The Wall Street Journal: Crude Calculations

EXTRACT: Alienating friends like the Germans and scaring away investors like Shell, dumped last month from the lead in the Sakhalin-2 project, aren’t smart ways to address these problems.

THE ARTICLE

January 11, 2007

In authoritarian systems, rulers get limited information. Contradictory voices are quieted and cronies unable or afraid to speak the truth to the boss. Which in turn leads to ill-informed decisions, as Vladimir Putin and Aleksander Lukashenko are discovering in this new year. The presidents of Russia and Belarus yesterday ended a second round of boxing over energy in the span of a week. Both came away bruised — yet again.

With no warning, much less consultation with Russia’s most important consumers, Mr. Putin this week cut off the pipeline through Belarus that supplies a chunk of Europe’s crude oil. The Europeans weren’t amused. This came after last week’s threat to turn off the taps on the natural gas pipeline through Belarus in a related dispute over prices with Russia’s little Slavic satellite.

Russia’s energy blackmail started this time one year ago, when the Kremlin put the fear of freezing into Western Europe by shuttering a far more important natural gas line through pro-Western Ukraine. “Even during the Cold War,” fumed Germany’s Angela Merkel Tuesday, “Russia was a stable energy supplier.” Keep it up and even lethargic Europe may start looking elsewhere for its oil and gas.

Mr. Lukashenko also miscalculated. His repressive regime was built on cheap Russian energy, which let him keep an uncompetitive industry going and pensioners paid off. He apparently didn’t expect the party to end. After nearly 13 years, the Kremlin finally seems to realize that the high price paid — in subsidies and in reputation for coddling the man in Minsk — yields little in return from the mercurial Belarusan. It’s a shame this Russian epiphany didn’t happen before Mr. Lukashenko rigged and bought, with Russian energy, his latest “reelection” last March.

When the Kremlin slapped an export duty at the beginning of the new year on previously tax-free oil exports to Belarus, as on any other country, Minsk retaliated by imposing a customs duty, dressed up as a “transit fee,” on the Russians for oil headed west. Russia is legally in the right to protest. Moscow already pays transit fees to Minsk, and goods bound for elsewhere aren’t eligible for custom duties. When Belarus siphoned off oil to claim its “fee,” Mr. Putin abruptly cut the pipeline. With few oil reserves, Belarus couldn’t outchicken Moscow for long. Yesterday Belarus dropped its “customs duty.”

The victory, however, is not sweet for Russia. As in forcing through higher gas prices and a large stake in Belarus’s gas pipeline for Gazprom last week, Mr. Putin in this case used energy as a blunt instrument of power politics. The Kremlin leader plays only one hand well, the heavy one. That may be what he learned at the KGB finishing school, but it’s hard to see how Russia’s interests are served in the process.

Natural resources give Russians an illusion of great power, when in fact, it’s limited. Energy prices are falling, if slowly. Russia’s rusty gas and oil rigs cry out for fresh investment. Oil output slowed again last year, to 2.2%, compared with near-double-digit growth earlier in the decade, when Russia’s private concerns, some of them since nationalized, led the way. Alienating friends like the Germans and scaring away investors like Shell, dumped last month from the lead in the Sakhalin-2 project, aren’t smart ways to address these problems.

Somehow we suspect that Mr. Putin may not be hearing this side of the story.

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