TCS Daily


Checkmate

By Ariel Cohen - May 21, 2003 12:00 AM

In early April, Russia and Turkmenistan signed a 25-year natural gas agreement which, if successful, is projected to sell two trillion cubic meters of gas, bringing the two partners half a trillion dollars in sales over its lifetime. Turkmenistan, with the third-largest supplies of natural gas in the world, will sell increasing amounts of gas to Gazprom, the biggest company in Russia and one of the world's largest energy producers, at $44 per cubic meter, while the price in Western European markets will be $80 to $120 per cubic meter. Thus, the reseller of gas is gaining more than the producer. Buy low, sell high. Not a bad deal for the former communist superpower.

Energy experts took the Russian idea of a "Gas OPEC" and its geopolitical clout with a grain of salt. This may be changing. The gas agreement is unprecedented, as it will generate $300 billion for Russia and $200 billion for Turkmenistan over its lifetime, according to the Russian news agency Interfax.

Alexei Miller, the head of Gazprom, has announced that Russia is to buy six billion cubic meters in 2004, 10 billion in 2006, and up to 90 billion cubic meters in 2009. The two sides will have an option to renegotiate the price in 2007.

"Friendly interaction and businesslike cooperation are the characteristic features of our relations with Turkmenistan," Interfax quoted Russian President Vladimir Putin saying. He probably also referred to a security agreement with Turkmenistan signed on January 2, 2003, in Ashgabat. Geopolitical and economic repercussions of this "deal of the century," however, are broader than its gargantuan size.

Geopolitics and political psychology were key to clinching the agreement. Russia shrewdly played to the insecurity and paranoia of Saparmurad Niyazov -- the Turkmen dictator self-named "Turkmenbashi," or head of all Turkmen. In November 2002, many experts believe, Turkmenbashi staged a failed "coup" to justify a crackdown on the opposition. The plot led to capture and incarceration of Boris Shikhmuradov, the former Foreign Minister, who was considered pro-Russian and who was supported by some Russian government entities. The Turkmen leader, nevertheless, demanded and received a statement from Russia, announced by the Security Council Secretary Vladimir Rushailo, that the coup was genuine, and, moreover, represented "an act of international terrorism."

Russia shrewdly made a tactical retreat in January 2003 by making a statement to the press on the "coup," but received political and economic dividends in April, which will reverberate throughout Eurasia and beyond for years to come. Russia will benefit from the contract four times over. First, it will be buying Turkmen gas effectively at half price. 100 percent profit before expenses is high by any standard.

Second, the deal stimulates the Russian economy by allowing Gazprom to continue selling gas in the domestic market at $21.50 per cubic meter, effectively providing Russian industry a subsidy of about $60 per each cubic meter of gas it consumes. Add to this a domestic oil price as cheap as $6 to $12 a barrel, and the picture is clear. The Russian government is using its abundant energy reserves to subsidize its otherwise obsolescent industrial base. Today, Russia, with an economy the size of the Netherlands, is the third largest consumer of electricity in the world. For key Russian manufacturers that consume huge amounts of electric energy such as the aluminum smelters, this subsidy is vital, as it keeps whole industries competitive. As Putin said, this is job creation all right.

Third, by signing the agreement, Gazprom can delay multi-billion dollar capital investments into the Arctic fields such as Yamal and Shtokman, while substituting Turkmen gas to its own production from high-cost Siberian fields. Finally, it provides additional stimulation to the economy and creates jobs by promoting imports of uncompetitive Russian goods on Turkmenistan.

The E.U., already nervous because of dependency on Russian gas -- 36 percent of consumption in Western Europe, and over 50 percent in Central Europe is Russian gas -- will be doubly suspicious of continuous subsidization of the Russian industry. The E.U. will be likely to step up its opposition to Russian membership in the WTO if the subsidization through artificially cheap energy prices is not resolved.

Geopolitical gains of Russia are equally impressive. The agreement puts the Kremlin in control of transportation and marketing of Turkmen natural gas to Russia, the European Union, and Turkey. Other projects that involved U.S. companies Bechtel and General Electric in Turkmenistan are now dead. It practically kills off the idea of a trans-Afghanistan pipeline from Turkmenistan to Pakistan, which the U.S. and Great Britain supported for a while.

The Russian coup-de-gras in April also left in the dust the gas pipeline project from Turkmenistan to Turkey via Azerbaijan and Georgia, supported by the oil major Royal Dutch/Shell and the U.S.-based construction giant Bechtel, which was sidetracked earlier by Turkmenbashi.

Finally, Russia is effectively directing future sales of Iranian gas from the giant South Pars field to India and Pakistan, thus preventing Iran from becoming a major competitor in Turkey and Europe. This, however, may change if and when pipelines might be constructed to carry Iraqi, and possibly Iranian gas to Europe via Turkey and Greece.

By playing multi-dimensional chess of energy and geopolitics, and catering to Turkmenbashi's paranoid proclivities, Russia positioned itself to become a market maker in natural gas - a position that can be only compared to that of the Kingdom of Saudi Arabia in the oil market. The gas deal of the century signifies Russia's coming of age not just as a key geopolitical, but also as a geo-economic player in Eurasia.
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