Publication: Eurasia Daily Monitor Volume: 5 Issue: 105

It might have appeared in the trying period of power-reformatting in Moscow, that political priorities were all over the place, from strategic bombers to nanotechnologies, and from small business to NATO enlargement. By the end of the first month of President Medvedev’s “era,” the newly-reappointed ministers and aids had re-started their petty intrigues pretending that they ruled a huge country that essentially follows its own uncertain trajectory (, May 21). The president and the prime minister, both visibly uncomfortable in their respective roles in the two-headed power construct, have in the meanwhile got down to the only activity that really matters–energy policy.

The first step was the reduction of taxes on oil companies, which gave a strong boost to their market value and brought the Russian stock exchange indices to record heights, Rosneft being the best performer (Kommersant, May 23; RBC Daily, June 3). It is not certain at all that the companies would invest their extra profits in exploration and production, as prescribed personally by new Deputy Prime Minister Igor Sechin. Previous experiments with incentives have failed to accelerate the development of hydrocarbon fields in East Siberia (RBC Daily, May 22). What is certain is the new jump of inflation, which has already reached 7 percent since the start of the year, but the government has apparently abandoned all attempts to keep it in check, opting instead for financial compensations and other cheap charity for state employees and pensioners (Expert, May 12). The International Monetary Fund and the World Bank now confidently issue the diagnosis of “overheating” (Vedomosti, June 3).

Another step was the long-postponed decision on constructing the second line of the Baltic Pipeline System (BTS) toward Ust-Luga, so that Russia would be able to reduce its dependency upon oil transit, while tanker traffic in the crowded Gulf of Finland would register a new sharp increase by the end of this decade, much to the concern of Helsinki (Kommersant, May 5; Vedomosti, May 15). Putin particularly emphasized the goal of shifting energy export from the ports of the Baltic states, arguing that Russia would thus become a “guarantor of Europe’s energy security” (Vremya novostei, May 15). Lithuania tried to resist this “diversification” and threatened to block the EU-Russia negotiations on a new cooperation and partnership agreement unless it would receive guarantees for stable deliveries to the Mazheikiu refinery. The Europeans, however, put so much pressure on Vilnius that the condition was dropped (Nezavisimaya gazeta, May 22). Putin was confident about the futility of the Lithuanian and Finnish complaints and refused an invitation to attend the Baltic Sea summit in Riga, sending instead First Deputy Prime Minister Igor Shuvalov (Kommersant, June 3).

Energy issues were also central in the agenda of Putin’s visit to Minsk for the meeting of prime ministers of the Commonwealth of Independent States, typically an event of secondary importance compared with the “presidents club.” Putin had a separate meeting with President Aleksandr Lukashenka, who teased him not too kindly about his new status but was all too eager to discuss new credits that would compensate for new prices (Kommersant, May 24). The meeting with Ukrainian Prime Minister Yulia Tymoshenko was even more loaded, but Putin did his best to maintain the friendly façade and expressed readiness to export gas directly without any intermediaries provided that the debts would be paid in full (Komsomolskaya pravda, Kommersant, May 24). A peculiar background for this hard bargaining was provided by the energy summit in Kiev attended by presidents of Azerbaijan, Georgia, Estonia, Latvia, Lithuania, and Poland, who approved a declaration on common energy transit space, entirely devoid of practical content (, May 23).

Meanwhile, Medvedev was traveling along a different energy avenue making his first foreign visit to Kazakhstan, perhaps indeed the most important neighbor, but not at all an easy partner. President Nursultan Nazarbayev pointedly reminded him that he had never encountered an insoluble problem with Putin and raised new demands, including a canal connecting the Caspian and the Black seas (Kommersant, Vremya novostei, May 23). Moscow has been trying to get Kazakhstan interested in the BTS export terminals, but Nazarbayev is having nothing of the Baltic channel and insists on expanding the pipeline to Novorossisk. One hurdle for that was removed when tax claims for the Caspian Pipeline Consortium were cancelled in Moscow, so Nazarbayev found it opportune to reiterate his support for transporting gas northward from Turkmenistan (RBC Daily, May 20; Vedomosti, May 23).

Medvedev’s next destination was Beijing, and with all the heavy symbolism of that visit, negotiations there were rather too difficult for a novice like him (Kommersant, May 23). There is very little to show for Putin’s grand promise to increase energy exports to China made during his official visit in 2006, as the construction of the East Siberia-Pacific (VSTO) pipeline is lagging behind schedule and the production of oil has stalled. China, for its part, is reducing imports of Russian arms and starting production of own unlicensed fighter, much to the vexation of the Sukhoi design bureau. Russia’s trade balance with China has thus become negative, but the two partners find it far easier to condemn jointly the deployment of missile defense systems than to agree on energy matters (Rossiiskaya gazeta, May 24).

Moscow has every reason to assume that strengthening state control over the oil-and-gas business pays handsome political dividends, beefing up its position of strength in the international arena. At the same time, the price of mistakes and risky gambles, such as the continuing attacks on the BP and TNK-BP oil companies, appears to go down as the oil price touches the astounding $135 per barrel (, May 21). Putin had the nerve to explain away the TNK-BP troubles as a conflict between owners (Vedomosti, June 2).

Both Russian duumvirs are deeply involved in this profitable business, and Medvedev proudly presided for the last time over a meeting of the Gazprom board on May 27, after which several top managers sold their shares, perhaps preparing to leave the company (Kommersant, June 3). That makes it so much more perplexing to see how little strategic thinking and how much bureaucratic inefficiency there is in Russian energy policy. Mikhail Khodorkovsky, reflecting in the Siberian labor camp on the destruction of Yukos, suggested that greed was the main driver, but cowardice came as a close second (Moscow echo, May 23). Motivations of this sort shape a rather unattractive business culture and do not exactly make Russia a trustworthy partner in building a stable energy future for the world.