#31 - JRL 2006-133 - JRL Home
From: "Dietwald Claus" dietwaldclaus@hotmail.com
Subject: Getting a Grip on Gas: The Possibility of a Russian-Iranian Gas Cartel for Europe
Date: Thu, 8 Jun 2006

Getting a Grip on Gas: The Possibility of a Russian-Iranian Gas Cartel for Europe
Dietwald Claus
Kirov, Russia

One of the more interesting aspects of Russian foreign policy at the moment is its approach to Iran. Few doubt that Russia has very little interest in Iran acquiring nuclear weapons ¬ and Russia has been rather clear on this. At the same time, Russia has been treading softly on the issue ¬ at least when compared to the bluster of the current US government.

Most analysts agree that Russia�s position is pragmatic ¬ unlike the US, it has a considerable economic stake in Iran. More importantly, Iran is a multi-ethnic, multi-cultural country. While Persian Shiites dominate the country, the many minorities are not very happy at the moment and would love the opportunity to gain more autonomy. The worst case scenario is that Iran would go the Iraq road, with civil war, separatism, and general mayhem beyond the control of any internal or outside power. Considering the physical proximity of Iran to Russia ¬ and the relative cultural closeness of some Iranian minorities to minorities within Russia ¬ Russia has very little to gain from a destabilized Iran. The general consensus is that Russia�s Iran policy is driven by a �the devil you know is better than the devil you don�t know� approach. Pragmatic damage control, in other words.

While this analysis is without doubt correct, it may underestimate the subtle activism of Russia�s Iran policy in particular, and it�s approach to the Muslim world in general. In fact, it is surprising that very few commentators seem to draw the lines between the different dots of Russia�s current foreign policy: Russia�s gas politics towards Ukraine, Belarus, and Georgia are discussed as if they had nothing to do with Russia�s invitation of Hamas, and its pussy-footing around the Iranian nuclear program. The only ones who see a connection are those who think Russia has nothing better to do but to crush democracy wherever it raises its ugly head. Frankly, I don�t think anybody in Russia�s current government gives two overcooked pelmeni about how other countries decide to manage their internal affairs. The only thing that matters to Russia is how other countries act towards Russia and how much consideration they give to Russian interests.

Should Georgia decide to turn itself into an anarcho-syndicalist utopia tomorrow, Mr. Putin would lose little sleep over it, provided Tbilisi sends him a telegram that from now on, gas will be bought from Russia ¬ paid in full ¬ and American �advisors� kicked out. And for all Russia cares, Lukashenka could declare himself a god tomorrow, if his first divine act were to turn over Belarus� pipeline system to Gazprom.

The point is this: Russia has long given up on ideological foreign policy to the point that it does not even need it as a fig-leave. Unlike the US, which by virtue of having �won� the Cold War is forced to continue bearing the lousy banner of democracy and human rights wherever it goes, Russia is free to promote its own interests unencumbered by the need for hypocrisy. And Russia�s interests are quite simple: continued and sustainable economic growth and stability, both internally and externally.

The key to this, for the moment, are Russia�s energy resources. Not only do they provide Russia with much-needed cash, they also give the Kremlin an enormously versatile ¬ though unwieldy ¬ foreign policy instrument.

No, I am not talking about energy as a weapon: this kind of thing only exists in the youthful fantasies of newspaper columnists whose opinions are blissfully untainted by knowledge. Energy makes a lousy foreign policy cudgel ¬ witness the aggressive but failed attempt by the United States and Saudi Arabia to dislodge Hugo Chavez. Venezuela�s economy may have taken a serious blow, but this has done little to change Chavez� anti-American politics, and he�s by all accounts more popular today than he has been before. And if Russia�s January gas spat with Ukraine was intended to turn the tide of Russophobia there, the outcome was at best ambiguous.

In the long run, the kind of things you can accomplish with the revenues from oil and gas will put to shame any benefits you�d have from turning off the gas tap to your rotten neighbors. Turning off the gas tap just costs a bundle, and makes you look bad. But with money coming out of both pockets, you can buy foreign politicians, pay newspaper columnists to spread your point of view as gospel truth, finance coups in your favor, and look apple-blossom white in the process. Oh, and your own people will love you to bits.

So, what does this obvious truth have to do with Ukraine, Belarus, Georgia, Iran, and Hamas? At the risk of painting with too broad a brush, and seeing design where there is only coincidence, I believe Russia�s current foreign policy is both cynical (as foreign policy tends to be), and brilliant (as foreign policy rarely is). Incidentally, it�s also the only foreign policy it could possibly adopt.

First the easy part: Russia does not like to lose money on its oil and gas sales. As long as Georgia, Belarus, and Ukraine do not pay the kind of money Russia wants, Putin and Miller are going to play rough. This has nothing to do with democracy, pro- or anti-Russian politics, or any such bromides. The upstart Saakashvili, the fruitcake Lukashenka, and the bratki in Kiev are all getting the same message: pay up or get off. Being nice to Russia may have helped in the past, but these days, money carries more weight than proclamations of eternal Slavic brotherhood. There is nothing particularly exciting or interesting about this ¬ Russia�s previous policy of subsidizing the economies of foreign countries was interesting, its new approach of squeezing them for all it�s worth is just plain vanilla economics.

Equally unexciting is Russia�s desire to increase its share in EU energy imports to the absolute possible maximum. At the moment, it is supplying more than 20% of EU�s total energy demand (by comparison, the Middle East provides less than 10% of the USA�s total energy demand). And while EU energy demand, particularly for natural gas, is going up, its gas and oil production is going down (so is Norway�s). Russia is more than happy to make up for the difference, and it�s busy building pipelines, developing fields, and reducing domestic energy intensity (the single most significant �source� of gas in Russia). The calculus is simple: the more energy the EU buys from Russia, the more money Russia makes. And the more money Russia makes, the more freedom to act according to its own desires it gains.

It�s not ¬ this may require repeating ¬ about gaining some kind of political strangle-hold on the EU. Almost 100% of Russian gas exports, and more than 80% of its oil exports, are to Europe, particularly the EU. While Russia could do a lot of damage to EU�s economy by stopping these exports, Russia would suffer far more in return. Not only would it lose its energy revenues, but it would decrease the purchasing power of its single most important industrial customer. With the exception of North Korea, countries generally do not threaten each other with suicide.

So far, nothing new. It all only becomes interesting when one looks at Russia�s Iran policy, and its general approach to the Muslim world. Throughout its brief history as an independent country, Russia has continued the Soviet policy of non-confrontation with the Muslim world, particularly with regard to Iran. Though hardly cozy, Russo-Iranian relations have been pragmatic and stable for almost two decades. Both are bound to each other not by fickle notions of friendship or similar ideologies, but by something far more solid: both countries have the same opponent, namely the USA and its proxy powers, and both have the ability to severely punish the other for hostile behavior: Iran could easily throw its support behind Islamic terror groups in the south of Russia, while Russia could, among other things, stir up trouble among the latently rebellious non-Persian, non-Shiite minorities in Iran. Not quite a Mexican stand-off, but close.

Consequently, Iran has done absolutely nothing to help the so-called Chechen separatists, nor has it provided support to any other radical Islamic factions in Russia. More, it has actively cooperated with Russia in fighting the Taliban regime in Afghanistan long before the USA and EU realized there was a problem to begin with (trusty Western allies, such as Saudi Arabia and Pakistan, were busy supporting the Taliban). In return, Russia has provided the Iranians with much needed technological expertise and hard-ware, maintained mostly normal trade relations, and generally undermined attempts by the US to have the Iranian question dealt with in a manner Washington would find agreeable. Russo-Iranian relations have not been all sweet and nice all the time, particular when it comes to the definition of the Caspian (it�s a lake, it�s a sea, it�s a gas field!). In the long run, however, this issue may turn out to be a mere detail. The point is that Russia and Iran have gotten along surprisingly well for almost two decades.

When the US is therefore asking Russia to support hard-line measures against Iran, it is asking Russia to jettison two decades of hard-earned diplomatic brownie points in return for ¬ pretty much nothing. Should Iran go down the drain, there is no telling of what�s going to happen in the south of Russia. Russia doesn�t love the Mullahs, but unlike the US, it�s living right next door to them. Iranian nukes are not a rosy prospect for Russia, but while Iran may be able to lob a few at Russia, Russia could wipe out Iran wholesale. In other words, Iranian nukes ¬ should Iran in fact have them one day ¬ do not change the basic calculus of Russo-Iranian relations: Not quite a Mexican stand-off, but close.

While in the past this kind of arrangement was based on the solid foundation of mutually assured punishment (better than friendship, not as bad as MAD), and a common hostility towards US imperial ambitions, the post-Soviet logic of pipe-line geopolitics may be putting it on the even better footing of mutually dependent revenue maximization: Russia and Iran may be able to create a gas cartel capable of setting prices much more effectively than OPEC has been able to set prices for oil.

As it happens, Russia and Iran control a combined 42% of the world�s gas reserves. The next largest reserves are in Qatar, which has an additional 14%. And only then comes Saudi Arabia with a comparatively meager 3.8%. Thus, close to 50% of all global gas reserves are controlled by three countries: Russia, Iran, and Qatar. The reserves of Algeria and Libya, the most important sources of natural gas to the EU after Russia and Norway, have a combined total of just about 3.5% of world-wide gas reserves. Norway represents just about 2.4%. Enough to keep Norway wealthy and care-free for many more years, but not even remotely enough to match the reserves of Russia and Iran.

On the face of it, this is not much different from the situation of oil: here, Saudi Arabia, Iraq, and Iran control a combined 46% of global reserves. Through OPEC, these countries have attempted to manipulate oil prices in their favor for almost three decades, and largely failed. Oil is mostly transported via tankers, and as a result, oil prices are spot-prices, negotiated on the basis of average world prices. To maintain a functional cartel, all OPEC members have to exercise a high level of discipline and cooperation. More often than not, individual cartel members have tried to increase their own profits by breaking the rules, and as a result, OPEC has been far less successful than most people assume.

A number of analysts therefore believe that a gas cartel would suffer from the same weakness. Short-term opportunism of individual members will undermine the long-term success of the cartel as a whole. Thus, while some gas producing countries have come together in the Gas Exporting Countries Forum (GECF), few analysts believe that this forum will ever become a future gas cartel; and if it should become a cartel, that it would be no more successful than OPEC.

All the EU therefore has to do in order to limit Russia�s ability to maximize prices for gas is to increase the number of its suppliers. The inherent instability of any cartel will automatically limit the danger of non-competitive pricing.

Consequently, the EU is currently pushing for the construction of the Nabucco pipeline, which is to provide it with 16 billion cubic meters of mostly Iranian gas by the end of the decade. There are also plans to increase gas deliveries from Algeria and Libya. Russia�s dominance in the gas market will not be ended by these schemes, but its ability to set prices will be severely limited by the market.

As sound as these calculations are, they miss several important points which in the long run may prove rather crucial.

First of all, all analyses which see little or no future for a successful gas cartel are based on the assumption that liquid natural gas will become increasingly important in the future and thereby off-set the rigidities and limitations of the pipeline delivery system. Unlike oil ¬ which is mostly transported by tanker ships ¬ natural gas is mostly transported via pipelines. Ships can change their course at a moment�s notice and virtually no cost, while pipelines take years and billions of dollars to build. While liquid natural gas is transported across the sea by tankers, it requires liquefaction and re-gasification infrastructures. These facilities are expensive to build, maintain, and expand. As a result, LNG has been considerably more expensive than natural gas transported via pipelines. LNG is only competitive when transported over large distances on water ¬ which is, for example, why 85% of Middle Eastern LNG ¬ such as from Qatar ¬ is exported to the Asia Pacific region, in particular Korea and Japan. As a result, LNG exports are highly concentrated by regions ¬ and there is currently no evidence that the market is going to become even remotely as flexible and integrated as the market for oil.

This is why Russia is currently trying to get into the gas distribution market in the EU. If it controls a large enough proportion of the distribution system, it can influence how the rising demand for natural gas in the EU is going to be met. It does not take much analytical genius to figure out that Gazprom-controlled suppliers will not favor LNG terminals or pipelines delivering non-Russian gas. This explains, for example, why Gazprom is willing to invest billions into the North-East pipeline project even though current gas demand does not justify its construction as of yet: by creating considerable surplus delivery capacity, alternative pipelines and LNG terminals will simply not be economically viable. Even if the North-East pipeline project is more expensive than its alternatives, once built, competing pipelines will be unrealistic.

The second point missed by those who believe a gas cartel will not be viable is political. The key country of OPEC is Saudi Arabia, whose regime is highly dependent on US support for its survival. As a result, the Saudis have always been very careful to take into consideration US interests when playing the oil market. The already mentioned economic attacks by Saudi Arabia on Venezuela have been motivated not only by a desire to discipline a renegade OPEC member, but also to advance US political interests in South America. A number of other significant oil producing countries are equally closely tied to the US and US interests, such as Kuwait and Nigeria.

The situation for the key gas producing countries is quite different. Neither Russia nor Iran owes the US any favors, nor is either in any way dependent on US or EU support for regime survival. While the Russian government has no problems defending itself against internal and external challengers, Iran�s government depends to some degree on Russian protection. And whereas Saudi Arabia is both the key to OPEC, and to some degree, the West�s Trojan horse within OPEC, a gas cartel consisting of Russia and Iran would be bound by mutual dependence and a common purpose.

As long as the current Iranian regime survives, Iran will find itself politically tied to Russia. But what if there is a regime change in Iran? If Russia plays its cards carefully and smartly, it will come out on top no matter what. Should the US against all reason decide to launch a military attack on Iran, the result will most likely be chaos along the lines of the current situation in Iraq. In that case, all plans for Iranian gas deliveries to the EU will fall apart for the foreseeable future, and the EU will have no alternative but to meet its rising gas demands almost exclusively with Russian gas. Consequently, Russia will be able to dictate gas prices as it sees fit, within reason. It is thus no surprise that the EU is vehemently opposed to any military solutions of the Iran situation.

Should the current regime be overthrown from within Iran by a genuine domestic opposition ¬ a fairly likely scenario ¬ Russia may still be able to benefit: it has made a point of never supporting the Mullah regime as such, but has always been at great pains to respect the interests of Iran as a sovereign country regardless of its government. A new Iranian regime ¬ should it succeed in maintaining the territorial and political integrity of Iran ¬ will very likely appreciate the role Russia has played in preventing a military strike against the country, thereby saving it from descending into chaos. Furthermore, considering the traditional rivalry between Iran and Turkey, and Iran�s rather problematic role within the Arab world, it is not unreasonable to assume that Russia and Iran will continue to have a common interest in limiting Western influence in the region. A non-Mullah regime in Iran is not necessarily a pro-Western regime, nor will it by necessity depend on Western good-will for survival. Thus, Russia�s past and current policies towards Iran constitute a good basis for creating good working relations with regard to manipulating prices for pipeline gas deliveries to Europe no matter who runs Iran.

Last but not least, Russia has not only adopted a very practical policy towards Iran, but towards the Muslim world in general. With the exception of Norway ¬ which in the context of gas politics should be treated as if it were an EU member ¬ the most important suppliers of natural gas to Europe are Muslim countries: Algeria and Libya. Algeria has for years been on the verge of a Muslim fundamentalist take-over, and the current Algerian regime is anything but a model of democratic governance, while Libya has been on less than friendly terms with the US and EU for decades. Russia has never been bothered by the nature of either regime, and is currently busy improving its relationship with Algeria ¬ including the development of key oil and gas fields in the Sahara desert. Its relationship with Libya has been motivated by the same pragmatism. Like Iran, neither regime is in any way dependent on Western good will and thus free to participate in a gas cartel at the expense of the EU.

While the US is increasingly positioning itself as a regime-changing Christian crusader throughout the Muslim world, and while the EU has at best an ambiguous relationship with it, Russia is presenting itself as taking a live-and-let-live attitude ¬ both within and without its own borders. This goes a long way in explaining why Russia has been quick in recognizing Hamas as a legitimate diplomatic partner. While the EU and US have boxed themselves into a position that allows for no dialogue with Hamas, Russia has been able to improve its image as a reasonable and willing partner for peace in a conflict that is galvanizing much of the Muslim world. It may still be an infidel in the eyes of the most radical imams, but at least it is an infidel one can do business with. It goes without saying that refusing to participate in the invasion of Iraq did not do any harm to Russia�s reputation there. And considering the amount of flak Russia is getting from the West in any case for pretty much everything it is doing, the additional screams in response to its current Middle East policies barely make a difference.

The irony in all this is that Russia is probably the greatest beneficiary of current US and EU policies towards the Middle East. While the US is spending billions on ruining its reputation, Russia has to do very little in order to improve its standing in Arab countries and in Iran: not send troops to Iraq, not support any sanctions or military strikes against Iran, not criticize any current government throughout the Middle East and North Africa. The Hamas junket may have cost a few rubles, but since the delegation was rather small, it is unlikely to have stretched Russia�s budget unduly.

And in the long run, the benefits for Russia may be tremendous. If Iran begins to change its current policy on limiting foreign participation on gas-field development, Russian companies are very likely to be the first in line. By maintaining and improving its current good relations to the Muslim world in general, Russia may be able to set up a European gas cartel capable of manipulating European gas prices much more effectively than OPEC has been able to manipulate world oil prices. Due to the inflexible nature of the gas market, this cartel will need no more than four or five members to operate effectively (OPEC has 11 members). And unlike OPEC, none of its member countries depend on EU or US support for regime survival ¬ as a result, they can to a large degree ignore US and EU interests.

None of this is going to make Russia�s government any more popular among the self-selected elites in the EU and USA ¬ but then again, as long as the money keeps on coming in, why would Russia care?