Oil wars

It looks as though Russia’s neighbours have made a New Year’s resolution for 2007 – to demonstrate to Russia that they too can flex their energy muscles. In the past few days:

• Belarus have slapped a tax on Russian oil transiting Belarus, and siphoning off Transneft’s oil to pay for it.  In response, Transneft have shut off the oil supply to huge chunks of Central Europe.
• Azerbaijan have stopped exporting oil to Russia, after failing to agree a price
• Georgia have signed a deal to buy gas from Turkey, instead of Russia (actually this was late last year, but its always good to get a headstart on New Year’s resolutions…).

Some of these moves are sensible, others aren’t. Either way, though, these moves don’t do Russia a lot of good – as ye reap, so shall ye sow.

(By the way – I’m posting this by phone while on the move, so no links at the moment. I’ll update with links tomorrow, but you can find details of each of these stories on the BBC News website).

Belarus’ decision to slap an oil tax of $45 per tonne on Russian oil transiting through Belarus (mostly en route to Poland and Germany) strikes me as an ill-considered reaction to the already signed deal to increase the rate Belarus pays for Russian gas to the global market rate. Effectively, it seems as though, Belarus have launched their counteroffensive after the war’s decisive battle has been lost. By taking this approach now, Belarus will bear the brunt of German and Polish irritation. And, what will they actually gain?

Azerbaijan’s decision is an odd one, which broke just as I was writing this article. There are conflicting reports as to what has actually happened, with some news agencies reporting that they have cut of oil supplies to Russia, others reporting that they have cut off supplies to Europe that were transiting through Russia. I wonder, though, if it will achieve all that much, other than to make Azerbaijan seem like yet another unreliable supplier of oil in Western European eyes. Things may become clearer by the morning – if so, I’ll post an update.

Georgia’s decision strikes me as much more sensible. Now that Russia is no longer offering massive subsidies on the price of gas, it isn’t an attractive choice of supplier. These days, countries perceive Russia as an unreliable supplier – one prone to using its gas supplies as a weapon. Given this, if a country can find another country willing to supply gas at the same price as Russia, they’d have to be crazy not to switch suppliers. (and in this case, I wouldn’t be at all surprised to discover that Turkey either undercut Russia’s prices, or offered some kind of sweetener to smooth the deal’ progress).

Russia is the biggest loser in this whole debacle. As I mentioned above, they way they’ve handled these price increases – linking them to political threat, and using them to bully countries into selling energy assets for a song – has created a perception among their customers – current and future – that they are an unreliable, unprincipled and bullying business partner.

Russia may well earn more per cubic meter of gas sold than it did last year, but if it is not careful, it may well find that is has less and less customers for its gas, driving down overall income. At the same time it will have lost friends around the globe, making its geopolitical aims that much harder to achieve.

Update: Tim comments below that “Russia is playing an exceptionally strong hand very very badly”.

This mornings newspapers show just how badly Russia has handled things, and how poor its image is in European capitals.  Splashed all over the front page of the (London) Times in big bold type is the headline “Russia turns off Europe’s oil supply“.

(While technically, the headline is correct – Russian firm Transneft turned off the oil – I’m more inclined to pin the blame on Belarus.  They imposed a ludicrously large tax on Russian oil transported through Belarussian pipelines and, when Transneft didn’t pay, began to siphon off oil in lieu of payment.  True, this was done in response to the way Russia imposed huge gas price increases on Belarus but, as I’ve explained above, I don’t think this was a particularly sensible reaction by Belarus).