Russia and Pipeline Politics

By Kimberly Amadeo, About.com Guide

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(Credit: David McNew/Getty Images)

Russia's Economy Is Important to the U.S.:

Russia is a $4 billion export market for the U.S. in areas such as agriculture, aircraft, and information technology.

Russian Is the Energy Supplier to Europe:

Russia supplies 30% of Europe’s oil and 50% of its natural gas. Gazprom, is Russia’s state-owned gas company and Rosneft is its state-owned oil company.

Russia has been using its energy revenues to diversify into other European businesses, while putting pressure on existing energy contractors to increase their profit-sharing to Russia. For example, Russia has:

Changed its agreements with Royal Dutch Shell and ExxonMobil.
Granted a license to the Russian-owned oil company Rosneft to operate in ExxonMobil’s area.
Revoked Shell’s license for a $20 billion Liquified Natural Gas project at the Sakhalin-2 island.

In 2006, Russia cut off gas supplies to the Ukraine, through which Europe’s gas must flow, in a successful bid to charge higher prices.

On the other hand, the European Union is concerned that Russia will not have the infrastructure to meet Europe’s future energy needs. To do that, Russia needs $738 billion in investment by 2020. In addition, Russia wants to increase France’s investment in Russia, which was only $905 million in 2005.

Russian has taken several measures to forge greater alliances with France and Germany. It has:

Calmed anxiety about any potential Russian attempt to gain greater control over EADS and Airbus. A Russian bank bought 5% of French Airbus parent European Aeronautic Defense and Space Company (EADS).
Assuaged French concerns that its oil company, Total, may lose its license to operate in the Russian Kharyaga oil field.
Signed agreements totaling $10 billion, such as one that allows the French construction company Vinci to build a highway between Moscow and St. Petersburg.

Russia Wants to Join the World Trade Organization:

Admittance to the WTO (World Trade Organization) would allow Russian businesses greater access to foreign markets, allowing its economy to expand beyond energy. Foreign companies such as Shell, Boeing and Ford to profit from joint ventures, including exploration of Russia’s natural gas resources.

In 2006, Russia and the U.S. signed a landmark trade agreement that will help its membership process. The agreement reduces tariffs on cars, increases foreign ownership of financial businesses, and protects of intellectual property rights. Russia relaxed their insistence on inspection of all meat products.

Russia must finalize bilateral deals with Costa Rica, Georgia and Moldova.

The U.S. must also approve Permanent Normal Trade Relations (PNTR) with Russia before it can join the WTO. That means removing a Cold War-era trade restriction known as the Jackson-Vanik amendment that linked U.S. trade benefits to the emigration policies of communist countries.

Congress has approved PNTR for Ukraine, which became a WTO member in 2008. It now has leverage to insist on trade restrictions against Russia.

Russia's Treatment of Georgia and Ukraine Threatens Its WTO Status:

In 2008, Russia used its peace-keeping troops inside Georgia to capture the city of Gori and the state of Abkhazia. This was in response to Georgia's invasion of South Ossetia, another semi-autonomous state along Georgia's border with Russia. Abkhazia and South Ossetia want independence similar to Kosovo's declaration in 2008.

Russia is trying to influence the election of Georgia's leadership, which has become more pro-Western. Georgia has replied it will only approve Russia's WTO membership if it can regain control of customs posts in its two break-away states.

Georgia is in a strategic location between Europe and Asia. It has become an important transit point for gas, oil and other goods by building the Baku-T'bilisi-Erzerum gas pipeline, and the Kars-Akhalkalaki Railroad. In fact, Russia attacked the area that contains the important Baku-Tbilisi-Ceyhan oil pipeline, owned by British Petroleum. (Source: The Economist, Georgia and Russia rattle sabers, April 20, 3008; IHT, Fighting escalates in Caucasus, August 9, 2008; CIA World Factbook)

Georgian President Mikheil Saakashvili has courted U.S. alliances. Georgia and Ukraine, both WTO members, are threatening to block Russia's WTO nomination. Germany and other EU members blocked U.S. attempts to give Georgia and Ukraine NATO membership. This lack of support may have emboldened Russia to attack its one-time province.

Gazprom and Sakhalin-2:

Russia is positioning the state-owned gas company Gazprom to take control of all the natural gas the country produces. Most of which has been promised to China, Japan and other Asian countries. Russia has close to one-third of the world's proven natural gas reserves, but controls only 20% through Gazprom.

Gazprom bought majority ownership in the Sakhalin-2 energy project for $7.45 billion on December 15, 2006. Sakhalin-2 is the largest integrated gas-and-oil drilling project in the world and, at $20 billion, the largest Foreign Direct Investment (FDI) in Russia.

Sakhalin-2 will access 10% of the Sakhalin Shelf off the northwestern coast of Siberia. The Shelf is estimated to contain 1.2 billion barrels of oil and 17.1 trillion cubic feet of natural gas. Sakhalin-2 was run by Sakhalin Energy, a consortium of Dutch-based Shell Oil and the Japanese companies Mitsui and Diamond Gas (Mitsubishi). In 2005, Shell doubled its estimated completion cost to $22 billion, and extended the estimated completion date to 2008.

In 2006, Russia threatened to revoke the project's environmental license, on grounds it would destroy the feeding grounds of the last 123 Western Gray Whales, leading to their extinction. The threat was also a ploy to allow Gazprom to gain control of the foreign-financed project, which is now 80% complete. In this way, Russia gained more of the profit from oil and gas sales.

The original agreement, which was signed during the Boris Yeltsin days, did not allow Russia to profit until all costs were reimbursed. When gas prices rose, Russia used its regulatory powers to renegotiate the terms of the agreement.

In May 2007, Gazprom announced plans to buy all the natural gas produced by Sakhalin-1, in which Japan has a 30% investment. This means that all the natural gas would go to Russia, and none to Japan, despite the years of financial investment and technical expertise Japanese companies brought to the project. This announcement comes just months after Gazprom bought majority ownership in Sakhalin 2.

Sakhalin-1 may be more difficult for Gazprom to take over than Sakhalin-2 was, according to Tass, the Russian news agency. That is because Sakhalin-2 was coming in way over budget, giving the government an excuse to “find” environmental regulations that had been violated. Sakhalin-1 is operating as planned, so any government take-over will be more blatant difficult to finesse.