Moscow
A visitor to Moscow quickly becomes familiar with the sight of the so-called Seven Sisters: a group of gray Soviet-era skyscrapers, each about 150 meters, or 450 feet, high, commissioned by Stalin and built in the late 1940s in a kind of neo-Gothic totalitarian style, with the symmetry, massiveness and reach- for-the-sky spires beloved by bureaucrats everywhere. They are spread around Moscow in a huge ring so that one of them dominates the skyline in any direction. While different in details, they are sufficiently similar in form to create a sense of déjà vu. A visitor can leave one of the sisters, the Moscow State University, say, and travel across the city only to encounter a look-alike, such as the former Leningradskaya Hotel.
There is an eighth sister, newly arrived and set back on a large open site on Nametkina Street, outside the innermost ring roads surrounding central Moscow. It is suitably massive and about the same height as the original seven, with a pyramidlike roof reminiscent of the pointed spires of the sisters. But the resemblance ends there. The new sister, finished in 1995, has a gleaming postmodern exterior of blue glass, steel and concrete. In keeping with this up-to-date look, it has an up-to-date function: it is the headquarters of Gazprom, the largest company in Russia, the world’s largest natural gas company and the mainstay of the Russian natural resources–based economy. Gazprom and the Russian state are as one in the exploitation of natural gas— what they call the “blue fuel,” in reference to the clean burning properties revealed in its blue flame.
Even in an age of government bailouts of entire industries, it is difficult for Westerners to grasp the scope of Gazprom’s operations and its links to the Russian government. It is as if ExxonMobil, J. P. Morgan and Time Warner were a single company, with Bill Clinton as its CEO. Gazprom’s revenues are about 10 percent of Russia’s gross domestic product. Gazprom produces over 85 percent of Russia’s natural gas and over 20 percent of the world’s supply. It controls almost 20 percent of global gas reserves and 60 percent of Russian gas reserves. It is fully vertically integrated, including exploration, production, transmission, processing, marketing and distribution. In addition to energy, it has major interests in media, banking and insurance, and operates an internal investment company.
Dmitry Medvedev, elected president of Russia in 2008, twice served as chairman of the board of Gazprom. The current chairman, Viktor Zubkov, is the deputy prime minister of Russia—that is, Prime Minister Vladimir Putin’s right-hand man. The CEO, Alexey Miller, is a Putin crony from their St. Petersburg days in the 1990s. While the company’s stock is traded on several exchanges, it is nevertheless controlled by the Russian state.
Gazprom’s long-range plans seem more like a study in military tactics than corporate strategy. It speaks of the Chinese vector, exploitation of the Yamal Peninsula and establishing bases in the Arctic. The military comparison is more than a metaphor. In 2007, the Russian Duma authorized Gazprom to create its own security force, with powers far beyond normal security companies—in effect, a corporate army like the ones the trading firms of the mercantilist age deployed. Gazprom also has a strategic enemy that it is determined to destroy. The enemy’s name is Nabucco.
Nabucco is a new natural-gas pipeline consortium backed by members of the European Union and the United States that will allow Europe to obtain natural gas without depending on Russia. It is a direct threat to Gazprom’s near monopoly on natural gas supplies to Europe through pipelines transiting Ukraine and Belarus. Nabucco is an attempt to circumvent these pipelines in a way that neither uses Russian natural gas nor passes through Russian territory. Nabucco would source its gas initially in Azerbaijan and later Kazakhstan and Iraq. It will traverse Turkey on its way to Europe.
One of the critical links in the larger Nabucco scheme is the South Caucasus Pipeline that runs through Georgia. With the invasion of Georgia in August 2008, Russian armored columns were used to threaten Nabucco and support Gazprom’s dominant position. This invasion came at the height of the U.S. bailout of Fannie Mae, and Russia was one of the largest holders of Fannie Mae bonds at the time. By bailing out Fannie Mae, the Bush administration protected Russia’s financial interests with U.S. taxpayer money even as Russia threatened U.S. interests on the energy front. Such is the geopolitical nexus in which the currency wars are fought.
Not only is Russia intent on disrupting Nabucco, it is also sponsoring two alternative pipelines that will deliver gas from Central Asia to Europe but are controlled by Gazprom and transit Russia. Gazprom’s goal is to keep Central Asian supplies bottled up inside Russian pipelines before flowing to Europe. Europe’s energy supplies are largely held hostage by Russia, and Russia has no intention of letting go.
Russia’s use of natural gas as a geopolitical weapon goes beyond threats; it has been put into action several times. On New Year’s Day 2006, Gazprom cut off supplies of natural gas to Ukraine. The effects were not limited to Ukraine but were felt throughout Europe. The stated cause was a billing dispute. While Ukraine had agreed to pay Russia for gas it consumed, Russia had agreed to pay Ukraine for the right to transit its territory to deliver gas to the rest of Europe. Russia could pay its transit fees in kind, meaning that it simply charged Ukraine nothing for some of the gas used by Ukraine. None of these payments were at market rates but were privately negotiated and involved middlemen believed to be diverting the payments to offshore accounts of Russian and Ukrainian officials. This mix of private negotiations, middlemen, payments in kind and off-market transactions ensured that the parties were constantly at odds over who owed what to whom.
Ukraine exploited this confusion to cover up its chronic hard currency shortages and late payments. In time, Russia learned that it could use the same ambiguity for its own purposes—using its disputes with Ukraine to halt shipments to Europe while blaming Ukraine for the stoppages. Russia could take the high ground by posing as an aggrieved creditor while showing Europe the implications of energy dependence.
New Year’s Day 2009 saw another Russian shutdown of deliveries to Ukraine. This time the consequences were more severe, with widespread factory closings in Eastern Europe and unheated homes in the dead of winter. By January 7 the gas war had escalated and direct Ukrainian supplies were reduced to zero. But then Ukraine diverted the transit supplies to its own use, and the shortages spread throughout Eastern Europe, seriously affecting Hungary, Poland and other states. Russia was holding Ukraine hostage, but Ukraine held the rest of Europe hostage to protect itself—a result that might have been foreseen by Russia. Finally, on January 18, an all-night summit conference between Putin and then Ukrainian prime minister Yulia Tymoshenko produced a new pricing plan, and Russia resumed supplies.
It seems unlikely the world has seen the end of the natural gas wars. Putin has recently suggested that the rest of Europe should help Ukraine with its cash shortages to protect itself from the consequences of future supply disruptions. This regionalizes the problem and shows how aggressively Russia is willing to use the gas weapon and the currency weapon in combination.
Russia recently released its official “National Security Strategy of the Russian Federation up to 2020,” an overview of the global strategic opportunities and challenges confronting Russia. In addition to the usual analysis of weapons systems and alliances, the strategy draws the link between energy and national security and considers the global financial crisis, currency wars, supply chain disruptions and struggles for other natural resources, including water. The strategy does not rule out the use of military force to resolve any of these finance- or resource-related struggles.
The perfection of Russia’s use of the blue fuel weapon arises in the midst of the global financial crisis. This provides Russia with its own force multiplier—something that amplifies offensive power beyond its normal value. Russia’s cutoffs of natural gas are devastating at the best of times. Coming amid a European sovereign debt crisis and housing market collapse, the next gas cutoff could have a catastrophic impact.
Of course, victims of blue fuel warfare have a remedy. They can turn their backs on NATO, the euro, the dollar and the West, and rejoin the Russian sphere of influence in exchange for secure, dependable and reasonably priced energy. Russia does not require its new vassals to adopt the totalitarian political systems of the Soviet past. It only requires that they be dependable allies in geopolitical matters and join a regional ruble currency bloc while maintaining a facade of democracy, as does Russia itself.
Russia also speaks openly of the dethroning of the dollar as the dominant reserve currency. While the Russian ruble is in no position to replace the dollar in international reserves, it could become a regional reserve and trade currency for Russian and Central Asian gas suppliers and Eastern European gas customers, dislodging the dollar to that extent at least. For now, it is enough to say that Russia has warned the world of the coming blue fuel wars in both words and deeds. Energy is a wedge used to forge a regional economic bloc with a regional reserve currency, the ruble. The dollar will be left out in the cold.
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