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Monday, April 11, 2011

SENTAKU MAGAZINE

From Russia with leverage

Spiraling oil prices and the serious accidents at a major Japanese nuclear power station caused by the March 11 quake and tsunami are helping strengthen the position of Russia in the international community.

The prediction by the Organization of Petroleum Exporting Countries (OPEC) that the oil price will soon go up to $120 a barrel is good news for Russia, which has based its national budget on the assumption that it would export crude oil at $75 per barrel. Any price above that level would be a windfall profit for one of the world's major oil exporting nations.

Russian Finance Minister Alexei Kudrin has stated that high oil prices will enable the Russian economy to grow by more than 4 percent this year, allowing more than a one-third reduction in the amount of issued bonds.

One indicator of an economic boom prevailing in Russia is the way its currency, the ruble, has appreciated against the dollar — greater than the currencies of the three other "BRIC" countries, Brazil, India and China.

Many Russian government officials hope for a prolonged political instability in the Middle East, which is the cause of the recent oil price spiral. There has been a correlation between Moscow's basic diplomatic stance and oil prices. In June 2008, for example, Russia launched a military invasion of Georgia at a time when crude hit a record $134 a barrel. Months later, the Kremlin shifted to a policy of reconciliation with the U.S. and Western Europe when the oil price plummeted to less than $50 amid the financial crisis triggered by the bankruptcy of Lehman Brothers.

Russia holds a strong card against its neighbors to the west, as Finland and the three Baltic nations of Estonia, Latvia and Lithuania rely on Russia for 100 percent of their natural gas needs. The European Union as a whole relies on Russia for 42 percent of what it pays for gas.

A Russian diplomatic source has confided that the Kremlin's strategy is ultimately aimed at "decoupling" Western European countries on the strength of its abundant natural resources. In April last year, Russia resolved the long-standing territorial dispute with Norway by equally dividing the disputed continental shelf, and the two countries agreed to develop resources in the Arctic Sea jointly.

This is one example of Moscow's attempt to create discord among NATO member countries and block any further expansion of NATO by promoting friendly bilateral ties with NATO signatories.

The EU member countries are countering these Russian initiatives by various means. One is to import liquefied natural gas (LNG) directly from countries like Qatar, Algeria and Nigeria using oceangoing tankers, a much less costly means than transporting Russian gas through long pipelines.

As of 2009, LNG sourced from the Middle East and Africa accounted for 14 percent of total European gas imports. An analyst said European imports of such LNG is believed to have increased further last year and that this trend could pose a threat to Russia.

In another bid to curtail Moscow's power, he adds, the EU in March adopted a new policy of banning the same business entity from engaging in both gas production and pipeline transport. This policy, due to come into effect after a two-year grace period, is aimed at liberalizing the market and lowering gas prices. Clearly the policy targets Gazprom, Russia's semi-national monopoly of gas production and transport. The analyst says this policy is a big business headache for Moscow.

As if to mitigate unfavorable consequences that might arise in Europe, Russia has lost no time trying to gain what it can. It offered assistance to Japan immediately after the devastating quake and tsunami March 11. On March 12, the day when a hydrogen explosion occurred in the containment building of the No. 1 reactor Tokyo Electric Power Co.'s Fukushima No. 1 nuclear power plant, Prime Minister Vladimir Putin ordered his deputy, Igor Sechin, to work toward increasing LNG exports to Japan.

Putin's ulterior motive is to raise Japan's reliance on Russian natural resources by selling fossil fuel to Tepco, which will inevitably be in dire need to boost thermal-power generation. Sechin is quoted as saying that Russia will double its combined exports of crude oil and LNG to Japan this year from last year's level.

Moscow's determination to sell more energy sources to Japan is reflected in its stepped-up pace of constructing East Siberia-Pacific Ocean oil pipelines. Russia now plans to complete the pipelines by the end of next year, two years ahead of schedule. Moreover, the Russians are trying to use Japan as a steppingstone for boosting exports of natural resources to other Asian countries. Their exports are now heavily concentrated on China. Diversification of export destinations is indispensable for setting export prices at levels advantageous to Russia.

An expert in Russian affairs has warned, however, that Japan would enter dangerous territory if it started buying more than 10 percent of its energy needs from Russia.

Even though Russia has sent a 161-man rescue team to the quake-devastated region, the same expert warns of what he calls the traditional Russian tactic of fishing in troubled waters by first assisting those in need of help. Unfortunately, nobody in the Japanese political arena or bureaucracy is aware of this danger, he adds.

A Kremlin insider even suggested that Russia is thinking of building a nuclear power plant on Kunashiri, one of the four islands or island groups northwest of Hokkaido that are claimed by both Japan and Russia but held by the Russians since the end of World War II, and supplying Japan with electric power from there.

Russia speculated that the present Japanese government, which has been troubled by the nuclear power plant crisis in past weeks, could very well jump on a plan to obtain electricity from the Kunashiri plant while giving up its claim to the Northern Territories.

The day could come when Gazprom, if equipped with enough financial resources, buys up Tepco. Such a scenario may well prove to be more than fantasy because, unlike broadcasting stations and news agencies, utility companies are not protected by regulations against foreign ownership.

This is an abridged translation of an article from the April issue of Sentaku, a monthly magazine covering Japanese political, social and economic issues.


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