Ruminations on Russia

It looks as though that the brief cup of coffee and lunch overran its allotted time.  So instead of a mid-afternoon blogfest this post is competing with a terrible Steve Martin film (aren't they all?) from Moscow to Heathrow courtesy of British Airways.

This is Russian Energy policy 2 because I am not yet ready for a bout of Rosneft caveat emptor cynicism.  Instead I am trying to find a place for a comment from Thomas Friedman's The World is Flat (no link because BA is Internet-less, though apparently Google is a good place to search and there is this company called Amazon that specializes in allowing you to order online and will deliver it to you in anywhere between a week and never.)  Despite winning the Goldman Sachs / FT Business Book of the Year it took 452 pages to find a truly original thought.  As a blogger smarter than I put it (clearly paraphrasing) - sometime around 2010 we should wait for the Friedman book telling us that the iPod is revolutionizing the music download world.  (note to self - get to the point) So this is the Centrica and GAZP post.

And his point was that there have never been wars between two countries that are part of a global supply chain.  A slight update on his previous books; there have never been wars between two countries which have McDonald's - presumably because everyone is suffering from indigestion.  Whilst Dell's just-in-time, albeit slightly longer than promised, supply chain may have a lot going for it, peace in our time was not a deliberate policy.

You can decide whether there is any merit in Dell as a global peace keeper.  The other side of the coin is that natural resource-based economies (pace Australia) tend not to be integral parts of the global services and lowest cost production supply chain.    Try Saudi Arabia and Kuwait for starters.  Because services can be moved quickly and outsourced production tends to have redundancy built in they are commodities - whereas natural resources are Commodities (some confusion here surely - ed?)

Before the argument becomes entirely circuitous as I try to argue that services are commodities and Commodities aren't commodities (at this point in the cycle) I'll try to get to the point about Russia.  When a large enough portion of a countries exports are service-based or lowest-cost-production commodities which can (relatively) easily be moved somewhere else in the globe its foreign policy is required to show that it is reliable partner.  If however, you believe (see Russia's Energy Policy Part 3 - if I ever get there)  that the world is dependent on your oil/gas/LNG/general largesse then you have no (immediate?) requirement to be a “friendly” part of the global supply chain.

The point that Friedman was making was specifically aimed at the Saudia Arabia's and Venezuela's of this world.  What I cannot decide is whether Russia's foreign policy is inside or outside the Friedman global supply chain - and indeed whether it matters.  If your point of view was exclusively guided by the FT and WSJ the answer would be that Russia was not acting like a good member of the interconnected world.  A more evidential based response would be that Russia tends to talk like the playground bully (Gazprom issues threat to EU gas supply) and act in a considerably more logical fashion - I think.

Nonetheless being the largest owner of a resource which is proving harder to discover  and more expensive to produce otherwise known as a Commodity, Russia's foreign policy does not have to be driven by its desire to see itself as part of a flat world.  And if that is the case will Russia see itself as integrated when it owns Centrica and Ruhrgas? Or are they Sword of Damocles investments?

I have argued during the Ukraine issue previously, and continue to believe, that Russia has every right to use its gas as an arm of its foreign policy.  As the FT has it:

“Russia is intent on using its existing and potential position as a major energy supplier to the global economy to get increased influence at the top table of global politics,”

and there is nothing wrong with that.  The nastier side is that

“Russia's use of its energy resources is unpredictable. The dominance of state monopoly in the gas sector means that reserves from the ground do not reach the market place and that gas can be used as a political weapon.”

Europe would rather that Russia signed up to long-term contracts and access to it's pipelines and hopes that by offering access to its retail markets Russia will play ball.  Russia sees no reason to do so because its guess is that Europe has nowhere else to go for 10-15 years.

Europe wants to diversify both the sources and routes of its energy supplies. It is pushing Russia to ratify the energy charter treaty, which provides for liberalising access to pipelines and stops countries from unilaterally suspending gas supplies in a pricing dispute. It has signalled it would let Russian companies operate in European retail markets in return..........

Russia understands the energy co-operation with Europe differently.

Having witnessed the destruction of Yukos in favour of Rosneft and with the knowledge that GAZP acts in favour of its managers, its government minders, the State and somewhere down the bottom of the list its shareholders and customers there are

legitimate concerns about allowing the purchase of assets by the state-owned entities of authoritarian regimes, particularly those with a track record of abusing private property rights. But the problem also has a tactical dimension. It might be better to tie Gazprom in to supplying the UK by allowing it to buy Centrica’s assets, which are largely customer contracts and hardly strategic. This argument might be even stronger if, in return, access could be gained to help develop Russia’s gas fields.

One further note of caution in this discussion; Friedman's flat world foreign policy may actually mean being a good member of the US foreign policy establishment which allows India to develop nuclear weapons; whilst Iran is at risk of being overrun by Rumsfeld's shock and awe tactics.

[composed and posted with ecto]

Technorati Tags: Energy, Gas, Russia