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Tymoshenko in Foreign Affairs: Containing Russia

Yulia Tymoshenko has published a long article in the new edition of Foreign Affairs titled “Containing Russia.” The article contains a wealth of information and numerous compelling arguments, so we will probably go about cherry-picking interesting excerpts over the next few days. Apparently the article was ruffling some feathers in the Kremlin even before the journal hit the newsstands.

There is another problem facing Gazprom: the actual engineering costs of developing new gas fields in Russia. In the Shtokman gas field and on the Yamal Peninsula, in particular, the engineering costs, including the cost of transporting the output to Europe, are twice as high as for new gas fields in North Africa and the Middle East. The international gas market is already beginning to recognize this, and, over the long term, it could be enormously dangerous for Russia. Indeed, Russia may actually be putting itself out of the gas business, because high engineering costs for new projects in Russia are signaling to the market that Russia and Gazprom lack the capacity to develop these fields. Western companies could come in and do the job, but given the Kremlin’s recent usurpation of Shell’s investments on Sakhalin Island, these companies would be remiss in their fiduciary duties if they undertook such investments. The only way to avoid a crisis is to break Gazprom’s monopoly on pipeline infrastructure and to license independent gas producers. Independent producers already account for 20 percent of domestic gas sales in Russia and are boosting their output. Further gains would require market-based incentives. Europe can help by explicitly linking its acceptance of Russia’s WTO membership to Russia’s ratification of the Energy Charter and its attendant Transit Protocol, which would guarantee access to Russian pipelines for Gazprom’s competitors. Any worthwhile energy security policy for Europe would also seek to loosen Gazprom’s monopolistic grip on the pipelines. European competition policy, which has successfully brought companies as big as Microsoft into line, could — if used skillfully — also help turn Gazprom into a normal competitor. Establishing an independent regulator, as Russian Economy Minister German Gref has suggested, would also be an important step toward splitting Gazprom into a pipeline operator and a production company. But Putin has vehemently rejected such a move. Thus, he now faces a choice between domestic gas shortages that threaten to slow economic growth and losing the Kremlin’s “national energy champion.” Beyond tackling Gazprom’s monopolistic power, a realistic energy policy for Europe would also seek to share the risks of any possible energy blockade equally among all Europeans, rather than allowing separate deals that leave others vulnerable to energy blackmail. Such a policy would need to incorporate a consensus that no country could reach a deal with Gazprom that undercuts EU plans to help construct pipelines from Central Asia that bypass Russia. Another counterweight could be built through trade. By extending the single market eastward to include Ukraine, the EU would shift the center of gravity for the region’s trade relations. Today’s negotiations over a “deep free trade agreement” between Ukraine and the EU need to lead, eventually, to an agreement that will give Ukraine candidate status for EU membership. …. The real test of statesmanship is the ability to protect one’s country against unfavorable and unforeseen contingencies. The fatal flaw in Russia’s current oil- and gas-powered assertiveness is that the leaders in the Kremlin have lost their sense of proportion. Today’s budget surpluses have allowed them to overestimate the extent of Russia’s economic renewal, and they seem to have forgotten that by bullying their immediate neighbors they are also sending shock waves across the entire West. Of course, the Kremlin leadership will find it hard to admit that the centralized system that it is re-creating lacks the capacity to spur initiative, that Russia, despite its vast natural resources, remains a very backward country. The subservience that the Kremlin demands is stifling the vitality and creativity that Russia needs if it is to grow for the long term, let alone sustain its place in the world.