RUSSIA - Part 5 - The Decision Makers.

Russia remains in transition from a Communist empire which collapsed in late 1991 to what a prominent intellectual has called "the unknown". But Russia's vast resources today are less poorly managed than in 1998-99. Under the presidency of Vladimir Putin until 2008, people in charge think the chances are strong that the resources would be managed in the same way in coming years. The decision makers for the petroleum sector, controlled by an authoritarian president, hope the transition will lead to a strong and prosperous Russia.

With most Russians under 45 favouring reforms based on political pluralism and a free market, the older ones - the majority in an ageing nation - are satisfied to see central control in resource management maintained by Putin. Communists and nationalists no longer dominate the lower house of parliament, the Duma, where the majority is controlled by Putin. In the Duma, Putin has added what most Russians want: the dictatorship of the law in a re-centralised system, with the KGB revived under the FSB name, and more respect for the authority of the Orthodox church. But in many respects this is Putin's law.

President Putin was in Athens on Sept. 4 to sign an accord to secure the future for a long delayed 35m t/y crude oil pipeline from the Black Sea to the Aegean, with construction to begin within 2006. Putin, Bulgarian President Georgi Purvanov and Greek PM Costas Karamanlis agreed on the deadline for construction, with the pipeline to run 280-km from the Bulgarian port of Burgas to the Greek Aegean Sea port of Alexandroupolis. The leaders said the 900m project would be signed by the three states before end-2006. After a meeting with the two other leaders, Karamanlis said: "Greece, Russia and Bulgaria agreed to sign a deal to back its construction within 2006". Putin said he "hoped that the deadline for implementation of the project we have agreed will materialise...I am convinced this [energy] field may become a driving force in Russian-Greek-Bulgarian short-term and long-term co-operation".

They said they will assign priority to creation of gas transmission systems and will consider new projects in this area. This is important for Moscow, as the state monopoly Gazprom is eager to join a gas pipeline to Italy from Turkey and Greece, while Washington has been trying to block any Russian participation in this (see gmt9RusGasExportAug28-06 & gmt10RusOverseas-Sep4-06). Putin said: "We regard reliable energy access as a condition of the dynamic and stable development of civilisation. This may be achieved only if the interests of all members of the energy chain, energy producers, transit countries and consumers are taken into account".

Russia, Greece and Bulgaria signed a memorandum for this in April 2005. The project has been repeatedly stalled since it was first drawn up 13 years ago, namely because Moscow did not believe it could be economically viable. Experts now believe that, with the high level of crude oil prices, the project can at last become a reality by bringing cheaper Russian crude to the Mediterranean and ensure Moscow's hold on the region's energy market. For years the three states had also disagreed on other key issues, namely who would be responsible for building the pipeline, transit fees and ownership of the terminals.

Under the Sept. 4 deal, all sides agreed to speed up creation of an international project team and to sign a governmental accord for the project by end-2006. The pipeline is to reduce the cost and time of transporting Russian crude to Europe and the US. Now thousands of tankers transport crudes across the Bosphorus Straits, but increasingly congested traffic over the years has made the task environmentally unsafe. Karamanlis told journalists: "I don't think anybody can stop this project now". The project is to include many of the top oil firms, such as Chevron, TKK-BP, Rosneft, Bulgaria's Bulgargaz and Terminal Universer Bourgas, and Greece's Hellenic Petroleum, Promitheas Gas and Petrola.

European Energy Commissioner Andris Piebalgs on Sept. 2 said questions over whether Russia could meet its commitments to Europe were "quite worrying". Russia supplies 26% of the EU's gas needs, though the 25-state bloc is trying to find ways to lessen its dependence. A dispute over pricing with Ukraine, which Russian pipelines cross to reach Europe, led to a dip in supplies last winter. But Piebalgs said there was no political issue to disrupt supplies and there should be enough gas stored in Ukraine.

The EU is to ask Russia in October at meetings to address doubts raised by the IEA and a former Russian energy official. Piebalgs said: "It's quite worrying information but we will have a chance to discuss it quite substantially".

The former economic adviser to Putin, Andrei Illarionov, on July 4 said state dominance in the petroleum sector meant Russia was an energy hazard to its G8 partners rather than a guarantor of secure supplies. This was quite alarming to the other G8 powers as they were to meet at St Petersburg on July 15-17 under Putin's chairmanship.

Illarionov, who served as Putin's envoy to previous G8 summits, warned the Kremlin's growing role in the petroleum sector ran counter to the theme of energy security Russia had selected as the focal point of the July 15-17 meeting. "Where you have state companies, security ends and danger arises", Illarionov, who resigned as Putin's adviser in 2005 to protest what he called the government's backtracking on freedoms, told a news conference, adding: "The model of a state monopoly...presents the world with the threat that energy supplies can be broken off at any moment for political, not economic reasons".

The rise of the state's role in this sector began with the transfer of Yukos' biggest oil production unit to state oil group Rosneft after its auction against a disputed multi-billion-dollar back tax bill in late 2004. In 2005 the state increased its share of Gazprom to a controlling interest of 51%. Soon after that Gazprom bought oil major Sibneft from Jewish tycoon Roman Abramovich (see Part 2 in OMT 8).

As Putin prepared to host the G8 leaders for the July 15-17 summit, Illarionov and other opponents of the Kremlin held an alternative conference on July 11-12 called "The Other Russia" aimed at uniting Russia's opposition and NGOs. Earlier in that week, Russia's G-8 envoy Igor Shuvalov said the Kremlin would view the attendance of high-ranking foreign officials at that event as "an unfriendly gesture". Illarionov said of those comments: "I follow the statements made by Russian officials with amazement". While Russia's year as chairman of the G8 should have been a "triumph" for Moscow in which it demonstrated its commitment to developing democracy, Illarionov said, it had only served to show how much Russia had fallen behind, adding: "Over the past four years in respect of...political democracy, Russia today is much further from the other members of this club than it was in 2002".

Putin, in a series of pre-summit TV interviews on July 12 suggested that criticism of Russia's energy policies, of its foreign affairs and of its embrace of democracy sprang from outdated Cold War competition and even misguided colonial-era arrogance. He told the French channel TF-1: "If we go back 100 years and look through the newspapers, we see what arguments the colonial powers of that time advanced to justify their expansion into Africa and Asia. They cited arguments such as playing a civilising role, the particular role of the white man, the need to civilise 'primitive peoples'. If we replace the term 'civilising role' with 'democratisation', then we can transpose practically word for word what the newspapers were writing 100 years ago to today's world and the arguments we hear from some of our colleagues on issues such as democratisation and the need to ensure democratic freedoms".

With their pleas for more liberal policies rebuffed, President Bush and the other G7 leaders have few options but to accede to Russia's new energy status, hoping to strike bargains as junior partners in energy developments ultimately controlled by the Kremlin. That is what Germany did with a 55 BCM/y gas pipeline under the Baltic Sea to be on stream in 2010. Majors from the US, France and Norway hope to join a Gazprom project to tap the huge Shtokman gas field above the Arctic Circle.

Dmitri Trenin, deputy head of the Carnegie Moscow Centre, wrote in the latest issue of Foreign Affairs: "For the two decades prior to 2005, Russia had been continually retreating in the realm of international politics". Describing a resurgent foreign policy "helped along mightily by high oil and gas prices", he said: "in the past year, Russia has begun acting like the great power it was in tsarist times". This new Russian confidence has ensnared the huge gas field Kovytka, and with it BP. BP in 2003 merged its Russian holdings with a private company, TNK, in what was then seen as a new model of foreign co-operation for the industry, with Kovytka a jewel. But Gazprom is blocking TNK-BP's plans to have Kovytka gas exported to China by pipeline.

Weeks after US Vice-President Dick Cheney accused Moscow of using blackmail in energy policy, Putin on May 25 said: "We see how the US defends its interests, we see what methods and means they use for this" - in a thinly veiled reference to the Iraq war. "When we fight for our interests, we also look for the most acceptable methods to accomplish our national tasks, and I find it strange that this seems inexplicable to someone". Putin's remarks, at an EU-Russia summit in the Black Sea resort of Sochi, showed his deep anger at Cheney's intervention.

In a strong US rebuke, Cheney accused Russia of using oil and gas as "tools of intimidation or blackmail". Cheney's intervention, made in the symbolic setting of the former Soviet republic of Lithuania, reflected the unease in many parts of Europe over Russia's aggressive tactics. But Putin made clear he was keen to resume strong ties with the US, saying: "There are many...spheres including the fight against terrorism in which partnership between the US and Russia cannot be replaced".

Putin was keen to mend fences with Europeans on May 24 when he hosted European commission President Jose Manuel Barroso and Austrian Chancellor Wolfgang Schussel, who then held the EU's rotating presidency. Putin reassured the EU that he would not jeopardise energy supplies to Europe by redirecting resources to China, saying: "China is not an alternative to Europe for energy supplies". Gazprom CEO Alexei Miller in April said Putin had decided to sign a gas deal with China after Barroso threatened to limit Russia's share of the EU gas market. At a meeting in Moscow in April, Barroso warned Putin that Russia could not expect to buy into European distribution networks unless it opened up Gazprom. Putin said he would not open up Gazprom unless Europe opened its energy markets, stressing: "If our European partners expect that we will let them into the inner sanctum of our economy - the energy sector - and let them in as they would like to be admitted, then we expect reciprocal steps in the most crucial and important areas for our development". Barroso responded by saying he was keen to improve ties "based on...the principle of inter-dependence".

Putin on Sept. 5-6 was in South Africa on a state visit, the first ever for a Kremlin leader, which reunited two old ideological soul-mates under a new banner: making money. After a meeting with President Thabo Mbeki, Putin at a news conference said Russia had signed a business co-operation pact and a deal to extend sales of nuclear fuel and technology to South Africa's nascent nuclear power industry.

The only important business on Sept. 6, wedged before ceremonial visits to scenic Cape Point and the apartheid-era Robben Island prison, was a meeting with 23 Russian and 23 South African business executives on improving commercial ties. The deal-making decisively overshadowed the historic symbolism of the state visit.

As Putin was a college freshman and aspiring KGB officer in 1970 Mbeki was in Moscow, studying Communist ideology and receiving military training as part of the Soviet Union's support for the guerrilla battle of the African National Congress (ANC) against apartheid. The Soviet Union was the crucial supporter of the ANC until the collapse of Communism in 1991.

Beyond its commercial import, Putin's visit revived a decades-old relationship which had grown chilly under their presidential predecessors, Boris Yeltsin and Nelson Mandela. Tom Wheeler, CEO of the South African Institute for International Affairs, said: "There's quite a lot of sentiment involved in this, going back to the days when President Mbeki and others were trained in the Soviet Union". Wheeler, a South African diplomat for 43 years, represented his country in the former Soviet republics of Central Asia in the 1990s. Wheeler said Putin was focused on reviving Russia's status as a world power; and reprising old ties with South Africa, the continent's dominant power, makes sense for both sides.

Putin told a meeting of ambassadors in June that the end of the Cold War had wiped out Africa's old East-West divides, making the continent a new "field of operations" for Moscow. Putin is intent on countering China, which has descended on Africa in recent years, striking deals to sew up supplies of commodities like copper and oil. Trade between Russia and South Africa was less than $125m during the first nine months of 2005. But the potential is great. Russia and South Africa control 75% of the world's diamonds production, and are prime sources of platinum and gold. Russian investor Renova has 49% in a company holding major reserves of manganese, a key steelmaking component whose deposits are found largely in South Africa.

Putin flew into Morocco on Sept. 6 on a visit aimed as boosting trade relations with the North African country, with a proposal to export natural gas. Morocco depends heavily on natural gas from neighbouring Algeria, a country which for many years used to be an ally of the Soviet Union. How Gazprom will be able to supply Morocco with natural gas remains to be seen. Gazprom and Algeria's state concern Sonatrach have recently signed a wide-ranging co-operation pact (see gmt10RusOverseas-Sep4-06).

Saudi Arabia and Iran knocked Russia out of the position of top crude oil supplier to Morocco in the first half of 2006, compared with last year. Russia exported 2.4 bn dirhams worth of crude oil to Morocco in the first half of 2006, compared with 4.7 bn dirhams for the same period in 2005.