LOSING CONTROL (20 page)

Not all ententes last very long, though.
The 1907 Anglo-Russian Entente, signed by Count Alexander Izvolsky, foreign minister of the Russian Empire, and Sir Arthur Nicolson, the British ambassador to Russia, was torn up relatively quickly.
Designed to carve up Persia (now Iran), Afghanistan and Tibet, this Entente, together with the Entente Cordiale, led to the creation of the Triple Entente which, among other things, drew France, Russia and the UK into the First World War.
Following the 1917 Bolshevik Revolution, Lenin’s Russia was no longer interested in any kind of entente with the UK and France (and, given their support for the White Russians in the Russian Civil War that followed, the UK and France were not very enthusiastic either).
No amount of glasnost and perestroika more recently has made any significant difference.
This matters, because Russia is now a giant in the world of energy.

Russia is the world’s biggest producer of oil and natural gas.
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In 2008, it was responsible for 12.4 per cent of global oil production, just behind Saudi Arabia, which accounted for 13.1 per cent.
It is natural gas, however, where Russia really counts.
In 2008, Russia was responsible for a remarkable 19.6 per cent of global natural gas production, putting it slightly ahead of the US, which was responsible for 19.3 per cent.
Unlike the US, which consumes more natural gas than it produces and, thus, is a net gas importer, Russia produces far more natural gas than it needs for domestic purposes.
Also, unlike the US, Russia has plenty of natural gas in reserve.
At current production rates, US natural gas reserves will run out in a handful of years whereas Russia could keep producing for another eighty years
or so: it has over 23 per cent of proved gas reserves globally whereas the US has only 3.6 per cent.

With all this gas, Russia has turned itself into an energy superpower.
It’s by far the biggest exporter of natural gas in the world.
In 2008, for example, Russia exported over 150 billion cubic metres of natural gas, half as much again as the amount exported by Canada, the second-biggest player.
For the developed world, this matters because the top five net importers of natural gas globally are the US, Japan, Germany, Italy and France.

Admittedly, neither the US nor Japan has any direct dependence on Russia for its natural gas supplies (Canada is the dominant supplier to the US while Japan gets its natural gas from a wide range of Middle Eastern and Asian producers).
For Europe, it’s a completely different story.

Russian gas is produced and distributed by Gazprom, the world’s largest natural gas company, which is 50.002 per cent owned by the Russian state.
Dimitry Medvedev, who became the president of the Russian Federation in 2008, was Gazprom’s chairman earlier in the decade.
The Russian leadership makes no secret of its desire to use Gazprom as an instrument of international diplomacy.
It can do so not just because of Gazprom’s huge production of natural gas but also because of the ways in which natural gas is transported to Russia’s foreign markets.
Russia’s economic muscle rests not with its domestic economy nor with its ownership of assets abroad through the growth of its sovereign wealth fund, but, instead, with the threat that, at some point, the pipelines that distribute natural gas throughout Europe might be switched off.

Russia hopes to extend its pipeline network into Europe through the construction of Nord Stream, a pipeline constructed under the Baltic Sea to link Vyborg in Russia with Greifswald in Germany, and South Stream, a pipeline from Dzhugba in Russia underneath the Black Sea to connect with Varna in Bulgaria and then on to Italy and,
possibly, Austria.
These proposed pipeline connections are significant for three key reasons.

First, their construction will allow Russia increasingly to deal with European countries on a bilateral basis, thereby weakening the role of the European Union in energy negotiations.
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Some countries are already highly dependent on Russian oil, notably those in Central and Eastern Europe where imports from Russia in some cases account for 100 per cent of domestic natural gas consumption.
Countries further west, which managed to avoid being trapped behind the Iron Curtain, now also find themselves in thrall to Russian energy diplomacy: imports from Russia account for almost 50 per cent of German natural gas consumption, virtually 30 per cent of Italian gas consumption, 75 per cent of Austrian gas consumption and around 80 per cent of Finnish gas consumption.
This dependency is likely to rise and to spread to other countries such as the UK which, to date, are not heavily dependent on imports of gas from Russia.
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Second, following their completion, Russia will no longer have to rely on natural gas flowing through, for example, Ukrainian networks to reach customers further west.
At a stroke, then, Russia will be able not only to control supplies to Western Europe but also to the Ukraine and other near neighbours.
The importance of this is twofold.
Russia will be able to raise the price of gas to the Ukraine by restricting supply.
This matters because Ukraine pays well below market prices for its Russian gas, a legacy of the Soviet era, and can happily resist supply restrictions imposed by Russia by cutting off the flows of gas leaving the Ukraine for countries further west.
And, by making any threats to cut gas supplies to the Ukraine and other former Soviet States credible, Russia may be able to discourage the tide of NATO membership sweeping in from the west.
Indeed, when Nord and South Stream are up and running, the Ukraine will become strategically less important to Western European nations,
making it easier for Russia to exert influence on its neighbour without fear of retaliation (see Chapter 10 for more details on this issue).

Third, the companies building the pipelines, Nord Stream AG and South Stream AG are, respectively, 51 per cent and 50 per cent owned by Gazprom and, thus, by the Russian state.
Even if the distributors in individual countries are not owned by Gazprom, they are still totally dependent on Gazprom’s goodwill to stay in business.
Intriguingly, Gerhard Schröder, Germany’s chancellor between 1998 and 2005, is chairman of the Nord Stream shareholder committee.
Smoke-filled rooms spring to mind.

Meanwhile, Russia has ambitions to widen its customer base to the east and south.
An oil pipeline between Taishet in Eastern Siberia and Nakhodka on the Pacific Coast near the Chinese border will open up the Asian energy market to Russia.
A tributary pipeline will feed directly into Daqing in northern China.
Europe will no longer be the sole buyer of Russian energy, dramatically transforming Russia’s bargaining power not just economically but also politically.

The creation of the Shanghai Co-operation Organization (SCO) – comprising China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, with India, Iran, Mongolia and Pakistan as observers – is a case in point.
Founded in 2001, its main purposes, according to China’s foreign ministry, are (take a deep breath):

From this long list of ambitions, it’s not too difficult to imagine the creation of a new energy cartel involving both producers and consumers, particularly if Iran were to become a full member at some point.
This has the potential to become a modern-day, energy-driven equivalent of the Silk Road.

It’s also relatively easy to see how these countries, in combination, could pursue an international economic agenda at odds with US interests.
As Dimitry Medvedev, the Russian president, said in St Petersburg in June 2009:

Russia is not the only country capable of flexing its economic and financial muscle.
China has similar capabilities, stemming in large part from its excess savings and, therefore, its potential buying power over assets elsewhere in the world.
The Industrial and Commercial Bank of China Ltd (ICBC) has a 20 per cent stake in Standard Bank, the South African-headquartered bank first established in 1862.
Standard Bank has operations in seventeen African countries.
For a nation like China, thirsty for natural resources, the ICBC stake in
Standard Bank provides important links across the African continent.
China also has strong interests in the Middle East, reflected in a £4.8bn bid made by Sinopec in June 2009 for Addax Petroleum, a London-listed oil explorer with fields in Iraqi Kurdistan and Nigeria.
Meanwhile, China has used its financial clout to influence long-standing international allegiances: Chinese purchases of Costa Rican government bonds, for example, were closely linked with Costa Rica’s decision to switch allegiance from Taipei to Beijing as the legitimate representative of the Chinese people.

While it has proved relatively easy to buy influence and curry favour in other emerging economies, China and other savings-surplus countries have found acquisitions more difficult in the developed world.
In one sense, this is odd given that the US, in particular, is heavily indebted to China, Russia and the Middle East.
Yet the US is not very keen on selling its prized assets.
Selling the Rockefeller Center was bad enough, but selling California’s major energy provider to the Chinese was a step too far.
And, unlike the French with their sale of Louisiana and surrounding areas to the Americans at the beginning of the nineteenth century, it’s unlikely that the Americans will be selling California or Alaska to the Chinese any time soon, even though both disposals might make economic sense.

Under the leadership of Fu Chengyu, the China National Offshore Oil Corporation (CNOOC) made an audacious bid in 2005 to buy Unocal (the Union Oil Company of California).
CNOOC, a listed company, was 70.6 per cent owned by its state parent, also headed up by Fu Chengyu.
Was he merely acting on a commercial basis or, as some suggested, on behalf of the Communist Party?
In the light of a media frenzy, the US House of Representatives decided the takeover
was a national security issue and referred the bid to President George W.
Bush.
At that point, CNOOC withdrew.
Unocal was bought by Chevron, a US oil company.
While the British government is content to have its energy supplied by the French, the Americans are not happy to see their energy supplies falling into Chinese hands.

It’s not just the Chinese who raise suspicion in Washington DC.
Following its acquisition of the UK’s P&O in 2006, Dubai Ports World agreed, under intense pressure, to sell its US port operations (including those in New York, New Jersey, Philadelphia, Baltimore, New Orleans and Miami) to American International Group (which subsequently imploded in 2008 as the credit crunch took its toll).
DP World knew full well that its takeover of P&O might otherwise have been blocked by US lawmakers, notwithstanding clearance from the Committee on Foreign Investment in the United States (CFIUS).
Despite the arrival of Middle Eastern money a couple of years later to bail out US banks, there are clearly some areas that are off limits.
As House Representative Barney Frank put it, seemingly echoing the thoughts of David Hume, ‘They’re Arabs … I wish that wasn’t the case but it’s one thing if you’re an Arab and it’s another thing if you’re Dutch and it’s another thing if you’re Malaysian.
We’re not in a good mood towards Arabs.
Worse than we should be – I regret that – but that’s the reality.’
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I am not suggesting that mutual antipathy is confined to relations between the developed and emerging worlds.
Energy and logistics may be the biggest flashpoints between, say, the US, China and the Middle East but, within the emerging world, food plays a much bigger role, as we saw in Chapter 6.
The big increases in food prices in 2007 and 2008 provided ample evidence of the difficulties associated with food shortages.
Within emerging economies, there is
a growing gap between the ‘urban rich’ and the ‘rural poor’.
In a world of rising food prices, the rural poor are in danger of becoming poorer still, given that a huge proportion of their incomes is devoted to food consumption.
Ideally, the best way to resolve this problem is to use a tax and benefit system to redistribute resources from the ‘haves’ to the ‘have-nots’, but, within emerging economies, the tax and benefit system is often rather rudimentary and, thus, unreliable.
An alternative approach is to drive a wedge between the global and domestic price of food.
For food-producing nations, this is relatively easy.
It’s a matter of restricting exports though the imposition of tariffs, quotas and outright bans.
Limiting exports increases domestic supply at the expense of a reduction in supply elsewhere.
Domestic food prices therefore decline in relation to global food prices.