Russia's real strategy evident in "near abroad"

By bne IntelliNews June 9, 2009

Ariel Cohen in St Petersburg -

The economic and political megastars have descended on Russia's "second capital" the 13th St Petersburg International Economic Forum. Here were Russian President Dmitry Medvedev; the presidents of Armenia and Azerbaijan locked in their eternal peace process; Russian vice premiers Igor Shuvalov and Igor Sechin (aka "the two Igor Ivanoviches"); and even the enigmatic former PM Victor Zubkov, who chaired a special grain congress.

Here also were ministers, the CEOs of Intel, Nissan, Coca Cola and other Forbes 50 companies, and oligarchs rubbing shoulders over canapés and mojitos in the Egyptian hall of the exquisite Hermitage museum with super-star pundits such as Thomas Friedman and economist Nouriel Roubini.

Russians are giddy over the purchase of 2 % of Facebook. "This is a great move, and Miller and Finger will make good money," says Anatoly Karachintsev, a famous tech entrepreneur. There is enthusiasm over state-owned Sberbank's participation in acquisition of the GM's German subsidiary Opel.

The public discourse is all about diversification, innovation and coping with the global crisis. Medvedev says he wants innovation-based growth. But privately, sotto voce discussions turn to the question: What is Russia's real strategy?

Carrots and sticks

Over the last few months, Moscow has pushed hard to expand its positions in commodities and energy resources in both European and Asian markets. Using a mix of carrots and sticks, Russia is redrawing the natural resources map around its borders.

At the Forum, Presidents Medvedev, Ilham Aliyev of Azerbaijan and Serzh Sarkisian of Armenia met to discuss a peaceful resolution of the conflict between the two countries. In April, Moscow invited Aliyev to sign a memorandum of understanding on gas exports. According to the proposed agreement, Azerbaijan will sell all its gas to Russia. Moreover, it will use the Russian pipeline system, controlled by the state-controlled monopoly Gazprom, to export gas to Europe. If in Iraq there was "oil for food," maybe here there will be "gas for peace."

Azerbaijani diplomatic sources say that, in exchange for the gas exports, Russia promised to help Azerbaijan resolve its conflict with Armenia over Nagorno-Karabakh. The Socar-Gazprom agreement, if implemented, would mark a massive shift in Azerbaijan's export policy. That nation has long favoured exporting via the proposed EU-backed Nabucco gas pipeline, which would run through Turkey to Europe.

The White House may be hoping to change Azeris' minds. Veteran "energy diplomat" Richard Morningstar has been dispatched to Baku bearing a personal letter from President Barack Obama to Aliyev. It remains to be seen whether this visit will be enough to keep this key Caspian player from reorienting its energy exports.

Azerbaijan is not the only target for Russia. Gazprom recently decided to play rough with a major gas supplier, Turkmenistan. In April, the sole pipeline carrying Turkmen gas to Europe suffered an unexplained explosion, paralyzing exports. Once the Russian pipeline was repaired, Gazprom demanded that Turkmenistan either decrease its gas exports or cut the price. These strong-arm tactics may yet backfire, pushing the Turkmen to play ball with the Chinese and the Europeans.

These days Russian Prime Minister Vladimir Putin seems content to let President Medvedev do the talking about high-tech development. Meanwhile, he focuses on the "core business" of Russia Inc.: multi-billion dollar projects in commodities and energy control.

From Mongolia with love

The true Russian agenda is most transparent in far-away Mongolia. Squeezed between China and Russia and land locked, it has been dominated by both nations in the past. Today, the pro-US democratic republic finds itself deluged by visits from senior Russian officials, including Putin himself. Putin jetted into Mongolia on May 13. He spent six hours pressing officials for a number of deals in uranium, copper, gold and coal. All these commodities are expected to be in high demand in the neighbouring Asian markets.

The government-owned Rosatom hopes to grab the Mongolia's massive uranium reserves. The key, here, are the railroads, controlled by Moscow since the times of Soviet hegemony there. Russian Railroads (RZhD), a state-owned mega-company, dominates Mongolian rail through a joint venture. It is offering Mongolia a railway modernization project. Part of the project includes building a new line that would ensure access to natural resources in the Gobi desert and the uranium-rich northeast, boosting Russia's grip on nuclear fuel supplies.

The railroad deal would also give Russia development licenses for two of Mongolia's largest mineral fields: the Tavan Tolgoi coal deposit and the Oyu Tolgoi gold and copper field. The latter is problematic, however. The Mongolian government has already signed a contract promising Oyu Tolgoi to Canada's Ivanhoe and Rio Tinto, the London-based natural resources giant.

And there's another catch. The Mongolian railways are eligible to receive $300 m for capital improvements from the US government's Millenium Challenge Corporation (MCC). The Russians have ordered the Mongolians to reject MCC funds – lest it comes with strings that might tie up their own plans. The Obama Administration faces a difficult choice: to allow the Mongols to redirect the MCC funds to other projects, or cede the strategic initiative to Russia.

Russian government-connected companies are preparing other major projects in Mongolia, as well. A slew of Russian firms – Alexei Mordashov's Severstal, Oleg Deripaska's Basic Element, Victor Vexelberg's Renova, Alisher Usmanov's Metalloinvest, and state-owned weapons exporter Russian Technologies – have their eyes on Oyu Tolgoi and other deposits.

As the rain falls on St Petersburg's glitzy economic forum and the Obama Administration plans its "reset button" summit with Putin and Medvedev in July, and is negotiating Moscow's accession to the World Trade Organization, Russia is consolidating its geo-strategic advantage from the Gobi desert to the Black Sea.

The US and Europe had better take notice. While the talk of new beginnings appeals to Western businessmen, the real show is happening thousands away from the capital that Peter the Great built on these grim Baltic shores.

Ariel Cohen, Ph.D., a participant in the St. Petersburg Economic Forum, is Senior Research Fellow at The Heritage Foundation's Davis Institute for International Studies.

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