The Washington Times Tuesday, June 9, 2009 COHEN:
Tuesday, June 9, 2009
COHEN: Russia's commodities strategy
Ariel Cohen
COMMENTARY:
ST. PETERSBURG -- The economic glitterati have descended on Russia's"second capital." President Dmitry Medvedev, vice premiers andministers, CEOs of Intel, Nissan, Coca-Cola and other Forbes 500companies, and oligarchs are rubbing shoulders with superstar punditssuch as Thomas L. Friedman and Nuriel Rubini. All have flocked to theSt. Petersburg International Economic Forum.
Russians are all smiles after the purchase of 2 percent ofFacebook, and state-owned Sberbank's participation in acquisition ofthe General Motors Corp.'s German subsidiary Opel. The public discourseis all about diversification, innovation and coping with the globalcrisis. Mr. Medvedev says he wants innovation-based growth. Butprivately, many sotto voce discussions turn to the question: What isRussia's global strategy?
Over the last few months, Moscow has pushed hard to consolidateits positions in commodities and energy resources in both European andAsian markets. Using carrots and sticks, Russia is redrawing thenatural resources map around its borders.
At the forum, Mr. Medvedev, and Presidents Ilham Aliyev ofAzerbaijan, and Serzh Sarkisian of Armenia met to discuss a peacefulresolution of the lengthy conflict between the two countries overNagorno-Karabakh.
In April, Moscow invited Mr. Aliyev to sign a memorandum ofunderstanding on gas exports. According to the proposed agreement,Azerbaijan will sell all its gas to Russia. Moreover, it will use theRussian pipeline system, controlled by the state-owned monopolyGazprom, to export gas to Europe.
The agreement, if implemented, will mark a massive shift inAzerbaijan's export policy. That nation has long favored exporting viathe proposed Nabucco pipeline, which would run through Turkey toEurope. Azerbaijani diplomatic sources say that, in exchange for thegas exports, Russia promised to help Azerbaijan resolve its conflictwith Armenia over Nagorno-Karabakh.
The White House hopes to short-circuit the proposed gas exportsagreement. Veteran "energy diplomat" Richard L. Morningstar has beendispatched to Baku, Azerbaijan, bearing a personal letter fromPresident Obama to Mr. Aliyev. It remains to be seen whether this visitwill be enough to keep this key Caspian player from reorienting itsenergy exports.
Azerbaijan is not the only object of interest for Russia.Gazprom recently decided to play rough with a major gas supplier,Turkmenistan. Last April, the sole pipeline carrying Turkmen gas toEurope suffered an unexplained explosion. It paralyzed exports. Oncethe Russian pipeline was repaired, Gazprom demanded that Turkmenistaneither decrease its gas exports or cut the price. That's hard-nosednegotiating.
These days Russian Prime Minister Vladimir Putin seems contentto let Mr. 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.
The true Russian agenda is most transparent in farawayMongolia. Strategically squeezed between China and Russia, it has beendominated by both nations in the past. Today, the pro-American,democratic republic finds itself deluged by visits from senior Russianofficials, including Mr. Putin himself.
Mr. Putin jetted into Mongolia on May 13. He spent six hourspressing officials for a number of deals in uranium, copper, gold andcoal. All these commodities are expected to be in high demand in theneighboring Asian markets.
The government-owned Rosatom hopes to grab Mongolia's massiveuranium reserves. The key is the railroads, controlled by Moscow sincethe times of Soviet hegemony there.
Russian Railroads (RZhD), a state-owned mega-company, dominatesMongolian rail through a joint venture. It is offering Mongolia arailway modernization project. Part of the project includes building anew line that would ensure access to natural resources in the Gobidesert and the uranium-rich northeast, boosting Russia's grip onnuclear fuel supplies.
The railroad deal would also give Russia development licensesfor two of Mongolia's largest mineral fields: the Tavan Tolgoi coaldeposit and the Oyu Tolgoi gold and copper field. The latter isproblematic, however. The Mongolian government has already signed acontract promising Oyu Tolgoi to Canadian company Ivanhoe and RioTinto, the London-based natural resources giant.`
And there's another fly in the ointment. The Mongolian railwaysare eligible to receive $300 million for capital improvements from theU.S. government's Millenium Challenge Corp. (MCC). The Russians haveordered the Mongolians to reject MCC funds - lest it comes with stringsthat might tie up their own plans. The Obama administration faces adifficult choice: to allow the Mongols to redirect the MCC funds toother projects, or cede strategic initiative to Russia.
Russian government-connected companies are preparing othermajor projects in Mongolia as well. A slew of Russian firms - AlexeiMordashov's Severstal, Oleg Deripaska's Basic Element, VictorVexelberg's Renova, Alisher Usmanov's Metalloinvest, and state-ownedRussian Technologies - a weapons exporter - have their eyes on OyuTolgoi and other deposits.
As the rain falls on St. Petersburg's glitzy economic forum andthe Obama administration plans its summit meeting with Mr. Putin andMr. Medvedev in July to negotiate Moscow's accession to the World TradeOrganization, Russia is consolidating its geostrategic advantage fromthe Gobi desert to the Black Sea. The U.S. and Europe had better takenotice. While the talk of high-tech diversification appeals to Westernbusinessmen, the real show is happening thousands of miles away fromthe capital Peter the Great built on these grim Baltic shores.
Ariel Cohen, a participant in the St. Petersburg EconomicForum, is senior research fellow at the Heritage Foundation's DavisInstitute for International Studies.