MarketWatch: Russia’s ‘petro-confidence’ could lead to a fall: Critics say hardball tactics could come back to haunt Moscow

By William L. Watts,
Last Update: 2:12 PM ET Jan 26, 2007

DAVOS, Switzerland (MarketWatch) — Alexander Medvedev went to Davos with the tall task of convincing European leaders and others that they have nothing to fear from the state-controlled Russian energy giant Gazprom.

The company enraged European leaders earlier this month when it temporarily shut off the flow of oil through a key pipeline due to a dispute with Belarus. The move came a year after it had similarly clamped off natural gas supplies due to a dispute with Ukraine.

“I’d like to assure all of the people in this room there is no reason to be afraid of Gazprom,” Medvedev, the firm’s deputy chairman, told a panel discussion on petro-politics Thursday night.

While attending the annual meeting of the World Economic Forum, the mountain schmoozefest that attracts thousands of the world’s most influential executives, economists and politicians, Medvedev has argued that long-term agreements recently secured with Ukraine and Belarus should prevent future problems.

“In reality, Gazprom is a guarantor of the security of supply,” Medvedev said in the panel discussion Thursday night.  And Medvedev has repeatedly made clear he sees no reason to apologize.

But critics say Russia could eventually come to regret a series of heavy-handed energy moves if oil prices fall.

There’s Sakhalin-2, a $22 billion oil-and-gas project initially led by Royal Dutch Shell. Shell. The company and its Japanese partners were forced to give up half of the project, receiving $7.45 billion for their trouble. The Sakhalin-2 grab was compared to a de facto nationalization of the project.

The Kremlin has played hardball with other energy producers as well, with the government seizing the assets of local producer Yukos; opting to go it alone in developing the Shtokman natural-gas field in the Barents Sea; and blocking Exxon Mobil Corp. from expanding the Sakhalin-1 project.

When Russian President Vladmir Putin took office in 1999, oil prices were in the teens and Russia was all but flat on its back.

But since then, energy prices have steadily rallied. And Russia’s economy has grown rapidly.

“The problem is that they feel that they’ve been humiliated in the post-Cold-War world, that they haven’t been granted their place in the world and they’re resurging with a vengeance,” said Clifford Kupchan, a long-time Russia watcher and a director of the Eurasia Group, a political-risk consulting firm, in an interview earlier this month. “And that has taken the form of a very strong-armed energy policy.”

Russia provides roughly a quarter of Europe’s gas consumption. About 20% of the gas comes through pipelines in Belarus.

“Belarus marks the second red line they’ve crossed [after Ukraine] … Anyone who thought they did it once and they’ll never do it again, well, they just shattered that,” Kupchan said.

Actions may have consequences

But while Russia has managed to leverage its energy assets with seeming impunity so far, Moscow ignores the cyclical nature of the energy markets at its own peril, warned Edward Chow, an international energy expert with the Center for Strategic and International Studies, a Washington think tank.

The Sakhalin move and other measures could make potential partners wary of investing in Russian projects down the road if oil prices drop.

“That’s hard for them to see right now because … they’ve got more oil income than they know what to do with and the banks are throwing money at them,” Chow said in an interview last week. “But the history of this industry is what goes around comes around.”

On the gas front, Kupchan argues that Europe has more leverage on Russia than it seems willing to use.

While a quarter of European gas imports are from Russia, virtually all of Russia’s exports are to Europe. Europe can import liquefied natural gas, increase imports from Algeria and invest in other potential suppliers. That would take time, but they could probably do it faster than Russia can diversify its markets, Kupchan said.

Europe’s hand is weakened, however, by the fact that there’s not a unified policy, he noted, adding that the picture is also complicated by European firms who have their own relationships with Gazprom. 

William L. Watts is a reporter for MarketWatch.

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