The Standard

Russia Loses Iraqi Oil Contract

Iraqis Nix Saddam-Era Deal

The Iraqi government has voided a contract with the Russian company LukOil to develop the West Qurna oil field.

The field is estimated to hold 11 million barrels of untapped reserves.

The contract was signed in 2002 while Saddam Hussein was still in power.

It was then rescinded by the Hussein government shortly before the American invasion.

Mr. Hussein had been angered that LukOil brokered agreements with opposition groups in the event that his regime might fall.

The Russian government has called the decision an "outrage."

Energy, Politics and Russian Nationalization

There has been growing concern in the West about the role of state-run energy companies in serving the Kremlin's political interest.

In August, the Kremlin leveraged the last independent oil entrepreneur, Mikhail Gutseriev, out of the country and swallowed up RussNeft, a company that represented a mere 3% of the Russian oil production market.

Last October the state-run gas monopoly GazProm suddenly announced an unpaid $1.3 billion Ukrainian debt and threatened to cut off Ukrainian gas supplies.

The surprise debt was announced the day after after pro-West parties triumphed in Ukrainian parliamentary elections.

Week in Review

  **** The previous week's Russia-EU summit ended with unresolved disputes over Russian investment in the EU energy markets and the planned US missile shield in central Europe.

**** In a joint letter published in French and German newspapers, the French and German foreign ministers warned that a Russia's planned withdraw from the Conventional Forces in Europe Treaty (CFE) may provoke an arms race.

The ministers referred to the "specter of a new Cold War."

**** Russia placed restrictions on the number of international monitors it would allow into the country to observe the December parliamentary elections. The monitoring agencies called the move "unprecedented."

**** The Chinese company TEDA reached an agreement with Egypt to build an industrial zone near Suez that is expected to pull in $2.5 billion in Chinese investment.

The deal is another tie forged in a growing economic partnership between the two nations.

EU-Russia Summit Leaves Rifts

Something, But Not Much

EU leaders and Russian President Putin ended Friday's EU-Russia summit with the announcement of two minor deals -- a bi-lateral aggreement on steel and a "Memorandum of Understanding"  between European and Russian drug control agencies.

An uneventful summit has highlighted rifts between Russia and the EU where it appears there is little room for compromise.

Energy and GazProm

Little was announced publicly about the so-called  "GazProm clause" in recent EU energy market reforms.

Europe depends on Russia for 25% of its natural gas.

European leaders have recently grown weary of Russia using energy as a blunt tool to further its political interests.

The reforms require foreign companies that own both production and transport capacity for natural gas to sell off one of their wings before investing in the EU energy market.

The rules effectively block out the Russian state-run monopoly GazProm from investing in the EU market.

The issue is contentious, as it is generally assumed that GazProm's expansion plans had involved size-able investments in Europe.

Missile Shield

The summit also addressed the issue of the defensive radar and missile systems the US has proposed to build in Poland and the Czech Republic.

The US has said the missile systems are purely defensive and are intended to defend Europe from missile strikes from so-called "rogue states" like North Korea or Iran.

Russian president Putin has called the missile shield a threat to Russian national security.

At the summit, Mr. Putin compared the American proposal to the Soviet decision in 1962 to secretly deploy medium-range nuclear missiles in Cuba -- an event which led to the Cuban missile crisis and pushed the world to the brink of nuclear war.

Putin's comparison (however absurd) sends the strongest signal yet to the West that Russia will refuse to compromise on the US, Czech and Polish plans.

EU Document Drafts: Russia an "Opponent"

Strategic Partners No Longer?

EU documents prepared ahead of the Russia-EU summit have revealed a growing ambivalence toward Russia among European politicians.

Papers circulated before the summit say there is a "risk" that "Russia will distance itself from 'Europe' in its social and political development and in its approach to the world."

The wording is much milder than in earlier drafts, where ministers go far as calling Russia a "competitor and even opponent."

Apart from the official language, there is also growing distrust of Russia and Russian president Vladimir Putin in the European parliament.

Energy

Europe is dependent on Russia for 25% of its natural gas.

The dependence has made energy the primary point of contention in Russian and European relations.

Europe has grown suspicious of GazProm, the state-run gas monopoly whose employees were recently granted the right to carry firearms by the Russian parliament.

The European Commission announced a proposal in September that would prevent GazProm from investing into European energy markets.

Russia reacted to the proposals with dismay.

Bomber Flights and Missile Treaties

There is also growing concern about Russian foreign policy.

President Putin has announced he will withdraw Russia from the Conventional Forces in Europe Treaty

He also has hinted he may nix Russia's involvement in a medium-range inter-continental ballistic missile agreement (NIF).

To top it off, Russia has accompanied this diplomatic chest-thumping with increased bomber flights over Scandinavia.

On the eve of the summit the latest EU draft is neutral yet suggestive:

"Russia is likely to be marked by an assertive foreign policy, tougher internal policies and heightened rhetoric."

Week In Review

****The US, France and Germany are separately taking steps to regulate investments by sovereign wealth funds. Sovereign wealth funds are huge investment funds controlled by foreign governments. Their current value is estimated to be between $1.5 and $2.5 trillion.

****Russian President Putin and Iranian President Ahmadinejad met in Tehran on Tuesday. Their call for diplomatic unity among Caspian nations was widely seen as a geopolitical rebuff to France and the US, who have publicly considered military action as a last ditch means of solving the Iranian nuclear dispute.

****The EU and Russia announced they would jointly appoint a panel of experts to discuss EU energy market reforms proposed by the European commission. The reforms would block out Russia's politically combative natural gas monopoly GazProm from investing deeper into the EU market.

****Russian President Putin announced on state-run television that Russia is planning to substantially upgrade its conventional and nuclear military arsenals. His remarks came on the same day Russia test fired and inter-continental ballistic missile.

EU and Russian Experts to Discuss Energy Markets

Talk Will Center On Russian State-Run Monopoly

The EU and Russia have agreed to organize a group of experts to discuss recent EU energy market reforms.

In September, the European Commission put forward proposals to "unbundle" the European energy sector.

In what has become known as the "GazProm clause," the proposal laid down criteria for foreign investment.

The proposals makes it illegal for companies to control both the production and transport of natural gas.

In addition, foreign companies can only invest if their home country gives the EU reciprocal access to their domestic energy market.

The rules effectively block the Russian state monopoly GazProm from buying into the European market.

 

Gas and Politics

Russia has regularly been accused of using GazProm to exert political leverage on other countries.

Earlier this month, GazProm abruptly announced a $1.3 billion dollar unpaid debt and threatened to cut off gas supplies to the Ukraine shortly after Yulia Tymoshenko's pro-West party took  an unexpectedly high number of seats in Ukrainian parliamentary elections.

While the Ukrainian government expressed surprise, experts questioned how such a large debt could build up without anyone noticing.

Then the Russian prime minister said one week later that the debt was $2 billion.

Thereafter pro-Russian ministers of the soon-to-be opposition party reached a settlement with GazProm of which details are still unclear.

Russian Nationalization

There has been general unease in the United States and Europe as Russia has moved away from a market-based economy in key sectors.

Early last week President Putin introduced legislation that will create yet another state-owned industrial giant, Rostechnologii, that will absorb Russia's largest car manufacturer and VSMPO-Avisma, a key international exporter of titanium.

Equal Access

When asked about providing equal access to Russian energy markets after a meeting with the EU Energy Commissioner on Tuesday, Russian energy minister Viktor Khristenko did not directly answer the question.

"We have the opportunity to participate in the development of various sectors of energy in Europe by means of joint projects with partners in Germany, Italy and France - wherever we've got this mutual level of understanding among partners," he said.

"We hope new initiatives, which are being drawn up by the European Commission, will not in any way represent an obstacle to these aims."

Strong Words From Russia and Iran

Putin and Ahmadinejad Meet in Iran

Russian President Vladimir Putin and his Iranian counterpart Mahmoud Ahmadinejad met at a summit of Caspian nations on Tuesday in Tehran.

The five-nation summit also included leaders from Turkmenistan, Kazakhstan and Azerbaijan.

The summit has been watched closely for signs from Russia regarding the debate in the UN Security Council over tougher sanctions against Iran.

Western members of the UN Security council plus Germany favor stronger UN sanctions to deter the Iranian nuclear enrichment program.

China and Russia have delayed a council decision by wielding veto threats over tougher proposals.

Caspian Security

Ahmadinejad and Putin called for stronger political unity among Caspian countries.

The Russian president urged publicly that no Caspian state should aid outsider nations in staging military strikes on another state in the region.

This was widely regarded as a direct response to speculation that the US may launch a military strike on Iran from military bases in Azerbaijan.

The European Card

Mr. Putin's remarks are also a response to France.

Both the French president and French foreign minister have suggested publicly that France would pursue military solutions against Iran if negotiations over its nuclear enrichment program ultimately broke down.

France also recently urged that the EU enact a set of tougher sanctions against Iran outside of the UN framework.

On Monday EU foreign ministers instructed experts to draft reports on new sanctions.

Officials have stayed mum on whether these reports are intended for independent EU sanctions or whether they will inform negotiation at the UN after Iran has reported (late) on its nuclear activities to the IAEA later this year.

Week In Review

Putin Shows His Hand, France Stays Tough on Iran

**** Citigroup and UBS announced large write-downs in assets tied to sub-prime securities.

They are two of many American and European banks who took multi-billion dollar hits on their balance sheets as the sub-prime crisis ripped through global credit markets during the third quarter.

**** Russian President Vladimir Putin accepted United Russia's invitation to head its list of candidates in the 2007 Russian parliamentary 'elections.'

Experts see this as Putin's first step on the road toward preserving his power through the office of prime minister.

**** Russian state-owned oil giant GazProm threatened to cut off Ukrainian gas supplies if the Ukrainian government did not pay a $1.3 billion debt by November.

The announcement was shrouded in confusion.

Analysts saw it as a Russian attempt to complicate the formation of a Tymoshenko-led government on the heels of close parliamentary elections in the Ukraine.

**** French Foreign Minister Bernard Kouchner strongly urged his European counterparts to consider EU-wide sanctions against Iran to halt its "nuclear defiance."

Italy, Austria, and Germany expressed reservations.

Russian GazProm Threatens Ukraine With Gas Cuts

Threats Come On Heels of Ukrainian Elections

State-owned gas giant GazProm announced Tuesday it would cut gas supplies to the Ukraine if a $1.3 billion dollar debt was not paid by the end of the month.

The announcement came after elections in the Ukraine seem to have paved the way for a coalition in parliament between blocs headed by Yulia Tymoshenko and Viktor Yushchenko.

Such a coalition would see Ms. Tymoshenko replace Viktor Yanukovich as prime minister.

Mr. Yanukovich and his Regions party are widely seen as pro-Russian.

Ms. Tymoshenko and Mr. Yushchenko led the Orange Revolution in 2004 and 2005. They are generally seen as pro-West.

General Confusion

The GazProm announcement and its aftermath have caused general confusion.

A spokesman for the Ukrainian gas company NaftoGaz told the AFP: "We don't understand what GazProm means. We don't understand where [the sum] came from."

GazProm has said that the debts have been piling up since June.

The situation was later complicated on Wednesday when GazProm announced a settlement after a meeting with ministers from the Yanukovich government.

Few details were disclosed.

GazProm said merely that the current government would "take control" of the problem.

Russian Interference

Many analysts have speculated that the GazProm announcement was an effort by the Kremlin to complicate the transition to power for Ms. Tymoshenko and her pro-west party.

GazProm is state-owned and its senior management is comprised of ex-KGB officers believed to have close links with President Putin.

The government has acknowledged the geopolitical leverage it holds with its energy industry in its domestic campaigns for nationalism.

A history-teaching manual endorsed this summer by the Kremlin read in part:

"The development of the global political process will depend on Russia's decision on where to send its oil and gas. It's enough to deprive a rival of energy for development – in the geopolitical battle, such an act could be a defining moment."