TCS Daily


Will the U.S. Blow This Opportunity?

By Joshua Foust - January 29, 2007 12:00 AM

After noting the other-worldly personality cult of Sapurmurat Niyazov, a.k.a Turkmenbashi ("the father of all Turkmen") and noting his passing late last year, media outlets have spent very little attention reporting what exactly is happening to Turkmenistan. But the presidential elections next month there are of huge importance.

Turkmenistan straddles Afghanistan and Iran, and has a long border with future big players Uzbekistan and Kazakhstan (map). At the very least, it is in a strategic location. What makes Turkmenistan even more important is gas: the country is sitting on upwards of 260 trillion cubic feet of natural gas, making it one of the world's largest suppliers. For a long time it has been a major conduit for Russian gas and oil to Europe. Furthermore, it is one of the few recalcitrant pieces of the "Near Abroad" -- Russia's former Soviet Republics. As such it carries great symbolic weight for Moscow.

Russian energy monopoly Gazprom recently elected to cut off former Soviet states from its gas shipments unless they yield to 400% rate increases. Most recently, Belarus refused and shut down oil shipments to Europe, causing a minor panic as Germany and Poland had to run off their strategic reserves. Across the EU, legislators are wondering at their over-reliance on Russia energy.

In response to its own Gazprom crisis last year, Ukraine has decided to stop importing oil from Russia and go entirely with Central Asian sources -- mostly Turkmen and Kazakh. Both the Duma and President Putin singled out Ukraine President Yushchenko over his "turning away" from the Kremlin and toward America. His country was, in essence, punished for not being sufficiently pro-Moscow.

A big part of the reason Gazprom could get away with all this thuggery was that it had established a favorable working relationship with Turkmenbashi. Though Turkmeni gas still flows through the Russian gas pipeline system (through the massive Central Asia-Center pipeline), it is much cheaper than Russian gas—about $65 per 1000 cubic meters compared to Russia's $230. That being said, most former Soviet states negotiated with Gazprom to buy a blend—in Ukraine's case, a $95 blend of mostly Turkmeni gas. Put differently, Russia can re-sell Turkmeni gas at a comfy profit, allowing it to partially subsidize its own energy while overcharging for what comes from Turkmenistan. Breaking this relationship would radically reshape energy politics across the Former Soviet Union, as Russia would have to compete on its own terms, and Turkmeni gas could price Gazprom out of several markets.

If Turkmenistan were to stop giving Moscow so much deference and allied its interests with, say, the United States, the implications would be vast. Allowing American interests an inroad into Caspian gas would be a big coup for pro-American governments in the region, namely Georgia and Ukraine. The U.S. should be thinking of ways to ingratiate itself to the new leadership—at this point, most likely Gurbanguly Berdymukhammedov, who has shown sympathy with Russia. If Russia maintains its stranglehold on Turkmen gas, the U.S. will have missed a critical opportunity to stake out some non-Russian sources of natural gas.

An America-friendly Turkmenistan could greatly curtail Moscow's energy influence, as it wouldn't have the easy tap of ultra-cheap Turkmeni gas to offset its higher sale price for those "deals" it cuts with desperate leaders. Recent Constitutional reforms suggested by Berdymukhammedov also offer cause for hope. There is a very real possibility of liberalization: reforming not just the economic and energy sectors, but schools, information infrastructure, health care, even allowing home ownership. Even though they came wrapped in the rhetoric of "continuing the politics of Turkmenbashi," they in fact represent a radical departure from the at-will governance of Niyazov.

Indeed, the possibilities created by a liberalizing government and a leadership receptive to negotiating gas deals should have everyone drooling all over the desert east of the Caspian. Turkmenbashi's death couldn't have come at a better time for the U.S.—world discontent with Russia's energy policies are reaching a near-fever pitch, and the winner of the next election looks likely to at least entertain some Western ideas. The ground is fertile, in other words, for breaking Moscow's energy dominance in Eurasia.

You can find more of Joshua Foust's writings here.


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18 Comments

interesting strategy
The cost of heating a house with natural gas in Europe is very high.

Here we go again
Given Turkmenistan's history, I wonder what the chances are that Berdymukhammedov is going to turn out to be anything different than Niyazov-Turkmenbashi? What we have here is a bidding war, where we attempt to outbribe the Russians for the new dictator-for-life's supposed favors.

This contest will be so exciting to watch. It'll be like the final tournament in the Belarusian soccer league.

At least the author gives it a nice spin: "Russian energy monopoly Gazprom recently elected to cut off former Soviet states from its gas shipments unless they yield to 400% rate increases."

Those dastards! Relying on market forces to set the price of gas rather than to retain the old-style soviet state subsidies. How dare they!

I can almost hear the strains of the old song now... "coming to the aid of the freedom loving peoples of Whatzit-stan, propping up the freely elected democratic leader with military aid against the spread of [insert name of terrorist philosophy here], the United States stands firmly in favor of progress and development, bla bla..." The press release pretty much writes itself. It should be delivered by Condi Rice at the airport during her brief stop there, before being spirited away to the next hop on the tour.

Monopoly busters
I can't figure out what the author proposing that we (US) do. How are we supposed to capitalize on this "opportunity"? Turkmenistan is having an election. Is he proposing that we somehow try to influence that election? I should hope not. If all he is proposing is that we look for business opportunities (for example, if the ruling party in Turkmenistan wants to build a second pipeline, one that would compete with the Russian one, allowing them to sell their gas directly on the open market, thereby keeping the profits for themselves rather that letting Gazprom take a cut) then by all means, let the oil companies and pipeline construction companies of the world bid on the job. But I see no reason why the US government should be trying to play the role of market manipulator.

Yes, we have a strategic interest in low energy prices. So does every other net importer of energy. But our goal should not be to create that situation through political manipulations. Our goal should be an open market, with prices set by supply and demand. If the owners of the Turkmenistan gas fields (presumably the Turkmenistan government) want to sell their gas to the Russians, who pay them a low price, and then jack up the price, we should be looking for a way to offer them a better deal. If the Russians currently have a monopoly because they have the only gas line, we (US and world business, not US government) should be looking to provide Turkmenistan a way to break that monopoly.

I'm not sure what the author wants, but it sounds like he wants to play political games to somehow replace the Russian monopoly with a US monopoly. Isn't the only reason the Russians have the monopoly is because they have the only gas line out of Turkmenistan? No political maneuvering is going to change that. Am I missing something here?

No Subject
Not to be churlish, but Russia was using its monopoly position to price gouge - hardly "market forces."

monopoly is markets left to themselves
You don't like the result, but it's a market failure. Or maybe you think the market has natural forces to prevent monopoly.

Sounds like market forces to me
Russia can sell all the natural gas she produces in western Europe for x price. But she has always been in the habit of offering it at y, a discounted price, to her old friends and former buddies in the old Soiet Union.

But times have changed and communism is dead. So she sees no need to provide subsidies until the twelfth of Never.

She has therefore informed Belarus and Ukraine that as of a certain date they will be paying the market price, just like everyone else. True, they have no alternate source for fuel. But make the argument, if you can, for Russia being required to sell them their product at a discount forever.

The strategy revealed
The issue is entirely commercial in nature. The author is endorsing that the US make an effort to influence the politics of this obscure dictatorship during the occasion of their changing dictators. They want this money. They want it so bad they dream about it at night. Why should the Russians get to develop this resource?

The author wants to attract the attention of some player in a position to affect the game, such as State. Possibly the National Endowment for Democracy is involved here. It may be that the author is just spending money already allocated to the endeavor. And enlisting the clout of government in the service of industry (by writing articles such as this) is a time honored way of doing business.

Think of Turkmenistan as a large, tasty warthog, and Russia and the US as two jackals. And now that Turkmenbashi has died, night is falling on the Serengeti.

Apples to oranges
When a newly government owned enterprise such as the Russian oil company competes in an open market it is not free market will. The siezed the oil company from a private company and jailed its rightful owner. They paid nothing for the company and have no stockholders to answer to. The Russian reporter that prints a bad article about their business practices that Her Putin does not like gets ill from some bad tea.
Communism is not dead, just a new style has emerged with rigged elections and an unfree press posing as Democracy.

Searching for legitimacy
I agree with your statement-- but only "sort of".

The problem of legitimacy of claims has plagued Russia all along. Initially the USSR's gas deposits were declared to be the property of the people. They were developed in their name, and the profits dedicated to the advancement of the nation.

All well and good. But corrupt apparatchiks running the old Sibneft stole much of the money. And more importantly, mismanaged the rest. Much of the blame comes from a poorly conceived planned economy, which spent the resources in ways that were not very productive.

Then 1991 comes along, and the old system falls. And before any element of the rule of law has been developed, all of a sudden in 1995 we find that this asset has been sold for a price. And that the bidding has been hasty and far from transparent. Was the price offered by Berezovsky and Abramovich a fair one for the owners-- the "Soviet people"?

The general consensus was no, its was not. It was an insider deal going to politically connected insiders. And the evidence of that is that the new owners have become a pair of those instant billionaires that all of a sudden litter the politico-economic landscape.

So in a very real sense, the transfer of title has taken place illegitimately. And in light of that, Putin moves to reconsolidate power-- this is the part where I agree with you-- by illegitimately taking the company back. Again, in the name of the Russian people.

So who owns Gazprom? No claimant has title any more legitimate than any other.

And more to our point, how does this impact the price of the product?

It doesn't. Whoever has control of this company, they enjoy the right to charge whatever the market will bear for the product (the "free market" solution) or to give it away below production cost should they care to (the centrally planned approach). And Putin, as de facto acting director, has decided to opt for method "A".

You are entirely correct to note that Russia has almost fully returned to being an autocracy-- in that all power resides in the executive branch, while judicial and parliamentary branches, the media and all political parties have largely been stripped of power. This, in fact, is very like what we're seeing now in the United States, with the novel doctrine of the Unitary Executive.

Let's see what happens in the next elections. Both Russia and the US, I believe, will have the chance in 2008 to correct any abuses they perceive.

Given
The rightful owners issue is subject to debate, the means be damned as none of us will ever know the real truth. You are correct and the markets will determine prices.
The unitary executive does exist in Russia and to a much lesser degree here due to our constitution and freedom of press which tends to limit questionable behaviors.
2008 will probably swing the historical pendulim the other way so that the opposition party in this country will have their chance to make the voters tire of their errors and corruption.
I do not hold as much hope for Russia. Putin's opponents will probably sustain some type of an illness or succumb to a sudden case of lead poisoning just before the election.

Privatized Monopoly?
>And before any element of the rule of law has been developed, all of a sudden in 1995 we find that this asset has been sold for a price. And that the bidding has been hasty and far from transparent. Was the price offered by Berezovsky and Abramovich a fair one for the owners-- the "Soviet people"? The general consensus was no, it was not. It was an insider deal going to politically connected insiders.

The reason privatization works (when done right) is that competitive markets keep prices in check. If you privatize the nations energy industry by selling it as one big prize, you cannot act surprised when the buyers use their newfound monopoly in monopolistic fashion. Why wasn't this asset broken into small enough pieces to ensure a competitive domestic energy industry?

I would chalk it up to naiveté, but I think that would be naiveté on my part. By allowing monopolization, you destroy competition, thereby ensuring the failure of privatization, and ultimately justify government seizure of property (again). I wonder if privatization failed because they wanted it to fail.

(I say all this realizing that natural gas is one of those industries (like cable television, phone, electrical power, etc) that is hard to run in a truly competitive "free market" manner, so maybe I'm being to harsh. When the cost of infrastructure required to deliver the product is so high, breaking into such a market is often prohibitively expensive. (Am I going to spend millions on a pipeline to deliver gas to your house just because you "might" switch over from my competitor to me?) Even here in the good old capitalistic US of A we struggle with how to keep these industries competitive. Often we give up, throw our hands up in the air, and decide to run these industries in a socialistic manner, via "public utilities corporations".)

Still, I wonder if they could have done better if they wanted to. Even now, if Putin had the good of the people in mind, couldn’t he do what was not done the first time - break Gazprom into small enough pieces to ensure a competitive market, and sell them to the private sector? Of course, that is a matter for the Russians to worry about, not me. For now, the Russian people seem content with the familiar old big government centralized planning way of doing things. To each his own. I just think it's sad that privatization gets a bad name when it isn't given a fair chance of success.

Is Roy getting wiser, or am I?
This may be the first time I've agreed with Roy Bean. For once (well, to my notice), he isn't looking at things from a one-dimensional, socialist/communist viewpoint. Maybe I haven't been paying enough attention, but it made stop lurking and comment.


Keep up the clear thinking, Roy, and I'll try to keep an open mind.


Tom on the rez.

Putinism without the Putin
I agree that the prospects for dictatorship here are poor. Bush has always spoken admiringly of that form of government-- indeed he's been regretful that it was not more of an American tradition. But we don't put up with that kind of crap. Bush's numbers have plummeted, and we'll see the full antidote to this kind of misrule in 2008.

Putin is another story. His popularity is sky high-- around 80%. And this is genuine popularity-- not contrived numbers. The Russians just love this approach to government, and didn't feel at all happy when they liberals, the ex-communists and everybody's brother were all duking it out in the marketplace of ideas.

They like certainty. And they also sense that Putin has his country's best interests at heart. As he sees them, of course. But he is being genuine and open-- he's running the country the way he sees fit.

He has also announced beaucoup times that he won't run again. And he has not hinted at a successor. So what will be up for grabs in the next election will be Putinism without the Putin.

This one will be an interesting race to follow.

Is this naivete?
You're assuming total, above board transparency. Is that something we should ever expact, when an asset worth not just billions of dollars but really, really serious bucks goes onto the block, in a sale presided over by people who can't be counted on to represent the actual best interests of the owners?

At the point that Communism fell, no one owned Russian oil and gas. No one. The prize was just sitting there unprotected. Then were we to suspect Boris Yeltsin would out an ad in the paper, inviting bids on the property like it was some abandoned real estate being put up for auction?

No. What we saw was the next time the curtain was raised, there's just this big banner, saying "Under new management". Too bad, folks, you should have been there. Chance of a lifetime.

Ideology aside, the way a company is run is dependent on conscientious management. There's no reason Russia's oil and gas industries can't be managed intelligently with the federal government acting as their board of directors. There really isn't.

I think any future comments concerning the wisdom of the renationalization should address actual current performance-- not the paper struggle of competing ideologies.

Win some lose some
I do not share your opinions on Bush and dictators. He gets a C+ in my book as a president. Great economy, agressive stance on the war on terror, refusing to have detente' with Iran and Syria, stopped Clinton brokered payments to the tune of 4 billion dollars to North Korea are a few of his pluses. Border security, bigger government, and this goofy notion of making nice with his political enemies are his big weakneses.
Even if Putin does not run again, I agree that someone just like him will and win. It seems that is what the masses want. It is really hard to tell what anyone truly wants or if polls are accurate with a state controlled media.

We need less rigid thinking
"For once (well, to my notice), he isn't looking at things from a one-dimensional, socialist/communist viewpoint."

Maybe you should read more of my stuff, neshoba-lurker. I've never been a fan of the doctrinaire approach, but instead have maintained many, many times that any viable economy capable of promoting the general welfare has to have the functionality of capitalism combined with the heart of social justice. I stand in the middle between those two ideological poles.

What you may have been reading instead is the many comments of my detractors. And their pattern is to deliberately misstate my meaning, so it can be more readily condemned by resorting to their simple chocolate or vanilla formula.

This is box thinking. It's like saying you're either for us or you're against us.

Look at the evidence
"It is really hard to tell what anyone truly wants or if polls are accurate with a state controlled media."

Here's a good way to get an accurate assessment. Read some Russian sources, and apply critical thinking skills. It's pretty apparent that Putin is wildly popular there.

Don't read American sources. CNN and Fox are giving you some seriously dumbed down news. And don't just do what most people do-- rely on their own dim sense of what must be happening out in the world. It takes more than a hunch to see what's actually going on out there.

The wisdom of refusing detente with Iran and Syria is a good example. If you exclude them from the Big Tent you allow them no role other than as enemies. This is idiotic. Any competent leader would recognize the wisdom of the old saw, "Keep your friends close and your enemies even closer".

Iran has a crucial role in helping create a stable Iraq-- only under supervision and in a cooperative mode. Otherwise what you have is a rival power that's a match for the currently weakened US military. Not cool at all.

Big Tent
I do not remember us having diplomatic relations with nations that were either directly or indirectly killing our troops and overtly sponsoring terrorism, not to mention calling for the destruction of a neighboring nation, which happens to be an ally of ours. We just have to agree to disagree on that one. My understanding of the Arab mentality is that negotiators are seen as weaklings, unless they are carring a big stick and will use it.
You are correct about American sources for foreign news. I get referals from some of my friends and relatives in Europe and some from another friend of mine that lives here now who is from Iran. He still has friends and relatives there. He says that the sanctions have weakend the economy and the radical leadership is losing its power base. I hope he is correct.

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