The politics of pipelines

Newsweek (International Edition), July 3, 2006

By Owen Matthews 

Yes, the hoary Great Game is back, pitting Russia, the United States and Europe in a tug-of-war over energy.

Half a century ago, Hungarians learned the price of defying Moscow. So when George W. Bush recently chose Budapest to send a message to today’s masters of the Kremlin, marking the 50th anniversary of the 1956 uprising that was crushed by Soviet tanks, the event was heavy with symbolism. « The sacrifice of the Hungarian people inspires all who love liberty, » said Bush as he laid flowers at a memorial to the uprising’s victims. « We resolve that when people stand up for their freedom, America will stand with them. »

Why the cold war rhetoric? In Budapest, there wasn’t much doubt that the « freedom-loving » people Bush had in mind were citizens of former Soviet Union countries, like Ukraine and Georgia, still struggling to break free of Moscow’s influence. But beyond all this lies a bigger geopolitical game being waged every bit as aggressively as the old cold war. Today’s tug of war features energy, not tanks, and will be very much in evidence at next month’s G8 conference in St. Petersburg. The West is wary of becoming excessively dependent on Russian fuel supplies. For its part, Russia wants to lock in European markets. This means more than controlling the pipelines that carry its oil and gas. It also involves pushing forcefully into such downstream energy businesses as refining and retail gasoline sales–and blocking emerging energy-rich rivals in Central Asia and around the Caspian Sea from entering the picture.

Washington wants to promote these new suppliers–and Europe has good reason to do so. Yet spooked by Moscow’s move last January to cut gas shipments to Ukraine, European governments are also reluctant to follow Bush into confrontation. « Europe has no alternative to Russia as an energy partner, » says former German chancellor Gerhard Schroder, who now works for the Gazprom led Baltic pipeline consortium. Individual European countries and corporations have already been cutting deals. In Moscow in late June, Italy’s new Prime Minister Romano Prodi and Paolo Scaroni, CEO of Eni, Italy’s state-owned oil major, worked out a telling quid pro quo with Russian President Vladimir Putin. Under it, Russia’s gas monopoly, Gazprom, will be able to invest in Italy’s domestic energy markets, while Italian companies will join in oil exploration projects in Russia. There were other sweeteners, too. UniCredit, Italy’s biggest bank, was given Putin’s blessing to buy a 26 percent stake in the International Moscow Bank. The message to other Europeans was clear: give us what we want, and you’ll get yours.

This worries Washington. Deals done now will shape political realities on the Eurasian continent for decades to come. « Are you going to be able to pick a fight with the guy who supplies all your energy? » asks one Western diplomat in Moscow. So far, though, Moscow’s way ahead in this game. « Russia is extending its roots into Western economies much faster than the West can find alternative supplies of energy, » says analyst Nikolai Petrov from Moscow’s Carnegie Center. A case in point is Hungary. The day before Bush’s visit, the country’s oil and gas company signed yet another agreement with Gazprom to extend the Russian conglomerate’s Bluestream gas pipeline (linking Russia and Turkey) into Eastern Europe. That’s a major blow to a U.S.-backed pipeline project called Nabucco, which would connect gas producers in the Caspian to Central Europe via Turkey, Bulgaria, Romania, Hungary and Austria, bypassing Russia.

The more European consumers Moscow can lock in now, the less chance there is for alternative projects–like Nabucco–to get off the ground. More, it helps Russia keep upstart suppliers elsewhere, such as Kazakhstan or Turkmenistan, from finding alternative export routes and entering European markets. Currently the only way either can ship their gas is via Soviet-era pipelines running through Mother Russia. That leaves Turkmenistan, for instance, with no choice but to sell gas to Gazprom at just $50 per thousand cubic meters, a fifth of the price at which Gazprom resells that same gas to European clients.

Not everything is going Moscow’s way. Next month a major pipeline built by British Petroleum will come online. Running from Baku, Azerbaijan, via Georgia to the Turkish Mediterranean port of Ceyhan, it will pump a million barrels of oil per day–the first outlet for Caspian energy that bypasses Russia. Result: Azerbaijan is now free from dependence on Moscow-controlled export routes. Another gas pipeline that runs parallel to the Baku-Ceyhan line will also soon begin delivering gas from the Shah Deniz field, off the coast of Azerbaijan, to Turkey. There it will dump into a southern European network to Greece and, ultimately, Italy. That will also free Georgia to buy its gas from Azerbaijan, rather than from Gazprom. « We can never be fully independent from Russia until we have an independent source of energy, » Georgian President Mikhail Saakashvili tells NEWSWEEK. Soon, Kazakhstan, too, will start to export at least some of its oil via Baku-Ceyhan, says BP spokesman Mike Bilbo, with similar political and economic advantages. Washington’s wariness about Russian intentions extends beyond Europe. Putin recently met Iran’s President Mahmoud Ahmadinejad in Shanghai, mooting what Mikhail Margelov, chairman of the International Relations Committee of Russia’s Federation Council, calls a « gas alliance » between Russia and Iran in order to « help stabilize prices. » Tehran’s also invited Gazprom to participate in a gas pipeline linking Iran, Pakistan and India, which could be extended to China. Putin’s also due to meet Venezuela’s rabidly anti-U.S. president Hugo Chávez shortly after the G8 summit. Among other things, Chávez wants to discuss ending Venezuela’s dependence on Western majors to export 87 percent of its oil and gas–and he will offer Gazprom a slice of a planned 8,000-kilometer gas pipeline to Argentina.

All this, coupled with Russia’s defense of Tehran’s right to a civilian nuclear program, puts Putin firmly in Washington’s bad books. In May, in what was interpreted as a G8 curtain raiser, Vice President Dick Cheney blasted the Kremlin for using oil and gas as « tools of intimidation [and] blackmail » and accused Moscow of attempting to « monopolize the transportation » of energy supplies from the Caspian. Europe’s scramble to sign deals with the Kremlin undercuts the larger strategy of containing Russia, the Bush administration feels, and makes a mockery of European talk of diversifying supplies. But that’s the U.S. view. The more Russia and Europe’s business interests become intertwined, argues Gaz-prom spokesman Sergei Kuprianov, « the more both sides will have to lose from a confrontation. » Yet again, business looks likely to trump rhetoric.