COMMENT: Putin meets Berlusconi - the nature of Russo-Italian backroom deals

By bne IntelliNews April 21, 2008

Ariel Cohen in Washington -

No matter who rules Italy (or Germany for that matter), Russia wins. On April 17, Russian President Vladimir Putin flew from Libya to the island of Sardinia to meet his good friend Silvio Berlusconi, who has just been re-elected prime minister of Italy. The Italian media mogul and billionaire politician received the Russian president in his private villa for talks that included the further development of Libya's energy sector with Gazprom taking over some of Italy's Eni gas assets there, and a possible takeover of Italy's failing flag-carrier Alitalia by Russia's Aeroflot.

Business, and specifically energy, was the key element in the discussions between the two leaders. With Italy the third-largest consumer of natural gas in Europe after the UK and Germany, it's Russia's second most important European gas customer. "We have discussed in detail potential work on the energy markets of third countries... Eni has already received access to assets in Russia, and Gazprom expects to obtain similar assets in other countries, in Libya in particular," said Putin

Eni is Italy's state-controlled oil and gas company. Back in April 2007, it was the first foreign concern to purchase oil and gas assets that belonged to Yukos. However, as soon as Eni won two gas companies and an energy company in the tender it turned around and transferred majority stakes in all three firms over to Gazprom. Robert Amsterdam, a lawyer for Yukos' incarcerated former owner Mikhail Khodorkovsky, wrote at the time that, "it looks like Eni is acting as a front for Gazprom."

Eni's subsidiary in Russia EniNeftegaz actually participated in the auction of Yukos' assets. Eni controls 60% of EniNeftegaz, with the remaining 40% owned by the Italian state-controlled electricity giant Enel, which also purchased gas assets from the Yukos liquidation. As a reward, Eni gained access to 20% of the shares of Gazprom's oil arm, GazpromNeft. After obtaining the assets of the Yukos subsidiaries, Eni gained reserves equivalent to 1bn barrels of oil.

At the crux of this burgeoning Russo-Italian energy cooperation is Italy's need to guarantee access to oil and gas reserves, and Russia's strategy to control the "commanding heights" as an energy supplier to Europe. Italy played ball with Russia under both Berlusconi and his successor/predecessor Romano Prodi. This has tremendous energy security implications for Europe, which seems thus far to be unable to come up with a workable counterstrategy.

Strategic agreements

Back in November 2006, Eni and Gazprom signed a strategic partnership agreement in which Gazprom would sell gas to Italy directly and Eni would buy oil interests in Russia - something Russia wants other European countries to do. Also, contracts on gas supplies to Italy were extended to 2035.

The provision on the direct gas sale to Italy is expected to be fulfilled with the South Stream gas pipeline project, which Eni and Gazprom agreed to cooperate on in June. This pipeline, equally owned by Gazprom and Eni, will transport up to 30bn cubic meters of gas under the Black Sea to Bulgaria, Serbia, Hungary and Austria, and then to Italy. South Stream is expected to come online by 2013. Likewise, the Blue Stream pipeline, which sends gas from Russia to Turkey also under the Black Sea, is jointly owned by Eni and Gazprom.

This kind of strategic agreement, which lacks much in the way of transparency, is reminiscent of Gazprom's agreement with German energy companies E.On and BASF to build the Nord Stream gas pipeline under the Baltic Sea. Chancellor Gerhardt Schroeder's government signed the agreement to build Nord Stream, and Schroeder was appointed chairman of the consortium building the pipeline when he was booted out of office. Involvement by France's Total oil company in developing the Shtokman gas project apparently included the swapping of assets owned by the French state in Gaz de France and Gazprom.

The Eni-Gazprom future deal to swap assets in Libya on behalf of Gazprom is likely to include Eni's stakes in the Green Stream gas pipeline linking the Libyan gas fields to Sicily, in the Elephant oil field or in a liquefied natural gas plant in central Libya. But Eni is not the only beneficiary of the Russo-Italian energy love affair. Enel has purchased 30% of OGK-5, one of Russia's biggest electricity generating companies, and the Russian government has given it permission to acquire up to 70% of the power company. Moreover, Enel plans to invest $14bn in the Russian power sector by 2013.

In other areas of economic relations, in 2005 the Italian state shipbuilding company Fincantieri entered a joint venture with the Russian submarine design-bureau Rubin to develop and market diesel electric submarines with an improved design internationally. And in January, Putin decreed that the Italian aerospace firm, Alenia Aeronautica of the Finmeccanica Company, could proceed to acquire 25% plus one share in Sukhoi Civil Aircraft, which is developing the new Superjet 100 regional airliner. Finally, Berlusconi asked Putin to have the Russian airline Aeroflot reconsider purchasing the Italian state's 49.9% stake in the struggling Italian airline Alitalia - a strange request given that Berlusconi had promised to find an "Italian" alternative solution to the bid tabled and then withdrawn by Air France-KLM. Alitalia has only enough cash to stay airborne until about the end of May.

The Berlusconi talks are typical of Putin's unique business style, which combines his supreme political power dedicated solely to advancing Russian strategic interests, personal friendships with key figures, and the formidable ruthlessness and instincts of a former intelligence officer.

With the Libyan and Italian gas deals, Europe's dependence on Russian-controlled energy is likely to increase. Just as with Berlin under Schroeder, Moscow is bringing Rome into its "mutual benefits" society in the EU, to the chagrin of Washington and its anti-Russian friends in Central and Eastern Europe.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Heritage Foundation

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