Higher oil could lead to a worldwide economic collapse, according to a top analyst at Germany’s largest bank.

"Two-hundred dollar oil would break the back of the global economy," Adam Sieminski, chief energy economist at Deutsche Bank AG (DB), told Bloomberg News in an interview yesterday (Wednesday) in Tokyo. "Next step after $200 would be global recession and bad news for everybody."

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Just a little over a year ago, $200 oil seemed out of the question. But the Deutsche Bank prediction of oil-fueled global recession follows a Goldman Sachs Group Inc. (GS) forecast that oil might climb as high as $200 per barrel in two years.

Keith Fitz-Gerald, Money Morning’s Investment Director – and one of the first global financial gurus to predict triple-digit oil prices – recently boosted his target price for crude oil from $187 to $225.

"The math is really simple here," Fitz-Gerald said back in May, when oil futures were trading around $123 a barrel.

"We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves," he said. "Throw in a few [surprises]… perhaps a terrorist event… and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices."

Since the time of Fitz-Gerald’s prediction, oil has gone on to several new highs, nearly breaking through the $140 barrier on June 16, earlier this month.

Russia’s Bubbling Oil Troubles

Exacerbating the high oil prices are production problems in Russia, the world’s second largest oil exporter. Aging oil fields and a lack of infrastructure investment has led to the country’s first annual production decline in 10 years. Output fell 0.9% to 9.76 million barrels a day in the first five months 2008, Bloomberg reported.

"Growth last quarter fell on a year-on-year basis, and this has to do with the policies implemented over the prior year to raise taxes on oil industries," Deutsche Bank’s Sieminski said, speaking of Russia’s oil difficulties. "This made it difficult for foreign capital to come in."

But "if Russia could reverse some of these policies and get their own oil industry back on, this will help very much" with supply concerns, he added.

Fear of government corruption and takeover of assets has dissuaded some firms from seeking investment in Russia. BP PLC (ADR: BP) is currently in litigation over its Russian joint venture TNK-BP Ltd.

"If the conflict escalates and continues for some time, it will have a negative impact on the company operations," Stan Polovets, representative of the TNK portion of the Russia-based company, told Bloomberg. At the same time, advanced techniques aimed at improving oil recovery are "not proving to be as successful as we had hoped," he added.

Production levels of TNK-BP have dropped as the two sides continue to argue and several drilling projects have been halted in disputes over contract workers.

BP is not the only "Oil Major" to run into trouble in Russia.

Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) recently bowed to pressure to sell state-controlled Gazprom OAO (OTC ADR: OGZPY) a majority stake in a $22 billion venture after the government threatened to halt drilling due to environmental concerns.

In a recent Reuters interview, new Russian President Dmitry Medvedev denied the government was trying to make a grab for BP-TNK assets.

Medvedev also defended his predecessor, Vladimir Putin, for tightening state control on certain economic sectors such as energy and defense, saying it was important to "guarantee the strategic interests of the economy in the years to come."

"But any additional strengthening of the role of the state, increasing its presence in the economy is not foreseen," Medvedev said. "On the contrary, we will take action to reduce the presence of the state in the economy."

News and Related Story Links:

• Bloomberg News:
  World Economy Would Collapse If Oil Hit $200, Deutsche Says

• Money Morning:
  Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China

• Reuters:
  Russia to cut state role in economy: Medvedev

• Bloomberg News:
  BP May Struggle to Boost Russian Output Amid Dispute

Russia agreed yesterday (Thursday) to write off $4.5 billion in Libyan Cold War-era debt in exchange for military and civilian contracts for Russian companies, Reuters reported.

The deal will almost certainly help Russia tighten its grip on European energy supplies.

“I am satisfied by the way we have solved the debt problem,” Russian President Vladimir Putin told reporters. “I am convinced we found a scheme which will benefit both the Russian and Libyan economies and the Russian and Libyan people.”

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Much of the debt was the result of Soviet arms supplies to Libya during the Cold War. At the time, trade between the Soviet Union and Libya totaled approximately $1 billion annually. With the subsequent collapse of the Soviet Union trade between Russia and Libya has slowed to a $200 million a year trickle.

Since dismantling its nuclear weapons initiative, Libya has been courted by a growing number of Western companies hoping to secure business and infrastructure contracts, particularly in the nation’s energy sector. Its oil and gas industries earned Libya more than $40 billion in oil and natural gas revenue in 2007.

Meanwhile, Russia would very much like to counter the growing Western influence, and close in on what is fast becoming a viable energy alternative for European consumers.

Russia’s state-owned oil and gas company, Gazprom OAO, has pocketed a fortune jacking natural gas prices throughout Europe, a market the company dominates. Gazprom supplies 25% of Europe’s gas, and has made a habit of raising prices and threatening to cut supplies, an action that would leave millions literally out in the cold.

A memorandum of cooperation between Gazprom and Libya’s state energy conglomerate National Oil Corporation (NOC) was one of ten trade, investment and political agreements reached during President Putin’s two-day visit to Tripoli. Stroytransgaz OAO, another Russian company is in talks to build a network of natural gas pipelines on the Mediterranean coast of Libya, the International Herald Tribune reported.

News and Related Story Links:

• Reuters:
  Russia, Libya seal debt accord, eye arms deals

• International Herald Tribune:
  Russia seeking tighter economic relations with Libya

• Money Morning:
  New Pipeline Subverts U.S. Efforts to Diversify Gas Supply

• Money Morning:
  The New Cold War: How Russia Has Turned Its Energy Exports Into Weapons of Diplomacy

BP PLC (BP) has found itself under pressure from the Kremlin to cede control of its joint venture in Russia, TNK-BP Holding OAO, to a state-owned oil monopoly such as Rosneft NK OAO or Gazprom OAO – the latest attempt by the Russian government to expand its energy monopoly and drive out international oil majors.

Last month, 78 Federal Security Service (FSB) officers raided the Moscow offices of BP and TNK-BP. The raid resulted in the arrest of one TNK-BP employee and his brother, who will both face charges of industrial espionage. Soon after the raid, the Natural Resources ministry said it would check TNK-BP’s largest oil field for environmental violations and the Interior Ministry accused the company of breaking visa rules.

Sources close to the situation, including TNK-BP Chief Executive Robert Dudley, said the raids and subsequent arrest were a "one-off" incident. But many analysts see a more sinister motive behind the crackdown.

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Tax claims, corporate malfeasance and government investigations could be just the kind of pressure the Kremlin needs to exert for one of its state-owned oil monopolies – some of which are the most heavily indebted companies in Russia – to acquire a stake in the venture for a relatively cheap price.

TNK-BP is currently co-owned by BP and a group of Russian billionaires. The Russian investors agreed not to sell their combined 50% stake in the company until 2008. But as the agreement nears its end, Gazprom is reportedly encouraging BP’s Russian partners to sell out.

Gazprom, whose chairman, Dmitry Medvedev, will be sworn in as Russian president on May 7, has frequently found itself the beneficiary of government interference in the energy sector.

Two years ago, OAO Yukos Oil Co., formerly one of the world’s largest private oil companies, went out of business after Russia’s Federal Tax Service demanded the payment of $30 billion in back taxes.

Soon after, Royal Dutch Shell PLC (RDS.A) was forced to relinquish control of its Sakhalin-2 oil and gas project to Gazprom for $7.45 billion when the Russian government threatened to block investment plans by canceling building permits on environmental grounds.

And just last year, TNK-BP was talked into selling its 62.8% stake in one of the world’s largest gas fields, the Kovytkta field, to Gazprom, after Russian authorities threatened to revoke the company’s license to develop it. 

So it’s perfectly reasonable to believe that TNK-BP, which produces close to a quarter of BP’s total oil and natural gas production, could be Gazprom’s next takeover target. It’s also reasonable to expect that Gazprom may want more than to simply replace the Russian oligarchs as junior partners in the venture.

"We think there is a possibility that BP ends up as a minority shareholder in TNK-BP," analysts at JP Morgan Chase & Co. (JPM) wrote in a research note.

Just two weeks after the Moscow raid, BP chief Tony Hayward began making a suspicious set of rounds. He met with Gazprom CEO Alexei Miller last Thursday. That meeting was followed by a meeting with Rosneft chairman Igor Sechin, and then another meeting with shareholder Viktor Vekselberg. Vekselberg, along with Mikhail Fridman and Len Blavatnik, is one of TNK-BP’s largest shareholders.

RBK Daily reported earlier this week that Gazprom is seeking a 1% stake in the joint venture from BP, while at the same time buying out TNK-BP’s three Russian shareholders, thereby giving the state monopoly a controlling stake in TNK-BP.

Sources cited by the paper, also said any deal would likely take place after President-elect Medvedev’s inauguration.

"We are all worried there is going to be some political maneuvering in order to relieve BP of the stake," Colin Morton, a fund manager at Rensburg Fund Management who owns BP shares, recently told Reuters. 

News and Related Story Links:

• The Guardian:
  BP may have to give up control of Russia venture

• The Moscow Times:
  BP Chief Hayward Meets Gazprom, Rosneft Heads

• RBK Daily:
  Gazprom Is in Talks To Take Control Over TNK-BP

• Reuters:
  Pressure from the Kremlin may push BP to cede control of Russian oil venture

• Money Morning:
  Gazprom and Ukraine Resolve Dispute

• Money Morning:
  Exxon Strikes Back At Venezuela

• Money Morning:
  The New Cold War: How Russia Has Turned Its Energy Exports Into Weapons of Diplomacy

Russian president Vladmir Putin’s United Russia party won 64% of the vote in Sunday’s elections, while Venezuelan president Hugo Chavez lost his constitutional referendum in by a slim 2% margin the same day.

That’s a split result for the wannabe dictators, but it looks like a net win for investors.

That may seem a strange view. After all, Russia is generally considered one of the most politically influential countries in the world, while Venezuela is a modestly important South American oil producer that carries little international clout. Even economically, Russia’s Gross Domestic Product in 2006 was $733 billion whereas Venezuela’s was only $186 billion.

However, the position becomes very different when you examine both countries’ principal export – oil.

On current production, Russia still dominates, with 10 million barrels per day in 2007, compared with about 2.5 million from Venezuela. But if you look at proven and probable oil reserves, the picture is very different. Not including places like the North Pole, which Putin is currently attempting to seize, Russia currently has about 74 billion barrels of reserves, or about 20 years of production at current rates.

Venezuela on the other hand has the Orinoco tar sands, which are believed to contain about 1.8 trillion barrels of oil, 24 times Russia’s reserves.

Orinoco, being tar sands, is relatively expensive to extract – though even at about $20 a barrel, it’s a bargain compared with today’s oil prices. Production from Orinoco currently is only about 600,000 barrels per day, one quarter of Venezuela’s total. U.S. companies have recently invested $15 billion in the region, but Chavez seized control of their projects in May, leaving them with only a minority position.

That’s where the good news comes in. If Chavez had won his referendum, he would have cemented his power, as well as getting control of Venezuela’s foreign exchange reserves at the Banco Central de Venezuela.

His loss in the referendum vote suggests that his popularity is slipping – after all, he won with 63% only a year ago. That’s not surprising – inflation in Venezuela has been running at almost 20% for a year now – and that "official figure" is artificially low because there are price controls on energy and basic foodstuffs.

The Venezuelan state budget is a mess, too. In 2007, budget expenditure was $53 billion, but actual expenditure came in at $64.7 billion. The new budget for 2008, which passed last week, estimates expenditure at $64 billion, but it is likely that the 2008 budget will also overshoot.

That doesn’t matter too much currently, with oil prices up 50% in the last year. However, at some point prices will come back down. When that happens, Chavez will quickly run out of money; both his social programs and his foreign policy are frighteningly expensive, involving as they do bribes to either the impoverished Venezuelan voters or the dozier and more anti-American Latin American satraps.

When oil revenues drop, Chavez will face a financial crisis and the awful reality of facing an election he might not actually win. The army will not back him; this referendum loss has dented his electoral magic and the last thing any army wants is to take responsibility for an economy going into a major recession.

Instead, Chavez will be allowed to lose an election and some opposition figure will replace him. That opposition figure may still try to do business with China in preference to the United States, but unless he’s really stupid, he will realize that Venezuela’s primary needs will be foreign capital and expertise to develop Orinoco. Regardless of who gets the oil out, the supply will enter a world market that will rapidly become much less tight as Orinoco production expands.

It would make Vladimir Putin really mad to learn that what he does in Russia doesn’t really matter to the world economy. However, in terms of oil reserves, Venezuela is 24 times as important as Russia, and the good guys won one in Venezuela on Sunday. At least one of the major risks facing the world economy, a real oil shortage, has become substantially less important.

News and Related Story Links:

• Money Morning:
  Where Should We Invade to Bring Down Oil Prices?

• Money Morning:
  ‘Axis of Unity’ Provides Dollar Dissent at OPEC Summit

• Money Morning:
  Eight Ways to Profit if OPEC Dumps the Dollar

• Wikipedia:
  Orinoco Tar Sands

Readers may well have missed the news that Ukraine is currently putting together a new coalition government led by reformist Julia Tymoshenko.

“So what?” you may ask. “I can’t know everything. And besides, how do you ever expect me to make a buck out of Ukrainian politics, a murky affair at best?”

Well, let me tell you a secret to emerging markets investing: The really big returns are made by spotting new markets as they begin to emerge, and then surfing the long wave of their emergence. The story of the independent countries that split from the Soviet Union is mostly a sad one, but there are a few gems beginning to emerge. There isn’t much to plunge into yet, particularly as a U.S. investor, but they’re well worth keeping an eye on.

Beginning first with all those confusing ones called “-stan” – I have to look up whether there are four or five of them. Uzbekistan, Tajikistan and Turkmenistan are backward dictatorships with few redeeming features, only modest amounts of resources and close ties to Vladimir Putin’s mob in Russia.  Kyrgyzstan is an emerging semi-democracy, with an almost functioning free market. Alas, it has only 5 million people, a puny Gross Domestic Product (GDP) of $10 billion, a modest growth rate, and no oil.

Kazakhstan’s the one with the oil. Unfortunately, it also has one-party government, high corruption and close ties to Putin. Nevertheless, with 15 million people, a much chunkier GDP of $53 billion and a growth rate of 10.6% in 2006 there’s money being made there. It has oil pipelines to the Black Sea and to China, so it’s not dependent on Russia to get its principal export to market. An international consortium led by Italy’s Eni SpA is currently drilling at the Kashagan oilfield, a huge project expected to have cost $130 billion by the time it comes on-stream in 2010. Since the Kazakh oil company Kazmunaigaz is state owned, Eni, itself (E), which has a price-earnings ratio of only 10 (well, NOBODY trusts the Italian government, which owns 39% of Eni), is worth looking at – what’s more, you get to share Eni’s new investment in Libya, another fun place with lots of oil!

The Baltic States – Estonia, Latvia and Lithuania – are well known; all three are now members of the European Union (EU), and have enjoyed rapid growth. They’re small, though, and there’s not much for U.S. investors to buy there. Estonia is the most exciting, with a growth rate of around 8%; Latvia, with a similar growth rate, also has a huge balance of payments deficit, which is rather worrying. Lithuania is growing somewhat less fast, and is the least glossy of the three.

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Armenia and Azerbaijan fought a war with each other only a decade ago, which doesn’t fully rule them out, but is still a factor to be considered. Armenia has a population of 3 million, a GDP of $6 billion, and a 13% growth rate; Azerbaijan has a population of 8 million, a GDP of $14 billion, and had an astounding growth rate of 34% in 2006 – that’s what opening a new oilfield will do for you. Unfortunately, neither country has any companies with American Depository Receipts (ADRs), nor does there seem any obvious way to play them – BP PLC (BP) is the most important oil company in Azerbaijan, but it’s a small part of its business.

Then there are the two non-Baltic, ex-Soviet republics that are showing signs of becoming real democracies: Georgia and the Ukraine (though Armenia and Kyrgyzstan are fairly close).

Georgia is small – 4.6 million people and a $5.3 billion GDP – but it has a splendid pro-free-enterprise government under Mikheil Saakashvili and a growth rate of 9.3% per annum that is dependent on real effort, not just oil prices. The other good news about Georgia is that it is the least corrupt country in the former Soviet Union (except for the Baltic states). Alas, that’s a bit like saying someone’s the least evil mobster in the Bambino crime syndicate, but at #79 on Transparency International’s Corruption Perceptions Index, Georgia is only just below India and China. The Bank of Georgia is probably the best way to play the country; regrettably that is listed in London (BGEO) but not in the US.

The Ukraine is much larger: It’s got 46 million people, an $82 billion GDP, and had a decent growth rate of 7% in 2006. For those who haven’t been following, Ukraine’s shaky democracy has recently been the scene of a huge tug of war between the pro-Russian east and the pro-Western, pro-democracy west. The Orange Revolution of December 2004 was supposed to mark the victory of pro-free market forces, but President Viktor Yushchenko proved feeble, and his first democratic government, with Julia Tymoshenko as prime minister, experienced its demise.

Since then, there has been an uneasy coalition between Yushchenko, as president, and the Putin-supported Viktor Yanukovich as prime minister. However, in last month’s election Tymoshenko – once again allied to the remnants of Yushchenko’s support – won a small-but-decisive majority and now seems poised for form a government.

Julia Tymoshenko made an oil-and-gas fortune in the 1990s, and is a very tough cookie. Imagine a cross between Madonna and Hillary Clinton and you have her style. (Amusingly for onlookers, there was a very old-time-Chicago series of delays in counting the election results, as first Donbass, controlled by Yanukovych, and then downtown Kyiv, controlled by Tymoshenko, had unexpected delays in announcing their results – in each case, a landslide for the local favorite with suspiciously high turnout!).

Putin hates her, which is a worry since Russia, through Gazprom, has the ability to turn off Ukraine’s heating every January. Fortunately, in doing so, they turn off half the EU’s heating as well, so there may be limits on how rough Putin wants to play.

However, Tymoshenko understands how a free economy works, and is determined to clean up the corruption in Ukrainian business, so prospects for Ukraine’s emergence currently look good. Don’t forget, the country has a 99.4% literacy rate and 15% rate of college graduations, yet a per capita GDP of only $7,800 – even at purchasing power parity – so there’s a hell of a lot of room for growth.

Like the other ex-Soviet states, Ukraine doesn’t have a lot of ADRs. It makes sense for a country with EU ambitions to list its shares in London first, but the hugely expensive requirements of the Sarbanes-Oxley Act must also be a factor. Even when ADRs are available, they don’t trade – the big electric power company Centrenergo (CTEUY.PK), for example, last traded 3 months ago. What’s more, there aren’t any mutual funds with more than a small share of their investments in Ukraine.

That’s bound to change, however, as the country opens up. We at Money Morning will keep an eye on the Ukraine, and will report back to you if and when their rapid growth inevitably brings investment opportunities. When that happens, the Ukraine will probably be well-worth buying.

Even in the apparent basket cases of the non-Russian former Soviet Union, there are growth opportunities and investments worth buying. The wise emerging-market investor must cast a wide net.

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In a story that underscores the risks investors face with emerging-markets investments, OAO Gazprom, Russia’s energy giant, is up to its old tricks and is once again threatening to cut gas supplies to the Ukraine, in an effort to extort payment, Bloomberg News reported.

It’s an issue that Money Morning has reported on extensively before.

Gazprom supplies 25% of Europe’s gas and is now threatening to curtail exports to the Ukraine over a $1.3 billion debt. The company warned the European Commission and consumers that it would take action unless the debt is settled by the end of the month. Gas supplies throughout Europe declined in a year and a half ago when Gazprom froze the Ukraine out the first time and negotiated a higher price.

And no one wants a repeat performance.

Troubles don’t end at the Ukraine either. Gazprom threatened to cut off gas supplies to Belarus in August. That dispute was resolved when Belarus paid $190 million of its $456 million debt. Threats and corresponding actions like these have made every nation in the European Union wary of Gazprom, and impelled them to seek out alternatives.

In September, the European Commission introduced a plan calling for a massive restructuring of power grids throughout the continent. The plan was designed to reduce the region’s vulnerability to massive energy companies that control the production and transmission of gas and electricity.

The Commission offered two options to proceed with a version of deregulation that it has labeled as "ownership unbundling." The first would force energy companies to sell off their transmission networks. The second would require companies to retain their respective transmission networks, but lease them to fully autonomous operators. The Commission also called for an independent EU energy agency to oversee national regulators.

The measures are clearly an attempt by the European Commission to safeguard the continent against Gazprom. Gazprom has clearly been agitated by accusations of impropriety and malfeasance. According to Bloomberg, after the commission signaled its intention to propose legislation on ownership unbundling, Gazprom Deputy Chief Executive Officer Alexander Medvedev called the plan "the most absurd idea I have ever met in the history of the world economy."

Regardless Gazprom’s power-play shenanigans have attracted the attention of the United States as well. A few months ago, Reuben Jeffery, the under-secretary at the state department for economic, energy, and agricultural affairs, traveled to Russia with the hopes of addressing some of these issues.

Jeffery commented on the failure of other nations in the region to work around Russia saying, "The objective as we talk about alternative routing systems is to create legitimate market-based competition, and to develop some redundancy in the system in the event of legitimate physical breakdown, or other political issues that might arise that might lead somebody to cut off supply."

It’s no secret just who that ‘somebody’ is.

With every price hike and subsequent threat from Gazprom, the company becomes less credible. Still, there isn’t much that Europe or the United States can do right now. Europe is heavily dependent upon Russian energy, and as the EU heads into the cold-weather months, that dependence is only going to increase. Until Europe cultivates alternative energy supplies from Africa and Central Asia, Gazprom is going to keep bullying the continent, and especially its weaker dependents, including Belarus and the Ukraine.

News and Related Story Links:

• Money Morning News:
  Belarus Assuages EU Fears; Agrees To Pay Part of Gazprom Debt.

• Money Morning News Analysis:
  EU Presses for More Energy Control.

• Bloomberg News:
  Gazprom Warns Europe of Possible Ukraine Supply Cut.

Last week, (July 20) Chevron Corp. said it would challenge a $290 million back tax claim issued against the Caspian Pipeline Consortium by Russia’s Federal Tax Service.  This is yet another attempt by President Vladimir Putin to seize control over all aspects of energy production and transportation within Russia.

The Caspian Pipeline Consortium is a group of international interests who operate a pipeline that transports Kazakh crude through Russia to markets elsewhere. The pipeline runs 935 miles from the Tengiz field in Kazakhstan to Novorossisk on the Black Sea. Chevron Corp. owns a 15% stake in the venture while Exxon Mobil Corp. owns 7.5% and the governments of Kazakhstan and Oman own 19% and 7% respectively.  However, it is the Russian oil monopoly OAO Transneft, which owns the largest piece of the pie, a 24% stake acquired in June.

Currently, decisions concerning the pipeline’s operation are reached by consensus, but state owned Transneft has attempted to persuade the pipeline’s other governing bodies to instead leave decision-making in the hands of a simple majority shareholder vote. This would give the company, and the Russian government, far more control over the pipeline. Failing in that effort, it now seems the country will resort to strong-arming the consortium members with its Federal Tax Service.

Russia, which is the world’s largest energy producer, has a history of using such tactics to manipulate foreign owned energy projects and usurp their authority.  The Federal Tax Service is the same agency that ran OAO Yukos Oil Co. formerly one of the world’s largest private oil companies, out of business after demanding more than $30 billion in back taxes.

Last year, OAO Gazprom, another state owned energy giant, agreed to buy 50% plus one share of Royal Dutch Shell Plc’s Sakhalin-2 oil and gas project for $7.45 billion. The deal was the culmination of a yearlong campaign in which the Russian government threatened to block Sakhalin-2’s investment plans and cancel building permits on environmental grounds.  This furthered President Vladimir Putin’s goal of gaining total control over Russia’s energy industry.

Last month, Russia put enough pressure on BP Plc. to convince the company to sell one of the World’s largest gas fields, the Kovytkta field, to Gazprom. BP’s local joint venture, TNK-BP, sold its 62.8% stake in the field after Russian authorities threatened to revoke the company’s license to develop it. 
Also as part of the deal, BP was “compensated” with inclusion in a $3 billion joint venture that will help take Gazprom worldwide. If the venture is successful TNK-BP could be rewarded with the opportunity to buy 25% of the Kovytkta field back.  Really, the arrangement is an attempt to coerce BP into helping Gazprom grow from a strictly Russian company into a global market giant. This will allow Russia, and Putin, to use its position as an energy provider as leverage in diplomatic negotiations.

Gazprom: Russia’s Ambassador to Europe

For evidence of just how heavily Russia relies on its state-owned energy corporations in foreign policy, look no further than a deal recently reached between Gazprom and France’s Total.  The company was chosen after five years of deliberation to help Gazprom develop a large offshore gas field in the Arctic. The project is estimated to cost $20 billion and is expansive enough to satisfy the entire world’s oil demand for an entire year. 

Together, Gazprom and Total will create a special-purpose company to organize the design, financing, construction, and operation of the Shtokman project’s phase one infrastructure. The company created will own this infrastructure for 25 years. Gazprom will maintain a 51% stake in the company and Total will be awarded 25% ownership. 

After the completion of phase one operations, Total will relinquish its share to Gazprom.  All of the reserves will belong to Gazprom as well.  Gazprom would just as soon do the entire job itself, but it is heavily reliant on foreign funding and lacks the expertise required to extract oil from a reserve located 984 feet below the surface of the Barents Sea, more than 370 miles off the coast of Murmansk. Additionally, the deal gives Russia another strategic foothold in European politics.

Of all the companies vying for Gazprom’s favor, Total was, by most accounts, the least likely champion. However, the decision was more political than practical. Russia, i.e. Putin, has a history of striking sweetheart energy deals with European countries with the end goal of turning their national energy companies into lobbyists for Moscow’s commercial and political agenda. This deal with Total is just the latest in a series of European joint venture deals that includes projects in Germany, Italy, and Great Britain.

The deal also comes at a time when France has recently elected a new president in Nicolas Sarkozy. Some have suggested that Sarkozy might take a harder line than his predecessor Jacques Chirac, but by offering a lucrative deal to Total, Putin has seized the opportunity to strike first and court France’s favor. 

Putin’s Foreign Policy Gets America’s Attention
Russia’s use of energy exports for diplomatic leverage as well as its intimidating arsenal nuclear weapons has, not surprisingly, rubbed Washington the wrong way.

Last week, Reuben Jeffery, the under-secretary at the state department for economic, energy, and agricultural affairs, traveled to Russia with the hopes of addressing some of these issues. 

“It’s no secret there have been some adjustments to contractual terms of pre-existing energy production and development arrangements that are troubling and we want to have a dialogue on this topic.” Jeffery said in an interview with Financial Times.

The U.S. has repeatedly encouraged nations like Kazakhstan and Turkmenistan to build a pipeline west, across the Caspian Sea to Turkey, in the hopes of circumventing Russia and providing central Asia with access to the world’s gas markets.

The announcement that Russia, Turkmenistan, and Kazakhstan recently agreed to build a natural gas pipeline across central Asia to Russia, further tightening Putin’s grip over energy routes out of the region, came as a huge blow to that effort.

Jeffery commented on the failure of other nations in the region to work around Russia saying, “The objective as we talk about alternative routing systems is to create legitimate market-based competition, and to develop some redundancy in the system in the event of legitimate physical breakdown, or other political issues that might arise that might lead somebody to cut off supply.”

That someone in question is Vladimir Putin who through Gazprom cut off gas supply to the Ukraine after the nation refused to pay quadruple the amount it previously paid for Russian gas.  The rest of Europe, which relies heavily on Ukraine for the transit of Russian fuel, felt the effects of the 2006 dispute as well. 
Hungary, Poland, and Austria reported that gas piped to them from Russia through Ukraine slowed down as much as 40%. French Utility Gaz de France SA reported a decline of 25%-30%. This is exactly the kind of occurrence that has U.S. lawmakers riled up and determined to find solutions. 

What’s Next For U.S. – Russia Relations

In 2006, a bipartisan taskforce was created with the specific goal of addressing the current diplomatic relations with Russia.  The task force was sponsored by the Council on Foreign Relations, and chaired by former Vice Presidential nominees John Edwards and Jack Kemp.

The report, titled Russia’s Wrong Direction: What the United States Can and Should Do noted that, “The political balance sheet of the past five years is extremely negative. The practices and institutions that have developed over this period have become far less open, pluralistic, subject to the rule of law, and vulnerable to the criticism and counterbalancing of a vigorous opposition or independent media.”

The report also addressed specific areas of concern including:

• De-Democratization: The report refers to the country’s political institutions as “corrupt and brittle,” saying “Russia’s capacity to address security concerns of fundamental importance to the United States and its allies is reduced. And many kinds of cooperation – from securing nuclear materials to intelligence sharing – are undermined.”
• Energy Supplies: “Russia has used energy exports as a foreign policy weapon: intervening in Ukraine’s politics, putting pressure on its foreign policy choices, and curtailing supplies to the rest of Europe.  The reassertion of government control over the Russian energy sector increases the risk this weapon will be used again.”
• Diplomatic Relations: “A country that has, in the space of a single year, supported massive fraud in the elections of its largest European neighbor and then punished it for voting wrong by turning off its gas supply has to be at least on informal probation at a meeting of the world’s industrial democracies.”

Russia and its president have responded in kind, taking the opportunity to slam the U.S. and its foreign policy on three separate occasions since May.  Putin has accused the U.S. of “hegemonic behavior,” as well as “neo-imperialism,” and provoking an arms race.

Unfortunately, the United States could struggle to curtail Russia’s aggressive foreign policy and that may be part of the reason for its emergence. It’s possible that Putin senses a little bit of blood in the water and suspects that the America is, perhaps, stretched too thin. 

The U.S. is embroiled in conflict in the Middle East, going back and forth with Iran over the ambitions of its nuclear program and bogged down and seemingly out of solutions in Iraq.  Several flare-ups have occurred with China in recent months and countering its economic and political growth spurt looks to be a long-term venture. Meanwhile, the dollar is falling and some believe its status as the world’s main reserve currency is in jeopardy. 

Lost in the shuffling of U.S. foreign policy priorities could be an oil-rich nation whose GDP grew 6.7% in 2006 and whose economic growth rate hit a six-year high of 7.9% year over year in the first quarter of 2007.  With so much on the plate of the United States, the question the rest of the world is left with is “Who’s going to stand up to Russia?”