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Russia: European Bank Denies It Struck Deal For Pipeline

International banking officials say talks have been held with Russia about an oil pipeline to bypass Chechnya. However, they says no deal has been struck. RFE/RL's Michael Lelyveld reports.

Boston, 29 October 1999 (RFE/RL) -- The European Bank for Reconstruction and Development (EBRD) confirmed this week that it has held talks with Russia about an oil pipeline to bypass Chechnya, but it denied that it has decided to finance the project.

An EBRD spokeswoman in London told RFE/RL that Russian reports of a deal to finance the bypass pipeline are "premature."

The spokeswoman said: "We are in talks on this project but cannot at the moment even confirm the tentative time frame when the project will be presented to the board."

Last week, Semyon Vainshtok, chief executive of the state- owned pipeline company Transneft, said the company would receive $120 million in loan guarantees from Sberbank and the EBRD for the project, Interfax reported. But the EBRD official indicated Monday that the bank has only held discussions on the possibility financing.

U.S. analysts have expressed skepticism about an EBRD role in the project to build a bypass around Chechnya on the oil route between Baku and Novorossiysk, citing security and policy concerns. If a bypass is completed through Daghestan to replace a 110-kilometer line through Chechnya, it could quickly become a target for Chechen separatists, putting the investment at risk.

Robert Ebel, director of the energy security program at the Center for Strategic and International Studies in Washington, said: "It would not be sound financing."

Another U.S. analyst expressed surprise at the possibility of financing by the EBRD, in which the United States is the largest shareholder. Washington disapproves of the Russian assault on Chechnya. On Monday, Secretary of State Madeleine Albright described the Russian attacks as "ominous and deplorable."

But a U.S. government official, who asked not to be identified, told RFE/RL on Tuesday that the question of policy toward an EBRD role in the bypass project had not yet been raised. The official, who deals with Caspian issues, said the United States generally supports the effort to maintain Azerbaijani oil exports between Baku and Novorossiysk.

The U.S. official said, "It's a good thing if they're keeping the oil flowing." The official said that although the Baku-Novorossiysk route is not the U.S. preferred option for a main export pipeline for large volumes of Caspian oil, Washington does support the idea of a Russian route for smaller volumes of what is known as "early oil."

The building of the bypass is likely to be a contentious issue, however. Operations on the Russian pipeline through Chechnya were disrupted for most of this year before the outbreak of the current war. Tapping of the line for unauthorized refining and theft in Chechnya were common. One of Semyon Vainshtok's first tasks after he was installed as Transneft's chairman last month was to start work on the bypass under orders from Prime Minister Vladimir Putin.

Although some care was taken to avoid irreparable damage to the Chechnya pipeline during the 21-month conflict that ended in 1996, press reports indicate that large sections have been destroyed during the current war.

But Russia's plans for financing the bypass have so far been problematic. The latest announced plan involving Sberbank and EBRD appears to fall short of the funding that would be required, even if it were approved. Although Transneft first said the new line could cost as little as $100 million, later reports suggest the price could be as much as $250 million.

An earlier bypass plan in 1997, which was estimated to cost $220 million, was supposed to be backed by an issue of Eurobonds. Such financing now appears out of the question because of the limited market for new Russian debt, as well as the risk. An appeal from Transneft for financial support from Azerbaijan, Turkmenistan and Kazakhstan has gone unheeded. Russia says that it has already produced a large quantity of pipe for the project, which it expects to last six months.

The schedule for completion of the bypass could provide a clue to Russia's intentions in the Caucasus, because it presumes that the region will be pacified and secured both for construction and operation of the line. If that is the case, a substantial troop presence could be required to guard against disruption indefinitely.

Despite U.S. expressions of support for a Russian route for "early oil," the plan may also not be entirely separable from Moscow's ambitions to keep competing for a main export pipeline. Russia is desperately trying to make some form of the Baku-Novorossiysk route viable. If it fails, it will be hard-pressed to make a case for a main export pipeline on its soil.

The 1997 plan for a bypass was quietly dropped after Chechen officials agreed to provide security for the reconstructed line through their territory. Those arrangements broke down amid widespread lawlessness and charges that Russia failed to honor its pledges of reconstruction aid to Chechnya.

But now, with the reported destruction of the old pipeline, Russia seems to have closed the door on the possibility of going back to the route through Chechnya again. If that is the case, Russia has staked much of its Caspian strategy on the success of the bypass. Both the financing and the future of the plan remain in doubt.