Gazprom’s China Initiative – Medvedev’s Misstep

Russian state energy mammoth Gazprom announced June 19 that it wants to scrap politically critical natural gas supply deals to China. The idea is logical, but the motivations are personal, and a major Kremlin figure is about to suffer because of them.

Deputy Gazprom CEO Alexander Ananenkov said publicly June 19 that Gazprom believes the Kremlin should ditch natural gas supply agreements with China signed in 2006 because implementing the deals — which would ship upward of 80 billion cubic meters (bcm) per year of natural gas to China — would prevent Gazprom from meeting domestic demand and its European export contracts. The assertion is certainly correct. Gazprom’s output is declining, and even if it could scrounge together the billions of dollars necessary to build thousands of miles of pipeline through Siberia, the cost-benefit analysis of such deals is, at best, questionable.

But Gazprom is not known for making clear statements devoid of political connotations and grounded in accurate numbers, and its deputy CEOs are not allowed personal opinions. Something else is up, and that something else is big.

Russian President Vladimir Putin’s government is in the process of transferring power to Putin’s two proteges: First Deputy Prime Ministers Dmitri Medvedev and Sergei Ivanov. For the past year, government media have given both men loads of airtime, complete with fan clubs, while Putin has tested out their policy skills with ever-greater responsibilities. One of them — Medvedev — is apparently not up to snuff.

In addition to serving the government as first deputy prime minister, Medvedev is Gazprom’s chairman of the board. The thrust for Ananenkov’s June 19 statement originated with Medvedev.

On the surface, Gazprom’s assertion about large-scale China deals not working out well for Gazprom or Russia is completely accurate. Gazprom’s production levels are stagnant to negative, and 80 bcm is a huge amount of natural gas to send anywhere — particularly since the China deals would require a few thousand kilometers of pipeline that simply are not operational yet. Gazprom also is upset that of all the projects that could send natural gas to China, the only one that has any chance of becoming a reality is the Sakhalin-1 project in which Gazprom’s archrival, Rosneft, is a participant. (Gazprom hates projects it does not control, and so far its control has prevented any other natural gas export project from being realized.)

But this is not why Gazprom — or, more accurately, Medvedev — fired off this particular flare. Medvedev’s ship is sinking. In Putin’s mind, Medvedev has consistently underperformed of late and so Putin is steadily if subtly boosting Ivanov’s stature while whittling away at Medvedev. Ivanov was given the opportunity to address the recent Russian economic forum in St. Petersburg while Medvedev was limited to a panel member. Furthermore, Ivanov is racking up control both over Russia’s power ministries and its economic planning, while Medvedev is only responsible for social and demographic issues — thankless portfolios dominated by seemingly insurmountable problems.

Medvedev knew he needed a big success to arrest his slide and figured that getting the Chinese to sign on to a high-dollar natural gas deal was the trick. But when he and the Chinese sat down to negotiate specific pricing, the Chinese refused to commit to paying more than Russia’s (subsidized) domestic prices of about $100 per 1,000 cubic meters. (The Chinese much prefer to deal with Rosneft since Rosneft has a reputation for treating customers and partners as equals, as opposed to Gazprom’s more autocratic attitude.) For Gazprom, this was simply a nonstarter: Gazprom charges nearly three times that for its natural gas exports to Europe, and that is through infrastructure that already exists.

In the aftermath of this meeting, Medvedev was mad at China for making him look the fool, and mad at Rosneft for outmaneuvering him (again). So, in essence, he threw a temper tantrum, and the announcement that a deal with China is bad for Russia was the result. For someone who wishes to be president, that was certainly a miscalculation.

Despite the creative (at best) economics of the Russia-China natural gas pipeline plans, those plans are a critical facet of the Moscow-Beijing and Moscow-Brussels bilateral relationships. The Kremlin supports the ideology of a multipolar world to contain the United States, and what better way to symbolize that system than to build up the idea of a grand Russian-Chinese economic partnership? That partnership also can be used as a threat to encourage European cooperation — the subtext being that a Europe unfriendly to Russia could be a Europe without Russian energy. Medvedev’s little outburst exposed the core fallacy of Russian foreign policy: that Russia has economic options.

Putin is not pleased.

But Putin does not have any magic bullet for the situation. Putin personally trained Medvedev for nearly 20 years, ever since the two first met in the St. Petersburg mayoral office before the end of the Cold War, so the president cannot simply drop Medvedev like a hot beet. That would be tantamount to admitting that the all-knowing, all-powerful Putin was not only wrong, but also that he had been wrong for years.

There is one additional complication. Russian media and culture are very adept at building up cults of personality, and both have been fixated on Medvedev for months. Consequently, even as Medvedev’s political potential is crashing and burning, his public image has shot up to rock star — many would say sex symbol — magnitude. Putin might not be able to pull the plug even if he wants to.

The safest course, then, is to whittle away at Medvedev’s responsibilities, both in Gazprom and the government, while slowly turning down the wattage on his press exposure in the hopes of darkening his image and edging him out of the public mind.

But remember, it is not that Medvedev is incompetent; it is that Putin feels he is both too emotional and too popular to be president. Medvedev likely still has a place in not just Putin’s government but also in the next administration. But if he displeases the Kremlin again, he could well consider committing suicide with a sniper rifle from across the street.

Stratfor.com  June 20, 2007   Russia: Medvedev’s Misstep

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