China’s rich panda challenges the poor Russian bear’s Turf

by Roman Kupchinsky

The Chinese financial and trade behemoth has begun to slowly make its might felt in the states of the former Soviet Union, a territory proclaimed by the Kremlin to be its scared sphere of influence.

These inroads are not only being made in countries close to China such as Turkmenistan where Beijing has signed important gas pipeline and purchase deals, but are now proceeding further Westward.

Belarus recently announced that it would pay China in Yuan for goods purchased from the People’s Republic. On July 29 the Chinese Central Bank transferred $3 billion worth of Yuan to the Belarus Central Bank in a currency swap.

In terms of local currencies, the Chinese swapped 20 billion Yuan for 8 trillion non-convertible Belarus Rubles. The Yuan will be used to pay China for imports such as potash fertilizers, spare parts, microchips and chip assemblies, chemical products and machine tools.

In 2008 Belarus-Chinese trade reached $2 billion.

One week before the parliamentary elections in Moldova, China, according to the Financial Times on July 28, signed an agreement to loan the “cash strapped, resource strapped country” $1 billion dollars.

The Financial Times noted “The money will be funneled through Covec, China’s largest construction company. It will ostensibly be put towards infrastructure and projects such as energy modernization, water systems, treatment plants, the industrialization of agriculture and the creation of high-tech industries, which Moldova sorely needs.”

Ukraine, meanwhile has avoided approaching China for a loan, but is looking to Asia for investments and on July 16 Prime Minister Yulia Tymoshenko arrived in Seoul, Korea, seeking to encourage Korean investments in Ukraine’s energy sector.

Tymoshenko promised that the Ukrainian government would form a special group of assistance to South Korean investors, which will be headed by Vice Premier Hryhoriy Nemyria.

"We will create special mechanisms of cooperation. A special group will be operating under Ukraine's government, which will be promoting your investments into the fields of cooperation with Ukraine," she said.

Nonetheless, Tymoshenko has also stated that Ukraine hopes to step up its trade and economic cooperation with China.

"We hope that our mutual relations will continue developing actively as well, but apart from that, we hope to step up cooperation concerning potential investment in Ukraine's economy by Chinese businessmen," she said at a meeting with Chinese delegates in Kyiv on June 26.

Chairman of the China Council for the Promotion of International Trade Wan Jifei, in turn stated that 2008 had been one of the best periods in the development of trade and economic relations between Ukraine and China.

Jifei said that representatives of 50 Chinese companies, representing such areas as engineering, the energy sector, electronics, and light industry, had arrived in Ukraine to attend various business forums and exhibitions.

"We consider today's meeting as one of the most large-scale events in recent years, and we hope to deepen our cooperation," he said.

How the Kremlin will react to Chinese trade and financial initiatives in the former USSR is unpredictable, but the possibility exists that it will be viewed with suspicion by a highly aggressive Kremlin looking to consolidate its regional power.

Budget Deficit to Devour Russia's Reserve Fund in 2010

by Alexander Melikishvili

On Monday, July 27, the Director of the Department of Budgetary Assessments of the Russian Ministry of Finances Alexei Lavrov held a press briefing in which he provided at least partial empirical confirmation of U.S. Vice President Joe Biden's remarks to the Wall Street Journal regarding the pitiful state of Russian economy. At the press briefing, which was organized on the eve of submission of the draft federal budget for 2010 for the approval of the Russian federal government scheduled for today, Mr. Lavrov presented the overview of the draft budget, which contained the following highlights:

- The Reserve Fund, one of the two Russian sovereign funds, is expected to be depleted by the end of 2010 because the government will use it to cover the growing budget deficit. It should be noted that as of July 1, 2009, the Reserve Fund amounted to 2.96 trillion rubles ($95.1 billion), but Prime Minister Vladimir Putin's decree issued on July 22 will decrease it by 1.36 trillion ($43.7 billion) to finance the state budget in the third quarter, and in 2010 the remaining 1.6 trillion rubles ($51.4 billion) will be spent for the same purpose. The Economist already called this measure "an astonishingly rapid depletion of a huge fiscal reserve."

- Russia's other sovereign wealth fund, the National Welfare Fund, which amounted to 2.8 trillion rubles ($90 billion) as of July 1, 2009, is expected to decrease to 2.3 trillion ($74 billion) by the end of 2010, and it will be further reduced to 1.6 trillion ($51.4 billion) in 2011, and to 940 billion ($30 billion) in 2012, according to the projections released by the Russian Finance Ministry.

- The state budget deficit this year will be equal to 9.4 percent of the gross domestic product, while in 2010 and 2011 it is expected to account for 7.5 and 4.3 respectively. As this exhaustive compilation of the Russian news reports of Lavrov's briefing indicates, the Russian Finance Ministry bases the aforementioned projections on a rather conservative estimate of oil prices, which are pegged at $55 per barrel in 2010, $56 in 2011 and $57 in 2012 (for comparison, on Wednesday the price was registered at $63.04 per barrel).

- Finally, for the first time since 1998, the Russian Finance Ministry will sell abroad 613.6 billion rubles ($20 billion) worth of Eurobonds in 2010 to finance the state budget shortfall. As Reuters reports, over the next three years the Russian government plans to borrow abroad $58.6 billion. As a result, by 2012 Russia's foreign debt will amount to 16.4 percent of the GDP.

Such a drastic reversal in the financial fortunes will invariably have an impact on Russia's foreign and, possibly, domestic policy over time. Undoubtedly much depends on the price of oil, but if the current trend continues, then the Kremlin may suddenly become more malleable and certainly more cooperative on the issues of importance to the United States and its Western allies, including strategic arms control, North Korea and Iran. While this does not necessarily mean the repeat of the 1990s, the more the Russian economy is dependent on Western financial infusions the more it is likely that the Kremlin will start to behave less as a spoiler on the international arena. In this regard, President Medvedev's surprisingly candid admission of Russia's inferiority in the strategically important area of supercomputers in his speech delivered at the National Security Council meeting on Tuesday, provides a rare glimpse at Kremlin's new found humility. However, as to whether this will force the Kremlin to abandon its idée fixe of the "sphere of privileged interests" (which the Russian officials repeatedly fail to define) in the post-Soviet space remains to be seen.

Russia Releases One of FBI’s Most Wanted Suspects

by Roman Kupchinsky

On July 27, Irina Dudukina, a spokeswoman for the Russian Interior Ministry’s Investigative Committee, announced that suspected organized crime boss Semyon Mogilevich, a man on the U.S. FBI’s most wanted list for fraud and racketeering had been released from prison. He and his co-defendant, Vladimir Nekrasov, had been released after signing statements that they would not flee the country.

Mogilevich was arrested in Moscow in late January 2008 along with Nekrasov, the owner of a chain of cosmetic stores, Arbat Prestige, on charges of tax evasion.

The FBI claims that Mogilevich headed a criminal organization based in Budapest in the 1990s which ran the so-called YBM Magnex scheme which defrauded U.S. citizens of hundreds of millions of dollars.

Mogilevich, and his co-conspirator, Igor Fisherman, fled to Moscow where they were safe from extradition to the U.S.

The Russian Constitution does not allow for the extradition of Russian citizens, even suspected organized crime bosses, and apparently insists on keeping them and their stolen wealth safe at home. The Kremlin, on the other hand, demands that indicted Russians living abroad be sent back to Russia from foreign countries to stand trial on often trumped up criminal charges.

In June 2009, a Moscow court refused to release Mogilevich on the largest bail ever offered in post-Soviet Russia – 120 million rubles per accused – on the basis that he might flee the country. However, on July 26, Dudukina said that the Interior Ministry had a sudden change of heart and decided that the charges “are not of a particularly grave nature so investigators had no particular reason to keep them imprisoned.”

The Mogilivich organization, according to the FBI director,was engaged in drug and weapons trafficking, prostitution, money laundering and stock fraud. He has been on the FBI’s wanted list since 2003. Ukrainian-born Mogilevich has denied U.S. allegations that he is a crime boss.

But,many experts believe that the real reason for Mogilevich’s arrest, has nothing to do with tax evasion for a chain of perfume outlets.

The WSJ reported on January 26, 2008: “In Washington, U.S. officials said they believe the arrest (of Mogilevich) is related to Kremlin intrigues involving the gas trade. The Justice Department's Organized Crime and Racketeering Section is investigating possible links between Mr. Mogilevich and a Ukrainian-Russian trading company that is central to the multibillion-dollar trade in Russian natural gas across Ukraine and on to Europe. His representatives and the companies involved have denied any ties.

“In Philadelphia, a federal court charged him in 2003 in a 45-count racketeering indictment and of masterminding a stock fraud using a web of shell companies in Europe. U.S. officials believe Mr. Mogilevich used $150 million of his winnings from the U.S. to invest in the gas business... "The arrest of someone this big had to come from the president himself or from the circle around the president," said Vladimir Ovchinsky, former director of Russia's Interpol bureau.”

The unnamed gas trader was RosUkrEnergo (RUE), the Swiss-based company which was 50 percent owned by Russia’s Gazprom and 50 percent by Ukrainian businessman Dmytro Firtash.

RUE, according to Ukrainian Prime Minister Yulia Tymoshenko, was linked to Mogilevich – thereby implicating Gazprom, Vladimir Putin, Dmitry Medvedev and others in the Kremlin of committing high crimes.

Eurasian Energy Briefs

UNIAN Press Agency

by Roman Kupchinsky

Ukrainian news agency UNIAN reported on July 25 that gas prices for domestic household consumers and communal energy companies will rise by 20 percent. The rate increase for communal energy will go into effect on October 1 and for household consumers on September 1.

The price increase was published on the website of the National Energy Regulating Committee; however UNIAN noted that the statement did not include the date this decision was reached.

The official announcement further stated that beginning January 1, 2010 there will be quarterly increases of 20 percent until the price of gas for consumers in Ukraine equals the price paid for imported Russian gas.

Currently Ukrainian’s pay between $51-$80 for 1,000 cubic meters of gas while the average annual price for imported Russian gas is $228/1,000 cubic meters. The difference is subsidized by the State budget.

The impact such an increase will have is many fold.

1. It will help clear the way for a loan of $1.2 billion from European banks to Naftohaz Ukrayina, the state- owned energy monopoly, and allow it to buy gas from Russia needed to insure reliable transit of Russian gas to the EU in the upcoming fall/winter heating season.

2. The price increase will help fill the coffers of Naftohaz which has been on the brink of bankruptcy for the past several years.

3. Higher prices often force a decrease in consumption. This is especially vital for Ukraine which is one of the least energy efficient countries in the world.

4. The increase was announced at the beginning of what promises to be a highly contested presidential election due to be held in January 2010. It might provoke a backlash from already impoverished consumers and work to the detriment of Prime Minister Yulia Tymoshenko, one of the major presidential candidates.

The financial woes of Naftohaz were the subject of a study on the Ekonomichna Pravda website

This study claims that if Naftohaz were to go into bankruptcy it would create a major legal problem as to who in Ukraine is legally entitled to buy Russian gas and who is responsible for fulfilling the binding transit contracts delivering Russian gas to the EU.

The largest creditors of Naftohaz are two Ukrainian banks –Oschadbank and Ukreksimbank - and they would stand to lose the most, even with an increase in the statutory fund of Naftohaz by the government.

Any attempt to bankrupt Naftohaz would need to have the approval of the Ukrainian parliament – an impossible task given the current divisions in that body according to the website.

“Clothing the Bear” and the Closing of Moscow’s Cherkizovsky Market

(visualrian.com)

by Roman Kupchinsky

For many years the largest and most popular open air market in Moscow was the Cherkizovsky. Filled with kiosks selling cheap clothing, electronics, carpets and shoes manufactured in China; imported to Russia by Chinese traders, it more then met the demand of Moscovite consumers but also supplied markets in Russia’s outlaying regions where consumers were constantly on the prowl for a good deal, even before the world economic crisis hit.

“Cherkizovsky was the biggest market in Eastern Europe, a sprawling bazaar where an estimated 5,000 buses arrived at the market every day; filled with shuttle traders who would buy up cheap goods in bulk and take them back to smaller markets in towns and cities across European Russia.” Its closing on June 29, 2009 has now become an international scandal.

The market place employed some 80,000 Chinese and Vietnamese citizens, many of whom were illegal immigrants. It was also known as the place where narcotics could readily be bought at cut-rate prices and that the Russian mafia was involved in this trade.

For years the Russian customs service suspiciously overlooked what was being imported for sale at the market. Apparently officials of the customs service were instructed to turn a blind eye to the legality of the imports and were handsomely rewarded for their lack of diligence by the traders – and their own bosses - who also allegedly took bribes. How far the bribes went up the ladder has not been revealed yet, but some are speculating that Moscow Mayor Yuriy Luzhkov might be implicated.

When the market was closed, some $2 billion in goods were confiscated by officials from the Ministry of Internal affairs. What became of these goods is now being questioned by high level Chinese officials who arrived in Moscow to investigate the case. The suspicion is that the Russian MVD will soon sell these goods on the black market and make millions of dollars.

According to the newspaper Vedomosti, Chinese authorities are mostly upset by the fact that the market was shut down without proper prior notice. The Russian Ministry of Internal Affairs however, insists that the closing of the market was not a discriminatory act again Chinese nationals. Despite this, the Chinese press and websites are outraged. One Chinese website stated that Russia has turned into a “naked bear” which will freeze in the first frost without Chinese made apparel.

The Chinese delegation which arrived in Moscow to investigate the closing of the market placed the blame for creating shady customs schemes on the Russian customs service and, according to Vedomosti, are threatening to retaliate by possibly reviewing the recent agreement to extend a major credit to Russia’s Rosneft.

In the midst of this conflict, Russian Prime Minister Vladimir Putin was only able to ask why nobody had been arrested – as if he did not know who was responsible for the scams.

Georgian-Russian Spy Row Preceded Vice President Joe Biden's Visit to Tbilisi

by Alexander Melikishvili

On Tuesday, July 21, on the eve of the U.S. Vice President Joe Biden's July 22-23 official visit to Tbilisi, the Georgian television company Imedi aired a news report in which the Secretary of Georgia's National Security Council Eka Tkeshelashvili stated that Georgia refused the entry to two unnamed Russian diplomats, who were supposed to assume their responsibilities at the Russian Federation's interest section* in the Embassy of Switzerland in Georgia as part of the regular cadre rotation. According to Tkeshelashvili, the Georgian government's refusal was based on the suspicion that the two were engaged in espionage activities and were affiliated with the Russian intelligence services. In her comments to Imedi regarding the diplomatic scandal, Tkeshelashvili noted,

"It is a sovereign right of any state to identify those people, who work at the diplomatic representations. Each country has the right to allow or to refuse the entry to diplomats, against whom there may be serious suspicions that they work for other services."

In response, the Russian side ordered two Georgian diplomats, including the Consul of Georgia in the Russian Federation, Zurab Pataradze, who was declared persona non grata, to leave Moscow. According to the Imedi news report, the diplomatic row took place two weeks ago. Although, later an unnamed Georgian government source told The Moscow Times that the reciprocal expulsions occurred in May.

However, the Russian side disputed the details of the diplomatic row and provided a pointed interpretation of why it was publicized by officials in Tbilisi. A Russian diplomatic source told the Russian news agency Interfax that the "exchange of diplomats" occurred in April and that neither of the two Georgian diplomats was declared persona non grata. Officially they were simply recalled and the two sides agreed not to use the incident for public relations purposes against each other, according to a source in Interfax with contacts in Russian diplomatic circles. On July 21, responding to Tkeshelashvili, the official spokesman for the Russian Ministry of Foreign Affairs, Andrei Nesterenko stated,

"Any action taken by this side or that, which deviates from customary practice, is, of course, regretful. A diplomat's work entails rotation of cadres and in this regard Russia follows the appropriate agreements. Usually in such cases, if a justification [for expulsion] is not based on logic or diplomatic explanation then, as a rule, adequate steps are taken in order to maintain the normal diplomatic parity."

The significance of the row can also be judged by the fact that the Russian Foreign Minister Sergei Lavrov found it necessary to comment on the sidelines of the 16th session of the ASEAN Regional Security Forum in Phuket, Thailand. Lavrov confirmed that the incident took place "some months ago" and added, "The Georgians had asked us not to publicize it, yet now they did it themselves and I have difficulties telling you why." Finally, the Russian Deputy Foreign Minister Grigory Karasin interpreted the diplomatic scandal as yet another demonstration of the Georgian government's anti-Russian policy timed to coincide with Vice President Joe Biden's visit to Tbilisi. Karasin derisively noted, "The Georgians are clumsily trying to use the spy theme to show their high-ranking guest their presumed strength and resolve."

* NOTE: Since the August 2008 war, diplomatic relations between Russia and Georgia have been significantly downgraded to the level of interest sections which mainly handle consular and limited diplomatic affairs. At present the Georgian interest section at the Embassy of Switzerland in Moscow and the Russian interest section at the Embassy of Switzerland in Tbilisi represent the only diplomatic presence of the two countries on each other's territory.

Reforming the Ukrainian Gas Sector

by Roman Kupchinsky

Can the Ukrainian natural gas sector be reformed? For the last two decades the Ukrainian gas business has been one of the least transparent and reportedly most corrupt and mismanaged sectors of the economy. Will this begin changing in 2009-2010?

Ukrainian policy makers and politician’s have resisted reforms tooth and nail because if they were implemented they would not only abolish a system which was so profitable for the political and economic elites, but would further impoverish an already poor population.

However, once the price charged for Russian gas reached European market levels in 2009; hastened by a debilitating shutdown of gas supplies to Europe in January 2009, the European Commission had had enough and began demanding immediate demonstrable reforms.

By June/July 2009 the European Commission finally had the leverage it needed to force Kyiv into taking action. Ukraine lacked the $4 billion needed to pay Russia’s Gazprom for gas to insure uninterrupted supplies to the EU during the fall/winter heating season. Prime Minister Yulia Tymoshenko had asked Russia for a loan - which was rejected - so she turned to the Commission with her request.

At the heart of the problem is the domestic pricing structure for Ukrainian produced gas which is sold to regional communal heating companies which supply heat and hot water to domestic consumers. The price currently charged communal heating companies is $154 per 1,000 cubic meters while the price of Russian gas is $228/1,000 cubic meters – a difference of $74 which is subsidized by the state budget.

On July 17, European banks demanded that these state subsidies end. According to the Commission spokesman Mark Grey, a decision on extending credits to Ukraine will be announced only after the Ukrainian government provides a definitive date when the subsidies will end.

Meanwhile the head of the Ukrainian National Regulating Commission for Power, Valeriy Kalchenko, stated the price of gas for consumers “does not make any economical sense”.

Yet Prime Minister Yulia Tymoshenko, immersed in an upcoming bitter presidential campaign, expressed doubts that the price of gas for Ukrainian consumers will rise in 2009. “Do not believe in rumors. I ask you to wait for the signing of a memorandum and then it will become clear if there will be a price increase or not”.

Earlier, Tymoshenko had promised to increase consumer prices in 2009 by 20 percent, a bare minimal which will not solve the problem according to experts. What is needed is a far greater increase, a proposition few in the Ukrainian government are willing to endorse at this time.

Are reforms likely? Many observers believe they will be postponed until 2010 or later. If so, Europe could well expect another gas delivery crisis this fall.

Tuesday Shorts

by Alexander Melikishvili

Former Presidents, High-Ranking Officials and Dissident Intellectuals from Central and Eastern Europe Present Their List of Grievances to Obama Administration in an Open Letter

Former presidents, defense and foreign ministers, ambassadors and dissident intellectuals from Central and Eastern Europe (including Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovak Republic) took an unusual step of writing an open letter to the Obama administration in the Polish daily Gazeta Wyborcza on July 16. Reflecting the common unease of Central and Eastern European countries over the current state of transatlantic relations, the letter touches on all major issues, including NATO's future, resurgent Russia, energy security and U.S. plans for missile defense system in Czech Republic and Poland.

The authors express concern "that Central and Eastern European countries are no longer at the heart of American foreign policy" and note that "all is not well either in our region or in the transatlantic relationship." Here are some of the notable passages from the letter:

- On last year's Russian-Georgian war: "Like you, we await the results of the EU Commission's investigation on the origins of the Russo-Georgian war. But the political impact of that war on the region has already been felt. Many countries were deeply disturbed to see the Atlantic alliance stand by as Russia violated the core principles of the Helsinki Final Act, the Charter of Paris, and the territorial integrity of a country that was a member of NATO's Partnership for Peace and the Euroatlantic Partnership Council - all in the name of defending a sphere of influence on its borders."

- On NATO's weakness: "Despite the efforts and significant contribution of the new members, NATO today seems weaker than when we joined. In many of our countries it is perceived as less and less relevant - and we feel it. Although we are full members, people question whether NATO would be willing and able to come to our defense in some future crises. Europe's dependence on Russian energy also creates concern about the cohesion of the Alliance. President Obama's remark at the recent NATO summit on the need to provide credible defense plans for all Alliance members was welcome, but not sufficient to allay fears about the Alliance´s defense readiness. Our ability to continue to sustain public support at home for our contributions to Alliance missions abroad also depends on us being able to show that our own security concerns are being addressed in NATO and close cooperation with the United States."

- On the resurgent Russia: "And then there is the issue of how to deal with Russia. Our hopes that relations with Russia would improve and that Moscow would finally fully accept our complete sovereignty and independence after joining NATO and the EU have not been fulfilled. Instead, Russia is back as a revisionist power pursuing a 19th-century agenda with 21st-century tactics and methods. At a global level, Russia has become, on most issues, a status-quo power. But at a regional level and vis-a-vis our nations, it increasingly acts as a revisionist one. It challenges our claims to our own historical experiences. It asserts a privileged position in determining our security choices. It uses overt and covert means of economic warfare, ranging from energy blockades and politically motivated investments to bribery and media manipulation in order to advance its interests and to challenge the transatlantic orientation of Central and Eastern Europe."

- On the U.S.-Russia "reset": "We welcome the "reset" of the American-Russian relations. As the countries living closest to Russia, obviously nobody has a greater interest in the development of the democracy in Russia and better relations between Moscow and the West than we do. But there is also nervousness in our capitals. We want to ensure that too narrow an understanding of Western interests does not lead to the wrong concessions to Russia. Today the concern is, for example, that the United States and the major European powers might embrace the Medvedev plan for a "Concert of Powers" to replace the continent's existing, value-based security structure. The danger is that Russia's creeping intimidation and influence-peddling in the region could over time lead to a de facto neutralization of the region. There are differing views within the region when it comes to Moscow's new policies. But there is a shared view that the full engagement of the United States is needed."

- On revamping NATO: "...we need a renaissance of NATO as the most important security link between the United States and Europe. It is the only credible hard power security guarantee we have. NATO must reconfirm its core function of collective defense even while we adapt to the new threats of the 21st century. A key factor in our ability to participate in NATO's expeditionary missions overseas is the belief that we are secure at home. We must therefore correct some self-inflicted wounds from the past. It was a mistake not to commence with proper Article 5 defense planning for new members after NATO was enlarged. NATO needs to make the Alliance's commitments credible and provide strategic reassurance to all members. This should include contingency planning, prepositioning of forces, equipment, and supplies for reinforcement in our region in case of crisis as originally envisioned in the NATO-Russia Founding Act."

- On the U.S.-proposed missile defense system in Poland and Czech Republic: "...the thorniest issue may well be America's planned missile-defense installations. Here too, there are different views in the region, including among our publics which are divided. Regardless of the military merits of this scheme and what Washington eventually decides to do, the issue has nevertheless also become -- at least in some countries -- a symbol of America's credibility and commitment to the region. How it is handled could have a significant impact on their future transatlantic orientation. The small number of missiles involved cannot be a threat to Russia's strategic capabilities, and the Kremlin knows this. We should decide the future of the program as allies and based on the strategic plusses and minuses of the different technical and political configurations. The Alliance should not allow the issue to be determined by unfounded Russian opposition. Abandoning the program entirely or involving Russia too deeply in it without consulting Poland or the Czech Republic can undermine the credibility of the United States across the whole region."

- On the energy security: "The threat to energy supplies can exert an immediate influence on our nations' political sovereignty also as allies contributing to common decisions in NATO. That is why it must also become a transatlantic priority. Although most of the responsibility for energy security lies within the realm of the EU, the United States also has a role to play. Absent American support, the Baku-Tbilisi-Ceyhan pipeline would never have been built. Energy security must become an integral part of U.S.-European strategic cooperation. Central and Eastern European countries should lobby harder (and with more unity) inside Europe for diversification of the energy mix, suppliers, and transit routes, as well as for tough legal scrutiny of Russia's abuse of its monopoly and cartel-like power inside the EU. But American political support on this will play a crucial role. Similarly, the United States can play an important role in solidifying further its support for the Nabucco pipeline, particularly in using its security relationship with the main transit country, Turkey, as well as the North-South interconnector of Central Europe and LNG terminals in our region."

Did Obama Draw a Thick Red Line over Georgia in Moscow?

According to at least one account of what transpired between Presidents Obama and Medvedev during the recent summit in Moscow, the United States made clear that another attack on Georgia would result in grave consequences for Russia. The head of the Georgian Service of Radio Free Europe/Radio Liberty David Kakabadze cited three different high-ranking officials, who confirmed on the condition of anonymity that President Obama told President Medvedev something akin to either "This time the United States would not stay away in the case of a new invasion in Georgia" or "This time it will have grave consequences for Russia."

Nabucco Partner Company and Turkmenistan Conclude a Gas Exploration Agreement

On Friday, July 17, the Turkmen state information agencies announced that the Turkmen government and the German energy company RWE AG, which is one of the shareholders in the Nabucco pipeline consortium, signed the deal that allows RWE AG to explore the 940 square km block of Turkmenistan's Caspian shelf for six years. Considering that earlier this month Turkmen President Gurbanguli Berdymukhamedov expressed willingness to provide gas for the Nabucco pipeline, the RWE AG deal bodes well for Nabucco if it is complemented by the construction of the gas pipeline across the Caspian Sea.

Closure of a Large Outdoor Market in Moscow Stokes Tensions with China

The decision by the Russian authorities to shut down Moscow's sprawling 740-acre Cherkizovsky market in late June apparently produced some tensions between Moscow and Beijing because of the manner in which the Chinese traders were dealt with. As this informative Wall Street Journal blog vigniette explains, the detention of 150 Chinese traders and expropriation of their merchandise led the Chinese Foreign Ministry spokesman Qin Gang to appeal to the Russian government "to protect Chinese businessmen's interests in Russia." It should be noted that in September of last year as a result of the raid by the Russian customs inspectors allegedly $2 billion worth of contraband goods (of mostly Chinese origin) were seized at the Cherkizovsky market. The Cherkizovsky market, which until recently was the largest outdoor marketplace in Europe, was a haven for organized crime activities and a site of frequent inter-ethnic clashes and racial tension. According to the Federation of Migrants in Russia, a non-governmental organization defending the migrant rights, the closure of Cherkizovsky market left 100,000 people (mostly merchants and shuttle traders from China, Vietnam and Central Asia and Caucasus) unemployed.

Will the EU Monitoring Mission in Georgia be Augmented by the U.S. Observers?

Reuters reports that, according to the Georgian Deputy Foreign Minister Giga Bokeria, the Georgian government is conducting "preliminary talks" with the United States regarding the possibility of including U.S. monitors in the 240-strong European Union Monitoring Mission (E.U.M.M.), which has been deployed along the de facto border of the separatist South Ossetia region of Georgia since last year's war between Russia and Georgia over the control of the aforementioned secessionist territory. It should be noted that Bokeria mentioned that Turkey expressed tentative interest in participating in the expanded E.U.M.M.

NATO Holds Air Defense Exercises in the Baltics

It looks like NATO is finally making some concrete steps to strengthen its Article Five commitments towards the three Baltic States of Estonia, Latvia and Lithuania. On July 14-15, the Allied Air Component Command Headquarters Rammstein held the Baltic Region Training Event (BRTE) aimed at increasing interoperability of Estonian, Latvian and Lithuanian air space surveillance and control capabilities. This is the third exercise of its kind. The first and second air defense exercises (codenamed Baltic Air Sovereignty Training Event or BASTE) were held in October 2008 and April 2009 respectively.

LA Times Factoid on Nabucco

The Los Angeles Times published a very handy reference to the Nabucco gas pipeline project.

Who is Behind the Murder of Natalia Estemirova?

Kadyrov and Putin at Mosque in Grozny (Alexey Nikolsky/AFP/Getty Images)

by Roman Kupchinsky

After the July 15 murder of Natalia Estemirova, a Chechen human rights activist on a deserted rural road in the Russian region of Ingushetia, human rights organizations in Moscow began to point to Ramzen Kadyrov, the President of the Chechen region as the organizer of the crime.

The 32-year old Kadyrov reacted to these charges soon afterwards, telling the head of Russia’s Memorial Society, Oleg Orlov, where Estemirova worked, that he would take personal charge of the investigation and bitterly complained that he was offended that Memorial suspected him of complicity. "You are not a prosecutor or a judge therefore your claims about my guilt are not ethical, to put it mildly, and are insulting to me," Kadyrov told Orlov.

After news of Estemirova’s murder was made public, the investigative committee of the Russian Procuracy became involved in the investigation and Russia's chief investigator, Alexander Bastrykin, arrived in Ingushetia to head the investigation.

His first finding was that her kidnappers did not really intend to kill Estemirova, but were merely frightened by a sudden traffic jam on the isolated rural road and decided to kill her in order to escape. It is highly doubtful that any traffic jams have ever occurred in the past on this deserted road. Apparently the Russian cover-up had begun.

On July 16, barely a day after the murder, Russian President Dmitry Medvedev already seemed to posses vital information about the crime and stated in Munich during his meeting with German Chancellor Angela Merkel: "As for the theories, I believe that those who committed this crime expected that the theories most primitive and unacceptable to the authorities would be put forward immediately," meaning that any implication of Chechen President Ramzan Kadyrov in the murder of Estemirova was unfounded. How the President of Russia, a trained lawyer could have known this, is a matter for speculation.

Nonetheless Medvedev tried to pacify the West’s indignation by saying the right things. "Her professional activities are necessary for any normal state; she was doing very useful things. She was telling the truth, she has openly and sometimes maybe even harshly evaluated certain processes in the country and that is why defenders of human rights are so valuable even if they are uncomforting and unpleasant for the authorities."

But the main question remains unanswered – did Kadyrov consult with his guru and protector in Moscow, Prime Minister Vladimir Putin, about Estemirova’s fate before her murder?

"If it were not for Putin, Chechnya would not exist," the 32-year-old Chechen leader said in an interview in the Rossiiskaya Gazeta government daily.

"He saved our people with his strong-willed decisions," Kadyrov said. "I know this history - I personally participated in it. If it were not for Putin, we would not be here."

Putin appointed Kadyrov president in 2007, after the assassination of his father in 2004, Since then he has managed to create a state within a state, a phenomenon that, not long ago, was inconceivable and to which Moscow prefers to turn a blind eye.

One example of Kadyrov’s alleged corruption, a fact most likely known to Putin who has always been understanding of such matters, is Kadyrov’s collection of expensive automobiles said to be worth over $1 million and a stable of horses.



Kadyrov could well be implicated in ordering the killing of Estemerova, but the real masterminds of the murder are those who made him President of Chechnya and who protect his brutal regime to this day.

New Russian Ambassador to Ukraine

Published by Kommersant, photo by Dmitry Dykhanin

by Roman Kupchinsky

In 2009 two new ambassadors will present their credentials to the president of Ukraine – one will be from the United States the other from Russia, two states who are vitally interested in Ukraine through which some 80 percent of Russian gas to Europe transits through.

Rumors in Washington indicate the new U.S. envoy will be John Tefft, currently ambassador to Georgia. But there are also whispers that it could be someone else.

Tufft has had a long and notable career as a diplomat. The Department of State’s official bio states: “John F. Tefft was sworn in as United States Ambassador to Georgia on July 28, 2005. He has been a career Foreign Service Officer for thirty-three years. Before assuming his current position, Ambassador Tefft served as the Deputy Assistant Secretary of State for European and Eurasian Affairs and was responsible for U.S. relations with Russia, Ukraine, Belarus, and Moldova“.

The man apparently chosen by the Kremlin to represent Russia in Ukraine is a bit more controversial in the eyes of Russian nationalists. Mikhail Zurabov, the former health minister, who currently is an adviser to President Dmitry Medvedev, is an unexpected choice as one source in the Russian Foreign Ministry told Kommersant Daily.

According to Kommersant, a member of the Russian State’s Duma’s Committee on CIS Affairs stated that he would “not like to see Zurabov” as ambassador. “With Zurabov’s appointment all illusions will disappear that we have any type of policy towards Ukraine.”

The deputy head of the CIS committee, Konstantin Zatulin, was even more categorical in his criticism of Zurabov. “The appointment of Zurabov will be a mistake. He is not a political figure but a manager who is not very popular”.

With Ukrainian presidential elections due in January 2010, Russia needs an envoy who will promote the Kremlin’s line in Kyiv. “Chernomyrdin was not able to and Zurabov more so. The ambassadors from the U.S. and Poland are very active in these matters, but if our ambassador remains silent this will not be understandable” Zatulin added.

It is clear that the Russian government, like most other governments, does not want a maverick in Kyiv but prefers a loyal, manager/spokesman who will do what he is told and leave policy making to Vladimir Putin – with some input from President Medvedev.

What the opposition to Zurabov could mean however, it that Russia's Ukrainian policy is being challenged by hard-line nationalists like Zatulin who was banned from entering Ukraine on a number of occasions.

Russia’s Energy Strategy Suffers a Major Setback

Courtesy European Dialogue

by Roman Kupchinsky

Has the European Union at long last found the wherewithal to stand up and draw the line on Vladimir Putin’s use of energy as a political weapon? At this week’s Ankara conference about the Nabucco pipeline, the EU displayed unusual tenacity and showed much needed foresight by engineering what many regard as a breakthrough agreement on finally beginning construction of Nabucco and filling it with gas from what many believe will be reliable suppliers. This measure, if implemented, would help stop Russia's much touted South Stream pipeline project and begin to block the Kremlin’s strategy of using gas to further its foreign policy.

The July 13 conference in Ankara resulted in an agreement between the governments of Turkey, Austria and Hungary along with Bulgarian and Romanian energy companies to sign a long-awaited agreement to begin construction of Nabucco.

The newly elected Bulgarian Prime Minister Boyko Borisov played a major role in the agreement. By deciding on July 10 to suspend all negotiations about future deliveries of Russian gas to his country and put on hold Bulgaria’s role in the construction of the Russian South Stream gas pipeline project as well as to end the agreement with Russia to construct the Belene nuclear power plant, he effectively put Putin and his government on notice that business as usual had ended.

However, Ivan Danilin, an analyst for the “Regnum” website, does not believe that “Nabucco” has moved forward by any means. He claims that the suppliers have not signed on to the project and without them the signing ceremony is merely a cosmetic exercise.

Yet, last Friday, Baku and Ashgabat announced their willingness to participate in Nabucco. Turkmenistan for the first time also agreed to take part in the project. On July 10, the President of Turkmenistan Gurbanguly Berdimukhamedov announced "Currently, Turkmenistan has excess gas for trade. We are ready to send it abroad to any customer. This includes Nabucco."

This poses major questions about the credibility of the head of Austria’s OMV Gas Company, a major player in Nabucco, Wolfgang Rittersdorf,who told Kommersant Daily on July 9, that Turkmenistan is not being considered as a supplier of gas to Nabucco in the near future.

When asked about the OMV sale of shares of the Hungarian company MOL to the secretive Russian company Surgutneftegaz, Rittersdorf refused to comment and redirected the questions to the Russian company, thereby raising more questions than answers.

Medvedev Visits South Ossetia

[Photo Credit: President Dmitry Medvedev is greeted by traditionally dressed Ossetians in Tskhinvali, the capital of Georgia's breakaway region of South Ossetia, July 13, 2009. Photo courtesy of Ezhednevniy Zhurnal, www.ej.ru]

by Alexander Melikishvili

Russian President Dmitry Medvedev's stealthy visit to Tskhinvali, the capital of Georgia's breakaway region of South Ossetia, on Monday, July 13, was significant in many ways. Occurring a week after U.S. President Barack Obama's historic "reset" visit to Moscow, it was firstly intended to demonstrate to Washington the importance Russian leadership (read Putin) attaches to the idea of "spheres of influence" in the post-Soviet space in general and in South Caucasus in particular. Secondly, as Russian investigative journalist Yulia Latynina correctly points out, it was an exercise in public humiliation of President Medvedev, who was dispatched to that forsaken landlocked enclave by Prime Minister Vladimir Putin. After all, what better way to dispel the speculations about who is in charge in the aftermath of the U.S.-Russian summit? Thirdly, undoubtedly it was a petty swipe at U.S. and the West as a whole for the three seemingly unrelated events (in no particular order of importance): the July 20-24 visit by U.S. Vice President Joe Biden to Georgia and Ukraine; the arrival of the U.S.S. Stout in Batumi on July 14 in preparation for the joint U.S.-Georgian naval exercises in maritime security scheduled for July 15; and the signing of the intergovernmental agreement for the construction of the strategically important Nabucco gas pipeline, which took place in Ankara on July 13.

Flown to South Ossetia on a helicopter from the military airport in Mozdok, North Ossetia, Medvedev spent some time touring the newly built 4th Russian military base in Tskhinvali. At the base, which is a part of Russia's 58th Army, the commander of the North Caucasus Military District Colonel-General Sergei Makarov, who commanded the Russian troops during last year's war with Georgia, showed Medvedev the tank hangar, barracks and dining area and boasted that, "At present our base is capable of fulfilling all tasks that are assigned to it." Indeed, the military component was prominent throughout Medvedev's visit as he was accompanied by the Russian Minister of Defense Anatoly Serdyukov. Mimicking the secrecy that usually shrouds the trips of Western leaders to conflict areas such as Iraq and Afghanistan, President Medvedev's visit to Tskhinvali was also kept secret until the very last moment. According to Kommersant, the separatist leader Eduard Kokoity was informed about the high guest less than an hour before his arrival.

Although no agreements were signed in the course of this very brief visit, its symbolic importance was manifold. The Russian government defiantly demonstrated to the West and the U.S. that it intends to honor its commitments to Georgia's secessionist areas. President Medvedev emphasized in Tskhinvali that Russia will continue to fund the reconstruction of the enclave even though he could clearly see that Russian taxpayers' money has been disappearing into thin air as much of the town still lies in ruins. The level of socio-economic deprivation and impoverishment in South Ossetia was even reflected in Medvedev's comments, when he could not help but notice that, "They [South Ossetians] live in very poor and difficult conditions, but to be honest, they are very grateful to Russia for the difficult decisions that were made in August 2008." Thus, utterly dependent on Russia in everything and with the economy at a virtual standstill, South Ossetia has been effectively turned into a military bridgehead whose sole purpose is to intimidate Tbilisi by its sheer proximity.

Eurasian Energy Briefs

By Roman Kupchinsky

Ukraine’s state-owned oil and gas company Naftohaz met the July 7 deadline and paid Russia’s Gazprom some $280 million for June gas deliveries. As has been the case every month since February 2009, Gazprom officials had been predicting that Ukraine would be unable to come up with the money and were threatening to demand prepayment if the monthly deadline were missed.

Part of the explanation for the relatively low amount paid for June deliveries is that Ukraine imported a record low amount of gas last month – some 33 million cubic meters a day. The previous bill for May 2009 was higher - $475 million, and was paid in full on June 7.

July however, might prove to be more problematic. Naftohaz increased daily deliveries for July to 120 million cubic meters or 3.5 times the June amount. Most July deliveries will go into underground storage for use during the heating season. The price Ukraine paid for gas in the third quarter of 2009 fell to $198 for 1,000 cubic meters from the second quarter price of $271.

Despite the lower price, Ukraine needs to come up with some $675 million by August 7 to pay for July purchases. The perplexing question is where will the money come from?

On June 29, 2009 the Slovak gas monopoly SPP signed a 10 year contract with Germany’s E.ON to buy 500 million cubic meters of gas annually, or 10 percent of Slovakia’s demand. The deal is being touted as the first step towards diversification of gas supplies to Slovakia which is totally dependent on Russian gas. SPP also announced that it intends to sign a similar agreement with France’s GdF according to the Polish Center for Eastern Studies publication Central European Weekly.

The following day, June 30, Poland signed an agreement with Qatar to buy 1 million tons of LNG (1.5 billion cubic meters) annually beginning in 2014. The Polish state-owned gas company PGNiG eventually hopes to import 5 billion cubic meters of LNG.

The growing trend in Central Europe to diversify gas suppliers could eventually have a ripple effect forcing Gazprom to reevaluate or downsize the expensive and controversial Nord Stream and South Stream gas pipeline projects and explore the much cheaper alternative of modernizing the aging Ukrainian pipeline.

China and Russia Compete for African Riches

by Roman Kupchinsky

On June 30, 2009 China agreed to extend Zimbabwe a loan of $950 million to help the country weather the global economic crisis, Zimbabwean Prime Minister Morgan Tsvangirai told the press.

The recently formed Tsvangirai government is a makeshift coalition between two bitter enemies, President Robert Mugabe and Tsvangirai, which is seeking $8.3 billion (5.9 billion euros) to revive the country’s once thriving economy, battered by years of political turmoil and deepening economic crisis under the leadership of Mugabe.

Explaining the nature of the loan, Chinese official Zhou Yongkang told state news agency Xinhua. "We will encourage and facilitate more Chinese companies to seek development in Zimbabwe.”

The Chinese loan to Zimbabwe comes on the heels of Russian President Dmitry Medvedev’s tour of African countries, a visit geared to promote Russian energy companies projects in Africa deemed vital to Russian energy strategy.

In Nigeria, where Russia's powerful gas giant Gazprom, wants to secure contracts to build new gas pipelines, Medvedev threw his support behind the Trans-Saharan pipeline project which can potentially deliver some 30 billion cubic meters of Nigerian gas to Europe.

While Russia concentrates on the African energy business, China aims to lay claim to vast reserves of minerals found on the continent.

Zimbabwe has huge reserves of chrome and according to a study by the Strategic Studies Institute of the U.S. Army War College by Kent Hughes Butts:

“The strategic mineral reserves and production capabilities of the world are concentrated in the former Soviet Union and Southern Africa. Of the foremost important strategic minerals, chromium, cobalt, manganese and platinum, these two regions account for 88 percent, 63 percent, 91 percent, and 99 percent of the known world reserves, respectively. With the exception of small quantities of platinum produced domestically and scrap, the United States is 100 percent dependent upon foreign imports for its supplies of these four strategic minerals.”

As Russian Gas Production Drops Poland Turns to Qatari LNG

by Roman Kupchinsky

In June 2009 gas production by Russia’s Gazprom fell by 35.9 percent compared to June 2008. In May the drop was 34.5 percent. Gazprom officials told the Russian newspaper Vedomosti they remain optimistic and by year’s end the fall of production would only amount to 7-10 percent.

The conventional explanations for this rapid drop in production are both the world-wide economic crisis which has dampened demand for gas in Europe and Gazprom’s failure to invest in the development of new fields. There are, however other factors contributing to lower Russian exports. One example of how EU member states are diversifying suppliers is the recent contract signed by Poland to buy 1.5 billion cubic meters (bcm) of Qatari LNG for 20 years.
Poland currently produces 5 bcm of gas and imports 70 percent of its gas from Russia. Annual Polish consumption of gas is 15.6 bcm and is forecast to rise to 16.4 bcm next year.

Qatari LNG is scheduled to begin arriving in Poland in 2014 once the new LNG import terminal is built on the Baltic coast near the German border. However, liquefied gas will be transported to Poland on the new Q-Flex vessels and concern has risen in Poland that the Nord Stream Russo-German pipeline project could prove an obstacle to the workability of the Poland-Qatar deal. The current plan for Nord Stream imagines the pipeline being laid across the fairway leading to the ports of Szczecin and Swinoujscie. This will reduce its depth to 12.9 meters, while Q-Flex ships require depths of 14.3 meters to pass.

PGNiG, the Polish state-owned gas monopoly, hopes to eventually import 5 Bcm/ of LNG annually.

On June 29, 2009, PGNiG's vice-president in charge of strategic projects, Radoslaw Didzinski, was reported as saying Gaz de France, Spain's Gas Natural and the UK's National Grid are potential partners in the LNG terminal. Meanwhile the company has signed preliminary agreements with Iranian and Algerian companies and held talks with Qatari companies as well as Gaz de France about supplies.

Polish Chamber of Commerce president Andrzej Arendarski summed up his country's interest in LNG: "We would like to have other suppliers too, so that there is no over-dependence on Russian producers."

EU and Ukraine Discuss Gas Loan

by Roman Kupchinsky

Consultations between Ukraine and the EU Commission about Ukraine’s urgent need for a loan to buy Russian gas ended Monday night in Brussels. Ukraine needs the loan to insure a steady flow of gas to Europe in the rapidly approaching heating season.

The EU was optimistic that terms could be worked out; however the size of the loan would be $2 billion, half of the $4 billion Ukraine was seeking. Moreover the Commission attached a number of conditions to the loan, foremost of which is a restructuring of Naftohaz Ukraine, the state-owned Ukrainian gas monopoly in order to improve its transparency. The Commission wants to see Naftohaz split into separate entities which would each be responsible for different functions such as transport, sales, production and storage.

Kommersant Daily reported that the EU was demanding that Ukraine insure the implementation of the March 2009 agreement on renovating the Ukrainian gas pipeline system, an agreement which has come under heavy criticism from Russia.

Ukraine needs to store 19.5 billion cubic meters (bcm) of Russian gas in its underground storage facilities in order to insure an uninterrupted flow of gas to Europe. This gas is used to power compression stations along the route of the Ukrainian pipeline.

The talks included representatives of Gazprom and Naftogaz, the World Bank, the IMF, the EBRD and the EU.

"The participants made good progress in identifying the key issues of concern and elements for possible solutions including possible financing arrangements," the representatives said in a joint statement.

Despite the optimistic prognosis, Russian energy experts and officials were not convinced that the problem could be solved in time for the heating season. One "Gazprom official was quoted as saying “We heard that it would be impossible to finalize the loan before September. This is already too late and we hope that it be agreed upon earlier.”