Russia Report: December 9, 2004

By Roman Kupchinsky

In 1968, the Soviet Union began its first natural-gas deliveries to Western Europe with exports to Austria. This was followed in 1973 with deliveries to Germany and, in 1974, to France and Italy. At that time, a debate began among Western security experts and political commentators about the wisdom of buying Soviet gas. Western Europe, some felt, could be subject to "energy blackmail" by the Kremlin.

These fears proved unfounded. Instead, the Soviet Union collapsed in 1991, and gas kept flowing West.

Now, however, the same "gasmail" debate rages as the Russian leadership speaks openly of using the state gas monopoly Gazprom as a "lever of power," something the Soviet Politburo always carefully avoided doing.

President Vladimir Putin's aggressive public statements have led a number of Western analysts to renew their concerns about Russia's ability to manipulate the European Union's foreign and domestic policies and to suborn them to Russia's national interests by using energy as leverage.

As the former head of the Polish intelligence service, Zbigniew Siemiatkowski, told a committee of the Polish Sejm on 25 October: "We are facing a restoration of the Russian Empire through economic means and by the principle of 'yesterday tanks, today oil.'" It might have been more accurate if Siemiatkowski had said "gas" instead of "oil."

In 1968, Germany, Italy, and France were far less dependent on Russian gas; by 2004, this dependency has mushroomed and continues to increase each year. Russia now supplies 36 percent of Germany's gas, 27 percent of Italy's, and 25 percent of France's, according to the 11 November issue of "Alexander's Gas And Oil Connections" (http://www.gasandoil.com).

A key feature in this debate has been the enormity of Russian gas reserves, which at 47.3 trillion cubic meters they remain the largest in the world. Theoretically, such reserves could sustain European demand for years to come and thus be an important tool in the Kremlin's political toolbox for years to come.

"The Moscow Times" on 23 November pointed out that Germany, France, and Italy -- the three European countries most dependent on Russian gas -- were the only EU states to turn a blind eye to the Yukos affair and insist it was Russia's "internal affair."

The Russian government is expected soon to become a majority shareholder in Gazprom, the world's largest gas company. Once a deal to trade the state-owned oil company Rosneft for a block of Gazprom shares is signed and sealed, the government will automatically gain a greater say in the operations of a number of European companies in which Gazprom has bought share holdings -- in some cases as large as 50 percent.

Germany has been the prime target for Gazprom purchases. According to figures from late 2001, Gazprom owned 35 percent of Wingas, 50 percent of Wintershall Erdgas, 49 percent of Ditgaz, 100 percent of Zarubezgas Erdgashandel, and 5.3percent of Verbundnetz Gas (see http://www.compiler.fi/idankaupan/tutkimukset/specialreports/LTKK-report5-eng-table.html#Table%201).

The CEO of the largest German gas company, Ruhrgas, sits on the board of Gazprom and while this is more of a ceremonial position, it underscores the importance of the relationship between the two companies -- and the two states.

Russian gas policy toward Germany and the rest of the EU was described frankly by Putin in October 2003, when he told German Chancellor Gerhard Schroeder: "The [gas] pipelines are our legacy from the Soviet Union. We intend to retain state control over the gas transportation system and over Gazprom. We are not going to divide Gazprom. The European Commission had better forget about its illusions. As far as the gas is concerned, they will have to deal with the Russian state."

Among the other major European shareholdings of Gazprom are: the UK/Belgium company Interconnector (10 percent), Poland's Gas Trading (35 percent), and Europol Gas (48 percent), Italy's Volta (49 percent) and Promgaz (50 percent), France's FRAgaz (50 percent), Austria's GHW (50 percent), Serbia's Progress Gas Trading (50 percent), Greek Prometheus Gaz (50 percent), Finland's Gasum Opy (25 percent) and North Transgas Oy (50 percent), Bulgaria's Topenergo (100 percent), Hungary's Panruysgaz (50 percent), Turkey's Turusgaz (50 percent), and Slovakia's Slovrusgaz (50 percent).

The value to Gazprom of these joint ventures was estimated by the "International Herald Tribune" on 7 October at $2.6 billion. The daily quoted Emmanuel Bergasse, administrator for Central and Eastern Europe at the International Energy Agency, as stating that "Gazprom gains control through direct investments and subsidies.... Gazprom has substantial market power, from being the supplier of gas down to the customer. It is the chain that counts." Bergasse added that "Gazprom's stated aim is to extend its dominant position, with obvious consequences for European energy diversification."

Some analysts, like Hermitage Capital's Vadim Kleiner, have expressed skepticism about the financial wisdom of Gazprom's joint-venture policies and the returns the company gets for its large investments. Others, however, suspect that profits are not the sole motivator for Gazprom's aggressive policies in Europe.

Gazprom also owns the gas-pipeline infrastructure in Russia, all 144,000 kilometers of it along with the compressing stations. Thus it is not only the largest producer of gas, but it also controls the sole means of getting gas to domestic and foreign markets. While Russian law obligates Gazprom to allow other entities to use the pipelines for domestic needs -- but not for foreign exports -- it can refuse to do so by claiming that the pipeline is filled to capacity. And it often does so without providing any evidence.

The export of Russian gas beyond the CIS via the pipeline is forbidden to independent Russian gas companies. This position was reiterated by Industry and Energy Minister Viktor Khristenko on 5 November, when Interfax reported his statement that Gazprom's monopoly on foreign sales will continue at least until 2020.

But Russia's so-called gas imperialism might be coming to an end soon. Predictions of Gazprom's ability to meet the European Union's demand for gas past 2020 are becoming pessimistic.

The U.S.-based International Energy Administration (IEA) predicts that natural gas will be the fastest growing fuel source in Western Europe, with demand projected to grow at an average annual rate of 2.4 percent. A European Union study found that demand for gas in 2020 in EU countries will be some 606 billion cubic meters per year, while production will be 230 billion cubic meters and imports will be 377 billion cubic meters.

Since its inception in 1993, Gazprom has neglected investing in its future operations. A recent Russian gas-industry study noted that as of 1 January 2003, Gazprom's accumulated investment deficit had grown to $ 21.2 billion, in addition to debts of some $10 billion.

Part of this can be explained by the low prices it is allowed to charge Russian domestic consumers. Those supplies constitute the largest share of Gazprom's business and the least understood and most corruption-friendly facet of its operations.

Russian experts have calculated that between $173 billion and $203 billion in investment is needed for gas-field development, exploration, and infrastructure to meet domestic and foreign demand by the year 2020. The long time span needed to bring new fields on line -- five to seven years -- is working against Russia's being able to maintain its strong grip on supplying European gas.

In 2003, the IEA predicted that Russia will have to invest some $300 billion in new fields in order to replace declining production at its old fields by the year 2030.

The Russian gas study projects that by 2020 Russia will export 164 billion cubic meters of gas to Europe. This will force European customers of Gazprom to buy some 213 billion cubic meters from other sources. The question is whether other sources will be able to meet this demand. Will Russia, even with purchases from Central Asia that are predicted to reach between 79 billion cubic meters and 96 billion cubic meters by 2020 be able to meet its European commitments? Many analysts find this unlikely without major disruptions in Russia's domestic gas market.

Russia's ability to use Gazprom as a "lever of power," as Putin has referred to it, might well turn out to be a myth in just a decade or so. In fact, it could well be that the Western capital that Gazprom desperately needs to revitalize its production and transportation becomes a "lever of power" with which Western companies and governments could gain increased influence over Russia.

By Liz Fuller

On the sidelines of the CIS summit held in Moscow in early July, the presidents of Russia and seven other CIS states (Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan) adopted, at Russia's instigation, a statement criticizing the Organization for Security and Cooperation in Europe (OSCE) and calling for a fundamental reappraisal of its priorities. Since then, senior Russian officials have reiterated those criticisms on several occasions, calling for the OSCE Foreign Ministers meeting scheduled to take place in Sofia on 6-7 December to address the issue of sweeping reforms that would enhance the OSCE's role in security and antiterrorism activities while reducing drastically its frequently critical focus on domestic political developments in the former Soviet republics (see End Note, "RFE/RL Newsline," 12 July 2004).

Among the criticisms listed in the July document were the OSCE's imputed failure to respect "such fundamental...principles as non-interference in internal affairs and respect for sovereignty." The six heads of state further charged that the OSCE is guilty of double standards in light of its "selective attention on certain states while ignoring problems in other states." They claimed that the OSCE's humanitarian activities are restricted to "monitoring the human rights situation in the countries of the CIS and former Yugoslavia," and that this almost exclusive focus on the human rights dimension "significantly restricts" its ability to counter new challenges and threats.

The statement further targeted the OSCE's Warsaw-based Office for Democratic Institutions and Human Rights (ODIHR), noting that its primary activity of election monitoring is frequently "politicized and fails to take into account the specifics of individual countries." Over the past decade, ODIHR monitoring missions have criticized as failing to meet European standards most of the ballots, both parliamentary and presidential, in all the nine states that signed the condemnation.

The joint statement also criticized as "ineffective" the OSCE's field missions in the CIS, noting that their financing consumes a significant chunk of the OSCE's budget. It claimed that instead of fulfilling their mandate "to provide assistance to the government of the host state," those missions concentrate "exclusively" on the human rights situation and engage in "unwarranted" criticism of the domestic political situation.

It concluded that "the OSCE's agenda should include the swiftest removal of the imbalance between the three dimensions of the organization's activity by increasing the role of its military-political, economic, and environmental elements" and called for drafting "new approaches" to the organization's work.

The same six CIS presidents followed up on their initial broadside in September with a second letter arguing that the OSCE should increase its focus on combating international terrorism.

Some subsequent Russian statements have repeated the criticisms expressed in the two initial documents. For example, in October the Russian Foreign Ministry issued a statement calling on the OSCE to draft new, "politically unbiased" criteria for monitoring elections. (The OSCE had evaluated both the 7 December 2003 elections to the State Duma and the Russian presidential ballot in March 2004 as failing "to meet a number of OSCE commitments for democratic elections.") At a meeting in Moscow last month with visiting members of the OSCE Parliamentary Assembly, Mikhail Margelov, chairman of the Federation Council's International Affairs Committee, accused the OSCE of trying to pressure national leaderships by predicting in advance of national elections -- including the 31 October presidential ballot in Ukraine -- how democratic and legitimate the ballot would prove to be. Russian Ambassador to the OSCE Aleksei Borodavkin has similarly claimed that the choice of OSCE observers to assess the September parliamentary ballot in Belarus was "selective and biased," the "Financial Times" reported on 11 November. Borodavkin said the OSCE should focus on promoting "political dialogue" and on the most important European security issues.

Other Russian officials came out with more specific proposals aimed to deflecting OSCE activities that irk Russia. The "Financial Times" quoted an unnamed Russian diplomat as arguing that the OSCE observer mission on the border between the Russian Federation and Georgia, the task of which is to monitor possible illicit border crossings by Chechen militants, is too expensive and no longer necessary. Those observers were deployed in 2000 at Georgia's request in the wake of repeated Russian allegations that Tbilisi was making its territory available to the Chechen resistance.

Addressing the OSCE Ministerial Council meeting in Sofia on 6 December, Russian Foreign Minister Sergei Lavrov claimed that the OSCE "has failed to make progress in fundamental issues of ensuring truly pan-European security, specifically, ratifying the amended Treaty on Conventional Forces in Europe [CFE]," RIA reported on 7 December. Lavrov noted that Russia, Ukraine, Belarus, and Kazakhstan have all ratified the amended CFE Treaty, and he called on the other signatory states to follow suit. (Speaking in Moscow in February 2004, Russian Defense Minister Sergei Ivanov said that in its present form, the CFE Treaty "cannot uphold stability and the balance of interests of the signatory states.") Some NATO members, including the United States, have pegged ratification of the CFE Treaty to Moscow's compliance with its 1999 pledge to close its military bases in Georgia and Transdniester.

Lavrov further argued that holding a special OSCE high-level seminar early in 2005 to discuss military doctrine and defense policy as Russia has proposed would contribute to strengthening stability and security in Euro-Atlantic region. Lavrov also echoed earlier calls for the OSCE to increase its collective potential for countering terrorism. And he called on the organization to abandon what he termed its "fruitless political maneuvers" aimed at revising the current format for seeking to resolve the Transdniestrian conflict. At present, Russia, Ukraine, and the OSCE serve jointly as mediators between Moldova and Transdniester; in June, Moldovan President Vladimir Voronin proposed an alternative format that would include EU and U.S. representatives in the negotiating process.

U.S. Secretary of State Colin Powell took issue with Lavrov on 7 December. Powell said he "categorically disagrees" with Russian allegations that the OSCE is guilty of double standards. He stressed that "all participating states signed up to the proposition that fundamental freedoms, democracy, and the rule of law are of legitimate concern to us all." Powell also defended the OSCE field missions, which, he said, "are among its most important assets." And he specifically noted the positive role of the observers deployed on the Russian-Georgian border and called for additional funding to extend their deployment for a further year.

Lavrov, however, remained obdurate, warning on 7 December that Moscow might withhold its contribution to the OSCE budget if the organization fails to revise its operation procedures. Lavrov further blocked passage of the council session's final document. (Liz Fuller)

By Julie A. Corwin

The so-called party of power, Unified Russia, managed to win outright in one region and lead the first round in two regions, while the Communist Party governors held onto control in two regions during the first round. It lost control in a third region, where the longtime Communist governor was disqualified just before the election.

But the courts -- rather than the political parties -- appear to have played the most significant role in these elections: In three regions, competitive candidates likely to finish first or second in their respective races were disqualified shortly before the ballot. All of those disqualified candidates were poised to oppose representatives of Unified Russia and/or representatives that the Kremlin favored.

Although Unified Russia supported winning candidates in three of six races, the party can hardly hail the results as a popular mandate. The only region where the party of power won an easy victory was Astrakhan Oblast, where long-time leader Governor Anatolii Guzhvin died suddenly last August. Putin named Guzhvin's first deputy, Aleksandr Zhilkin, as acting governor soon after the tragedy, and the majority of the regional elite supported him going into the election. Zhilkin won in the first round with more than 65 percent of the vote, but the electorate supported him as a representative of a continuation of Gushvin's policies, not as a representative of the party of power, according to RFE/RL's Astrakhan correspondent. The opposition in the oblast was led by State Duma Deputy Oleg Shein (Motherland) and concentrated its efforts on the mayoral race in the city of Astrakhan, which was also held on 5 December, RFE/RL's Astrakhan correspondent reported on 6 December. The opposition candidate, former oblast legislator Sergei Bazhanov, won that race.

In Bryansk Oblast, Unified Russia candidate Nikolai Denin won the first round with 45 percent in large part because a local court struck incumbent Governor Yurii Lodkin, a Communist, off the ballot a week before the election (see "RFE/RL Newsline," 30 November 2004). Lodkin responded to the court's action by calling on his supporters to vote against all candidates, and about 20 percent of participating voters did so, according to RFE/RL's Bryansk correspondent. Despite the help from the court, Denin will have to face a second round of voting.

In Ulyanovsk Oblast, the wildly unpopular incumbent Governor Vladimir Shamanov, who until recently was a member of Unified Russia, intended to seek a second term, despite polls showing that he would fail to make it into a second round. Just last month, following a meeting with President Vladimir Putin, Shamanov was lured away to Moscow with a job as an adviser to Prime Minister Mikhail Fradkov. With Shamanov out of the way, Dmitrovgrad Mayor and Unified Russia party member Sergei Morozov managed to win the first round, but not by much. He got only some 40,000 more votes than Ulyanovsk entrepreneur Sergei Gerasimov. Gerasimov is a member of the political council for the Union of Rightist Forces (SPS) in Ulyanovsk. While Morozov had the support of Unified Russia, another member of Unified Russia's State Duma faction, Margarita Barzhanova, ignored the party's instructions to bow out of the race and finished third with 15 percent of the vote. Barzhanova accused presidential envoy to the Volga Federal District Sergei Kirienko of interfering in the race on Morozov's behalf.

In the set of races on 5 December, the red governors did surprisingly well -- with the obvious exception of Bryansk Governor Lodkin, who was disqualified a week before the vote. Volgograd Oblast Governor Nikolai Maksyuta is only nominally Communist, and his strongest alliance is not with the KPRF but with LUKoil. In addition, local analysts believe the Kremlin does not object to Maksyuta retaining his position despite his Communist Party membership, RFE/RL's Russian Service reported on 6 December. They speculate that Kremlin officials might even have helped Maksyuta by giving a nudge to the Supreme Court, which upheld the disqualification of Maksyuta's chief competition in the race, Volgograd Mayor Yevgenii Ishchenko. Maksyuta led the first round with 41.4 percent of the vote, compared with 13.2 percent for city legislator Nikolai Volkov. The two candidates supported by Unified Russia, State Duma deputies Vladimir Goryunov and Oleg Savchenko, failed to make it to the second round.

In Pskov Oblast, the candidate supported by a coalition of the Communist Party and Yabloko and other local groups, former State Duma Deputy Mikhail Kuznetsov (People's Deputy), managed to unseat incumbent Yevgenii Mikhailov. Mikhailov enjoyed strong support from Unified Russia and presidential envoy to the Northwest Federal District Ilya Klebanov. In addition, a Supreme Court presidium decision disqualifying his toughest competitor, Pskov Mayor Mikhail Khoronen, a week before the first round on 14 November gave his campaign a big boost. But Pskov Oblast's electorate has a tradition of "protest voting" due in part to poor economic conditions, "Kommersant-Daily" reported on 7 December. However, all may not be lost for Unified Russia. Kuznetsov is reportedly going to sign up with his former foes. Unified Russia General Secretary Valerii Bogomolov declared that Kuznetsov is a party supporter and will enter its ranks.

In Kamchatka Oblast, incumbent Governor Mikhail Mashkovtsev is full-fledged Communist Party member and does not enjoy Kremlin support. Like Kuznetsov, his chief rival in the second round, local raion head Boris Nevzorov, is a new convert to Unified Russia. Mashkovtsev has been the center of a long-running criminal case, and five days before the election, law enforcement officers forcibly brought him to the local prosecutor's office to review the 20-volumes of legal documents amassed against him. Despite his legal troubles, Mashkovtsev managed to win the most votes in a field of 16 candidates. The candidate officially supported by Unified Russia, Aleksandr Dudnikov, finished fourth with only 10 percent of the vote.

Second rounds will be required in Kamchatka, Volgograd, Bryansk, and Ulyanovsk oblasts and will take place before the end of this month. With the Federal Assembly's recent passage in all three readings of a bill ending the direct election of regional governors, these elections are likely to be the last executive-level races in these regions for the foreseeable future. It is therefore not unreasonable to suggest that the second round of these races will be even more hotly contested than the first.

Region___________Candidate _________Party Affiliation_____percent of vote

Kamchatka Oblast_____Mikhail Mashkovtsev (I)___KPRF______38

____________________Boris Nevzorov__________ER**________24

Volgograd Oblast______Nikolai Maksyuta (I)____KPRF_______41

____________________Nikolai Volkov_________SPS________13

Pskov Oblast_________Mikhail Kuznetsov____KPRF, Yab.*_____49

____________________Yevgenii Mikhaikov (I)___ ER_______41

Bryansk Oblast_______Nikolai Denin____________ER________45

____________________Yevgenii Zelenko________SPS_________13

Ulyanovsk Oblast______Sergei Morozov___________ER________28

___________________Sergei Gerasimov___________SPS______21

Astrakhan Oblast________Aleksandr Zhilkin_______ER_________65

______________________Igor Negerev___________ KPRF______14

Sources: regional election commission websites, RFE/RL's Russian Service

I=incumbent

KPRF= Communist Party

ER= Unified Russia

SPS= Union of Rightist Forces

* a coalition of the Communist Party, Yabloko, and rightist groups backed Kuznetsov

** Nevzorov only recently joined Unified Russia, and the party backed fourth-place finisher Aleksandr Dudnikov

December: A draft law on toll roads will be submitted to the government, according to the Federal Highways Agency's Construction Department

11 December: Federation Council Chairman Sergei Mironov to head a Russian delegation to Iran for talks with senior officials

12 December: Government deadline for determining the route of a pipeline to transport Siberian oil to the Asia-Pacific region, according to presidential adviser Arkadii Dvorkovich

19 December: Presidential election in the Republic of Marii-El

19 December: Government to auction off Yuganskneftegaz, the main production subsidiary of oil giant Yukos. Minimum purchase price set at $8.6 billion

19 December: Mayoral elections in Nakhodka, Severodvinsk, and Komsomolsk-na-Amure

20 December: A board meeting of oil giant Yukos expected to vote on the possible initiation of bankruptcy proceedings

22-23 December: Belgian Foreign Minister Karel De Gucht to visit Moscow

26 December: Presidential election in Ukraine

26 December: Presidential election in the Republic of Khakasia

26 December: Second round of the gubernatorial election in Volgograd Oblast

29 December: State Duma's fall session will come to a close

January 2005: President Putin to visit Poland for the 60th anniversary of the liberation of the Auschwitz concentration camp

1 February 2005: Former President Boris Yeltsin's 74th birthday

March 2005: Gubernatorial election in Saratov Oblast

May 2005: Commemoration of the 60th anniversary of the end of World War II

2006: Russia to host a G-8 summit