Russia aggressively using energy deals in foreign policy

Gazprom's Libya Bid Imperils Moves to Curb Russia's Energy Clout

By Sebastian Alison
Bloomberg News Service
Friday, July 11, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahS3Z_wUYD0c&refer=home

MOSCOW -- Moves by Russia's state-run OAO Gazprom to buy African energy assets threaten to thwart U.S. efforts to limit Moscow's use of oil and gas as political weapons.

Gazprom, the world's largest natural gas producer, on July 9 offered to buy all of Libya's spare oil and gas exports, after opening its first African office in Algeria a month earlier. It also is seeking to buy exploration licenses in Nigeria and to build a gas pipeline from there to Algeria, said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow.

President Dmitry Medvedev "wants to use Russia's largest conglomerates as a tool of foreign policy," said Nick Day, chief executive officer of Diligence LLC, a business- intelligence firm focused on emerging markets. "What he's looking to do is to buy oil, gas, and mineral resources around the world," he said by telephone from London.

Apart from ensuring that Russia retains sufficient resources, this expansionist policy means it will continue to supply neighbors like Ukraine and Georgia, and with that leverage "you can stop states from joining NATO, and you can act as a counterweight to the U.S.," Day said.

Both Ukraine and Georgia are trying to join the North Atlantic Treaty Organization.

Gazprom's Libya bid may weigh on a U.S. strategy to weaken the Russian company's grip over supplies of gas to Europe. The U.S. is trying to line up new gas supplies from friendly governments in Central Asia, such as Azerbaijan, and from Iraq for shipment to Europe via pipelines that skirt Russia.

... Pipeline Progress

Gazprom may have stepped up the pace of overtures after seeing progress on the U.S.-backed Turkey-Greece-Italy and Nabucco pipelines that would ease Europe's reliance on Russia for energy supplies, said Matthew Bryza, U.S. deputy assistant secretary of state for Eurasian affairs.

"The monopolist Gazprom is behaving like a monopolist does," Bryza said in a telephone interview from Ankara, where he is visiting with Turkish officials. "It tries to gain control of the market as much as possible and to stifle competition. And that's clearly what's going on."

The U.S.-backed pipeline projects use Turkey as the conduit for gas flows to Europe. Gas already flows from Turkey to Greece, and an undersea extension to Italy is planned by 2012. The Nabucco pipeline is set to link Turkey to Austria and other European markets by 2013.

... Ukraine, Georgia

Russia has been accused by U.S. and European leaders of using its energy resources to bully neighbors, for example by raising natural gas prices sharply after revolutions in Ukraine and Georgia tilted their foreign policy orientation to the West. It has also cut off supplies to Ukraine, a transit route to Europe, leading to shortages across the European Union.

Weafer said the Kremlin is backing Gazprom in its plans to become the global giant.

"The Kremlin wants Gazprom to be a dominant force in global energy, and the dominant force in global gas," he said by telephone. "Tying up gas resources in Central Asia and Africa is part of that." The plan is for Gazprom to dominate "in every corner of the planet," he said.

Medvedev has also taken steps to portray Russia as a reliable energy supplier. In a speech in Berlin on June 5 he said he was ready to work on creating an "early warning system" for energy so that Russia's European energy customers would have immediate alerts on possible supply disruptions.

... International Consortia

Russia is also "prepared to consider the possibility of creating international consortia to operate transit pipelines with the participation of companies from Russia, the European Union, and transit states," he said.

Gazprom's move into North Africa -- part of the energy "triangle" supplying Europe, along with the North Sea and the former Soviet republics -- is a new development. Former President Vladimir Putin, now prime minister, visited Libyan leader Colonel Muammar Qaddafi in April, less than a month before he left office.

"The Libyan side positively evaluated Gazprom's proposal to buy all future volumes of gas, oil, and liquefied natural gas assigned for export at competitive prices," Gazprom said in a statement July 9 after Chief Executive Officer Alexei Miller's follow-up visit.

The announcement came days after Medvedev, a former chairman of Gazprom, completed his second trip to gas-rich Central Asia since taking office in May. The visit, to Azerbaijan, Turkmenistan and Kazakhstan, was designed to lock up the region's gas and make sure it flows to markets through Russia.

... 'Default Advantage'

"That would seem to be the subtext" of Medvedev's visit, said Kim Iskyan, a fund manager at Diamond Age Capital Advisors in Moscow. "Russia has a default advantage in Central Asia and anyone else who comes in has to be particularly aggressive."

By visiting the three countries little more than a month after traveling to Kazakhstan on his first foreign trip as president, Medvedev was sending a message that "anything that happens here in the energy area is our domain first of all," Iskyan said. "Gazprom is doing everything it can to ensure that it has lots of European supply, and it has Europe more or less over a barrel," he said.

Gazprom already supplies the European Union with a quarter of its natural gas, either from Russian fields or buying it from Central Asian countries and selling it on.

... Gazprom Ambitions

Weafer said the newly expansionist ambitions of Gazprom follow years under Putin when Russia was "busy restructuring ownership of the energy sector," for example, by setting up oil company OAO Rosneft. During this time, he said, "Gazprom was not much more than a utility."

Now it's seeking access to the U.S. market through supplies of liquefied natural gas, he said, as well as expansion into distribution and retail markets in countries like France, Spain and Italy -- to be supplied with its new assets in Africa.

Gazprom's presence in those markets would be "at the expense of companies like Total and ENI," he said, referring to France's Total SA and Italy's ENI SpA. "We could see European or international companies now looking to play a role alongside Gazprom," he said.

The expansion abroad is also partly explained by underinvestment in domestic exploration at a time when economic growth is boosting industrial demand for gas, leading to possible shortfalls of available surplus to export, said Masha Lipman, a political analyst at the Moscow Carnegie Center.

"Russia has one huge advantage, and the advantage is resources," she said by telephone in Moscow. "Being the supplier makes Russia more influential."

Because the drive to boost Gazprom is backed by Medvedev, Putin, and the whole political establishment, "the Kremlin can offer the full resources of Russia. This gives Gazprom a huge competitive advantage," Weafer said. "What we've seen so far is just the beginning."

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