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Corruption Watch: January 30, 2006


30 January 2006, Volume 6, Number 1
WAR ON TERROR
PAKISTANIS SAY U.S. RAID KILLED AL-QAEDA LEADERS.
Pakistani intelligence sources have identified three of four Al-Qaeda members who were believed to have been killed in a U.S. air strike on 13 January. U.S. officials tell the media privately that it could deal a setback to the international terrorist organization.

But the missile attack on Damadola, a village in Pakistan's desolate northwestern Bajur tribal agency, also killed over a dozen civilians, including women and children. That has put Pakistani President Pervez Musharraf under domestic pressure over his role as a U.S. ally in the war against Al-Qaeda.

Western news agencies on 19 January cited Pakistani intelligence sources as saying those killed in the 13 January attack include a son-in-law of Al-Qaeda second-in-command Ayman al-Zawahri.

The sources, who spoke anonymously, said another of those killed is thought to be a bomb-making expert -- Midhat Mursi al-Sayid 'Umar -- who had a $5 million reward on his head.

The air strike targeted a dinner party in the village of Damadola and was reportedly intended to kill al-Zawahri. However, news agencies quoted sources as saying al-Zawahri escaped harm because he failed to show up for the meal.

"The Washington Post" reported that "one U.S. source said the CIA had been tracking movements in the area for two weeks, and another [source] said U.S. intelligence officials were given time-sensitive information that al-Zawahri was expected to be among a group of guests at a banquet" that night.

Al-Zawahri has been a spokesman for Al-Qaeda and, in the past year, has issued a number of videotaped messages threatening even greater acts of terror against the United States: "Oh Americans, what you have seen in New York and Washington, and the casualties you witness in Afghanistan and in Iraq, despite all the media blackout, are nothing but the casualties of the initial clashes. If you continue the same policy of aggression against the Muslims, you will see, Allah willing, horrors that will make you forget what you saw in Afghanistan...I mean, in Vietnam."

The U.S. administration has not officially acknowledged the 13 January air strike in Pakistan as a U.S. operation. But the attack has caused a firestorm of protests in Pakistan against Washington because it killed a total of 18 people, including women and children.

Shortly after the attack, Pakistani Federal Information Minister Sheikh Rashid Ahmed issued a statement saying that there was "no information about the presence of any foreign terrorists" in the Bajur tribal agency.

Ahmed added, "Such a violation of our territories will not be tolerated next time." He said: "We deeply regret that civilian lives have been lost in an incident in Bajur Agency. While this act is highly condemnable, we have been for a long time striving to rid all our tribal areas of foreign intruders who have been responsible for all the misery and violence in the region. This situation has to be brought to an end." Under the terms of Pakistan's partnership with the U.S. in the war on terror, the U.S. military is forbidden from conducting military operations on Pakistani territory.

Pakistani Prime Minister Shaukat Aziz restated those terms during a press conference in Islamabad with former President George W. Bush shortly after the attack.

"The Washington Post" on 18 January quoted Aziz as saying, "Pakistan is committed to fighting terrorism, but naturally we cannot accept any action within our country which results in what happened over the weekend."

Aziz also said he would raise the issue with U.S. officials during a forthcoming trip to Washington. He characterized the incident as "unfortunate" in a "long-standing" relationship with the United States.

The incident is sure to increase domestic pressure on Musharraf by domestic Islamic groups such as the Mutahiddah Majlis-i-Amal. The pro-government regional party Mutahiddah Qaumi Movement has also condemned the president's policies.

Some think tanks such as Stratfor do not believe that the incident will threaten Musharraf's hold on power but will add to a mounting list of destabilizing problems.

Musharraf is faced with Al-Qaeda-related attacks on security forces in the federal tribal areas and setbacks in normalizing relations with India.

The incident also points to increasing pressure on U.S. forces to produce a significant victory over Al-Qaeda. The rising number of terrorist incidents attributed to the Taliban and Al-Qaeda inside Afghanistan, coupled with the lack of success in quelling the insurgency in Iraq, could be forcing U.S. military commanders to risk taking chances in the hope of killing a major terrorist leader.

Complicating the Pakistan-U.S. alliance in the war on Al-Qaeda are persistent complaints by high-level Afghan officials that Pakistani government leaders continue to support Taliban-led attacks in Afghanistan.

Assadullah Khalid, the governor of Kandahar, told RFE/RL recently that suicide bombers are trained and equipped in Pakistan and then sent to Afghanistan for sabotage activities. "It is clear that this area has a long border with Pakistan," he said. "And it is also clear that all enemies of Afghanistan live inside Pakistan. They have centers for training suicide bombers. They can easily infiltrate Kandahar [Province]. Afghans don't have the history of suicide bombing. These are all foreigners."

Khalid's remarks came soon after Afghan President Hamid Karzai said intelligence reports show foreign suicide bombers are being trained in frontier regions, presumably meaning in Pakistan. Some analysts say Pakistan is not willing to take a strong enough stand against Al-Qaeda and might, in fact, be involved in sheltering some of its leaders.

Replying to a question posed by "The New York Times" on 15 September, George Perkovich of the Carnegie Endowment for International Peace put his view as follows. "For me," he said, "the outstanding question is, at the highest levels in Islamabad is there a conviction that capturing or killing [Osama] bin Laden would be good for the leadership of Pakistan?"

Perkovich continued: "And given the answer to that question, how hard are they willing to try? And can they afford to be seen as being solidly on America's side? I think Musharraf also worries about whether or not Washington will stay the course. Therefore, he's got to keep the Americans online: hold back something that they want. And, in that respect, Osama could be seen as an insurance policy for them." (By Roman Kupchinsky. Published on 19 January.)

UKRAINE
AN UNREPENTANT GAS JUNKIE.
During a January 2001 meeting in Viktor Yushchenko's office about energy conservation, Ukraine's then prime minister reportedly turned to his assistant and asked him to turn out the lights. Such concessions -- if, indeed, Yushchenko's request was meant seriously -- are rare in Ukraine.

One of the most important and overlooked factors of the recent Ukrainian-Russian gas war is that Ukraine is one of the most energy-intensive countries in the world. Unless it kicks its wasteful habit, this type of crisis could repeat itself year after year as energy prices continue to rise.

It is perhaps easy and convenient to blame Russia and President Vladimir Putin for attempting to take revenge on Ukrainian President Yushchenko for his pro-Western stance or by placing the blame on Russia's "energy imperialism."

Gazprom's inept and heavy-handed handling of the situation certainly went a long way to discredit Russian leaders and have raised serious questions about their intentions. However, the fires have been stoked by Ukraine's stubborn refusal to conserve fuels and to expect that Russia and Central Asia would continue to subsidize its addiction to gas.

Waste

The figures for energy consumption in Ukraine are astonishing. Ukraine is one of the most energy wasteful countries in the world. It consumes more natural gas -- 74 billion cubic meters in 2003 -- than Poland, Hungary, the Czech Republic, and Slovakia combined. Despite the huge amount of energy Ukraine consumes -- 1.5 percent of the world's total energy consumption according to the U.S. Energy Information Administration (EIA) -- Ukraine's GDP of $300 billion in 2004 was far below Poland's figure of $463 billion.

A 2004 study prepared by Margarita Balmaceda for the U.S.-based Woodrow Wilson Center, "Ukraine's Energy Policy and U.S. Strategic Interests in Eurasia," found that "not only does Ukraine have one of the highest levels of energy intensity in Europe and the world, but its energy intensity (measured as its energy consumption per unit of GDP) actually increased by about 50 percent from 1991 to 1999."

But despite these dire figures, few in Ukraine seem to be paying much attention.

Successive governments have largely ignored energy waste: from pipelines in desperate need of repair to poor energy conservation in the home. When confronted over this state of affairs, politicians have prepared numerous energy-conservation plans -- which have never been implemented or even made public.

The Ukrainian American Environmental Association is one group concerned with energy conservation in Ukraine. In a letter to senior Ukrainian officials sent on 20 July 2005 it wrote: "There are many energy-savings measures that can be acted on and implemented very quickly.... These programs have included simple tasks such as urging people to turn off lights and appliances like TVs when not in use, suggesting ways to make doors and windows less drafty, or offering suggestions to motorists on how to drive while using less fuel. Similarly, common-sense energy conservation advice offered to schools, hospitals, stores, and industries has helped reduce energy demand anywhere from 10-30 percent."

Corruption also figures prominently in Ukraine's dismal energy efficiency. The more gas sold to Ukraine, the greater the kickbacks to the chain of suppliers and their protectors in government.

Too Cheap To Save

But subsidies are doing much to hamstring Ukraine's energy efficiency. On 23 December 2005, Interfax reported that Gas Ukrayiny, a subsidiary of Naftohaz Ukrayiny, announced that the company planned to supply natural gas to the population and public sector at the current price of about $35-$38 per 1,000 cubic meters for the population and about $46 for public-sector entities. With Ukraine buying gas for $95 per 1,000 cubic meters, household prices will continue to be heavily subsidized. And with gas so cheap, there has never been a pressing need to save it.

This is insignificant compared to Ukraine's highly subsidized metallurgy and chemical industry, which consumes gargantuan amounts of gas. Companies such as Interpipe, the Kryvorizhstal steel works, and the Industrial Union of the Donbasthrive on cheap and plentiful gas supplies, which allow the owners to produce steel at rock-bottom prices.

The metallurgy industry was the main factor behind the rapid growth of Ukrainian gross domestic product (GDP) in 2001-04. The government of former President Leonid Kuchma and former Prime Minister Viktor Yanukovych was loath to see it drop -- something that was sure to happen if gas prices increased. Russia, in turn, was interested in supporting the Kuchma-Yanukovych government for political reasons and continued to supply cheap gas in the hope that this would keep the bond strong.

That bond could be partly broken by Ukraine's (and Russia's) application to join the World Trade Organization (WTO). The WTO has impressed upon post-Soviet states that they must pay market prices for energy in order to improve the efficiency of their economies.

Ukraine has another six months before it renegotiates with Russia the price it pays for gas. One highly placed Naftohaz Ukrayiny official in Kyiv told RFE/RL that it would be the height of irony if Putin, by raising the price of gas to Ukraine, forced Ukrainians to conserve energy and adopt European norms -- thereby hastening Ukraine's entry into the European Union. (By Roman Kupchinsky. Published on 17 January.)

RUSSIA
GAZPROM -- A TROUBLED GIANT.
Gazprom, the largest gas company in the world, is the jewel in the crown of Russian business. It employs over 300,000 people and its tax contributions account for more than 25 percent of the Russian budget.

Gazprom owns the entire gas-pipeline infrastructure in Russia -- all 144,000 kilometers, along with the compressing stations. Not only is the company the largest producer of gas in Russia, it also controls the sole means of getting gas to domestic and export markets.

By Russian law, Gazprom is obligated to allow other entities to use its pipelines for domestic needs, although not for foreign exports. However, it is allowed to refuse to do so in the case of pipelines being filled to capacity -- the company often does so without offering any evidence.

Gazprom, among other holdings, owns its own bank, Gazprom Bank; an insurance company, Sogaz; a media holding company, Gazprom Media; and recently it purchased the Zenit football team in St. Petersburg.

The company has close ties with the Kremlin. The chairman of the board of directors is Dmitry Medvedev, Russian President Vladimir Putin's former head of administration. The president is Aleksei Miller, a close friend of Putin's from St. Petersburg.

Gazprom controls 25 percent of the world's gas reserves and 94 percent of Russia's natural gas. It is the only company in Russia legally allowed to sell gas outside the borders of the former Soviet Union -- a factor that largely contributed to the recent gas conflict between Ukraine and Russia and placed European gas supplies in danger.

Brief History

Gazprom traces its origins to the Soviet Gas Ministry, which was created in 1965 when the USSR first decided to place a greater emphasis on gas production and consumption.

In 1989, the ministry became Gazprom and its first head was Viktor Chernomyrdin, presently the Russian ambassador to Ukraine, who earlier had been appointed by Soviet leader Mikhail Gorbachev to be gas minister.

In 1993, the corporation was reorganized into the Russian shareholding company RAO Gazprom, which in 1998 was renamed OAO Gazprom, the name it bears today. In 2005, the Russian state became the majority shareowner (51 percent) of Gazprom.

Production And Investment Problems

Despite its size and predominant position in Russia and the world, Gazprom is seen by many as a mismanaged giant unable to reform itself into a modern company and one with substantial problems hidden from the public inside its glass and steel headquarters in Moscow.

In its 2005 country brief on Russia, the U.S. Energy Information Administration (EIA) was downbeat about Gazprom's market position: "Russia's natural gas industry has not been as successful as its oil industry, with both natural gas production and consumption remaining relatively flat since independence. Moreover, Gazprom's natural gas production forecast calls for only modest growth (about 1.3 percent) by 2008. Russia's natural gas sector has been stunted primarily due to aging fields, state regulation, Gazprom's monopolistic control over the industry, and insufficient export pipelines. Three major fields (called the 'Big Three') in Western Siberia -- Urengoy, Yamburg, and Medvezh'ye comprise more than 70 percent of Gazprom's total natural gas production, but these fields are now in decline; and the government and Gazprom each project steep declines in Russia's natural gas output between 2008 and 2020."

The EIA study reflects the views expressed in a Russian gas industry analysis prepared in 2004, which examined Gazprom's long-term prospects and its ability to supply domestic as well as European and Asian customers with enough gas to meet skyrocketing demand.

The study found that in order for Gazprom to meet its obligations in 2020 it will need to begin a serious revamping and expansion of its gas transportation system -- the trunk pipelines and compressor stations -- as well as develop new fields.

According to the Russian industry study this means:

The construction of 26,000 kilometers of 1420-millimeter diameter trunk pipelines between 2004-2020

137 new compressor stations

The development of new major gas fields -- the most important being in Yamal and in the Ob-Taz shelf, both in western Siberia. As it stands today, the "big three" major fields in production will be producing only 23 percent of Gazprom's needs by 2020.

The Russian study estimates that, for new trunk pipeline construction alone, $3 billion per year is needed.

The study broke down the sectors where major investments are needed by the gas industry from 2001-2020:

Geological exploration: $25.5 billion-$33 billion

Production costs: $44.4 billion-$52.5 billion

Processing costs: $21 billion-$22 billion

Transportation (pipelines etc.): $83 billion-$96 billion

That would mean investments totaling between $173 billion and $203 billion.

A recent study by the OECD notes that the development of the fields in the Yamal Peninsula and the Ob-Taz shelf will cost $25 billion, with the infrastructure costing another $40 billion.

Furthermore, the time lag of five-seven years between the start-up of work and the beginning of production suggests that no other super field outside of the Zapolarnoye gas field will be brought on-stream before 2010.

The recent Russian gas-industry study further notes that Gazprom does not have the money for these investments. On 1 January 2003, its accumulated investment deficit had grown to $21.2 billion in addition to debts of some $10 billion. By 2005, this had greatly increased with the purchase of Sibneft for approximately $10 billion.

The recent liberalization of ownership of Gazprom shares is intended to raise the money needed for these projects and might indeed succeed in doing so -- or it might not, depending on how institutional investors react to the recent Russian-Ukrainian gas conflict and the price for Gazprom shares.

Gazprom has traditionally argued that much of its financial woes stem from artificially low domestic prices for gas. The OECD study shows that the current wholesale price for 1,000 cubic meters of gas for a Russian household in late 2003 was around $15.90, and to industrial users at around $24.20. By comparison, in the EU, household tariffs varied from $159 in Finland to $735 in Denmark for 1,000 cubic meters.

The OECD study of 2004 also reiterated the criticism made by the EU and other critics: "The reform of Russia's crucial and highly monopolized gas sector has repeatedly been postponed, and it is not clear that any substantial reform will be undertaken in the foreseeable future. Despite its enormous importance, the natural gas industry is perhaps the least reformed major sector in Russia."

Other critics, such as the Moscow-based Hermitage Capital Management, have contended that Gazprom is one of least transparent and wasteful companies in Russia.

Despite the less than rosy appraisal of Gazprom by industry experts, Russian Energy Minister Viktor Khristenko was quoted by Interfax on 5 January as saying that "Russia and Gazprom have been reliable partners for European consumers at all times. Gazprom has stood by its commitments since Soviet times, therefore Europeans do not have any doubts about Gazprom's reputation."

How Gazprom intends to remedy these wasteful and possibly corrupt practices is not known. However, what is known is that the Russian government does not intend to liberalize the gas industry in Russia and allow for competition.

The Gazprom monopoly on gas exports was reiterated by Khristenko on 5 November 2004, when he announced that it will continue at least until 2020. Europe will be forced to deal with Gazprom, the only gas company in Russia, if they want to buy Russian gas. (By Roman Kupchinsky. Published on 5 January.)

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