What’s in it for Putin?

If there’s one mystery trumping all the others in the recent Russian-Ukrainian gas supply row, it is the one concerning the role and intentions of the Kremlin, particularly with respect to Vladimir Putin: Why fight a public battle over an issue that is almost as intransparent and complicated as the geological processes that created the gas in the first place? Veronica Khokhlova is trying to make some sense of the deal –

On the surface, it’s all clear and nice: they’ve reached an agreement, and we aren’t paying what Gazprom initially wanted us to pay. Europe can relax, too. But … it’s a complex deal. The Reuters piece [she cites on her blog] doesn’t mention Rosukrenergo as part of the scheme, an intermediary company that will be buying Russian gas from Gazprom for $230 and then selling both Russian and Turkmen gas to Naftogas for $95. A Gazprom affiliate and Austria’s Raiffeisen Investment AG own 50/50 stakes in Rosukrenergo, which, in a way, means that Gazprom will be buying gas from itself. Rosukrenergo is registered in Switzedrland, and Raiffeisen Investment AG has, allegedly, nothing to do with Raiffeisen Bank. Oleksandr Turchynov, former head of SBU and Yulia Tymoshenko’s man, launched an investigation into Rosukrenergo in summer 2005, but was not allowed to finish it.”

And Jerome at Eurotrib keeps arguing that all this is (simply) a matter of oligarchic infighting at the expense of the peoples involved (as they are paying significatnly higher energy prices than those paid by their countries/oligarchs energy corporations).

Be that as it may – the real question at hand is, as I see it, the following: did Russia/Putin want to appear weak in this matter, demonstrating to the west that he needs to do in Russia what he deems necessary (remember Yukos, the NGO law), or is the Kremlin/Putin indeed so weak that it has to accept oligarchic infighting to the extent of creating a foreign policy crisis, and that, as a result, the Kremlin needs to tighten its grip? Quite frankly, neither alternative is likely to make anyone happy.

24 thoughts on “What’s in it for Putin?

  1. Oh yes, here’s the blurb:

    Framatome ANP has developed a large (1600 and up to 1750 MWe) European pressurised water reactor (EPR), which was confirmed in mid 1995 as the new standard design for France and received French design approval in 2004. It is derived from the French N4 and German Konvoi types and is expected to provide power about 10% cheaper than the N4. It will operate flexibly to follow loads, have fuel burn-up of 65 GWd/t and the highest thermal efficiency of any light water reactor, at 36%. Availability is expected to be 92% over a 60-year service life. The first unit is about to be built at Olkiluoto in Finland, the second at Flamanville in France. A US version of the EPR is also undergoing review in USA with intention of a design certification application in 2007.

    With nearly four years to go to the next election, and no-greens in sight, seems like a good moment for a rethink in Germany to me.

    Finland is building a version of the Framatome reactor for 2009 start-up

    In May 2002 Finland’s parliament voted 107-92 to approve building a fifth nuclear power plant, to be in operation about 2009. There was intense debate leading up to the decision. The vote is seen as very significant in that it is the first such decision to build a new nuclear power plant in Western Europe for more than a decade.

    And the Austrians now seem determined to have a EU position on this technology debated at the March summit.

  2. It’s not gonna happen, Edward. Russian unreliability issues aren’t worth reopening that debate for the grand coalition, the test balloons were non starters. (that is, unless, of course, the grand coalition would like a very high profile controversial topic to distract the public from any tough reforms, but I even doubt that it would fly).

  3. Ok, I buy your argument, you are in Germany. But the issue is more EU-wide than just Germany. The UK is probably moving of its own volition, but now we also have this (from EU Observer):

    Meanwhile, some member states have taken matters into their own hands, with Poland, Hungary, the Czech republic, Slovakia and Austria striking a deal on Tuesday to work together on energy in international fora.

    I think the issue is up and running, and we will now see how far it goes. For something which was virtually dead 3 days ago, that ain’t bad.

  4. >For something which was virtually dead 3 days >ago, that ain’t bad.

    I suppose we should wait another three days to see if doesn’t die of sudden child death. The volatility of news cycles is increasing in Europe as well…

  5. “I suppose we should wait another three days”

    Agreed. But I am inclined to think that this one is here to stay, since the rise in energy prices (including now even more obviously gas) makes a reconsideration of the situation more or less inevitable. Indeed, it could be that the cost of the non-nuclear option in Germany just went up considerably. I’d be surprised if there wasn’t a debate about this, at least in the mid-term.

  6. I guess looking at news from Jerusalem and thinking about Iran, nukes and oil, I see the next oil price hike coming.

    Is this only me, or are the pro nuke comments coming from the CSU and the anti nuke comments from the second tier of the SPD. Merkel has spoken, the new SPD chairman has remained silent.

  7. Going back to the topic, is it possible that Mr. Putin wished to demonstrate that he is willing to actually fire the gas weapon?

  8. On Neeka’s quote: “Rosukrenergo is registered in Switzedrland, and Raiffeisen Investment AG has, allegedly, nothing to do with Raiffeisen Bank.”

    I just read this article in the Moscow Times (http://www.moscowtimes.ru/doc/HotNews.html#65224) which states: “RosUkrEnergo, a company transporting Turkmen natural gas to Ukraine, and Ukraine’s state oil and gas company Naftogaz will establish a joint venture to transport natural gas intended for Ukraine’s domestic market, a spokesman for Russian energy giant Gazprom said Wednesday. RosUkrEnergo is a joint venture of Gazprombank, a Gazprom subsidiary, and Raiffeisen Bank, which own 50% in the company each.”


  9. Also interesting ( http://hermitagefund.com/index.pl/news/article.html?id=681 ):

    Even as Gazprom bids to rival South Korea’s Samsung as an emerging market heavyweight by lifting restrictions on foreign ownership of its shares, many market watchers fear that increasing state interference in the economy could undermine calls to cut costs and boost efficiency. The concern is that as the state increases its dominance in state-controlled companies like Gazprom, they could be used even more as sources of funding for the government and its political activities.

    “The shareholding in the company and the predominance of government people on the company’s board means Gazprom is a huge cash cow for the government,” said Jonathan Stern, a professor and director of gas research at Oxford Institute for Energy Studies. “There’s no question that’s what Mr. Putin has in mind. That’s how he thinks this operation should be run.”

    “As Gazprom used different intermediaries to purchase pipes from Ukraine, too, the average pipe price for Gazprom increased by 35 percent in 2004 while the average market price for Ukrainian pipes went up only 1 percent, the report said.

    Hermitage also said Gazprom was continuing to lose cash via a gas-trading channel between Turkmenistan and Ukraine. Gazprom managed to win part of the trade last year by suddenly replacing Eural Trans Gas, the obscure trading firm that had been handling billions of dollars in gas sales between the two countries, with a new entity, Rosukrenergo, in which it owns a 50 percent stake. Gazprom had no ownership stake in the previous entity.”

  10. I’m sorry Tobias, if I sort-of hijacked this with the nuclear topic. I suppose I was curious as to your opinions, since from the safe harbour of Barcelona it is hard to see what is actually happening in Germany.

    On the more general points, this is obviously also about gas, and about Asian gas as well as Russian gas. Ukraine and Russia may be getting very cheap access to this latter product.

    On Guys issues, the FT has this revealing paragraph:

    Deliveries of both Russian and central Asian gas will now go through an intermediary, Ros-UkrEnergo, a joint venture between the banking arm of Gazprom, Russia’s natural gas giant, and Raiffeisenbank of Austria. Raiffeisenbank holds the stake on behalf of unidentified ultimate owners.

    So who knows what is actually going on.

    More issues:

    Moldova was also cut-off, and Armenia is being threatened with a big price hike.

    On the big Putin question: is he weak, or merely pretending to be weak? My guess is the latter, and next years elections will be interesting. Remember he had to resort to banning the nazis from the Moscow elections, and that is hardly a sign of strength in the Russian context.

    This publication:


    is daily, and a mine of information. I’m just about to post on some of it now.

  11. I think he was trying to play off the customer states against the pipeline states, in order not to deal with a European monopsony. Unfortunately, the pipeliners and customers were rather induced to hang together rather than swing separately, and he backed down in order to prevent the point of payment being moved to the Russian-Ukrainian border, which would have effectively put the Ukraine in the EU for gas purposes.

  12. “I think he was trying to play off the customer states against the pipeline states”

    Interesting theory, but how do Moldova and Armenia fit into this. The former was cut off and the latter has been badly threatened?

  13. Armenia – rather different case. The pipeline/customer thing doesn’t apply (AFAIK), but as Armenia is a small customer relative to Russian gas production, the relationship is very different. No need for anything complicated, just a shakedown for more cash.

    Moldova – interesting question. It’s not on the way to anywhere is it?

  14. That’s it, then: a power grab for control of (or at least cheaper rates on) two export lines, by trying to play off the customers against the pipelines. Armenia was pure opportunism.

  15. “It seems Moldova is sitting on the pipeline”

    “That’s it, then: a power grab”

    Fascinating! This certainly gives plausibility to the idea that they were going for control of the landline installation. The issue now is how will the customers respond.

  16. Armenia is part of the Iran-Armenia-Georgia-Ukraine pipeline. Not that that pipeline is planned for. (Outside of the fact that the Iran-Armenia pipeline, which is build now, is a little bit to large to only supply Armenia)

  17. “Armenia is part of the Iran-Armenia-Georgia-Ukraine pipeline.”

    It is curious how a lot of roads through all this – including the nuclear issue – do lead through Iran.

    @ Oliver

    I am not ignoring Iran’s demographics, I think the political-demographic interaction is very important in Iran, but I thought that for once I’d give this issue a rest :).

  18. I wasn’t thinking of any complicated interactions. I was wondering how much of that gas Iran will have to use for itself given a young population and a need to industrialise.
    If you want to get into politics, I’ll boldly predict that any Iranian government will find it politically necessary to provide domestic consumers cheap gas leading to inefficient use.

  19. Meantime, how do you like the look of this Franco-German pressurised water reactor?

    Not at all. While I am a big fan of nuclear power, the current reactors leave a bit to be desired. Improvement is needed if generation of electrical power is to be fully switched to nuclear. It seems that the French administration thinks the same:


  20. “I was wondering how much of that gas Iran will have to use for itself given a young population and a need to industrialise.”

    Well I think this is now the big unknown about Iran. The recent political setback, just how will it affect Iran in the longer term.

    They certainly have a ‘window of opportunity’ now, but it seems they won’t make much use of it in the short term. Energy consumption isn’t just about demographics, its about democraphics times GDP per capita, look at the difference between China and the US in this sense, even though energy has been subsidised in China.

    So Iran’s future energy requirements are a big unknown, as is just about everything relating to energy consumption come 2020: some really hard decisions lie ahead I think.

    Incidentally, “and a need to industrialise”.

    This raises a really interesting question: to what extent will currently developing countries need to industrialise, and to what extent would it be better for them to jump straight to services?

    China seems locked-in to the industrial pathway, but given that this space may now be occupied, are there alternative models available? This is a really live issue, not only in India, but also in Latin American countries like Chile and Argentina, which have been traditionally ‘bad’ at industry.

  21. (that is, unless, of course, the grand coalition would like a very high profile controversial topic to distract the public from any tough reforms, but I even doubt that it would fly)

    Rather than discussing certain questionable acts by the CIA and certain ministers’ involvement?
    It’s working, i’d say.

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