Russia’s Bare-Knuckle Policy on Oil

The new Obama administration needs to realize Russia has a potential stranglehold on America's European allies and will play its energy card when it wants to: to block the further expansion of NATO, for example, or the EU. Russia's next likely move, which could be delayed until the global economy starts picking up again, will be an attempt to orchestrate a global natural gas cartel patterned on the Organization of Petroleum Exporting Countries. About 15 gas-producing countries, led by Russia and Iran, met in 2004 and agreed to establish an "executive bureau" to coordinate "interests" in the global gas market.

Russia's Bare-Knuckle Policy on Oil
November 23, 2008
William F. Shughart II
Washington Times

If President-elect Barack Obama and his top advisers learn nothing else from Russia's invasion and occupation of South Ossetia this summer it should be that Moscow aspires to be an energy superpower.

Russia already is the world's second-largest producer of oil, pumping nearly 10 million barrels a day, and is the largest supplier of natural gas. Like all energy-exporting countries, Russia benefited enormously from the run-up in prices over the last decade. Every $1 increase in the price of a barrel of oil transferred about $1 billion into Russia's state budget. As a result, Russian foreign exchange reserves grew from $12 billion in 1999 to $470 billion at the end of last year, a balance equaled only by such countries as China, India and the Middle East oil producers.

When its tanks rolled into Georgia, the Kremlin sent notice it intends to dominate the oil and natural gas resources of the former Soviet republics in the Caspian Sea basin, raising the threat of supply disruptions to Europe. That possibility could give Russia political leverage over Germany, the Czech Republic, Slovakia, Ukraine and other Central and East European countries that rely heavily on Russian fuels.

As rising oil prices strengthened the Kremlin's hand, Mr. Putin clamped down on Russian businessmen, most notably by prosecuting and imprisoning Yukos Oil Co. Chief Executive Officer Mikhail Khodorkovsky.

The company's assets were later sold at bargain-basement prices to state-owned enterprises, one of which—Gazprom—was headed by Dmitry Medvedev, Mr. Putin's handpicked successor as president.

Despite existing contracts with Western oil companies, the Kremlin voided exploration licenses held by ExxonMobil and Chevron, then forced Royal Dutch Shell to sell some of its holdings to Gazprom. Increasing the pressure, Russia then raised previously subsidized natural gas prices to Ukraine and Belarus, two important conduits for gas exports to the West.

The new Obama administration needs to realize Russia has a potential stranglehold on America's European allies and will play its energy card when it wants to: to block the further expansion of NATO, for example, or the EU.

Russia's next likely move, which could be delayed until the global economy starts picking up again, will be an attempt to orchestrate a global natural gas cartel patterned on the Organization of Petroleum Exporting Countries. About 15 gas-producing countries, led by Russia and Iran, met in 2004 and agreed to establish an "executive bureau" to coordinate "interests" in the global gas market.

As world demand for natural gas begins to outpace supply, incentives for collectively reducing production and increasing prices will strengthen.

For the United States, a combination of conservation, increased energy production and improvements in energy efficiency is the best defense against volatile oil and gas prices and Russian blackmail.

But congressional gridlock over energy policy—and lack of leadership from the White House—has blocked longer-term solutions.

While increasing domestic energy supplies by tapping proven oil and gas deposits in the Outer Continental Shelf, the mountain West and Alaska will help, the most important step the United States can take on the energy front is to use more coal and nuclear power.

America has a 250-year supply of coal, more plentiful on an energy-equivalent basis than the oil reserves of either Saudi Arabia or Russia.

The president-elect should re-examine his position on coal in particular. "Clean coal" is not an oxymoron. Building more coal-fired power plants that use new technologies to capture and store carbon dioxide emissions deep underground and converting coal into liquefied fuel for transportation are sensible policies.

Increasing our reliance on coal and nuclear power would free up natural gas for household and industrial uses and go a long way toward immunizing the United States from both OPEC and Russian blackmail.

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William F. Shughart II is a Senior Fellow at The Independent Institute, Frederick A. P. Barnard Distinguished Professor of Economics at the University of Mississippi, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.

Russia's Resurgence or Downfall?

Russia is rotting from the inside - morally and demographically. It may be strong enough to kick around weak neighbors, but that's about it.

Its population is increasingly falling into alcoholism, even among women now, with the resulting early death rates. Russians are literally drinking themselves to death. (The Russian government is now relying on alcohol excise tax receipts to take them through the economic crisis!) And the reproduction rate is not high enough to support any real resurgence in the world. They are aborting themselves into oblivion. The Western European abortion rate is 20-25%. The American abortion rate is 30%. The Ukrainian abortion rate is 45%. The Russian abortion rate is 60-70%. (That's according to Russia's Surgeon General.) That means two out of every three pregnancies in Russia end in death. How do they expect to build a great nation on self-destruction?

The Russian economy is not weak because it's monocultural. It's weak because it is highly dependent on oil and gas production and export (60% of the Russian budget!), and we all know how wildly the price of oil can swing up and down. The Ukrainian economy, by the way, has a similar weakness because it is still strongly dependent on metals exports. And when the world price of steel drops 4 times, like it did a couple months ago, all of the sudden the economy is in trouble. Both Russia and Ukraine badly need to diversify their economies away from natural resource extraction into value-added products and services. If you want to know where the main strengths of any economy are, all you need to do is look at who the richest people are. The richest people in Russia and Ukraine are oil and gas tycoons, and various metals oligarchs. Rinat Akhmetov, Ukraine's steel tycoon, has declared himself to be the richest person in Europe a half a year ago, with a $50 billion fortune behind his name. (And in Russia you would have to include the heads of state - because Putin's personal fortune was reportedly over $10 billion in 2004.) There are no billionaires in the post-Soviet space who have built their wealth from software production and marketing (like Bill Gates, Sergey Brin, Larry Page, et al), stock market investments (like Warren Buffet), department stores (like Sam Walton), etc. The bad thing about resource extraction and export is not just that its prices swing wildly and that it doesn't have a broad beneficial effect on the entire economy, but that it requires the least intellectual and creative labor, causing a certain degree of stagnation in society (look at the Middle East). The other major problem with natural resource extraction is that these are the most corrupt industries, and if they are dominant in a particular economy, they increase the level of corruption in the entire society.

The American quasi-empire is fundamentally a commercial empire. Its strength is primarily economic, and its cultural and military strength flows out of that.

The Russian (very real) empire is fundamentally a military empire. It was built through brute physical force, deception and propaganda, starting from the small fiefdom of Muscovy 700 years ago. And it should not suprise anyone that the Russian Federation is using those same tools to maintain or try to re-build their largest empire. Historically this strategy served Moscow well, as its neighbors were comparatively weak and its population and the military was comparatively large. This is no longer the case in several major respects. Russia neighbors a far numerically superior and economically dynamic China in the Eastern part of its empire and it neighbors NATO in the West, which is stronger than the Russian Empire, primarily because it includes the United States. So, Moscow's past strategy is counter-productive today, because if they keep pushing military conflict, they will inevitably get into a war with the world's major powers, a war that they will loose. (Unless they use major nuclear weapons, in which case everyone looses, but Russia still looses more.) It is also counter-productive because most European nations have abandoned brute imperialism and militarism in the second half of the 20th century. Only Russia has not shed its empire or its militarism. It is the wayward and unruly child of Europe.

Another major issue in mid-term perspective, that no one seems to be paying attention to until its going to be too late, is that radical Islamization of Russia. First off, Russia is fast turning into a Muslim nation. The Russian army recruits are already 40% Islamic. The next generation of Russian citizens after them is going to be majority Muslim (and non-Slavic). Aside from the religious factor this might not have been so bad if it it wasn't combined with the radicalization of Russian Muslims. When the Soviet Union fell apart, Russia proper had 400 mosques. Today it has over 40,000! The vast majority of these new mosques have been built on Saudi money (and money from other Gulf States), and are staffed with Wahhabi imams, who are teaching radical political Islam to Russia's historically moderate Muslims. That's why there is a high likelihood that in one generation Russia is going to be a majority radical Muslim state. Does anyone think this is going to be good for Russia's neighbors or for the world?

Foreign Investors Flee Russia

Not only has Russia almost completely isolated itself diplomatically, it is also shooting itself in the foot economically by its unjustified agressiveness and expansionism.

The damage to Georgia has been estimated at $1 billion. And yet the Georgian stock market is booming. And now the US has pledged $1 billion in aid, which will replace the infrastructure damage, and European financial assistance should be forthcoming soon.

Russian stock market, however, is continuing to slide, as investors are pulling money out of Russia in droves. At least $25 billion in foreign investments has left Russia since the start of its imperialist operation in Georgia.


"For the first time since the Crimean War, Russia has no allies," said Garry Kasparov, chess grandmaster turned opposition politician. "We are encircled by countries that are either suspicious or alienated and very angry."

"Boris Nemtsov, an opposition politician, has said the invasion was a blunder, and that ordinary Russians will pay for it."

http://news.yahoo.com/s/ap/20080829/ap_on_bi_ge/georgia_russia_economic_impact

Fears of isolation as investors flee Russia

By CATRINA STEWART, Associated Press Writer
Fri, Aug 29, 3:16 PM ET

MOSCOW - At the outset of this year, Russia proudly proclaimed itself an island of stability at the annual economic gathering in Davos, setting itself apart from the tumult of the global financial crisis.

Then came the war with Georgia, which some here regard as Russia's 9/11.

Within hours of Russia's retaliation to Georgia's move to take back its breakaway republic of South Ossetia, Russia had attracted widespread condemnation and threats of isolation and expulsion from the international community.

"For the first time since the Crimean War, Russia has no allies," said Garry Kasparov, chess grandmaster turned opposition politician. "We are encircled by countries that are either suspicious or alienated and very angry."

On the economic front, investors are hightailing out of Russia, while Western politicians have hinted at sanctions, visa restrictions and even the denial of Russia's right to host the 2014 Sochi Winter Olympics.

Increasingly cut off from the global world, Russian President Dmitry Medvedev risks undoing many of the successes of the past 10 years, ranging from the country's robust economic growth to a growing sense of national prestige and purpose.

Stock markets plunged, and Russian Finance Minister Alexei Kudrin said more than $7 billion was pulled out of the country in just two days, exposing the fragility of Russia's nine-year economic boom.

Stock markets plunged, and more than $7 billion was pulled out of the country in just three days, exposing the fragility of Russia's nine-year economic boom.

The economy was already under strain.

The five-day war followed months of bad news on Russia's corporate front, led by a high-profile shareholder tussle for control at TNK-BP, the Anglo-Russian joint venture.

In early summer, Bill Browder's Hermitage Capital blew the lid on a catalog of intimidation and corporate theft at the hands of Interior Ministry officials, and in July Prime Minister Vladimir Putin publicly attacked steelmaker Mechel, sending its shares into a tailspin.

Inflation was running at nearly 15 percent.

But while the storm clouds gathered, investors clung on.

The war was the tipping point, said James Fenkner, managing partner at Red Star Asset Management.

French investment bank BNP Paribas has estimated that more than $25 billion has been withdrawn from the country since the outbreak of the conflict, and Russian stock markets have plunged more than 30 percent since May.

It's a far cry from last December, when investors and analysts said 2008 was the year that Russia's stock markets would recover from the previous year's mediocre performance, even in light of the global turmoil.

Now investors are pulling their money out in droves.

"Very few investors have to be here now," said Fenkner. "Unless they are Russia-dedicated, they will move to friendlier environments. Sentiment is just very bad."

To many, Russia's fundamentals look very attractive.

"Russia is extremely cheap, and most of the growth dynamics are still in place," said Peter Halloran, whose hedge fund Pharos Fund has $150 million under management in Russia. "If I look forward 12 months, I want to own Russia."

But as the uncertainty continues, Russia could be seen as a high-stakes geopolitical gamble.

"If there is a perception of Russia as a risky place or as an undesirable place to invest, then the damage will be more long term," said Chris Weafer, chief strategist at UralSib. "It will restrict the development of the economy and hurt the government's plans to create a more diversified the economy."

The war has played well at home. Russians have rallied to the government's decision to punish Georgia for what it calls aggression and recognize the independence of South Ossetia and another separatist-controlled region, Abkhazia.

Alexander Konovalov, president of Moscow's Institute of Strategic Assessment, said many in Western countries see a "big, strong, unmanageable Russia" attacking "a small, democratic, innocent Georgia."

"In Russia," he said, "it is big, aggressive, undemocratic and irresponsible Georgia who took small and innocent South Ossetia."

As Western politicians warn of sanctions and consequences, many ordinary Russians feel increasingly isolated — and blame the Western media for painting a distorted picture of the conflict.

Russians "are sad about the situation and I have had many e-mails from people asking why the media is reporting the situation only from one side," said Lioudmila Siegel, chairman of an organization for Russians in Sweden.

A minority of Russians, though, have denounced the government's decision to use military force in the conflict.

The Union of the Committee of Soldiers' Mothers, for instance, has railed against the use of conscripts in Georgia, despite promises by the Defense Ministry that it would not do so.

Boris Nemtsov, an opposition politician, has said the invasion was a blunder, and that ordinary Russians will pay for it.

"This is a strategic and long-term mistake, the effects of which will be felt by virtually all Russians," Nemtsov wrote. "This is the beginning of a new arms race."

It could, he predicted, also mean visa restrictions, expulsion from the G8 group of countries, discrimination against Russian business abroad and a reversal of the decision to give Russia the 2014 Winter Olympics.

But for the most part, liberal opposition to Russia's actions has been relatively subdued. "The liberals have been extremely quiet," said Konovalov. To stand up for "democratic values and cooperation with the West ... will be seen as a betrayal."

David Cameron, head of Britain's Conservative opposition party, called for the British government to suspend visas for some Russian nationals and even, possibly, suspend Russia's membership of the G8 club of rich nations.

Since the murder of Alexander Litvinenko on British soil nearly two years ago, relations between London and Moscow have deteriorated, and British tabloids were quick to pick up on anti-Russian sentiment.

On Thursday, the Daily Mirror tabloid newspaper condemned British foreign secretary David Miliband for allowing "hundreds of Russian oligarchs who prospered under Vladimir Putin" to use "Britain as a bolthole."

But while there is some popular bashing of Britain's very rich Russians — who the tabloids have long loathed because they benefit from Britain's relatively generous expat tax laws — the overwhelming political and business view of Russians in Britain is still positive.

But analysts warn that, even if Russians themselves are welcomed abroad, it may become more difficult for Russian big business to expand there — especially in sensitive areas such as defense and energy.

In a fit of pique two years ago, then-President Putin canceled foreign participation in the Shtokman gas project after European objections to a move by VTB, a major Russian bank, to acquire a minority stake in Europe's EADS aerospace and defense group.

"This Russia phobia is nothing new," said Fenkner. "But it's going to turn up a couple of notches. It's not a trend reversal."

Henry Kissinger is Moscow's "useful fool"

Henry Kissinger recently wrote an opinion article in Washington Post, entitled "Finding Common Ground With Russia," in which he advises United States to appease Russia and not "humiliate it" and agree to many current Russian demands, such as stopping the push for Ukraine's NATO membership. http://www.washingtonpost.com/wp-dyn/content/article/2008/07/07/AR2008070702218.html

My personal opinion is that Kissinger is a "useful fool" of the Putinist Russia. He seems so concerned about a decade of perceived Russian humiliation and is absolutely unconcerned about hundreds of years of actual and extreme Ukrainian humiliation and national destruction. Just one example here: http://www.encyclopediaofukraine.com/display.asp?AddButton=pages\E\M\EmsUkase.htm Kissinger is basically repeating the talking points of the Kremlin - if Ukraine wants to be in the EU, that's great, but NATO - that's not necessary.

To the Russians, brotherly behavior has always meant sucking resources and creativity out of Ukraine, but claiming credit exclusively for Russia. For goodness sake, many Russians still consider the Klitschko brothers to be "their boxers" and list them on Russian sports sites as Russian boxers, along with some other Ukrainian athletes. Basically, if an athlete is primarily Russian-speaking, then he is claimed as "Russian".

And don't even start me on where the name of their nation comes from. Peter the First renamed his fiefdom of Muscovy into the Russian Empire after taking over Ukraine-Rus.

In any case, one thing is clear - Kissinger is not a friend of Ukraine or its European aspirations.