STRATFOR: Global Market Brief: Dec. 6, 2004

STRATFOR ^ | December 06, 2004 0039 GMT

[Axion]

Deutsche Bank recommended in a Nov. 30 report that Russian state energy firm Gazprom "buy Yuganskneftegaz, Yukos's main production unit, as part of a wider strategy to increase its presence in the oil sector." Deutsche Bank went on to recommend that Gazprom -- already the world's largest natural gas firm with production of 540 billion cubic meters annually and exports of 190 billion cubic meters -- also snap up Surgutneftegaz and Sibneft, Russia's fourth- and fifth-largest oil firms. Gazprom would then have annual oil production pushing 4 million barrels per day (bpd), making it a top mover and shaker in international oil markets.

Such a development is not imminent. While Gazprom will certainly walk away with Yuganskneftegaz at the Dec. 19 auction, as well as merge with government state oil firm Rosneft, Surgutneftegaz and Sibneft are privately held firms not (currently) in the grip of a massive state evisceration campaign. The point is that there are now respected Western financial institutions -- such as Deutsche Bank -- clearly being influenced by political desires.

It is no secret that German Chancellor Gerhard Schroeder and Russian President Vladimir Putin get along well. Putin speaks fluent German from the time he served as a KGB officer assigned to gathering industrial intelligence in West Germany during the Cold War. The two hit it off well after meeting in 2000 and regularly visit to discuss various policies. French President Jacques Chirac has often joined them, most famously during the lead up to the 2003 Iraq war.

Schroeder, however, has wanted to take the relationship much further than Chirac. For Chirac, it is about having a geopolitical counterweight to the United States; For Schroeder it is about basic economics. Germany imports 75 percent of its natural gas and 94 percent of its oil. Russia is the world's largest natural gas exporter and second-largest oil exporter. If not for the pesky Central European states between them that do not trust Russia, it would be a match made in heaven. Unsurprisingly, Schroeder has personally lobbied many German energy firms -- most notably Wintershal and E.On -- to invest heavily in the Russian energy sector.

It is a relationship fraught with a single large problem: overdependence. On Dec. 1, the International Energy Agency (IEA) warned that the European Union was dangerously dependent upon Russian energy, specifically gas. "Governments have been too early in thinking there would never be supply issues with natural gas and electricity," said IEA Director Claude Mandil. The 25-member EU currently purchases nearly half of all of its natural gas imports from Russia -- which means from Gazprom.

Gazprom is a company with friends in high places. The Kremlin is in process of morphing the firm into a combination energy super firm and oligarch bashing machine. Part of this process involves using hook and crook to ensure that Gazprom wins the Yuganskneftegaz auction Dec. 19, while another part involves shoving ever more assets Gazprom's way -- ultimately the list will include the bulk of Russia's electricity sector.

Sources within the German government indicate that Schroeder has chosen to throw Germany's weight behind the effort, and pressured Deutsche Bank to issue the report encouraging Gazprom to spread its control far and wide. Such a course of action is diametrically opposed to what most European institutions have been working toward for some time -- the liberalization of the Russian energy network -- not to mention the IEA's recommendations of energy source diversification.

Current events put all of this under a much harsher light. Ukraine serves as the conduit for three-quarters of Russia's natural gas exports to Europe. The West -- both Europe and the United States -- is pushing for Viktor Yushchenko, a pro-Western presidential candidate. Both sense, correctly, an opportunity to remove Russia as a threat to their security.

Not to put too fine a point on it, a Yushchenko victory would be the most significant development in the former Soviet empire since the Soviet collapse of 1991-1992. Should Ukraine, as Yushchenko hopes, join NATO, then the West would control territory roughly analogous to that of the high-water point of the Nazi invasion in 1943, raising questions about the survivability of Russia itself.

Needless to say, the Russians are far more than simply furious about current developments. They feel betrayed and exposed in equally large amounts. Moscow perceives the issue as one of national survival, and when states with thousands of nuclear weapons feel threatened, it behooves one to pay attention -- particularly if one imports huge amounts of gas and oil from such a state.

This is doubly the case for countries such as Russia. Among the many characteristics that Russians are known for, perhaps the most applicable one in this circumstance is linkage. When Russia acts, it does so in a way that indicates to rivals -- or even friends -- that it has leverage. In response to the Ukrainian situation, Russia has already moved to pressure the United States on Afghanistan and India -- two topics that could not have less to do with Ukraine. Should events continue developing along this path, Russia will soon feel the need to pressure Europe as well. Tinkering with European energy supplies would be an exquisitely painful form of pressure.

This is not a situation that will be dialed back anytime soon. The incoming U.S. secretary of state is none other than soon-to-be former National Security Adviser Condoleezza Rice. She cut her teeth in government service during the Bush Sr. administration, specifically during the breakup of the Soviet empire when she was one of the National Security Council's Russia specialists. She knows the people, the institutions, and -- judging by past performance -- she certainly knows the pressure points. Most importantly, she believes in linkage as much as the Russians do.

And unlike the Europeans, she does not come from a country that imports a meaningful amount of Russian energy. She can push without fear of an economic catastrophe being waved in front of her.

Chances of a supply disruption in the immediate future remain relatively low. After all, Russia might be Europe's largest supplier of energy, but energy is Russia's largest source of income. More likely than an outright cutoff is Russia playing hardball with long-term contract prices, or insisting that new contracts -- or even the continued enforcement of old ones -- be linked to forced investments in Russian infrastructure. Europe will face an uphill battle in maintaining a united front resisting such demands, particularly as Schroeder has been so proactive in keeping in Moscow's good graces.

Russia is not simply being beaten back or down. It believes (with some credence) that it is being beaten to death. Russia will react. The only question is how -- and when?

[Max Combined]

"Germany imports 75 percent of its natural gas and 94 percent of its oil. Russia is the world's largest natural gas exporter and second-largest oil exporter."

They had it once, but they could not hold on to it.

[pierrem15]

Gerhard "von Ribbentrop" Schroeder.

The Russians have been pushing Poland for years to acept a new oil and gas pipeline across Bielorussia into Poland instead of expanding the existing pipeline through Ukraine.

The Poles told them to get stuffed and negotiated a deal to buy liquified gas and oil via tanker from Norway.

Look for the EU to push the East Europeans to "accept reality" vis a vis any new contracts with the Bear.

I hope, with our backing, they have the guts to tell them to kiss off.

[endthematrix]

"The point is that there are now respected Western financial institutions -- such as Deutsche Bank -- clearly being influenced by political desires."

Is this any surprise? Public and private capital funds support the ChiComs. Of course it's political, that's how the return is derived via State economic policies. That's business.

[Southack]

Stratfor is once again co-mingling their annoying habits of #1 looking at the right data/events with #2 analyzing them as though the Cold War was still on-going. But the world has changed. Former Soviets need no longer prop up Cuba and a variety of failed nation-states in its old empire, much less pay for maintaining armed forces capable of conquering European territory against an American enemy.

So Russia's worldview has changed (Stratfor simply hasn't adapted to the new times).

Likewise, Europe has changed. Germany has now united East and West into its old Greater Fatherland again. Yugoslavia is now Balkanized, and even Czechoslovakia has split up into smaller components. Thus, Europe's worldview has shifted dramatically since 1991. And again, Stratfor hasn't adjusted to this new reality.

Furthermore, the U.S. is no longer fighting Soviet aggression/expansion; instead, the U.S. is fighting a global war against Radical Islamics and a North Korean fanatic of a different sort. So the U.S. has changed its worldview since 1991, too.

Publicly, the leaked intel and various columnists' seem to be blaming the U.S. for the Ukrainian situation. Nothing could be further from the truth. Our CIA is wholly incompetent; pulling off such a stunt would require giving a thermo-nuclear causi belli to a large contingent of bureaucratic American gays and leftists who typically do little more than push paper and shout the same opinion at each other behind closed doors. Our CIA couldn't pull off such an operation, nor would it be entrusted with one. Moreover, it isn't in our prime interests to irritate the Ruskies.

Russia is fighting our same Radical-Islamic enemy in Chechnya as we are slaughtering wholesale in Iraq, Afghanistan, and in the Horn of Africa, among other places right now. For that matter, but not to digress on this point too much, so too is China fighting that same enemy in remote Xinjiang.

It's an enemy that Germany isn't really fighting, though. Germany is the odd man out, and that gives it unique status on a list of suspects behind Ukraine's current election woes.

With Ukraine split off from Russia, Germany is no longer held hostage by Russian energy contracts. Germany would gain a physical buffer of immense territory between the Bear and itself with Ukraine adapting a pro-Germany, anti-Russian stance, too.

The Ukraine offers unique launch facilities and nuclear expertise, too...something that Germany is prohibited from having. Germany is a nuclear unik, after all. She shoots blanks. But the Ukraine is under no such prohibition.

So while Germany (at least in public) wants to bring the Ukraine into NATO, the smart money says that what she is actually trying to do is bring the Ukraine into the new EU military axis...an axis that specifically excludes the U.S. and Russia.

Likewise, Germany could insure cheap, dependable energy imports while simultaneously building such a formidable military alliance with Ukraine.

So it is Germany, not the U.S., which stands to gain the most from a Ukrainian split away from Russia. It is likewise Germany that is not fighting the same common enemy as is the U.S. and Russia.

Nor is it Russia that is the emerging threat to world peace. Russian diplomats aren't criss-crossing the globe gathering political support against American actions.

So what Stratfor is missing is something entirely predictable by historical standards: a German powerplay for European status, run by a Beider Meinhoff "ex" terrorist (Fischer) and an avowed Nationalistic German Socialist (Schroeder).

Oh, and today's Germany is now violently anti-Jewish again, with an 11% unemployment rate and an entire generation of draft-age youth who don't even know about the bloodbath of 1939-1945.

That's who the smart money says is stirring the pot in the Ukraine.