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The New Tools of Russian Power: Oil and Gas Pipelines
11:10, 03/01/2001, BY ARIEL COHEN, Ph.D., is the Research Fellow at the Heritage Foundation, WASHINGTON, December 29 (U

President Vladimir Putin is increasingly relying on oil and gas pipelines in his dealings with his neighbors who need them. Putin is achieving his stated goal, making Russia the predominant Eurasian power. The Newly Independent States (NIS, a.k.a. former Soviet republics) are paying attention as Moscow pulls their energy leash. This is the newest development in the geopolitics and geo-economics of Eurasia, to which policy experts of the incoming Bush Administration will be forced to pay increasing attention.

Russia is applying pressure on both net energy importers, such as Ukraine and Georgia, and exporters - the oil-rich Azerbaijan and gas-endowed Turkmenistan. As natural gas importing countries are running up their tab at the pipeline, Russia can limit its supplies in the middle of cold winter, at times triggering public unrest and political instability. Thus, it is increasing political and economic dependency of the former Russian provinces.

In Kyiv, senior government officials are livid with Russia`s strong-arm tactics. "Putin is no Boris Yeltsin, with whom President Leonid Kuchma could drink a glass (of vodka), and solve the problem," a senior Foreign Minister official told me recently. "It`s all business now."

Russia is talking tough to its former `younger brother` Ukraine. "The Russians offered Ukraine a choice: to join the Russia-Belarus Union, and buy natural gas at $25 for a thousand cubic meters; and to join the Commonwealth of Independent States (CIS) Customs Union, and buy at $50 -- or to behave like a Western European country, and pay full market price, close to $100," the same official said.

Joining a Russia-Belarus Union would mean the end of Ukrainian independence; participating in the CIS Customs Union would undermine the Ukrainian bid to integrate into the European Union (EU).

In talks between the Russian Prime Minister Mikhail Kasyanov and Ukrainian PM Victor Yushchenko in November, Moscow demanded that Ukraine recognize its gigantic $1.2 billion energy debt as a state debt; collateralize it with industrial assets, such as natural gas distribution networks and refineries; pay interest on it, and swap its controlling interest (over 50 percent equity) of the Soviet-era Druzhba gas pipeline, for the debt. The Druzhba (Friendship) pipeline carries most of the Russian gas to Western Europe.

The Kremlin has also launched an ambitious plan to build two new gigantic pipelines to Europe: the Yamal pipeline via Belarus and Poland, and another one through the Baltic Sea to Scandinavia. Such a plan will allow the Kremlin to leave Ukraine with no natural gas in the middle of winter.

The Ukrainian government correctly maintains that Russian claims may endanger Ukrainian independence. However, Russia also has a case: Ukraine siphons off huge amounts of natural gas that Russia could sell to Europe, and has little to show in terms of privatizing the energy sector and making it more efficient.

The situation in Georgia is even more tragic. The country is over $50 million in debt to Moscow. Power outages last as long as 16 hours a day; and electricity is more or less available in summer only, when hydro-electric power stations have enough water in the rivers.

In late October, thousands of Georgians demonstrated in the streets of the capital, Tbilisi, frustrated with power interruptions and rampant corruption in the energy sector. Russia is demanding equity in a power distribution grid to pay for the past debt, and to secure exports of Russian electricity to neighboring Turkey.

The huge Russian state-controlled gas monopoly Gazprom effectively blocked its competitor Turkmenistan from gaining direct access to its strategic gas exporting network, forcing that country instead to sell natural gas to Gazprom for $32 for a thousand cubic meters -- a third of what it would have made selling to Europe.

In October, Moscow suddenly broke a signed agreement and interrupted the promised flow of natural gas to Azerbaijan. It blamed the delays on "organizational problems at the customs." The gas was supposed to fuel the local electric power plants, so that the Caspian oil-rich country could pump more oil to Russia. As the result, thousands of Azeris took to the streets.

Energy dependency in Eurasia is a historically complicated issue. Stalin and his heirs utilized cheap energy as a way to subsidize the empire and keep republics in Moscow`s iron grip.

These countries ended up muscle-bound, with overdeveloped and obsolete heavy industries. However, today Russia and other exporters would rather sell their energy in the world markets.

And governments in the New Independent States have only themselves to blame for tolerating corruption and inefficiency, for their reluctance to privatize, and for not making energy industries attractive to foreign investors.

The United States should certainly support sovereignty and territorial integrity of the NIS. However, it is the political will to transparently privatize and restructure, which will make Ukraine, Kazakhstan, and other NIS truly attractive to foreign investors - and independent from the Big Brother in Moscow.



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