Putin Retains Initiative in the Gas Dialogue with Europe

The annual security conference held in Munich last weekend should have attracted the prime attention in Moscow, not least because U.S. Vice-President Joe Biden delivered the first presentation of the Obama administration's arms control strategy. In reality, however, the attention was superficial at best; and it was Russian Deputy Prime Minister Sergei Ivanov, who was delegated to confirm there that Russia was indeed interested in negotiating some new framework for its fast shrinking strategic arsenal. Ivanov assured that the new tactical Iskander missiles would not be deployed in Kaliningrad Oblast anytime soon but offered no explanation for Russia's "surprise attack" aimed at the U.S. airbase in Manas, Kyrgyzstan, which apparently will have to be closed in 180 days (RIA-Novosti, www.gazeta.ru, February 7). These maneuvers might appear at cross-purposes but could make more sense in the context of the Russian leadership's real priority—energy relations with Europe.

Moscow has inflicted a great deal of damage to these relations by escalating the gas quarrel with Ukraine until it reached a complete shutdown of pipelines, and it does not seem to have any regrets about that blunder. The first step in minimizing the consequences was made in talks with Bulgarian President Georgi Parvanov last week, which resulted in an agreement on direct trade between Gazprom and Bulgargaz and, more important, on compensation for the interruption of deliveries in January (Vremya novostei, February 6; Nezavisimaya gazeta, January 26). Such deals are definitely more attractive for Bulgaria, hard hit by the financial crisis, than any attempt to sue Gazprom for breaking its contractual obligations.

The next step was more complicated. President of the European Commission Jose Manuel Barroso brought no fewer than nine commissioners, including energy commissioner Andris Piebalgs, to Moscow last Friday for wide-ranging talks, first with President Dmitry Medvedev and then with Prime Minister Vladimir Putin. At the joint press conference afterward, Putin resolutely dismissed the discussions about "rule of law" that Barroso had held with Medvedev, asserting that Russia had its own view on "problems with freedom" and that mutual recriminations would only hinder the really important energy discussions (Kommersant, February 7). One particular point in the discussions on energy concerned Russia's request for continuing EU monitoring of the gas transit system in Ukraine, since Putin expects new problems there, despite his cordial agreement with Ukrainian Prime Minister Yulia Tymoshenko. She delivered a spirited defense of Ukraine's reputation in Munich and argued that building pipelines circumventing that "wonderful" transit country was a "crazy idea" (RIA-Novosti, February 7). Putin, however, scored an important victory making Barroso confirm that the EU was broadly in favor of the Nord Stream and South Stream pipeline projects and did not see the latter as a competitor to the Nabucco project, which constitutes Brussels' best hope for diversifying the import of gas.

Whatever Barroso's diplomatic neutrality, controversies around these pipelines have, in fact, reached a new peak since the "gas war," and it is plausible that Russia's security maneuvering is aimed at these targets. By postponing the deployment of the as yet non-existent Iskanders, Moscow has removed a shadow of militarization from the Baltic area, thereby clearing the way for Nord Stream, perhaps expecting the difficult Swedes to lift their objections.

By shutting down Manas, Russia demonstrates to the forever ambivalent Turkmenistan that the United States has no leverage in Central Asia. The decision on strengthening the military component of the Collective Security Treaty Organization was another gentle reminder to Presidents Berdimukhamedov and Aliyev, who remain outside this dubious institution, that Russia's ability to project power was not diminished by the crisis (Nezavisimaya gazeta, February 5). Under such pressure, Turkmenistan would hardly procrastinate much longer with final consent on constructing a pipeline to the north, and Azerbaijan would have to reconsider Gazprom's offer to buy all free volumes of gas produced at Shah-Deniz. Without this supply base, the Nabucco project will remain wishful thinking.

It may be far easier to torpedo a "hostile" pipeline project than to advance your own, and Gazprom admitted for the first time last week that it would have to reduce its 2009 investment program estimated at $26 billion (www.newsru.com, February 6). There is nothing worrisome about Gazprom's falling production, as both domestic and European demand is set to contract; but economizing on investments is a policy that guarantees a shortage of gas in the admittedly uncertain recovery phase in the first half of the next decade. This horizon may be too far away for most politicians, but Putin thinks very much in gas business terms, hence the unwavering focus on tightening control over "green fields" in Central Asia that must fill the gap until Yamal comes on-line sometime by 2020.

There is, however, a significant hole in this strategic vision: Gazprom, with its bloated operational expenses and enormous apparatus, cannot function normally with the level of export prices that will be fixed in April and will most probably remain flat until the end of the year. Its survival strategy is set to clash with the interests of domestic consumers, and Putin would be hard pressed to reconcile them. He becomes irritated when European partners raise issues pertaining to the rule of law or human rights, assuming that these irrelevant matters should be dropped in the situation of an unfolding economic disaster. This irritation is probably induced by a suspicion that Barroso's persistence is not just a ritual or habit but a reflection of doubts about the survival chances of the inflexible and corrupt regime that makes Russia so special in the European arena. Most speakers at the Munich conference argued for engaging Russia closer by every available means from arms control to tourism, because nobody is prepared to entertain such alternatives as isolation and implosion. These possibilities are nevertheless looming larger every day as Putin swings from suppressing regional protests to staging loyal demonstrations and from placating pensioners with small income raises to dumping billions of dollars into black holes in the collapsing economy, among which Gazprom is the unrivaled champion.

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