Imperial Dreams

by , December 17, 2006

Well, our esteemed President has decided that he won’t make any adjustments, whether cosmetic or substantive, to his policy in Iraq until after the first of the year, so perhaps I’ll leave the topic alone for a while as well. Although it no doubt means more Americans and Iraqis will die for nothing much, it might actually be a shrewd move. Few Americans want the Christmas season spoiled by having to consider the pros and cons of cut-and-run, cut-and-walk, or sending more troops to be ineffectual.

Sufficient unto the New Year is the evil thereof. And besides, things are happening in other parts of the world. Take Russia. Please.

The Russian government has pressured Shell, the Anglo-Dutch oil company, into reducing its stake in a promising but difficult oil and natural gas field in Siberia from a majority share to a minority share. Gazprom, the Russian state-owned energy group, which has invested little in exploiting the energy resources on and around Sakhalin Island, will now have the majority interest. The interests of two minority Japanese investors, Mitsui and Mitsubishi, have also been reduced.

LARGER PATTERN

This might be a back-of-the-business pages story except that it seems to be part of a pattern of pushing foreign companies out of any ownership interest in Russian energy resources, as part of a larger project of bolstering the power of the Russian state and making it more authoritarian. Russia’s government wants to control those energy resources and its temporary cut-off of oil supplies to Belarus last year – which had an impact on Western Europe – shows that it is not averse to using the power such control will give it in geopolitical power games.

There is not much we can do about this, but it’s worth knowing about. It just might presage a day when Russia recreates enough of an empire to become a legitimate U.S. foreign-policy concern. Even if that doesn’t happen, it is a troubling development for those who had hoped that Russian policy after the fall of communism might be a bit more enlightened and good for the Russian people.

Sakhalin, an island north of Japan and once claimed by Japan, off the coast of Siberia, is home to oil and gas reserves. When it is fully exploited it is expected to produce 150,000 barrels of oil a day and around 10 million tons of liquefied natural gas a year. But it is a difficult environment in which to operate – bitingly cold, and near a feeding ground for gray whales. Development to date has cost about $20 billion, $10 billion more than originally expected.

Shell went into the project as a 55 percent owner of the energy to be extracted and the major operational partner. This summer the Russian environmental ministry shut down the project for environmental problems. Those problems are real to a great extent. Sakhalin has 1,000 rivers, streams and brooks, many of which are used by salmon for spawning. Shell is obliged to be careful when laying pipes across or under them, restoring the topsoil and relaying gravel in the streambeds. This is labor-intensive work and doesn’t always get finished correctly.

LEGITIMATE AND POLITICAL

There have no doubt been legitimate environmental concerns. But the pattern to date has been for the Russian government to come down hard on foreign companies like Shell and Exxon-Mobil, while Russian-owned companies are seldom sanctioned.

The Sakhalin project was described in financial publications as recently as May as a make-or-break proposition for Shell. A successful Sakhalin project was supposed to be the key for the troubled company to get future contracts in Russia by showing it could operate in the frigid conditions that seem to be where most of Russia’s energy reserves are located.

Chris Finlayson, chairman of Shell in Russia, told the London Sunday Times: “All natural-resources companies have to go where the natural resources are. Russia has 40 percent of the world’s natural gas and is the largest oil producer after Saudi Arabia. Russia is by definition important. It is where the opportunities lie.”

It’s hard to weep too sincerely for a multinational oil company that gets the screw from a government rather than the favored treatment and subsidies such companies often extract from governments where they operate. But the campaign against Shell will almost certainly raise the cost of extracting those resources, since state-owned Gazprom will not have the incentives a private company in a competitive environment would have to improve efficiency.

The sanctions against Shell unquestionably were instrumental in creating pressure to give in to Russian demands that it cede its majority interest, giving Gazprom a 51 percent stake and Shell 25 percent. There’s little doubt that the sanctions were deployed politically. Dimitry Peskov, spokesman for President Vladimir Putin, told reporters that in the future foreign companies might be welcome as subcontractors, providing capital and expertise, but not as owners.

These moves against foreign ownership of natural resources in Russia reflects a changing economic environment. In the 1990s Russia was strapped economically and welcomed foreign investors and owners. Since then oil prices have risen and Russian energy companies have profited, so they need foreigners less.

GOING AUTHORITARIAN

This has coincided with an increase in nationalist sentiment in Russia, encouraged and exploited by the government to justify a more authoritarian regime than most people hoped for after communism fell. Russia clearly aches to be a major geopolitical power again, and oil wealth – and the leverage of being a major energy supplier for Western Europe – is part of the equation.

Oil wealth has been a mixed blessing – perhaps even more curse than blessing except for those who have become fabulously wealthy like Saud family members – in countries where oil wealth is the primary or only source of large-scale wealth. Russia has a more diversified economy than, say, Saudi Arabia, but having politicians with a lust for power in control of the country’s energy resources will undoubtedly invite hubris and abuses along the way.

Dreams of empire such as those entertained by Putin and his claque are usually vain in the end. And the process of seeking or enhancing an empire is almost uniformly deleterious to the ordinary people of countries that harbor leaders with such ambitions. Free and open markets produce wealth faster and distribute it more equitably than state-controlled economies.

Vain as such dreams may be, however, imperial ambitions usually lead to political and military conflicts that can cause enormous suffering. Russia under Putin is hardly an imminent threat to the United States. But it is now in a position that it can pressure most of Western Europe through manipulating energy supplies. The ambitions of its leaders – remembering that Putin is still quite popular among the general population, though that could change – bear watching.

Read more by Alan Bock