Thursday, August 14, 2008

The Russia, Georgia and Energy Connection

Why is there suddenly activity in Georgia that looks a lot like war? Most of us know nothing about Georgia and think that it is a state in the US. Why is Russia flexing its muscle? What are we not hearing in the news?

These are but a few of the questions we were asking when we heard the reports of fighting between Russia and Georgia. We turned to someone who knows a great deal about the inner workings of that part of the world, Michael Economides—one of our favorite contributors and author of the new book From Soviet to Putin and Back, subtitled: The Dominance of Energy in Today’s Russia.

We asked Economides for his insights on the situation and this is what he sent us. We believe it will shed new insights on the situation for you.


Scratch Russia-Georgia War and You Find Oil and Gas Pipelines
The war between Russia and Georgia has some nationalist elements, some old grudges but mostly it rubs the wrong way Russia’s newly found power: energy imperialism.

Georgia has refused to play along like other former Soviet states and, if anything, its independent attitude has been a giant irritant for Russia ever since Vladimir Putin used oil and gas to project hegemony over the region and, by extension, into all Europe. At the same time, Georgia, a tiny, 4 million people country has been trying to ward off the giant on its north by seeking membership in NATO or the European Union. In the post-Cold War era, the United States and Russia-dependent Europe are reduced to just pleading for calm.

A look at the map makes the issue at hand quite transparent.

Oil and gas can come from Russia into Europe by tanker through the Black Sea from its massive terminal in Novorossiysk or by pipelines through Belarus, Ukraine and even plans of under water construction in the Baltic. All of these give Russia a huge leverage, almost monopoly, over both the transit and destination countries. More than 25 European countries depend now for more than 75% of their oil and gas from Russia.

But Georgia was eager to act as a spoiler and European countries were even more eager to comply while trying to avoid incurring the wrath of the hand that feeds them.

First, it was the Baku-Tbilisi-Ceyhan (Turkey) oil pipeline that started in 2002 with a much weaker then Russia. The 1776 km line was to connect the Caspian and south Europe in what was to be an “Energy Corridor” for European oil and gas supplies. The pipeline was designed to carry 1 million barrels per day from Azerbaijan’s Caspian oil fields to the export terminal Ceyhan via Tbilisi, with Georgia acting as a very important transit country. This did not sit well with Russia, cutting it out from oil exports to that vital part of Europe. The pipeline, funded by western oil companies and banks at the tune of $3.2 billion, was commissioned in 2006.

What gave and still gives Russia fits is what else can happen that could affect its control. For example, how about building under-water pipelines across the Caspian linking Kazakhstan or Turkmenistan?

What really caused the ire of Russia was the talk of a gas pipeline, similar to the oil pipeline, again linking Azerbaijan and Turkey and points beyond (Baku-Tbilisi-Erzerum) through Georgia. This would give Georgia energy independence and create an alternative route to the holy grail of Russian geopolitics: Gazprom’s monopoly.

Back in 2006, Gazprom, flexing its muscles, was manipulating the former Soviet states, by setting new records in gas export prices practically every month. It was clear then that the geopolitical climate in Eastern Europe would be severely damaged. In fact, double and triple increases in gas prices were imposed on Russia’s neighbors: Ukraine, then Belarus, then Armenia after all of them were threatened with gas supply interruptions, until new contracts with huge price increases were signed. They had no other choice but to surrender on Gazprom’s terms and conditions.

Georgia resisted the Russian might and that conflict predictably ended up with a war.

Things did not deteriorate all of a sudden. The conflict between Russia and Georgia started with the election in 2004 of the western-oriented president, Mikhail Saakashvili, who refused to accommodate Russia’s ambition of control over his country.

Then, Georgians discovered and expelled alleged Russian spies. In return, Russia’s president, Vladimir Putin, stirred a crass witch hunt against ordinary Georgians in Russia while Gazprom threatened to cut off gas supplies to Georgia unless it agreed to pay new gas prices from $110 to $230 per thousand cubic meters.

The blackmail from Gazprom was blatant: “The Georgian side could still maintain lower gas prices. They could compensate for gas price by trading off some assets… For example, Armenia had already paid Gazprom with its transportation network.” What this referred to was that Armenia saw the writing on the wall and kept the same price for gas supplies as before – $110 per thousand cubic meters. But they relinquished control of their gas network in the bargain.

But it was the talk of the construction of the gas pipelines via Georgia that was bound to create an alternative energy supply route to Russian oil and gas, thus threatening Russia’s energy stranglehold on the vast south European markets. This was not something that Russia could tolerate and the war, no matter what the daily pretexts are, is blatant and punishingly brutal.

Prof. Michael J. Economides, University of Houston and also Editor-in-Chief Energy Tribune Houston, TX

1 comment:

Tom said...

Interesting article.
Thanx for posting.
Maybe I will have a link to this on one of my pages.