THE NEW COLD FRONT
CNBC European Business
new-cold-front/716/
November 2008
The West is more shaken than stirred by Russia’s recent actions in
the Caucasus, but what does it mean asks Pamela Ann Smith
Chilly along the Czech border? Blustery in Baku? Rigid in
Riga? Russia’s recent conflict with Georgia has completely changed
the temperature across its western and southern flanks, inviting
more cooling metaphors than even the Cold War produced. But has
anything really changed or is this just more of the same antics by
the Putin-Medvedev tag team, determined to reassert Russian greatness
in the wake of two decades of humiliation?
While Medvedev may have stopped short of a total occupation of the
former Soviet republic, a move that would have revived the Cold War,
he lost no time insisting that Moscow has "regions of privileged
interest." As a result, Russia is now seen by many to have declared
a new sphere of influence on its western and southern borders
reminiscent of its old imperial days under the Tsars. Countries
such as Estonia, Latvia, Lithuania, Ukraine, Poland and the Czech
Republic are now, their officials say, living in fear of the Russian
bear once again. Nato’s failure to come to Georgia’s rescue and the
weak response by the EU, which could not agree on imposing sanctions
on Russia in the wake of its incursion, has added to that fear.
Energy security is the other elephant in the room. The ruling regimes
in Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan – all oil-
and gas-rich former Soviet republics, along with countries such as
Ukraine, which is a major transit route for Russian energy exports to
Europe – are all nervous.Based on a fear of Russian state-controlled
Gazprom’s intentions, the Bush Administration, Nato officials and the
governments of several east and central European states, as well as
the UK, are demanding that Brussels acts, and acts swiftly, to reign
in Russia. At risk are several pipeline and tanker routes through
the Caucasus, Black Sea, Mediterranean and Baltic regions. "What we
have seen is a complete paradigm shift in the security architecture
of Europe," Estonia’s president, Toomas Hendrik Ilves, said after
talking to George Bush in August. "Everything we have done has been
based on the assumption that Russia won’t engage in aggression. That
premise is no longer operable. "What is happening in Georgia has
direct consequences for Poland and its interests, for its energy
diversification plans," the president of Poland, Lech Kaczynski,
told reporters in early September. His country is actively opposing
the construction of the North Stream gas pipeline under the Baltic
Sea, being built under a Russian partnership agreement with Germany,
for fear that Russia could use its energy exports as a political
tool."When the former Soviet Union fell apart, the so-called ‘fourth
corridor’ of energy exports [to Europe] opened up," says Alex Forbes, a
London-based independent energy analyst. Oil and gas can only travel to
the west "via Azerbaijan, Georgia and Armenia to Turkey. South of that
corridor lies Iran, and north of it Russia. That corridor is strategic,
and for Europe, very strategic. There is a theory, he observes,
"that Russia had been waiting for an excuse to raise doubts about
[the energy corridor’s] stability. It’s hard to say whether Russia
intended [its invasion of Georgia] to become an energy war, but it
has become an energy war ipso facto. The problem for Brussels is that
some of the EU’s largest members, such as Germany, France and Italy,
along with Austria, Slovakia, Hungary and Bulgaria – all countries
heavily dependent on Russian energy supplies – have called for dialogue
with Russia, rather than sanctions or a halt in proposed partnership
talks between the EU and Moscow. "Either we want to relaunch the
Cold War, point our finger at Russia, isolate it and stamp on it as
was the case for a decade… or we choose the option of dialogue,"
French Prime Minister Francois Fillon told French radio, according
to Reuters, just before an emergency EU summit called to discuss the
Russian invasion in early September. "Today the word ‘sanctions’
is not on the agenda. Today the word is ‘dialogue’. Fillon’s
stance is widely supported by banks, oil companies, utilities and
other corporate interests in Europe. Medvedev and his predecessor,
Vladimir Putin, have gained global economic power since Russia became
the world’s number two producer of crude oil, second only to Saudi
Arabia. Windfall revenues in the past few years have led to extensive
European investment in the country and to a rapid expansion of Russian
trade with the EU in products and services, as well as in energy. To
these EU doves, talk of a Russian stranglehold on European energy
supplies is counterproductive. Russia received a nasty financial shock
in September when its benchmark RTS stock market index fell nearly
60% since its peak in May. As the British historian Niall Ferguson
observed, at least "when Hitler invaded neighbouring countries, he
had capital controls in place." Compounded by the wider turmoil of the
credit crunch, the fall also burnt some Western investors, a reminder
that European financial interests in Russia are much more extensive
than they were even a decade ago. Sweden’s foreign minister, Carl
Bildt, tried to calm the situation, telling an international energy
conference in Slovenia in early September that Russian influence
should "not be overestimated." He added "Don’t forget…the EU in
terms of population is 3-1/2 times as big. Our economy is 15 times the
Russian economy. Our defence spending is 10 times [higher]. We need
to have a proper perspective on the relationship." Because Sweden
is due to take over the EU Presidency in January, Bildt’s comments
are seen as reflecting future EU policies as well as its present
concerns. "Yes, the EU is dependent on Russia for gas imports,"
Robert Mabro, honorary president of the Oxford Institute for Energy
Studies and Emeritus Fellow at Oxford University told CNBC European
Business. "In the short run there is no alternative. All the talk by
[Gordon] Brown and others that we have to reduce our dependence is
wishful thinking." But, Mabro notes: "Russia is equally dependent on
the EU [for its energy markets]." The EU, he feels, "should engage
in constructive diplomacy," not confrontation. "They are mutually
dependent. Meanwhile, Mabro observes, there may be a much simpler
answer to the dilemma of diversifying Europe’s energy supplies. If
Caspian oil and gas is desirable, he says, rather than going through
Georgia, "build another pipeline, through Turkey. It’s not insuperable,
just more expensive. Paolo Scaroni, head of Italy’s giant oil company
ENI, suggests another solution. He says the EU should increase its
storage capacity for oil and gas while at the same time promoting
energy conservation measures. "If you are worried about the security
of supplies, have strategic storage," Mabro insists. "The US and
Japan have it. Another solution is diversification of energy supply
through shipments of liquefied natural gas (LNG). Cynthia Poynter,
senior manager for midstream operations at the US consultancy, IHS,
says of LNG shipments, "Europe would have to pay more, but this
would be short-term, a matter of months or a year at most," she
maintains. "It’s virtual storage in a way. LNG, which is gas that
has been supercooled to liquid form so that it can be transported in
tankers by sea, is a rapidly growing business for Algeria, Libya and
Gulf States such as Qatar, all suppliers of Europe. Future suppliers
may include Nigeria and Brazil according to Matthew Clements, Eurasia
analyst at Jane’s Country Risk. None of this changes the seismic
nature of what took place in August 2008. News pictures of Russian
bombs dropping near the strategic TransCaucasian Baku-Tbilisi-Ceyhan
(BTC) oil pipeline, plus oil tanker trains mysteriously on fire in
central Georgia sent shudders through virtually every European capital.
The BTC line carries up to one million barrels of crude a day from
Azerbaijan to a Turkish terminal on the Mediterranean. Other links,
for both oil and gas from the Caspian, pass through Georgia to the
Black Sea from where they are transported to destinations in central
Europe or to southern Europe via the Bosphorus and Mediterranean. The
Russian invasion also threatens the EU’s pet diversification project,
the 3,300-mile Nabucco pipeline from the Caspian, across the Caucasus,
to central Europe and Italy via Turkey. Azerbaijan, a major Caspian
producer, has already said it will now ship more oil to Europe via
Russia and Iran, as well as via Georgia and the Black Sea. Kazakhstan
is expected to follow suit, along with Turkmenistan. "The Nabucco line
is still being discussed, but without firm gas supplies committed,
it will not be financed," says Julia Nanay, senior director at the
US consultancy PFC Energy. "It is difficult to know how it could be
built. The EU is adamant that the line must go through, even though its
proposed path crosses Georgia. Ironically, the ultimate viability of
Nabucco may depend on the EU gaining access to exports from Iran,
but this eventuality opens up a can of worms in international
relations. "It may be that the Russian situation will galvanise
this… Europe will have to look to all possible alternative gas
sources, and Iran could come into the picture," says Nanay. "The
next US administration will have to focus on Iran and may look to
establishing relations." She is confident that "there is likely to
be a change in US policy" on the issue, despite both US and European
fears regarding Iran’s nuclear potential. While the stick against
Iran appears to have been bolstered, so too has the carrot of talks
with the US and, possibly, the EU as well. Well known as a policy of
Democratic presidential candidate Barack Obama, the intention to extend
a diplomatic line to Tehran was also embraced by Republican candidate
John McCain in late September, a dramatic reversal of his previous
position. For the EU, US talks with Iran would help to unblock the
Nabucco proposal. McCain’s change of direction, some analysts suggest,
demonstrates that while the Western world’s focus has been on a newly
aggressive Russia, others are eyeing the US’s relative decline.
Indeed, Medvedev and Putin are busily recruiting new allies both
in Latin America and the Gulf. While the Caucasus incursion meant
that Russia had to delay the Middle East Peace Conference it was
planning for Moscow this summer, the parade of key figures from
Syria’s president Bashar al-Assad to Palestine’s Mahmoud Abbas with
Russian leaders, as well as Putin’s unprecedented visits to Saudi
Arabia, Qatar and Jordan last year, has sent a signal that Russia now
intends to take the lead in the Arab world. Israel, the US and Europe
will not be happy. Moscow also signed a wide ranging energy pact,
including nuclear technology and know-how, with Venezuela’s maverick
president, Hugo Chavez. He met with Medvedev in Moscow at the end
of September, when Russia also announced that it will provide $1bn
in military aid to the nation which is a key supplier of oil to its
northern political foe, the US. A spokesman in Moscow said at the
time, "After such insolent and false positions of the US over South
Ossetia, limits on cooperating with enemies of the US have ceased to
exist. Reinforcing alliances such as these could easily be seen as
turning an already toxic Caucasian cocktail into a Molotov version
that could explode not only in European boardrooms, where costly
long-term plans are being drafted to exploit Latin America’s huge
hydrocarbon resources, but also scupper Brussels’ hopes to prevent
further Russian influence on energy exporting nations. A resurgent
Russia seeking to dominate its neighbours and all of Europe’s oil and
gas supplies is one thing. A Russia bent on building up loyal nuclear,
and military, allies in other continents is quite another.
NATO’s reaction Nato has taken a strong stance against the
Russian invasion of Georgia and its military occupation of the two
separatist enclaves, Abkhazia and South Ossetia. In mid-September,
Nato secretary-general Jaap de Hoop Scheffer strongly criticised
the agreement reached with Russia by French president, and current
president of the EU, Nicolas Sarkozy, regarding the withdrawal of
troops from Georgia. The six-point pact calls for a withdrawal of
Russian military forces to their positions prior to the conflict in
return for a resumption of talks with Russia on a new partnership
with the EU. A supplemental agreement also called for the withdrawal
of troops from Georgian territory outside Abkhazia and South Ossetia
within 10 days of the deployment of EU monitors in early October.
De Hoop Scheffer said the deal was "difficult to swallow" and
"not acceptable" because it ceded too much ground, according to
media reports in London. Russia’s foreign minister, Sergei Lavrov,
announced in September that Moscow intended to station 7,600 troops in
the two enclaves, twice as many as before, a move seen as confirming
Russia’s intention to create a military base on what was, before 8
August, Georgian territory. De Hoop Scheffer’s criticism put paid to
hopes in some quarters, notably Germany, France and Italy, as well
as congressional leadership in Washington, that Nato would resume its
six-year programme of military cooperation with Moscow. In Brussels,
the US Ambassador to Nato, Kurt Volker, confirmed in early September
that, unlike with Georgia, or with Ukraine, another non-member that
fears Russian military action against it, Nato would come to the
military defence of Latvia, Lithuania and Estonia. The three Baltic
states, he noted, are full members and signatories of Article 5, which
guarantees the defence of any Nato ally threatened with aggression. De
Hoop Scheffer has also promised that "the process of Nato enlargement
will continue," a move that will be welcomed by EU members such as
the Czech Republic and Poland, which have been cooperating with the US
and Nato on new weapons and missile deployments in their countries. De
Hoop Scheffer said the process would be carried out "with due caution,"
but with the "clear purpose" of helping to create a stable, undivided
Europe. While Nato was not in the business of "punishing Russia,"
it would not accept Russia’s implicit demand that Nato had to choose
between an alliance with Moscow or one with Tbilisi.
us military spending vs the world 2008 in billions of US dollars anD %
of world total Military Spending: Europe, NATO and Russia Europe’s
military spending is nearly four times as high as Russia’s and
represents about one-fifth of the $1.5 trillion that is expected
to be spent in 2008 by countries around the world, according
to the Washington-based non-profit Centre for Arms Control and
Non-Proliferation. Spending by the US was expected to reach
a staggering $711 billion this year, almost one-half the world
total. This means that the US and Europe, who together account for
most of NATO’s 26 allies, will have a combined military expenditure
this year of $1 trillion, compared to Russia’s $70 billion. Source:
tary-spending Share of
Arms Sales for Top 100 Arms Producing Companies 2006Country/Region
No. of companies $bn@S 41 200.2 Western Europe 34 92.1 Russia 8
6.1 Other* 17 17 Total 100 315.4 Source: Stockholm International
Peace Research Institute, SIPRI Yearbook 2008. * Canada, Japan,
India, South Korea, Singapore, Israel and Australia Together, the
US and Western Europe account for 92.7% of the arms sales by the
world’s leading weapons manufacturers. Russia falls way behind,
with just under 2% of the total. Defence analysts say arms sales
by a country help it to support its own military industries,
in addition to creating export earnings that boost its economy.
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