Russia’s Central Asia Premium

During a trip to my birthplace of New York City some years ago, I had the pleasure of briefly meeting the impressive and talented Professor Jenik Radon of Columbia University’s School of International and Public Affairs (SIPA).  Radon is one of the fellows who actively participates in the Harriman Institute’s (annual?) conferences on Eurasian pipeline politics – a subject which attracts a small but highly dedicated, active, and wonky crowd to travel up the Washington Heights campus to debate the who, where, and how of oil and gas leaving Central Asia toward other markets.  These highly technical discussions sometimes come back to earth with remarks on Russia’s conduct and goals in the region, which many, such as myself, have been warning for years are driven by monopolistic, anti-market policies, creating pressing security concerns for regional energy security.

For the latest pipeline conference, Ariel Cohen of Heritage Foundation was a featured speaker on one of the panels, and has posted a summary of the discussion.  Below I extract one part of his article dealing with Russia’s willingness and ability to pay a “premium” for Central Asian energy resources as a form of discouraging the development of alternative export routes (which as Svante Cornell has point out, it would be inaccurate to call these proposals a Russia “bypass” – because it is a more direct route to consumers).  What is interesting about the politics of “premiums” is that we have also discovered that if a supply partner breaks its deal with Russia, and opens up tenders for competitive bidding – in other words, normal market behavior – the punishment is severe and lawless.  Turkmenistan learned the hard way that you’re not supposed to sell gas to Russia and then expect to consider offers from anyone else.  It would be hard to find a more demonstrative example of anti-market behavior than an “accidental” pipeline explosion, but the question will remain whether or not Azerbaijan knows what they are getting into.

MarthaBrill Olcott of the Carnegie Endowment pointed out that westwardpipelines from Central Asia have improved the region’s bargainingcapacity. The reason that BTC and BTE could be built was because Russiahad for many years grossly underpaid for the energy it took at theborder and sold for market prices in Europe. However, today, Russia ispaying a premium.

It is likely that Russia is paying the premiumbecause domestic underinvestment and stagnant production have caused ashortage of available gas for export. Secondly, if Russia is overpayingfor the gas – and the West dithers in building alternative pipelines -that will encourage Central Asian states to export gas via Russia.Finally, if Europe’s top priority is a unified energy market,insufficient commitment and effort going into future projects such asthe Nabucco gas pipeline and the Trans-Caspian Pipeline will diminishtheir chances of being built.

Energy demand and declining pricesdue to the global economic crisis make high-cost Eurasian energy lessattractive for investors. For project financing, oil at $50 a barrel ismuch less attractive than oil at $75.

With projects of greatgeopolitical complexity taking 10 years and more to negotiate, and withmulti-billion-dollar financing not readily available at the currentenergy price levels, the chances that by 2019 we will see much oil andgas flowing West from East in general, and West Caspian in particular -under Western ownership – look slimmer than two years ago.