Russia’s new Great Game


Vladimir Putin (left), then the president of Russia, met with Muammar Qaddafi, the Libyan leader, in April to discuss arms, energy and debt. AFP

Employing strategies redolent of a new Great Game, Russia has stepped up its diplomatic and trade activities in the Middle East and North Africa in a bid to enhance its geopolitical clout and gain access to, and at least partial control over, the region’s oil and gas reserves.

Among the former global superpower’s tactics: linking arms deals and debt-forgiveness to energy deals.

The strategy has been most apparent in former client states of the ­Soviet Union including Libya, Iraq and Syria, although by no means limited to such countries. Moreover, Moscow has not shied away from courting the authoritarian regimes of countries such as Iran, Syria and Libya that are or have been shunned by the US and other western governments.

Russia is among the world’s biggest holders of oil and gas reserves, and is also a top global producer and exporter of both commodities, yet some of its biggest oil and gas producers have been seeking, with government backing, to expand their operations abroad.

Moscow is not alone among oil-producing states in pursuing such tactics. Abu Dhabi, for instance, has also been buying up international energy assets through sovereign investment vehicles such as Mubadala, Abu Dhabi National Energy Company (Taqa) and International Petroleum Investment Company (Ipic).

But whereas Abu Dhabi’s approach to international energy transactions has been low-key, aiming to avoid the international spotlight and political controversy, the Kremlin’s has been brash, with deals almost always linked to official state visits and high-level talks between top government officials.

Furthermore, the Russian energy deals, concentrated in countries that are or hope to become significant oil or gas suppliers to Europe, increasingly appear to have geopolitical overtones. Some analysts have warned of Russia mounting a “pincer” attack on Europe, aimed at tying up gas exports from its principal North African suppliers, Algeria and Libya.

Others see a wider chess game – or more accurately, an encircling strategy from the Japanese game of Go – involving a Russian attempt to gain control of gas suppliers from as many current and potential exporters to Europe as possible. The country’s recent negotiations with Iran and central Asian states such as Turkmenistan fall within this purview.

“If you are sitting in Europe, there would be a sense that Gazprom is operating on too many fronts for it to be comfortable,” said Samuel Ciszuk, Middle East and North ­Africa analyst for Global Insight, a British consulting firm.

Nonetheless, the jury is still out on whether Moscow’s international energy agenda has sinister overtones, he said.

Faced with declining domestic production – at least in the short term – Russia could simply be trying to maintain sufficient oil and gas supplies for both its domestic and international customers. Still, some European Union (EU) officials are spooked. In April, the EU energy commissioner, Andis ­Pielbags, said he was concerned that Gazprom might try to create a gas cartel.

Some Gulf states are also taking note of Moscow’s wheeling and dealing. In an interesting twist on the Russian strategy, Saudi ­Arabia has offered the Kremlin major military contracts in return for it suspending co-operation with ­Tehran.

Still, Russia is far from declaring checkmate over any rival. Its arms-for-energy tactics have not always paid off. Algeria is a case in point: the state has apparently decided to keep its options open rather than tying future gas sales to one main buyer – a rival supplier of gas to ­Europe at that.

Similarly, Russia’s recent deal to buy more gas from Turkmenistan has not stopped that country from proceeding with construction of a gas pipeline to China, and it still may seek to expand its market options as its gas output rises.

In Iraq, Lukoil, Russia’s largest independent oil company, invested billions of dollars to develop one of the countries largest oil fields under a deal with the former Iraqi president Saddam Hussein, only to have the contract cancelled last year by the current Iraqi government. Despite forgiving Iraq nearly $13bn of foreign debt, Moscow has yet to win assurances of future oil contracts in the country.

Whether Libya will go along with Russia’s proposition for its energy exports – at least without further sweeteners – also remains to be seen. “To give all your future increments to one buyer is a bad business idea. There needs to be an economic rationale for doing it,” said Mr Ciszuk.

Still, if Moscow is acting strategically in North Africa, that should definitely be a matter for western concern, he added. “For Europe, that would be very disconcerting,”

Algeria

In 2006, Moscow agreed to write off Algeria’s $4.7bn of Soviet-era debt in exchange for new arms purchases during a state visit to Algiers by the Russian president, Vladimir Putin.

In the largest arms deal in Russian history, Algiers subsequently agreed to buy $7.7bn in weapons, including fighters, jet trainers, anti-aircraft missile systems and tanks. The following year, Algeria additionally agreed to purchase two Russian submarines for $400m.

Also during Mr Putin’s visit, the Russian gas monopoly, Gazprom, agreed with the Algerian state energy company, Sonatrach, to co-operate on oil and liquefied natural gas (LNG) production in Algeria. ­However, the alliance has yet to yield any deals.

In June, Gazprom opened an office in Algeria – its first in Africa – to forge closer ties with Sonatrach.

Sonatrach supplies about 13 per cent of Europe’s gas consumption, compared with 25 per cent supplied by Gazprom. The Algerian company plans to boost its gas exports to Europe by building two new LNG plans, expanding its undersea pipeline to Italy and building two new pipeline links.

Iran

Intent on restoring its hegemony in central Asia and surrounding areas, Russia has reached agreements to deliver $4bn of defence-related goods to Iran over the next five years. Moscow has also established common cause with Tehran in opposing western political agendas. Among other things, it sold gas centrifuge technology to Tehran, helping Iran set up the controversial uranium enrichment programme that Washington claims is the basis for covert nuclear weapons development. Iran is also building a nuclear power plant based on Russian technology.

In the oil and gas sector, Gazprom is a partner with state-owned ­National Iranian Oil Company (NIOC) in developing the giant South Pars offshore gas field, which contains about 500 billion cubic feet of gas, representing half of Iran’s total gas reserves – the world’s second largest after Russia’s. A number of ­European oil companies have recently backed away from South Pars, after Washington stepped up pressure on its allies to comply with UN sanctions against Iran.

In July, Gazprom signed a major co-operation pact with NIOC, agreeing to set up joint ventures to pursue oil and gas projects in Iran, Russia and other countries, to build Iranian oil refineries and to transport Caspian oil to southern Iranian ports.

Iraq

At a meeting in Moscow last year, Iraqi and Russian foreign ministers pledged co-operation on Iraq’s post-war reconstruction efforts, including the country’s oil sector.

Lukoil, the largest Russian independent oil company, had been lobbying Baghdad for a contract to develop the second phase of the giant West Qurna oil field, hoping to replace a deal with former Iraqi strongman Saddam Hussein that Iraq cancelled in 2002. In a recent letter to his Iraqi counterpart, Nouri al Maliki, the Russian prime minister and former president, Vladimir Putin, also pressed for a Russian deal to rebuild an Iraq-Syria oil pipeline.

In February, Russia wrote off $12bn in Iraqi debt dating from the ­Saddam era. Nonetheless, Iraq’s oil minister, Hussain al Shahristani, has said Lukoil would not be given special advantages over competing West Qurna bidders including Chevron and Total.

Libya

Before international sanctions were imposed on the North African state in 1996, Libya was the region’s largest recipient of Soviet arms, for which it racked up $4.5bn in debt. Russia stopped applying sanctions only three years later, but Libya was reluctant to revive substantial military ties with Russia until recently.

Mr Putin, in one of his final acts as Russia’s president, agreed in April to cancel Libya’s Soviet-era debt during a state visit to Tripoli. The Libyan leader, Muammar Qaddafi, said the world needed a Russian “superpower” to provide balance in a new global arms race.

Debt forgiveness was tied to a 2.2bn euro contract in Libya for ­Russian state railways. Russia’s Interfax news agency reported that Moscow also hoped to sell Tripoli 2.5bn euros of anti-aircraft systems, jet fighters, helicopters and warships. In a related deal, Gazprom, the Russian gas monopoly, and Libya’s state oil conglomerate, National Oil Corporation (NOC), signed a co-operation agreement.

Separately, Gazprom and Eni, the Italian energy company, agreed to work together in Libya, where Eni holds a 33 per cent stake in a large offshore oilfield, a 50 per cent interest in the Greenstream pipeline, which delivers up to eight billion cubic metres of Libyan gas annually to Italy, and a stake in a Libyan LNG plant. The companies are in advanced talks over potential swaps of Libyan and Russian assets.

In July, during a follow-up visit to Tripoli by Mr Putin’s successor Dmitri Medvedev, Gazprom offered to buy all of Libya’s future uncommitted oil and gas exports and to pursue a refining joint venture with NOC. It also proposed building a new gas pipeline from Libya to Europe.

Saudi Arabia

After much antipathy during the ­Soviet era, Moscow and Riyadh have been striving to patch up their differences. Since 2003, rising oil prices have helped lubricate relations between the world’s two leading petroleum producers by highlighting their convergent interests. Strains in their respective relationships with Washington, meanwhile, have intensified Saudi-Russian rapprochement efforts.

These have extended to business dealings. In 2003, Russia and Saudi Arabia signed an oil and gas accord, setting the stage for a number of joint ventures in the kingdom. In the energy sector, Lukoil signed a contract in 2004 for natural gas exploration and development. The previous year, Stroytransgaz, Russia’a biggest oil and gas construction firm, signed a strategic partnership agreement with Saudi Oger, and in 2007 won a $100m (Dh367m) contract to build a 200-kilometre oil pipeline for Saudi Aramco.

During a February 2007 state visit to the kingdom led by Mr Putin, then the Russian president, the Saudi foreign minister, Prince Saud Al Faisal, said there would be “no obstacle” to Saudi weapons purchases from ­Russia. However, no arms deals between the two countries have yet been signed.

In July, Russia’s Kommersant newspaper reported that Saudi Arabia had offered to award major military contracts to Russia in return for Moscow curtailing co-operation with Iran.

Syria

In 2005, Russia and Syria signed a major weapons agreement and an energy and trade deal, prompting US and Israeli officials to voice concerns over Moscow’s assistance to states accused of aiding the insurgency in Iraq.

The military co-operation agreement signed by Mr Putin and the Syrian president, Bashar Assad, enabled Russia to upgrade Syria’s military and to sell Damascus advanced arms, including anti-aircraft missile systems mounted on armoured personnel carriers and advanced surface missiles capable of engaging multiple targets ­simultaneously.

Mr Putin also pledged joint business ventures focusing on oil and gas development in Syria, and agreed to write off $9.8bn or 73 per cent of Syria’s $13.4bn debt to Russia. Much of that debt was incurred during the Soviet era for military equipment.

In the two years following Mr ­Putin’s visit, Stroytransgaz won tenders totalling $2.5bn to build ­Syrian sections of the pan-Arabian and Kirkuk-Banyas gas pipelines and a Syrian oil refinery. In 2007, the ­Russian contractor signed a 160m euro contract to build a gas refinery on Syria’s Palmyra plateau. Damascus also ratified a $220m deal for a gas processing plant with Stroytransgaz without putting it out to tender.

Other Russian companies active in Syria’s energy sector include Volgogradneftemash, a manufacturer of oil, gas and chemicals industry equipment, which is supplying the Syrian Gas Company with specialist items for a gas refinery. Taftneft, a Russian oil company, is exploring for oil and gas under a 2005 production sharing agreement with the Syrian State Oil Company. ­Tekhpromeksport, the Russian energy construction firm, and a Russian machinery supplier, Silovyye Mashiny, in 2006 won a deal worth about $200m to increase the capacity of Syria’s Tishrin thermal power plant.

Turkmenistan

In June, Turkemistan agreed to purchase six BM-30 Smerch multiple rocket launchers from the Russian armaments manufacturer, ­Motovilikhinsk Factories. The deal, valued at roughly $70m, may be intended to help persuade Ashgabat not to supply gas to the proposed Nabucco pipeline project, which aims to provide the first transmission route to Europe for gas from Asia’s Caspian region to circumvent Russian territory.

In July, Turkmenistan agreed to start building a Moscow-backed pipeline to transport up to 10 billion cubic metres of Caspian gas to ­Russia, starting in 2010.

UAE

In July, Stroytransgaz beat Italian and Greet rivals to win a $418m contract to extend the Dolphin Energy gas pipeline from Taweelah, on Abu Dhabi’s Gulf coast, to Qidfa, ­Fujairah, on the UAE’s Arabian Sea coast, its first major deal in the UAE. In this case there is no suggestion of a quid-pro-quo for Russian arms deals. The UAE relies heavily on foreign arms and has a policy of diversifying its suppliers, buying from the US, France, the UK and Russia.

Tamsin Carlisle
July 26, 2008

Source: The National

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