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  • The New Cold Front

    THE NEW COLD FRONT

    CNBC European Business
    http://www.cnbceb.com/oil-gas-mining/the- new-cold-front/716/
    November 2008

    The West is more shaken than stirred by Russia's recent actions in
    the Caucasus, but what does it mean asks Pamela Ann Smith

    Chilly along the Czech border? Blustery in Baku? Rigid in
    Riga? Russia's recent conflict with Georgia has completely changed
    the temperature across its western and southern flanks, inviting
    more cooling metaphors than even the Cold War produced. But has
    anything really changed or is this just more of the same antics by
    the Putin-Medvedev tag team, determined to reassert Russian greatness
    in the wake of two decades of humiliation?

    While Medvedev may have stopped short of a total occupation of the
    former Soviet republic, a move that would have revived the Cold War,
    he lost no time insisting that Moscow has "regions of privileged
    interest." As a result, Russia is now seen by many to have declared
    a new sphere of influence on its western and southern borders
    reminiscent of its old imperial days under the Tsars. Countries
    such as Estonia, Latvia, Lithuania, Ukraine, Poland and the Czech
    Republic are now, their officials say, living in fear of the Russian
    bear once again. Nato's failure to come to Georgia's rescue and the
    weak response by the EU, which could not agree on imposing sanctions
    on Russia in the wake of its incursion, has added to that fear.
    Energy security is the other elephant in the room. The ruling regimes
    in Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan - all oil-
    and gas-rich former Soviet republics, along with countries such as
    Ukraine, which is a major transit route for Russian energy exports to
    Europe - are all nervous.Based on a fear of Russian state-controlled
    Gazprom's intentions, the Bush Administration, Nato officials and the
    governments of several east and central European states, as well as
    the UK, are demanding that Brussels acts, and acts swiftly, to reign
    in Russia. At risk are several pipeline and tanker routes through
    the Caucasus, Black Sea, Mediterranean and Baltic regions. "What we
    have seen is a complete paradigm shift in the security architecture
    of Europe," Estonia's president, Toomas Hendrik Ilves, said after
    talking to George Bush in August. "Everything we have done has been
    based on the assumption that Russia won't engage in aggression. That
    premise is no longer operable. "What is happening in Georgia has
    direct consequences for Poland and its interests, for its energy
    diversification plans," the president of Poland, Lech Kaczynski,
    told reporters in early September. His country is actively opposing
    the construction of the North Stream gas pipeline under the Baltic
    Sea, being built under a Russian partnership agreement with Germany,
    for fear that Russia could use its energy exports as a political
    tool."When the former Soviet Union fell apart, the so-called 'fourth
    corridor' of energy exports [to Europe] opened up," says Alex Forbes, a
    London-based independent energy analyst. Oil and gas can only travel to
    the west "via Azerbaijan, Georgia and Armenia to Turkey. South of that
    corridor lies Iran, and north of it Russia. That corridor is strategic,
    and for Europe, very strategic. There is a theory, he observes,
    "that Russia had been waiting for an excuse to raise doubts about
    [the energy corridor's] stability. It's hard to say whether Russia
    intended [its invasion of Georgia] to become an energy war, but it
    has become an energy war ipso facto. The problem for Brussels is that
    some of the EU's largest members, such as Germany, France and Italy,
    along with Austria, Slovakia, Hungary and Bulgaria - all countries
    heavily dependent on Russian energy supplies - have called for dialogue
    with Russia, rather than sanctions or a halt in proposed partnership
    talks between the EU and Moscow. "Either we want to relaunch the
    Cold War, point our finger at Russia, isolate it and stamp on it as
    was the case for a decade... or we choose the option of dialogue,"
    French Prime Minister Francois Fillon told French radio, according
    to Reuters, just before an emergency EU summit called to discuss the
    Russian invasion in early September. "Today the word 'sanctions'
    is not on the agenda. Today the word is 'dialogue'. Fillon's
    stance is widely supported by banks, oil companies, utilities and
    other corporate interests in Europe. Medvedev and his predecessor,
    Vladimir Putin, have gained global economic power since Russia became
    the world's number two producer of crude oil, second only to Saudi
    Arabia. Windfall revenues in the past few years have led to extensive
    European investment in the country and to a rapid expansion of Russian
    trade with the EU in products and services, as well as in energy. To
    these EU doves, talk of a Russian stranglehold on European energy
    supplies is counterproductive. Russia received a nasty financial shock
    in September when its benchmark RTS stock market index fell nearly
    60% since its peak in May. As the British historian Niall Ferguson
    observed, at least "when Hitler invaded neighbouring countries, he
    had capital controls in place." Compounded by the wider turmoil of the
    credit crunch, the fall also burnt some Western investors, a reminder
    that European financial interests in Russia are much more extensive
    than they were even a decade ago. Sweden's foreign minister, Carl
    Bildt, tried to calm the situation, telling an international energy
    conference in Slovenia in early September that Russian influence
    should "not be overestimated." He added "Don't forget...the EU in
    terms of population is 3-1/2 times as big. Our economy is 15 times the
    Russian economy. Our defence spending is 10 times [higher]. We need
    to have a proper perspective on the relationship." Because Sweden
    is due to take over the EU Presidency in January, Bildt's comments
    are seen as reflecting future EU policies as well as its present
    concerns. "Yes, the EU is dependent on Russia for gas imports,"
    Robert Mabro, honorary president of the Oxford Institute for Energy
    Studies and Emeritus Fellow at Oxford University told CNBC European
    Business. "In the short run there is no alternative. All the talk by
    [Gordon] Brown and others that we have to reduce our dependence is
    wishful thinking." But, Mabro notes: "Russia is equally dependent on
    the EU [for its energy markets]." The EU, he feels, "should engage
    in constructive diplomacy," not confrontation. "They are mutually
    dependent. Meanwhile, Mabro observes, there may be a much simpler
    answer to the dilemma of diversifying Europe's energy supplies. If
    Caspian oil and gas is desirable, he says, rather than going through
    Georgia, "build another pipeline, through Turkey. It's not insuperable,
    just more expensive. Paolo Scaroni, head of Italy's giant oil company
    ENI, suggests another solution. He says the EU should increase its
    storage capacity for oil and gas while at the same time promoting
    energy conservation measures. "If you are worried about the security
    of supplies, have strategic storage," Mabro insists. "The US and
    Japan have it. Another solution is diversification of energy supply
    through shipments of liquefied natural gas (LNG). Cynthia Poynter,
    senior manager for midstream operations at the US consultancy, IHS,
    says of LNG shipments, "Europe would have to pay more, but this
    would be short-term, a matter of months or a year at most," she
    maintains. "It's virtual storage in a way. LNG, which is gas that
    has been supercooled to liquid form so that it can be transported in
    tankers by sea, is a rapidly growing business for Algeria, Libya and
    Gulf States such as Qatar, all suppliers of Europe. Future suppliers
    may include Nigeria and Brazil according to Matthew Clements, Eurasia
    analyst at Jane's Country Risk. None of this changes the seismic
    nature of what took place in August 2008. News pictures of Russian
    bombs dropping near the strategic TransCaucasian Baku-Tbilisi-Ceyhan
    (BTC) oil pipeline, plus oil tanker trains mysteriously on fire in
    central Georgia sent shudders through virtually every European capital.
    The BTC line carries up to one million barrels of crude a day from
    Azerbaijan to a Turkish terminal on the Mediterranean. Other links,
    for both oil and gas from the Caspian, pass through Georgia to the
    Black Sea from where they are transported to destinations in central
    Europe or to southern Europe via the Bosphorus and Mediterranean. The
    Russian invasion also threatens the EU's pet diversification project,
    the 3,300-mile Nabucco pipeline from the Caspian, across the Caucasus,
    to central Europe and Italy via Turkey. Azerbaijan, a major Caspian
    producer, has already said it will now ship more oil to Europe via
    Russia and Iran, as well as via Georgia and the Black Sea. Kazakhstan
    is expected to follow suit, along with Turkmenistan. "The Nabucco line
    is still being discussed, but without firm gas supplies committed,
    it will not be financed," says Julia Nanay, senior director at the
    US consultancy PFC Energy. "It is difficult to know how it could be
    built. The EU is adamant that the line must go through, even though its
    proposed path crosses Georgia. Ironically, the ultimate viability of
    Nabucco may depend on the EU gaining access to exports from Iran,
    but this eventuality opens up a can of worms in international
    relations. "It may be that the Russian situation will galvanise
    this... Europe will have to look to all possible alternative gas
    sources, and Iran could come into the picture," says Nanay. "The
    next US administration will have to focus on Iran and may look to
    establishing relations." She is confident that "there is likely to
    be a change in US policy" on the issue, despite both US and European
    fears regarding Iran's nuclear potential. While the stick against
    Iran appears to have been bolstered, so too has the carrot of talks
    with the US and, possibly, the EU as well. Well known as a policy of
    Democratic presidential candidate Barack Obama, the intention to extend
    a diplomatic line to Tehran was also embraced by Republican candidate
    John McCain in late September, a dramatic reversal of his previous
    position. For the EU, US talks with Iran would help to unblock the
    Nabucco proposal. McCain's change of direction, some analysts suggest,
    demonstrates that while the Western world's focus has been on a newly
    aggressive Russia, others are eyeing the US's relative decline.
    Indeed, Medvedev and Putin are busily recruiting new allies both
    in Latin America and the Gulf. While the Caucasus incursion meant
    that Russia had to delay the Middle East Peace Conference it was
    planning for Moscow this summer, the parade of key figures from
    Syria's president Bashar al-Assad to Palestine's Mahmoud Abbas with
    Russian leaders, as well as Putin's unprecedented visits to Saudi
    Arabia, Qatar and Jordan last year, has sent a signal that Russia now
    intends to take the lead in the Arab world. Israel, the US and Europe
    will not be happy. Moscow also signed a wide ranging energy pact,
    including nuclear technology and know-how, with Venezuela's maverick
    president, Hugo Chavez. He met with Medvedev in Moscow at the end
    of September, when Russia also announced that it will provide $1bn
    in military aid to the nation which is a key supplier of oil to its
    northern political foe, the US. A spokesman in Moscow said at the
    time, "After such insolent and false positions of the US over South
    Ossetia, limits on cooperating with enemies of the US have ceased to
    exist. Reinforcing alliances such as these could easily be seen as
    turning an already toxic Caucasian cocktail into a Molotov version
    that could explode not only in European boardrooms, where costly
    long-term plans are being drafted to exploit Latin America's huge
    hydrocarbon resources, but also scupper Brussels' hopes to prevent
    further Russian influence on energy exporting nations. A resurgent
    Russia seeking to dominate its neighbours and all of Europe's oil and
    gas supplies is one thing. A Russia bent on building up loyal nuclear,
    and military, allies in other continents is quite another.

    NATO's reaction Nato has taken a strong stance against the
    Russian invasion of Georgia and its military occupation of the two
    separatist enclaves, Abkhazia and South Ossetia. In mid-September,
    Nato secretary-general Jaap de Hoop Scheffer strongly criticised
    the agreement reached with Russia by French president, and current
    president of the EU, Nicolas Sarkozy, regarding the withdrawal of
    troops from Georgia. The six-point pact calls for a withdrawal of
    Russian military forces to their positions prior to the conflict in
    return for a resumption of talks with Russia on a new partnership
    with the EU. A supplemental agreement also called for the withdrawal
    of troops from Georgian territory outside Abkhazia and South Ossetia
    within 10 days of the deployment of EU monitors in early October.
    De Hoop Scheffer said the deal was "difficult to swallow" and
    "not acceptable" because it ceded too much ground, according to
    media reports in London. Russia's foreign minister, Sergei Lavrov,
    announced in September that Moscow intended to station 7,600 troops in
    the two enclaves, twice as many as before, a move seen as confirming
    Russia's intention to create a military base on what was, before 8
    August, Georgian territory. De Hoop Scheffer's criticism put paid to
    hopes in some quarters, notably Germany, France and Italy, as well
    as congressional leadership in Washington, that Nato would resume its
    six-year programme of military cooperation with Moscow. In Brussels,
    the US Ambassador to Nato, Kurt Volker, confirmed in early September
    that, unlike with Georgia, or with Ukraine, another non-member that
    fears Russian military action against it, Nato would come to the
    military defence of Latvia, Lithuania and Estonia. The three Baltic
    states, he noted, are full members and signatories of Article 5, which
    guarantees the defence of any Nato ally threatened with aggression. De
    Hoop Scheffer has also promised that "the process of Nato enlargement
    will continue," a move that will be welcomed by EU members such as
    the Czech Republic and Poland, which have been cooperating with the US
    and Nato on new weapons and missile deployments in their countries. De
    Hoop Scheffer said the process would be carried out "with due caution,"
    but with the "clear purpose" of helping to create a stable, undivided
    Europe. While Nato was not in the business of "punishing Russia,"
    it would not accept Russia's implicit demand that Nato had to choose
    between an alliance with Moscow or one with Tbilisi.

    us military spending vs the world 2008 in billions of US dollars anD %
    of world total Military Spending: Europe, NATO and Russia Europe's
    military spending is nearly four times as high as Russia's and
    represents about one-fifth of the $1.5 trillion that is expected
    to be spent in 2008 by countries around the world, according
    to the Washington-based non-profit Centre for Arms Control and
    Non-Proliferation. Spending by the US was expected to reach
    a staggering $711 billion this year, almost one-half the world
    total. This means that the US and Europe, who together account for
    most of NATO's 26 allies, will have a combined military expenditure
    this year of $1 trillion, compared to Russia's $70 billion. Source:
    www.globalissues.org/article/75/world-mili tary-spending Share of
    Arms Sales for Top 100 Arms Producing Companies 2006Country/Region
    No. of companies $bn@S 41 200.2 Western Europe 34 92.1 Russia 8
    6.1 Other* 17 17 Total 100 315.4 Source: Stockholm International
    Peace Research Institute, SIPRI Yearbook 2008. * Canada, Japan,
    India, South Korea, Singapore, Israel and Australia Together, the
    US and Western Europe account for 92.7% of the arms sales by the
    world's leading weapons manufacturers. Russia falls way behind,
    with just under 2% of the total. Defence analysts say arms sales
    by a country help it to support its own military industries,
    in addition to creating export earnings that boost its economy.
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