Learning lessons from the oil and gas conflicts

This time last year, there was our gas conflict with Ukraine, the land of the triumphant Orange Revolution. This year we have oil-and-gas problems with Belarus. Certain similarities are becoming apparent in the way Moscow treats its CIS partners.

The year of 2007 is off to a shaky start. We seem to be making a habit of shaky starts. This time last year, there was our gas conflict with Ukraine, the land of the triumphant Orange Revolution. This year we have oil-and-gas problems with Belarus, a country whose status still remains uncertain after 15 years: is it forming a Union State with Russia, or is it just one of our neighbors in the former Soviet Union?

The situations are different, of course. In the case of Ukraine, Moscow failed to steer the political conflict to its own advantage and decided to punish Kiev’s new administration with a steep rise in gas prices. In the case of Belarus, purely economic interests prevailed, since there weren’t any newly-discovered reasons for penalizing Belarusian President Alexander Lukashenko: he had been playing a double game with the Kremlin for years, and continues to do so, with the inexplicable support of substantial parts of Russia’s public and political elite.

All the same, in my view, certain similarities are becoming apparent in the way Moscow treats its CIS partners. Declaring itself an energy power (if only because it has no other advantages), Russia has effectively abandoned geopolitical expansion (imperial ambitions) in favor of economic gains. In the past, gas prices were dictated by the level and quality of political relations with our former Soviet neighbors, with the aim of binding them to the former metropolis. The transition to free-market criteria in price formation certainly brings in more revenues from our hydrocarbon exports, but it also pragmatically equalizes access to them for “friendly” and “unfriendly” nations alike.

In other words, Moscow is ceasing to subsidize the economies of former Soviet republics in exchange for their political loyalty and (mostly empty) promises to return to Russia’s fold in one form or another. We might also put it this way: politics is starting to serve economics.

The example of Belarus has already shown us what happens when economics serves politics. None of the pricing preferences extended to Minsk produced any real progress toward making the Russia-Belarus Union State a reality; they only intensified the appetites of the Belarusian leadership and fed its political ambitions, extending even beyond Belarusian territory. Moreover, in contrast to the demonstrative embraces of national leaders and promises of eternal friendship and mutual benefits, Lukashenko issued dozens of laws and decrees which directly discriminated against Russian companies, whether private or state-owned.

The costs of integration (if it’s something other than an illusory revival of an empire) should not be paid by only one country, even if it is the largest. The costs should be paid by all interested parties, since integration can only be effective if it brings real mutual benefits.

In fact, the subsidies which Moscow has trained many of its neighbors to depend on don’t facilitate their economic growth at all. As we observed in the Soviet era, and in resistance to market reforms in post-Soviet Russia, dependency kills off entrepreneurial initiative, inflates non-production costs, and eventually leads to economic collapse. Thus, by gradually raising hydrocarbon prices to market levels, Moscow is (intentionally or unintentionally) forcing its partners to reform their economies and rationalize energy costs.

Many of them don’t want to do this. After apparently reaching agreement with Russia, Lukashenko has criticized Russia in his latest statements and threatening to shift Belarusian foreign policy priorities to the West. Of course, geopolitical gains might convince the West to forget that it’s dealing with “Europe’s last dictator.” There might be promises of allowing Belarus to join NATO, and promises of assistance from the European Union. But the West won’t give Belarus any money. It won’t permit the Belarusian economy to remain in its non-market form. The West won’t open its markets to uncompetitive Belarusian goods. Moreover, it would force Belarus to observe civilized democratic standards in general and election standards in particular.

Russia itself would do well to learn some lessons from the oil-and-gas conflicts.

Firstly, there are some lessons to be learned in our relations with Western consumers. Both last year and this year, our moves in raising prices for Ukraine and Belarus were so clumsy that they seriously alarmed the Europeans. Even Prime Minister Mikhail Fradkov admitted the other day that Russia’s actions have noticeably damaged its reputation among its Western partners. Of course, we might point out that major powers (not only Russia) often act clumsily, like a bull in a china-shop; but we have smashed far too much china in these conflicts, last year and this year. Even the Soviet Union, by no means the world’s most agreeable trade partner, never permitted itself to breach gas delivery agreements with Western Europe.

After all, the same operation aimed at “monetizing gas benefits” for our neighbors could have been carried out far more tidily – not in the final hours of December 31. We should have taken account of the fact that natural gas, in contrast to oil, does not have established global prices. Gas prices are calculated using certain formulas that include the consumer’s ability to pay. Of course, Russia could boost prices for CIS countries to the same level as what it charges Europe: $230 per thousand cubic meters. But Ukraine, Belarus, and most other post-Soviet countries simply couldn’t afford to pay such sums. And negotiations on this issue should have been smoother and more transparent than nervous statements in television broadcasts, with the audience distracted by the holiday season.

An energy power cannot exist in the dimension of exports alone. We should take advantage of the current favorable circumstances, of course. But it’s also important to know how the revenues should be spent. Russia won’t be considered an energy power until it puts its own energy industry in order. Many communities in Russia still lack household gas supplies. Energy production facilities and pipelines require costly modernization. We have spent far too much time on unproductive talk and discussion about reforming RAO Unified Energy Systems. By raising prices for gas, we are teaching our neighbors to be economical in their energy use – but our own attitude to energy resources is predatory.

And while we’re establishing ourselves as an energy power, the human race will discover some effective alternative energy sources. And we’ll be left behind once again.