Imperial Dreams

December 22, 2006

By Alan Block

Well, our esteemed President has decided that he won’t
make any adjustments, whether cosmetic or substantive,
to his policy in Iraq until after the first of the year,
so perhaps I’ll leave the topic alone for a while as well.
Although it no doubt means more Americans and Iraqis will
die for nothing much, it might actually be a shrewd move.
Few Americans want the Christmas season spoiled by having
to consider the pros and cons of cut-and-run, cut-and-walk,
or sending more troops to be ineffectual.

Sufficient unto the New Year is the evil thereof. And
besides, things are happening in other parts of the world.
Take Russia. Please.

The Russian government has pressured Shell, the Anglo-Dutch
oil company, into reducing its stake in a promising but
difficult oil and natural gas field in Siberia from a
majority share to a minority share. Gazprom, the Russian
state-owned energy group, which has invested little in
exploiting the energy resources on and around Sakhalin
Island, will now have the majority interest. The interests
of two minority Japanese investors, Mitsui and Mitsubishi,
have also been reduced.


This might be a back-of-the-business pages story except
that it seems to be part of a pattern of pushing foreign
companies out of any ownership interest in Russian energy
resources, as part of a larger project of bolstering the
power of the Russian state and making it more authoritarian.
Russia’s government wants to control those energy resources
and its temporary cut-off of oil supplies to Belarus last
year – which had an impact on Western Europe – shows that
it is not averse to using the power such control will give
it in geopolitical power games.

There is not much we can do about this, but it’s worth
knowing about. It just might presage a day when Russia
recreates enough of an empire to become a legitimate U.S.
foreign-policy concern. Even if that doesn’t happen, it
is a troubling development for those who had hoped that
Russian policy after the fall of communism might be a bit
more enlightened and good for the Russian people.

Sakhalin, an island north of Japan and once claimed by
Japan, off the coast of Siberia, is home to oil and gas
reserves. When it is fully exploited it is expected to
produce 150,000 barrels of oil a day and around 10 million
tons of liquefied natural gas a year. But it is a difficult
environment in which to operate – bitingly cold, and near
a feeding ground for gray whales. Development to date has
cost about $20 billion, $10 billion more than originally
expected. Shell went into the project as a 55 percent owner
of the energy to be extracted and the major operational
partner. This summer the Russian environmental ministry
shut down the project for environmental problems. Those
problems are real to a great extent. Sakhalin has 1,000
rivers, streams and brooks, many of which are used by
salmon for spawning. Shell is obliged to be careful when
laying pipes across or under them, restoring the topsoil
and relaying gravel in the streambeds. This is labor-
intensive work and doesn’t always get finished correctly.


There have no doubt been legitimate environmental concerns.
But the pattern to date has been for the Russian government
to come down hard on foreign companies like Shell and Exxon-
Mobil, while Russian-owned companies are seldom sanctioned.

The Sakhalin project was described in financial
publications as recently as May as a make-or-break
proposition for Shell. A successful Sakhalin project was
supposed to be the key for the troubled company to get
future contracts in Russia by showing it could operate
in the frigid conditions that seem to be where most of
Russia’s energy reserves are located.

Chris Finlayson, chairman of Shell in Russia, told the
London Sunday Times: “All natural-resources companies
have to go where the natural resources are. Russia has
40 percent of the world’s natural gas and is the largest
oil producer after Saudi Arabia. Russia is by definition
important. It is where the opportunities lie.”

It’s hard to weep too sincerely for a multinational oil
company that gets the screw from a government rather than
the favored treatment and subsidies such companies often
extract from governments where they operate. But the
campaign against Shell will almost certainly raise the
cost of extracting those resources, since state-owned
Gazprom will not have the incentives a private company
in a competitive environment would have to improve

The sanctions against Shell unquestionably were
instrumental in creating pressure to give in to Russian
demands that it cede its majority interest, giving Gazprom
a 51 percent stake and Shell 25 percent. There’s little
doubt that the sanctions were deployed politically. Dimitry
Peskov, spokesman for President Vladimir Putin, told
reporters that in the future foreign companies might be
welcome as subcontractors, providing capital and expertise,
but not as owners. These moves against foreign ownership of
natural resources in Russia reflects a changing economic
environment. In the 1990s Russia was strapped economically
and welcomed foreign investors and owners. Since then oil
prices have risen and Russian energy companies have
profited, so they need foreigners less.


This has coincided with an increase in nationalist
sentiment in Russia, encouraged and exploited by the
government to justify a more authoritarian regime than
most people hoped for after communism fell. Russia clearly
aches to be a major geopolitical power again, and oil
wealth – and the leverage of being a major energy supplier
for Western Europe – is part of the equation. Oil wealth
has been a mixed blessing – perhaps even more curse than
blessing except for those who have become fabulously
wealthy like Saud family members – in countries where oil
wealth is the primary or only source of large-scale wealth.
Russia has a more diversified economy than, say, Saudi
Arabia, but having politicians with a lust for power in
control of the country’s energy resources will undoubtedly
invite hubris and abuses along the way.

Dreams of empire such as those entertained by Putin and
his claque are usually vain in the end. And the process
of seeking or enhancing an empire is almost uniformly
deleterious to the ordinary people of countries that harbor
leaders with such ambitions. Free and open markets produce
wealth faster and distribute it more equitably than state-
controlled economies. Vain as such dreams may be, however,
imperial ambitions usually lead to political and military
conflicts that can cause enormous suffering. Russia under
Putin is hardly an imminent threat to the United States.
But it is now in a position that it can pressure most of
Western Europe through manipulating energy supplies. The
ambitions of its leaders – remembering that Putin is still
quite popular among the general population, though that
could change – bear watching.


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