On Monday December 1st Russian President Vladimir Putin surprised the world by announcing the end of the South Stream project which would have seen Russian energy resources transferred to European markets by a route which would bypass Ukraine. Initially, the end of the project was greeted with surprise but in hindsight it makes sense. The combination of the European Union’s Third Energy Package, which stipulates that companies that produce and transmit energy must be separate entities, and the reality that the cost of the project has risen consistently have been obstacles for years. One year the project is projected to cost 10 billion euros, a few years later its 15 billion, then its 30 billion. Trends like this make investors nervous. Recent threats by some investors to pull out, thus passing the costs back to Moscow, combined with the sanctions that had been imposed upon Russia due to Moscow’s activities in Ukraine have made the project less and less viable. This is not to say that a similar project will not be developed at a later date but Monday’s announcement makes it clear the current iteration is not in Russia’s interest.
As things stand now Russia’s plan appears to be to utilize the existing infrastructure and direct it towards Turkey. This move would provide Ankara with an additional energy source while allowing the development of a potential transfer point for the redirection of energy resources to European markets, which would benefit both Russia and Turkey. Though Moscow does not have the same leverage over Ankara that it has over Kiev this development would at least provide Russia with an additional revenue stream that the country desperately needs. Estimates suggest that Russia has lost at least $120 billion to capital flight in 2014 with some analysts projecting that another $80 billion could depart the country in 2015. The combination of the ruble being at its lowest value since Russia's 1998 financial crisis and declining oil revenues means that the Russian economy in a difficult position. Diversifying Russia’s economy would presumably improve the country’s economic standing. However, diversifying an economy is not something that happens overnight. Therefore, Moscow must make the best of a bad situation by reaching out to new customers, positioning itself to service old clients if their demand rises, and minimizing competition. Putin appears to be pursuing all of these tactics.
Though much attention has been paid to the fact that many European countries are dependent upon Russia for the bulk of their energy needs we must also understand that Moscow has been overly dependent upon these countries as customers. If something were to happen that limited the purchase of Russian energy resources by these countries it would be a major blow to Moscow’s budget. Clearly this is what has happened. This shift has forced Moscow to diversify its clientele. May’s 30 year $400 billion plus natural gas deal between Russia and China is an initial step in this direction. (An interesting side note is that deal was executed in a currency swap denominated in Yuan. This can be perceived as an early attempt to diminish the US dollar as the world’s dominant reserve currency).
In addition to finding a major new client in China Moscow is hedging its bets closer to Europe. Using Turkey as an energy connection point could in theory serve as a hedge against the proposed Trans-Caspian Pipeline. Though the September 29th meeting of the Caspian 5 (Russia, Iran, Azerbaijan, Uzbekistan, and Kazakhstan) ended with an agreement which better delimited which portions of the Caspian Sea falls under the sovereignty of each state, and appears to give Russia a degree of the control over the management of energy resources of the sea, there is no guarantee that this agreement might not be undermined if it benefits a Caspian 5 country. In theory, Moscow could use the energy connection point in Turkey to undersell, and thus undermine the Trans-Caspian Pipeline, if such an action was perceived as being in Russia’s interest. Though that move would not make sense economically (especially because Moscow would have to get Ankara on board which, if possible, would not be cheap) it would make sense politically and would be in line with Moscow’s history of using energy resources to accomplish political goals even if the action ran contrary to Russia’s economic interests. Just the threat that Russia could pursue such a policy affords Moscow a degree of leverage over the other Caspian 5 countries.
The fact that much of the European Union shares a currency but fiscal policy is dictated by the capitals of the bloc’s respective members rather than by Brussels combined with the reality that the constituent members of the EU have varying economic interests has meant that Europe has been unable to effectively tackle its fiscal and unemployment crises. Clearly, the EU needs money. South Stream would have provided states, such as Bulgaria, income from transit fees and construction jobs and companies, like Italy’s Saipem, revenues from service rendered. The abandonment of the project impacts the interests of these entities. For example, Saipem estimates that the termination of the project will cost the company about $3 billion. There is no doubt that there are EU member states and European companies who have a vested interest in South Stream or a comparable project. Given the rise of anti-establishment parties in Europe and the concomitant decline of the power of the traditional political parties in many European countries we could see a political shift in the EU that could set the stage for a reincarnation of South Stream somewhere down the line. Though such a development is unlikely to occur anytime soon it is not unreasonable to believe that Russia is playing the hands that it can now while keeping an eye on the long game in Europe.
In Russia’s ideal world the realization of large profits through the sale of energy resources to customers who are located near existing infrastructure would be an ongoing phenomena. Clearly, the world is not ideal. Europe’s desire to reduce dependency on Russia, sanctions due to Moscow’s actions in Ukraine, and drops in oil prices and the value of the Ruble has forced Moscow to begin the diversification of its client base. Might this be less profitable than before? Absolutely. That said, this is not about missing the good old days. This is about adapting to new realities even if they are not as fortuitous as in the past. We must recognize the reality that though Russia’s economy is experiencing a great deal of pain it does not mean that the Russians are alone in their suffering. As the economic crisis in Europe deepens (and it looks like it will) the pain that many countries feel could turn into desperation and we should never underestimate the ability of desperation to changes public interests, state policies, and who is deemed as a suitable trading partner. South Stream as we know it may have been abandoned. This does not mean that a project that closely resembles it will not take its place somewhere down the line.
Showing posts with label Trans-Caspian Pipeline. Show all posts
Showing posts with label Trans-Caspian Pipeline. Show all posts
Friday, December 5, 2014
Sunday, September 28, 2014
Is There Sufficient Pressure to Finally Force a Consensus as to the Legal Status of the Caspian Sea?
The 4th Summit of the Caspian 5 (Russia, Iran, Azerbaijan, Turkmenistan, and Kazakhstan) will meet on September 29th in the southern Russian city of Astrakhan. The purpose of the conference is for these countries to come to a consensus as to the legal status of the Caspian Sea. Though there is some precedent for cooperation in managing the Caspian Sea and its surroundings, such as tackling criminal activity, consensus has thus far proven elusive. There are a variety of reasons for this impasse with Russia’s fear that the proposed Trans-Caspian pipeline would undermine Moscow’s ability to influence its neighbors being of particular prominence. Despite such challenges a variety of factors such as the effects of sanctions against Russia and the developing détente between the United States and Iran could mean that this summit could actually result in a consensus as to the legal status of the Caspian Sea. If this consensus were to become a reality it would be of great significance to Eurasian energy markets.
Pipelines that bypass Russian territory and cause Moscow to lose influence over countries that are dependent upon Russian energy exports has been a concern of the Kremlin for a long time. Moscow is well aware that the fragile but ongoing rapprochement between Iran and the United States could set the stage for the construction of pipelines that would link the Caspian to the Persian Gulf. Moscow also knows that if such a pipeline were built the proposed Trans-Caspian pipeline linking Turkmenistan with Azerbaijan would likely become a reality. These potential pipelines and the existing Baku-Tibilisi-Ceyhan pipeline are thus a serious threat to Russia’s ability to project power therefore Moscow has done everything that it can to prevent the development of such infrastructure. Currently, Russia is carrying on with its usual points of contention, e.g. claiming that developing pipelines in a seismically active area is a recipe for disaster. Despite this and other tactics, such as arguing that the Caspian is in fact no more than a large lake and thus is not governed by international laws that pertain to the seas, Moscow is facing a variety of challenges including a negative demographic trajectory and the economic and political consequences of the crisis in Ukraine. All of these factors could cause Russia to lose influence in Eurasia in the long-term therefore it is not impossible that Russia might try to negotiate agreements to protect its interests now while Moscow is in a position of relative strength. Ending the ambiguity surrounding the legal status of the Caspian Sea would also allow Moscow to devote resources to other issue such as Russia's Arctic claims and desire to control shipping lanes North of the Arctic Circle which are becoming more useful as the planet warms.
If the Caspian 5 Summit were to produce consensus as to how the resources of the Caspian should be divided and managed it is likely that such a resolution would be contingent upon assurances that Russia would have a stake in the management of any Trans-Caspian Pipelines. For this to happen it is likely that Iran’s demand that the Caspian be divided in to five equal parts would also be met. After all it is unlikely that Tehran would give Moscow what it wants and not want something in return. If consensus were to occur it is also possible that the Caspian would be delimited to ensure that any Trans-Caspian Pipelines passed through Russian territory thus giving both countries a stake in the management of any pipeline. The other Caspian 5 countries might not like this but they might accept it especially if Russia paid for some of the pipelines. It is also not impossible that the Caspian 5 could push for the Caspian Sea to be classified as a lake. After all, many of the Caspian 5 countries have an interest in limiting outside influence in the region. Ensuring that the United Nations’ Convention on the Law of the Sea did not apply to the Caspian Sea would be a means to this end. That said, it should be noted that even if the Caspian 5 countries agreed that the Caspian Sea is in fact a lake it is unlikely that the international community would recognize this recategorization.
As things stand now the Caspian 5 countries are contending with very different realities than the ones that they were living with during the 3rd Summit in 2010. As we have seen Russia is facing significant political and demographic challenges which could compel Moscow to make concessions that it might not have made in the past. We’ve already seen a precedent for similar concessions with May’s thirty year, $400 billion natural gas deal between Russia and China serving as a striking example. Negotiations for this deal had been going on for years but Russia had balked at China’s terms. Pressure put on Russia due to the crisis in Ukraine changed all this as Russia needed to find non-European customers. This shift forced Moscow to acquiesce to China’s demands. In terms of Iranian interests we should note that the ongoing rapprochement between the Washington and Tehran could set the stage for greater investment in Iran which would allow the country to further develop its energy infrastructure. We have also seen Kazakhstan and Turkmenistan’s energy sectors receiving a great deal of investment from the Chinese. The ability to export more energy would be beneficial to the treasuries of both countries thus any action that could lead to the development of pipelines in the Caspian Sea is likely to be championed by these countries. Turkmenistan and Azerbaijan will of course benefit from their proposed Trans-Caspian Pipeline so any move that can move that project ahead will presumably be backed by both Baku and Ashgabat. If these pipelines were developed it is likely that the political risks associated with Russia’s penchant for using energy exports as a tool of coercion are mitigated thus providing additional stability to energy markets in Eurasia. We shall know with in the coming days whether or not the 4th Summit of the Caspian 5 results in real change. If it does it could prove to be one of the more significant developments that Eurasia has seen in recent years.
Pipelines that bypass Russian territory and cause Moscow to lose influence over countries that are dependent upon Russian energy exports has been a concern of the Kremlin for a long time. Moscow is well aware that the fragile but ongoing rapprochement between Iran and the United States could set the stage for the construction of pipelines that would link the Caspian to the Persian Gulf. Moscow also knows that if such a pipeline were built the proposed Trans-Caspian pipeline linking Turkmenistan with Azerbaijan would likely become a reality. These potential pipelines and the existing Baku-Tibilisi-Ceyhan pipeline are thus a serious threat to Russia’s ability to project power therefore Moscow has done everything that it can to prevent the development of such infrastructure. Currently, Russia is carrying on with its usual points of contention, e.g. claiming that developing pipelines in a seismically active area is a recipe for disaster. Despite this and other tactics, such as arguing that the Caspian is in fact no more than a large lake and thus is not governed by international laws that pertain to the seas, Moscow is facing a variety of challenges including a negative demographic trajectory and the economic and political consequences of the crisis in Ukraine. All of these factors could cause Russia to lose influence in Eurasia in the long-term therefore it is not impossible that Russia might try to negotiate agreements to protect its interests now while Moscow is in a position of relative strength. Ending the ambiguity surrounding the legal status of the Caspian Sea would also allow Moscow to devote resources to other issue such as Russia's Arctic claims and desire to control shipping lanes North of the Arctic Circle which are becoming more useful as the planet warms.
If the Caspian 5 Summit were to produce consensus as to how the resources of the Caspian should be divided and managed it is likely that such a resolution would be contingent upon assurances that Russia would have a stake in the management of any Trans-Caspian Pipelines. For this to happen it is likely that Iran’s demand that the Caspian be divided in to five equal parts would also be met. After all it is unlikely that Tehran would give Moscow what it wants and not want something in return. If consensus were to occur it is also possible that the Caspian would be delimited to ensure that any Trans-Caspian Pipelines passed through Russian territory thus giving both countries a stake in the management of any pipeline. The other Caspian 5 countries might not like this but they might accept it especially if Russia paid for some of the pipelines. It is also not impossible that the Caspian 5 could push for the Caspian Sea to be classified as a lake. After all, many of the Caspian 5 countries have an interest in limiting outside influence in the region. Ensuring that the United Nations’ Convention on the Law of the Sea did not apply to the Caspian Sea would be a means to this end. That said, it should be noted that even if the Caspian 5 countries agreed that the Caspian Sea is in fact a lake it is unlikely that the international community would recognize this recategorization.
As things stand now the Caspian 5 countries are contending with very different realities than the ones that they were living with during the 3rd Summit in 2010. As we have seen Russia is facing significant political and demographic challenges which could compel Moscow to make concessions that it might not have made in the past. We’ve already seen a precedent for similar concessions with May’s thirty year, $400 billion natural gas deal between Russia and China serving as a striking example. Negotiations for this deal had been going on for years but Russia had balked at China’s terms. Pressure put on Russia due to the crisis in Ukraine changed all this as Russia needed to find non-European customers. This shift forced Moscow to acquiesce to China’s demands. In terms of Iranian interests we should note that the ongoing rapprochement between the Washington and Tehran could set the stage for greater investment in Iran which would allow the country to further develop its energy infrastructure. We have also seen Kazakhstan and Turkmenistan’s energy sectors receiving a great deal of investment from the Chinese. The ability to export more energy would be beneficial to the treasuries of both countries thus any action that could lead to the development of pipelines in the Caspian Sea is likely to be championed by these countries. Turkmenistan and Azerbaijan will of course benefit from their proposed Trans-Caspian Pipeline so any move that can move that project ahead will presumably be backed by both Baku and Ashgabat. If these pipelines were developed it is likely that the political risks associated with Russia’s penchant for using energy exports as a tool of coercion are mitigated thus providing additional stability to energy markets in Eurasia. We shall know with in the coming days whether or not the 4th Summit of the Caspian 5 results in real change. If it does it could prove to be one of the more significant developments that Eurasia has seen in recent years.
Friday, September 12, 2014
Factors that Could Transform the Shanghai Cooperation Organization Into a More Powerful Entity
The 14th Summit of the Shanghai Cooperation Organization (SCO) was held from September 11th to September 12th in Dushanbe Tajikistan. Though security concerns resulting from the United States’ withdrawal from Afghanistan and the economic consequences of sanctions against Russia due to the crisis in Ukraine dominated the meeting, fora such as this serve as useful venues for regional powers to discuss common concerns. Given that SCO is looking to admit new members this could increase the utility of the organization. For these reasons an understanding of SCO is more important than ever.
The Shanghai Cooperation Organization was formed in June 2001 by the Republic of Kazakhstan, the People’s Republic of China, the Kyrgyz Republic, the Russian Federation, the Republic of Tajikistan and the Republic of Uzbekistan. The stated goals of SCO were to cooperate on issues of concern such as security, environmental degradation, and economic cooperation and development. Despite some successes in combating terrorism, narcotics trafficking, and smuggling SCO faces significant limitations in its ability to project power. A key limitation of the organization is its refusal to interfere in the internal affairs of other countries. All of the members of SCO have domestic problems to which they are sensitive to thus any action on the part of SCO members that could be perceived as sanctioning intervention could set a precedent that would serve as justification for the international community to interfere with the internal affairs of these countries. This is why such precedents will be avoided. This reality begs the question, "How can an entity project power if it refuses too?" This reality combined with other internal tensions, such as Russia and China’s ambition to dominate the organization, means that effective power projection is unlikely anytime soon.
Despite structural factors which limit the Shanghai Cooperation Organization’s ability to project force beyond anti-terrorism/law enforcement operations the organization’s activities should be monitored as it is possible that greater economic cooperation amongst members and neighboring states (the so-called Silk Road Economic Belt) could lead to the further development of Central Asian energy resources. Two key questions we should be asking are:
The first question will be answered largely by whether or not there are enough factors to encourage cooperation (aside from border security and anti-terrorism/joint law enforcement operations) amongst states with differing interests. To a degree we might be seeing such an alignment of interests now. Essentially, we have a group of countries all of whom have a vested interest in further developing the energy sector of Central Asia while limiting Western interference in the region. There are several developments that have and/or are emerging whose implications we must ponder:
All of these developing stories have the potential to influence global energy markets. For this reason it is more important than ever to keep tabs on summits such as the annual meeting of the Shanghai Cooperation Organization. This will become even more true if India, Pakistan, and Iran were ultimately admitted to SCO. There are of course reasons that can prevent these countries from joining the organization. Russia wants India to join to weaken Chinese influence in SCO. If this were to happen China would want Pakistan to join to offset India admission. Meanwhile no one really trusts Iran and SCO members currently use the sanctions against Tehran to justify not offering admission. Despite these challenges it is difficult to argue that SCO truly represents Eurasia if these countries are not admitted. However, one does not need to be a member of the Shanghai Cooperation Organization to work with it. It will be interesting to see if the factors discussed earlier makes SCO into a more important organization.
The Shanghai Cooperation Organization was formed in June 2001 by the Republic of Kazakhstan, the People’s Republic of China, the Kyrgyz Republic, the Russian Federation, the Republic of Tajikistan and the Republic of Uzbekistan. The stated goals of SCO were to cooperate on issues of concern such as security, environmental degradation, and economic cooperation and development. Despite some successes in combating terrorism, narcotics trafficking, and smuggling SCO faces significant limitations in its ability to project power. A key limitation of the organization is its refusal to interfere in the internal affairs of other countries. All of the members of SCO have domestic problems to which they are sensitive to thus any action on the part of SCO members that could be perceived as sanctioning intervention could set a precedent that would serve as justification for the international community to interfere with the internal affairs of these countries. This is why such precedents will be avoided. This reality begs the question, "How can an entity project power if it refuses too?" This reality combined with other internal tensions, such as Russia and China’s ambition to dominate the organization, means that effective power projection is unlikely anytime soon.
Despite structural factors which limit the Shanghai Cooperation Organization’s ability to project force beyond anti-terrorism/law enforcement operations the organization’s activities should be monitored as it is possible that greater economic cooperation amongst members and neighboring states (the so-called Silk Road Economic Belt) could lead to the further development of Central Asian energy resources. Two key questions we should be asking are:
- How effective is SCO as a forum for formal and informal discussions of member and observers such as Iran, India, and Pakistan?
- What factors exist that could encourage cooperation or conflict?
The first question will be answered largely by whether or not there are enough factors to encourage cooperation (aside from border security and anti-terrorism/joint law enforcement operations) amongst states with differing interests. To a degree we might be seeing such an alignment of interests now. Essentially, we have a group of countries all of whom have a vested interest in further developing the energy sector of Central Asia while limiting Western interference in the region. There are several developments that have and/or are emerging whose implications we must ponder:
- The sanctions imposed on Russia due to the crisis in Ukraine has led Moscow to impose import bans on Western products and forced Russia to seek new markets for its oil and natural gas.
May’s 30 year 400 billion USD natural gas deal between China and Russia is an example of this eastward shift. (Russia got a very poor deal here as Moscow was desperate to secure a deal and Beijing knew it had all the leverage).
- China is actively working towards developing its interior. Access to cheap energy is an essential component of this strategy. Central Asia can serve as such a source.
- Many Central Asian countries’ economies are heavily tied to Russia and are dependent upon remittances sent back from expatriate workers residing in Russia. A fluctuating ruble or a reduction in remittances is heavily damaging to their economies so they have a vested interest in ensuring that Russia is making money. If Moscow cannot profit off trade with the West it will have to look elsewhere. Clearly, this is what Russia is doing. Central Asian countries have an interest in facilitating this process.
- Interest in developing the energy resources of the Caspian is growing while factors that have limited development in the region are arguably diminishing. Traditionally, Azerbaijan has been the dominate player in the region vis-à-vis energy exports but if the Trans-Caspian Pipeline were built and sanction against Iran were dropped Turkmenistan and Iran could both become significant energy exporters. Russia has opposed the Trans-Caspian Pipeline as it would undermine Moscow’s ability to force countries to respect Russia’s will or risk having their energy supplies cut off. Iran has significant supplies of natural gas but due to sanctions has been unable to attract the capital and technical know-how to best exploit them. Russia will of course do what it can to prevent competition from developing however Moscow is facing constraints that it did not have to contend with prior to the crisis in Ukraine. It is not impossible that we will see greater investment in the Caspian. The question is how involved will Russia be? The Caspian 5’s summit on September 29th could provide some answers. If some of the territorial disputes over the Caspian were resolved amicably it would set the stage for significant investment in the region. If this were to happen it would indicate that Russian companies would have a privileged position in any consortium which would exploit the resources of the Caspian.
All of these developing stories have the potential to influence global energy markets. For this reason it is more important than ever to keep tabs on summits such as the annual meeting of the Shanghai Cooperation Organization. This will become even more true if India, Pakistan, and Iran were ultimately admitted to SCO. There are of course reasons that can prevent these countries from joining the organization. Russia wants India to join to weaken Chinese influence in SCO. If this were to happen China would want Pakistan to join to offset India admission. Meanwhile no one really trusts Iran and SCO members currently use the sanctions against Tehran to justify not offering admission. Despite these challenges it is difficult to argue that SCO truly represents Eurasia if these countries are not admitted. However, one does not need to be a member of the Shanghai Cooperation Organization to work with it. It will be interesting to see if the factors discussed earlier makes SCO into a more important organization.
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