Kremlin energy strategy encompasses more than oil and gas

By bne IntelliNews February 9, 2010

Ben Aris in Moscow -

The world's energy map is being redrawn and Russia intends to plant its flag in the centre of the new world order. Already amongst the biggest producers of oil and gas, Russia is using its store of petrodollars to make sure it stays in the game when the world's hydrocarbons start to run out - or at least become so expensive that everyone switches to alternative sources.

In the last year, the oil and gas geo-political map has been redrawn after China managed to break Russia's half nelson on Central Asia by building two new big oil and gas pipelines that run east out of the region. The Kremlin has being playing the same game as it develops a trident of gas pipelines running westwards.

Less visibly, the Kremlin (or its oligarch friends) have been busy shopping for energy assets in what the Russians call "the near abroad" as well as further afield. Russian companies already own the main power station that supplies its erstwhile enemy Georgia as well as the main export power line out of the country. The Kremlin has launched a sustained campaign to build nuclear power stations in places like Iran, Belarus, Turkey, Bulgaria and beyond, and even the state-owned hi-tech agency Rusnanotec is investing heavily in photovoltaic cells.

Pipeline plays

The new pipelines will dramatically alter the rules of the energy game, but in addition to building new pipes the Kremlin has deployed its massive wealth to buy up as many of the existing pipelines and energy companies it can. Some countries have welcomed the Russian approaches, like Turkey and Serbia, while others, like Ukraine, are resisting for all they are worth.

Turkey's prime minister, Recep Tayyip Erdogan, was in Moscow in January to talk energy, amongst other things. Newswires reported that Russian state-owned energy contraction company Stroytransgaz (Gazprom's construction company) will participate in the privatisation of Turkey's Istanbul Gas Distribution Company when it goes under the gravel. Gazprom Germania, a German subsidiary of the Russian company, has already taken control last year of the Turkish gas company Bosphorus Gaz Corporation, which delivers gas to Turkish endusers. In return, Putin suggested that Turkey would be invited to play a more important role in the planned South Stream gas pipeline, which will transport Russian gas to the Black Sea to Bulgaria and further to Italy and Austria.

If the Turks don't seem to be too alarmed about getting into bed with Moscow, the Serbs are falling over themselves to befriend the Russians. Belgrade has already handed over control of the national oil company Naftna Industrija Srbje (NIS) to Russia at the end of 2007 in exchange for €900m in cash and investments.

Russian President Dmitry Medvedev followed up with a trip to Belgrade in October when another flurry of deals appeared. Serbian President Boris Tadic signed off on a South stream deal, and Gazprom CEO Alexei Miller and Dusan Bajatovic, Srbijagas' CEO, also signed an agreement on the construction and operation of the natural gas underground storage site at Banatski Dvor. During his trip, Medvedev was presented with a long wish list of investment projects, including: the building or upgrading of railroads, ports, a metro system and a ring road for the capital city, as well as building gas-fired power plants.

Russia is expected to remain the main importer of Central Asian gas and oil despite the opening of new pipelines to China. In 2009, Gazprom agreed to take a majority stake in Kyrgyzstan's gas distributor Kyrgyzgas, promising heavy investment into its outdated network. Investments by utility Inter Rao UES have extended Russia's hold over hydroelectric power infrastructure in both Kyrgyzstan and Tajikistan.

Russia has also been well received in Vietnam, its best friend in Asia. (Many Vietnamese studied in Moscow in Soviet times). Gazprom was negotiating with the government in December to buy the country's gas pipeline network and has signed a preliminary deal. "The agreement we signed provides for Gazprom taking a stake in PetroVietnam Gas. That is the Vietnamese gas distribution company analogous to our Mezhregiongaz," Gazprom CEO Alexei Miller told journalists during his trip there.

Other countries are succumbing to Russian pressure a bit more reluctantly. While Kyiv is resisting fiercely any suggestion that it may sell its gas pipeline to Russia, Belarus already caved in three years ago. Gazprom already owns 37.5% of the national pipeline operator Beltransgaz, but will raise its stake to 50% this February after transferring the last $625m payment of a $2.5bn deal. The Kremlin is now manoeuvring to buy out the other really attractive energy assets in Belarus - two modern oil refineries.

Russia threatened to cut Belarus' oil supplies off in January and at the time of writing a deal had reportedly been struck in which Russia got most of what it wanted (and the Bealrusians didn't). Call it Ukraine-lite: turning off the oil spigots would also leave five European countries dry - Hungary, Czech Republic, Germany, Poland and Slovakia. Moscow wants to reduce the oil transit tariff, but Minsk is playing hardball. The issue of privatising the refineries has been mentioned, but currently there is no resolution for the row in sight.

Going nuclear

But Moscow doesn't come empty handed. Minsk may be unhappy about giving up first its pipelines and later its refineries, but in exchange Russia has promised to build (and, more importantly, finance) a $9bn nuclear power station in Minsk. This project has especial appeal after Lithuania shut down its Soviet-vintage Ignalina nuclear power plant at the start of this year.

Former Prime Minister Sergei Kiriyenko is the CEO at Rosatom and has been tasked with building some 40 new nuclear power stations over the next 20 years in Russia, as well as selling as many reactors as he can to Russia's neighbours. He is not doing as well as the Kremlin would like, but deals are still being struck.

The Bushehr nuclear power station Russia has been building in Iran is due to go online in March according to reports and is bound to cause a storm of comment; the station has long been a bone of contention with the US, which fears Iran getting its hands on nuclear material that can be used to build nuclear weapons.

Less contentious is a deal current being negotiated to build a similar plant in Nigeria. Nigerian Science and Technology Minister Alhassan Bako Zaku said in November that the Nigerian government planned to use Russia's assistance in a project to build its first nuclear power plant following his meeting with Kiriyenko in Moscow.

Russia's historically close relationship with Kazakhstan extends to the nuclear sector; the two countries are collaborating on the new VBER 300 reactor, which was due to be installed at a power station in west Kazakhstan. However, Kazakh state nuclear company Kazatomprom has been busy striking deals in other countries, and has not yet made a decision on the power plant. "Kazakhstan has not made a decision... If the power plant is not built there, we will find another partner," Kiriyenko said in January.

In Bulgaria, Russian is standing in the wings ready to finance a planned nuclear plant in the Danube town of Belene after German company RWE pulled out last year due to the rising cost of the project. Russian company Atomstroyexport has already been chosen to build the plant, but now the Kremlin is also pushing to take at least a 49% stake, which the Bulgarian government is planning to sell in order to help get the €10bn plant built.

In a lunch with bne in 2007, First Deputy Prime Minister Igor Shuvalov said the Kremlin was planning a multi-vector energy policy. As the oil runs out, Russia will move in new directions. At the time, most of the talk was still about Russia-Ukraine gas wars, but only three years later it seems that the Kremlin's policy to diversify and fix itself at the heart of the energy infrastructure of emerging Europe (and beyond) is proceeding well, if not entirely according to plan.

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