing even now while for Mr. Putin and for many Russian officials, and even for the Russian public it seems that Russia regains some of its influence in the world. But I do not see any move to elaborate some kind of this new foreign police in Russia. Russian sphere of influence is now properly reduced to some parts of the former Soviet space.
Russia remains, of course one the five permanent members of the UN Security Council, but I really can"t remember any particular foreign issue on which Rus-sia"s position had changed the course of affairs. I think Russia is a declining po-wer in global affairs, and this is caused by its abusive concerns on energy policy.
Piet Bukman: Thank you, Sir. Other questions?
Q: I want to ask you something about your very last point: Russia"s influence in the world. Can you tell us something about the relationship between Russia and Iran, about what"s happening here? Is there a common interest in the energy sector? What is Russia"s interest in nuclear energy? Are they going to play a go-between role between the West and Iran? Is there a kind of a coalition building going on? I mean Iran will be a big issue in the near future? What"s Russian role?
Q: I am ambassador of Bulgaria to this country. Different perspective. Now we see a phenomenon of internationalization, let"s say, of Russian energy compani-es. For example, in the Netherlands there are at least five Lukoil companies re-gistered, at least three Gazprom companies and four Yukos companies. The sa-me is around Europe. There are about 50 Gazprom companies registered in the EU. Maybe Gazprom will move its headquarters to Berlin some time. So my question is about phenomenon of internationalization of Russian even state-ow-ned energy companies. Could you comment?
Vladislav Inozemtsev: The first question touches a prominent issue of Russi-an-Iranian relationship. I will express only my personal opinion. Iran is now one of the biggest Russian economic trading partners in the south. Of course it"s a country which belongs to the axis of evil, as Mr. Bush uses to say. But Iran is one of the very few countries with which the Russian economic relations are well balanced. Russian export to Iran is not energy export. Russia exports not oil or gas to Iran but technologies, nuclear technologies, weapons, electrical machi-nery. Gazprom is involved in building some pipelines there. Some Russian com-panies are building power stations in the country. So this exists a huge econo-mic cooperation between Russia and Iran. Russia"s export to Iran is $2.5 billion annually. So, it"s a good economic partner for Russia. And of course it is a valu-able regional partner in the Caspian region.
Of course the Russian position on Iran is actively debated now both in Russia and in the world. I should say Russia doesn"t seek some kind of strategic part-nership with Iran because Russian politicians realize that it even if there is some possibility to build Russian-Chinese partnership on different points, Iran remains totally different from Russia. But the current problems arise from Russia"s desire to demonstrate its independent position, which is contrary to the attitude of the major Western countries. I do not know for how long will Russia keep this po-sition, but I think for Mr. Putin this is something that proves his "sovereignty".
But also I must say that the conflict around Iran seems to be very contradictory. E.g., what has happened in Pakistan and India since 1997 when they both gai-ned access to nuclear weapons? Nothing special, should I say. Pakistan now us U.S. ally in the "war on terror". Mr. A.G.Khan, who was the creator of the Pakis-tani nuclear program had established something like a "nuclear Wal-Mart", and where were the Americans? India and Pakistan were on the brink of the war se-veral times in the last century. But while having nuclear weapons, they stay now far away from launching a war. The Nonproliferation Treaty is a very loose treaty because anybody can quit, making some announcement six months in advance. So really there are no grounds for the international community to deny Iran the right to have nuclear power plants or even nuclear weaponry.
In this case, I think, the United States is escalating global tensions on Iranian problems as they had already escalated these tensions about Iraq. I think there is room for negotiations there. And I think this problem should be solved in much more open diplomatic manner. I believe that the American policy towards Iran is one of the major factors which pushes this Islamic country towards the creation of nuclear weapons because under such circumstances only the ability to retali-ate with a nuclear strike, for example over Israel or even over the American for-ces in the Gulf region, can secure to Iran a noninterference from abroad.
So I don"t think this question is so catastrophic as it seems, and this is a very rare situation where I do agree with Russia"s politics on issue, but not only from the economic point of view, but from a broader attitude as well. I believe that a unified attitude should be elaborated to all nuclear powers, to all countries which want to gain nuclear weapons. And if one gets it without problems, like Pakistan, and another one will be at the brink of the war with the United States while wanting to get it, it"s really not an "order", but an absence of what can be called "order".
What can I say about "internationalization" of Gazprom and Lukoil? You know, there are two elements of the problems which are quite different. For example, Lukoil. Lukoil is an energy company with a global reach. It has huge production facilities outside Russia. It has presence in Iraq, in Libya, Venezuela and some other oil-producing regions. And Lukoil bought several companies in the United States and Europe. In the United States, for example, it bought a firm which ope-rates many gasoline pumping stations on the U.S. East Coast, even in Washin-gton, D.C.
Lukoil is truing to do business by Western standards and buys companies in Europe or in the United States which suit its business purposes, even financial companies. Another situation is with Gazprom. Gazprom has a lot of companies incorporated in different European countries and even offshore zones. Even "RosUkrEnergo", the company which plays now a central role in Russia-Ukraine dispute, is incorporated in Switzerland in the canton of Zug, which, as everybody knows, is Switzerland"s domestic offshore zone. And there is a lot of similar stru-ctures, which are registered in other offshore zones. For example, Gazprom re-cently paid US$13 billion for a controlling stake in Sibneft. And all this deal was also managed through offshore companies that presumably belong to Mr. Ab-ramovich. So in this case this is not about internationalization in the traditional sense of the word. It"s about making some financial affairs and tracing the cash flows. Those companies are not subsidiaries of Gazprom (or Yukos). They are used for some secondary goals and do not live for long.
Piet Bukman: Okay, thank you. Are there other questions on this?
Q: Do you think under the circumstances of the oil pricing - sorry, gas pricing policy in Russia, Russia should be admitted to the WTO, which is one of its fo-cuses these days?
Piet Bukman: Are there other questions left? If it"s not the case, this question is the last one. Your answer will be the last one.
Vladislav Inozemtsev: You know that gas prices on the internal Russian mar-ket are low compared to European or U.S. prices, but each country has its own competitive advantages, and it should have. E.g., a huge amount of cheap la-bor is Chinese competitive advantage. There is a lot cheap energy resources in Rus-sia, and this should be Russia"s competitive advantage.
So I don"t think that the people who negotiate the Russian admission to the WTO should be obsessed with oil and gas prices inside the country. For example, the gasoline prices in Russia are not so low, 20 rubles per liter of gasoline, which is about 60 euro cents per liter. So comparable to American ones. But another - and much more significant - point is that inside Russia there is a lot of influential forces in business and government which oppose Russia"s entrance into the WTO. And since the WTO is an organization which has an Appellate body which stays for some rules, I think it will be good for Russia and for all major countries in the world to have Russia inside the WTO not outside of it.
If Russia wants to be in, it should be allowed to, because if not allowed, Rus-sia"s will evaporates in recent years. And if not admitted to the WTO in 2006-2007, Russia never applies anytime soon. So I think this is the biggest problem because this is question of self-isolationism, which is on the rise in Russia. And to oppose this trend, I think Russia should become a WTO member this year, and I think this will not hurt other competitors, maybe a very few of them. This will not result in anything like the Chinese textile imports to Europe. The impact on the European economy will be much smaller, even nonexistent. And I think it will be a good price to have Russia inside the organization which really does obey some rules.
