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Thursday, January 08, 2009

The Gazprom Episode

Russia's oil & gas resources not only fills their coffers with money but also adds muscle when it comes to political negotiations. On January 1, the Russian state-run gas company Gazprom closed their pipes that supplies 25% of gas to most of the European countries. This is their argument: The pipes run through Ukraine to other countries. Ukraine has been stealing gas. And going forward they'll have to pay the market value which is $430/cum from their current subsidized $180/cum. This decision comes in the middle of a chilly winter and most of the eastern European nations that heavily depend on this supply to heat their homes, not to mention some of the industries.

Except for island nations, most of the countries today have political issues with their neighbors because of contiguous borders. And there are evergreen discussions to solve them without affecting the daily routine. Responsible nations don't react as sharply as Russia did to seriously undermine the daily affairs of so many dependent countries. One of the reasons is because of the free fall in the price of oil: from $144/barrel in July' 08 to $43 today. Such drops have left Russian foregin reserves in bad shape and Putin is trying to make it up by flexing his negotiating muscle through Gazprom. The other reason is that this cut-off could serve as a warning message to Ukraine for seeking NATO membership. Russia has expressed displeasure at having too many NATO members close to its western border. (Since politically powerful European players like Germany and France too depend on Russian supplies, they turn a blind eye to Ukraine's request for NATO entry.)

Russia is not entirely unjustified in its demand: it has been buying gas from Uzbekistan and Turkmenistan and they have increased their prices. There's also demand for energy from China which contributes to a spike. But cutting off the supply doesn't only grind the gears to a halt, it also has a lot of socio-economic repercussions. Bulgaria, which heavily relies on Russian supply, has about 20 days of energy resources and their economy could cripple if the gas pipes remain locked. Industries are halting production in Hungary and Romania. Many households are bracing to face harsh winter without heat. Although the dependent countries could call Russia & Ukraine 'irresponsible & uncivilized', they also feel the political power of Russia and the effects of antagonizing it.

Twenty years since the end of cold war the west & Russia have only warily shaken hands and have tried to gain geopolitical allies next to their cold enemies. While a bunch of ex-Soviet breakaway countries are now in NATO, Russia signs a multibillion dollar military deal with Venezuela (the largest non-Arab oil supplier). While US bullies by means of shadow confrontation (mostly economic sanctions), Russia bullies like a bully. While Russia is home to a huge number of billionaires and while Moscow is touted as the most expensive place on the planet, the gap between the rich & poor is dizzyingly high. The oil price drop in the eighties is attributed as one of the reasons for the downfall of the Soviet regime. While hard-negotiations like the Gazprom seal may turn out to be in favor of Russia in the short term, it has to understand that it isn't making any friends. Call me idiotically optmistic, I believe we're going to see some viable alternative fuel technologies in 10 years from now and its not coming from Russia. And when the market frenetically switches to them the energy giants are going to find themselves neither with friends nor with any clout.

2 comments:

ohmsdeeps said...

I am kind of wondering where does India stand.
Where do we get energy from to feed our so called growth.

Prasad Venkataramana said...

Ohm,
Here are couple of links that answer you question. Essentially, we have some and we buy more to feed our demand.

http://www.cslforum.org/india.htm
http://www.cfr.org/publication/12200/indias_energy_crunch.html