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ZERKALO NEDELI: IS THE DRUZHBA PIPELINE DRYING OUT?
The first law of petroleum-policy formulated by American researcher Thomas L. Friedman reads as follows: “The level of democracy is inversely proportional to oil prices”. According to the American expert, “when oil cost USD 20-40 there was a Russian President whom I would call ‘Putin I’. After their first meeting in 2001, George W. Bush said he looked into Putin’s soul and saw he could trust the man. Now that oil costs USD 60 per barrel, it is a different president whom I would call ‘Putin II’. If Bush looked into his soul today, he would see it is as black as oil.” It sounds like a diagnosis.
Russia: “We will earn money ourselves”
Of late, Russia’s treatment of other countries’ energy markets and infrastructures has been fairly consistent and systemic. It is clearly described in the Energy Strategy of the Russian Federation: “Russia has considerable energy resources and a powerful fuel-and-energy sector that forms a basis for its economic development and a lever in its home and foreign policy”.
A year before T. Friedman formulated his law of petroleum policy, Russia had considered revising its oil exporting policy. On 15 August 2005 President Putin made a symptomatic statement about a need to raise the unfairly low price of traditional Russian export mix Urals to that of the standard Brent oil. Yet how could that be done in practice?
The answer came from Vagit Alekperov, LUKOIL CEO, in his interview with a German newspaper in December 2005. He suggested that prices for Russian oil would go up as soon as it was in short supply in Europe. Thus, petroleum refinement inside Russia should increase while its exports should be reduced. The Russian Globalization Institute estimated that exporting oil-refinement products was seven times as effective as exporting crude oil. The exact figure could be called into question but there is no doubt that the former is much more profitable than the latter. Therefore the key premise was that Russia should take away from Europeans and Americans the money they earn by refining Russian crude oil. Before doing so, Russians needed to take this money away from Byelorussians first. “We will earn this money ourselves,”– the Institute experts maintain.
Russian oil-transporting monopolist TRANSNEFT seems to be in full agreement with this position. The company’s major exporting system is the DRUZHBA (Friendship) pipeline: almost 80% of the annual 220-million-ton export of Russian oil is pumped via this header pipe. Semion Weinstock has repeatedly argued it was high time for Russia to stop increasing its crude oil supplies to Europe, reduce oil export by 50%-60% and “organize effective oil-refining and oil-chemical production at the ends of the expert pipelines”, which will allow Russia to keep a significant part of added value inside the country.
Last year, Russian oil experts discussed plausible pretexts for limiting oil transportation via the DRUZHBA pipeline. TRANSNEFT suggested putting the termination of supplies down to the lack of technical capacity. Specialized literature promoted the idea that DRUZHBA had used up its potential, had been profitable from an investment standpoint, and would cost more in repairs than a newly built infrastructure. As the capacity of the Baltic pipeline system was growing, two DRUZHBA outlets went dry: one leading to the Latvian town of Ventspils in 2003, and the other – to the Lithuanian town of Butinga in 2006. Experts expected the other pipeline runs, including those in Ukraine and Belarus, to suffer the same fate.
In October 2006, Vladimir Putin spoke of the possible reduction in oil supplies via Belarus: “We look at the volume of our crude oil currently supplied to refineries in Belarus, and we also look at that republic’s needs and exports of oil products. Unless we manage to reach relevant agreements, we will have to impose certain restrictions, no matter how reluctant we might be to do so”.
The Byelorussian scenario of “decommissioning” the DRUZHBA pipeline came in handy for Russia. The latter got a welcome opportunity to test its arrangements for reducing oil supplies to the European market without any special technical ruses. The European market, predictably, responded with spiking prices for urgently purchased oil. The situation fell short of growing into a steady trend thanks to a warm winter and a brief stoppage in oil pumping. Of course, the Russian leadership’s political ratings went down, but that is a different matter.
A. Lukashenko: “Independence and sovereignty are sacred”
The Kremlin establishment insists that for Lukashenko to be viewed as Russia’s true friend, he has to hand Byelorussian assets over to Russian companies (preferably, to GASPROM and ROSNEFT) and introduce the Russian rouble as Byelorussians currency.
In a rejoinder to his Kremlin counterparts, Alexander Lukashenko stated on 7 December: “Sovereignty and independence are not for sale. They are too valuable to be exchanged for any gas or oil”. Of course, one could take this statement with a grain of salt since the Byelorussian leader is commonly recognized as a champion of integration with Russia, but under the circumstances and irrespective of their final outcome, Lukashenko demonstrated that he had his leverage in relations with Putin. Belarus is not as pro-Russian as many tend to think. The Byelorussian President’s image was formed back in 1995-1998 when he actively advocated the unified Russian-Byelorussian state he hoped to head some day, given the health problems of the aging Boris Yeltsyn. Byelorus’s interpretation of sovereignty and independence is extremely personal. To Lukashenko, it is also most possessive. He is fully aware that Putin’s Russia, unlike Yeltsyn’s one, does not need sovereignty over Belarus. What it needs is Byelorussian assets that would allow Russian companies to add momentum to their IPO on the world’s stock exchanges. What it needs is a Belarus without Lukashenko or, even better, several oblasts incorporated into the Russian territory.
The Byelorussian President who outlasted Putin’s predecessor in office hopes to outlast Putin as well, which infuriates the latter. So does the thought that somewhere near Moscow and St. Petersburg there is a lot of “unattended” property. That could be the reason why in the heat of the dispute between the two Slavic states some Russian analysts pointed out the Russian President’s good memory. Suffice it to mention the lot of Northern Caucasian separatist leaders or YUKOS major shareholders…
Lukashenko understands it. However, foreign pressures are known to enhance authoritarian regimes, to consolidate the society and boost national identities. Moscow emphasizes the economic pragmatism in its relations with Minsk, quoting billions in its indirect subsidies to Byelorussian economy through low gas and oil prices. This is the truth, but only part of it. The other part of the truth is that Belarus, as well as Ukraine, has always contributed to the increasing the profitability of Russia’s oil-and-gas exports by keeping transit dues at a very low level (almost twice as low as the European ones). Given that Russia pays only a nominal amount for its military bases to either Belarus or Ukraine, its relations with these two countries are far from charitable.
The Byelorussian leader never overestimated his chances. He realized that at some stage in this confrontation with Russia he would have to give in and cancel the new duty. Yet having lost the economic battle, he won the psychological one. He struck a serious blow to the Kremlin’s reputation, likely to have far-reaching economic repercussions, of which Russian Prime Minister Mikhail Fradkov spoke recently. In fact, the responsibility for unfailing steady power supplies to European clients lies with the Russian party. De jure, TRANSNEFT transfers oil to clients on the Byelorussian-Polish border, and it is up to the Russian supplier to ensure the smooth oil transit via the territory of Belarus. Thus all claims and complaints in the event of irregular or insufficient supplies would be brought against the Russian party, which was actually the case this time. European oil consumers have ascertained, yet again, the need to diversify sources and routes of energy resources.
Furthermore, Lukashenko proved that the Kremlin host was not the king of Byelorussian castle. The Byelorussian President managed to mobilize the bureaucratic state machinery so as to implement his decisions and withstand pressures from a much more powerful opponent. Hence another conclusion favourable to Lukashenko: the Byelorussian state system is not so corrupt as Europe and the USA want to believe, for otherwise it would have never been able to stand its ground. That does not mean there is no corruption in Minsk. Corruption does exist but it does not jeopardize Belarus’s national security and interests. Alas, this cannot be said of our country: you will remember 4 January 2006 when Ukraine, having a favourable negotiating position as well as international support, surrendered in the gas dispute with Russia.
The Byelorussian leader will have to learn a number of lessons from the conflict. First, Belarus was left to its own devices in it, because of the regime’s international isolation. Second, heavy dependence (up to 90%, on average) of Byelorussian exports on the Russian market hampers its economic-political mobility and flexibility. Third, Belarus should gear up for the Kremlin’s retaliation. It could take the form of meat, milk, sugar and other “trade wars” in the sectors where Belarus is most vulnerable to Russia’s influence.
Brussels: “The EU cannot help being concerned”
Analyzing the possible implications of Russia’s move to raise prices artificially by limiting oil supplies to the European market, the Russian government consultants predicted “tensions” in relations between the Russian Federation and the European Union. These relations did, indeed, sour after the Byelorussian incident when TRANSNEFT stopped pumping oil via the DRUZHBA pipeline. Another forecast was that the European Commission would react as usual – by voicing concern. It came true as well: when Russian envoy to the EU Vladimir Chizhov was summoned to the European Commission to discuss the situation, Paul Vandoren, Deputy Head of the EC Delegation to Russia, declared that he disagreed with those Western politicians and mass media who blamed the Russian Federation for “blackmailing” other countries with its energy resources. That is how the Brussels diplomacy works.
Should the European Commission keep pursuing its “policy of appeasement” toward a country that has been practicing energy blackmail since 2003 (when it imposed an oil-transit blockade on Latvia, home country of EU Energy Commissioner Andris Piebalgs) as a means to achieve its economic and political ends, Brussels will be defeated. It will never have a unified energy policy or, rather, it will only have it on paper while the European consumers incur very tangible losses. According to Russian experts, European companies spent an additional USD 10 per ton on crude oil, urgently buying deficit amounts from traders, which is exactly what the Russians were hoping for.
Ukraine: history shows that we never learn its lessons
Ukraine’s response was traditionally vague and slow. It could have been explicable, had it not affected its national economic interests. True, the interruption in oil transit was detrimental only to two of the smallest oil refineries in Western Ukraine. Yet the Minister of Fuel and Energy chose to be selective in his comments on the situation, reducing them to the reversed use of the Odessa-Brody oil pipeline, which had been shut off. He cited the most unrealistic estimates of losses: they are improbable because a suspension in the reversed use of the pipeline can easily be offset with the use of another route – via Nikolske and Kremenchug – that bypasses the territory of “rebellious” Belarus. Somebody must be eager to take advantage of the situation and cover virtual losses with real allocation from the state company’s budget. A Kyiv-based newspaper was so impressed with the Minister’s comments that it wrote about Ukraine’s losses worth USD 120 million as if it were a fait accompli. By way of comparison: Russian TRANSNEFT assessed its losses at RUR 9 million (equivalent to USD 340 thousand).
At the same time, the Minister prefers to keep silent about the actual losses ensuing from the GASPROM “detour” policy. In late 2006, construction of a 310- kilometer-long main pipeline from Sohranovka to Oktiabrskaya was commissioned to connect the north and south of Rostov Oblast, bypassing Ukraine. Since then Russia has not been transporting oil via Ukrainian territory in that direction, thus stripping our country of USD 40 million in annual revenues.
Throughout the gas dispute between Russia and Belarus, the Ministry of Fuel and Energy of Ukraine has been evidently supportive of the former, showing its willingness to increase oil transit. The First Vice Prime Minister even had to interfere so that Ukraine could “save its political face” in the incident between the two Slavic countries. Mykola Azarov stated that Ukrainian officials who publicly discuss the opportunity to increase gas transit (if the Russian-Byelorussian relations deteriorate) do so as private persons expressing their individual opinion. The impression is that the Monoster of Fuel and Energy and the First Vice Prime Minister represent different Cabinets, which testifies, yet another time, that Ukrainian authorities still lack a consistent and unanimous approach to oil-and-gas transit policy, particularly in view of the latest Russian-Byelorussian disagreement.
Ukraine should learn several practical and political lessons from this situation. The practical lesson is that Ukraine should build up its strategic oil reserve. Poland, Slovakia, the Czech Republic, Hungary and Germany, concerned as they were, did not panic, since they had oil reserves for 90 days of normal operation. Ukraine cannot boast such a reserve. Second, we need to diversify power supplies and transit opportunities. One of the ways is through pumping oil via the Odessa-Brody pipeline to Europe. It could mitigate risks for at least four countries – Ukraine, Slovakia, the Czech Republic and Hungary. The pipeline could also be used to transport Russian oil. Third, oil consuming and oil transiting countries should form an alliance. Ukraine, Belarus and the Baltic States occupy the entire transit territory from the Baltic to the Black Seas. How many times must Russia turn off its gas and oil taps to these countries before they understand the need for a united front? Each of them has suffered from energy blackmail. Russia is stronger than any of the above states, so it will always have the upper hand in bilateral disputes. What smaller countries need is a multilateral format with the involvement of EU structures.
The first political lesson is that all speculations about the right choice of integration models for the post-Soviet countries are hollow and futile; thus, they should be dropped for good. In the context of the latest conflict between the “Slavic brothers,” any discussion of the future of NIS, CES or Eurasian Economic Partnership has no point whatsoever.
Another political lesson is that the society should respect and support the government. Belarus and its President demonstrated how the national leadership should safeguard and expedite national interests. Even the opposition backed up the President in this dispute. None of the Byelorussian top officials rushed to Moscow to seek favours, as some Ukrainian politicians often do. Dependence on a more powerful country could be weakened not only by applying economic or political instruments but also through changing attitudes, mindset and morale.
Finally, the latest incident confirmed that loyalty to the Kremlin host doest not guarantee any price preferences for politicians’ own or sponsored business. Putin does not seem to believe in friendship and brotherhood as long as oil prices remain high. The first law of petroleum policy is still in force.
Mykhailo HONCHAR
“Zerkalo Nedeli”, Ukraine’s International Social Political Weekly, 13 – 19 January 2007
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