Gazprom, Meet Globalization Posted by Heather Hurlburt

For those of us on the older side of young, Russia's abortive attempt to cut off natural gas supplies to Ukraine brings back memories of the 1980s -- when Germany and others first began pipeline discussions with the Soviet Union, triggering rows within NATO about whether it was wise or totally unacceptable for Europe to make itself dependent on  Moscow in this way.  Of course, at that time no one ever imagined Ukraine, Poland or Hungary getting in the way.

This is a very particular European moment, one that people have been talking about for decades -- when Moscow finally did get angry enough to use an economic weapon against countries to the west.  Right now it looks like a failure -- but it's an interesting one.

First, the EU will now get involved in negotiations between Russia and Ukraine, one way or another -- and that will likely result in Russia getting some more money from somewhere.

Second, it may not look so bad inside Russia that Gazprom "stood up" and the Europeans (and US) intervened on Ukraine's behlaf.  If nothing else, it does reinforce certain stereotypes about Russia's being surrounded by hostile tools of the West -- perceptions which come in handy politically.  (I apologize for not having checked Russian press on this... if anyone else has, please comment on it.)

Third, this becomes yet another football in German politics, where it gets laid at departed Chancellor Schroeder's door -- as he had initiated negotiations for yet another gas pipeline to Germany from Russia.

Fourth, it's a reminder of how globalization does work -- and how it doesn't.  Yes, Tom Friedman, the earth is flat where gas pipeline flows are concerned.  But has Russia also made a point here?  Can Ukraine continue on as if Russia didn't exist, as if national boundaries didn't matter a whit?  No.  Half a milennium of history buts up against 21st-century economics, and I'd call the result a draw -- so far.

Comments

[Dan Kervick]

Much of the commentary I have read today seems to me to focus excessively on the political dimensions of this episode. But the gas shutoff is mainly a hardball business move by Gazprom. It is a business move with significant political overtones and repercussions to be sure; but it is primarily a business move nonetheless.

Gazprom has been trying to pressure Ukraine for some time now into accepting new terms on natural gas shipments. They have asked Ukraine to pay for natural gas at a price much closer to the market rate, which is a three or fourfold increase over the subsidized price they received for years when the Ukraine was a Russian client. But Gazprom has also offered to continue to supply the gas at the same price, in exchange for full Russian control over the pipeline, thus cutting out the Ukraine's transit fees. I suspect this is Gazprom's preferred option. It is part of a larger effort to cut other transit countries out of the supply chain, including a project to bulid a sub-Baltic pipeline to Europe.

Gazprom announced last month that they were going to make this week's move, if no agreement could be reached before the end of the year. They also announced the January 1st date. At the same time, Gazprom announced that they had taken measures to assure its European customers would not see their own supplies interrupted by the turnoff of the Ukraine's natural gas.

From what I can gather from the news reports, the Ukraine, coached no doubt by its Western backers and Gazprom's competitors, has attempted to turn the Russian move to their own public relations advantage by tapping gas destined for Europe, thus causing a sudden shortfall in supply to Gazprom's end customers. They announced as the turnoff began that European supplies might be threatened. At the same time, Western governments have mounted a diplomatic campaign aimed at calling Gazprom's reliability as an energy supplier into question.

So on its face, this would appear to be a case in which the Ukrainians outmaneuvered the Russians. However, the Russians seem to have predicted this move. The Russian Foreign Ministry said yesterday that Ukraine would be to blame for possible complications in deliveries to Europe:

"We expect Ukraine to ensure uninterrupted natural gas transit via its territory to European Union countries in line with its international obligations and take every measure to prevent gas flowing to Europe from being tapped," the ministry said.

Today they charged that the Ukraine illegally tapped 100 million cubic meters of gas during the turnoff. Gazprom has hired the Swiss firm SGS to study and estimate the amount of natural gas that has been tapped by the Ukraine from Russian deliveries to Europe. If the Russians can demonstrate to the satisfaction of international observers that Ukraine illegally taps gas that is supposed to be transiting to Europe, then it is the Ukraine that is now an "unreliable" link in the supply chain. Clearly such a perception would enhance Gazprom's position. Perhaps creating the conditions where this tapping would occur, and could then be measured and demonstrated, was part of the motivation for the move to begin with?

And the Ukraine's Naftogaz has now accepted an increase in its natural gas prices for the second quarter of 2006, and sent a draft contract to Gazprom. However, I don't know what the terms are, and I assume the pressure and negotiations over price will continue.

So judging the tactic a "failure" is premature. I suspect Gazprom has strengthened its position in the end. A message was sent and received, and may yet have its desired effect.

There are several articles on this episode to be found at the the Russian News and Information Agency site.

[Dan Kervick]

Fourth, it's a reminder of how globalization does work -- and how it doesn't. Yes, Tom Friedman, the earth is flat where gas pipeline flows are concerned. But has Russia also made a point here? Can Ukraine continue on as if Russia didn't exist, as if national boundaries didn't matter a whit? No. Half a milennium of history buts up against 21st-century economics, and I'd call the result a draw -- so far.

Heather, this comment went over my head. Could you explain it a bit more? Because on the surface, the Gazprom move this week seems to be a case of an international energy supplier competing aggressively in the global marketplace - globalization in action.

Nor do I uderstand your claim about Moscow getting "angry" and using an economic weapon against the West. In this December 20th BBC report on Gazprom, which provides some essential background to this week's events, Gazprom's deputy chairman Alexander Medvedev sounds anything but angry. Rather he seems to be chatting very frankly and cheerfully about plans to use his firm's economic muscle to extract better terms from some customers and middle men, and improve its market position.

As I said before, the temporary natural gas shutoff is mainly about business, and only tangentially about high end global politics and all that East vs. West stuff. We're not talking about an "energy as a weapon" situation in which Russia shut off someone's gas in order to get them to withdraw their troops from some country, or to end diplomatic relations with some rival, or to change their government. Gazprom did it to get better terms from the Ukraine.

[Dan Kervick]

In my first comment, I included this quote without a clear citation:

"We expect Ukraine to ensure uninterrupted natural gas transit via its territory to European Union countries in line with its international obligations and take every measure to prevent gas flowing to Europe from being tapped," the ministry said.

That quote can be found in one of the articles available at the RNIA site for which I provided the link.

[Heather Hurlburt]

Dan,
Exactly the point here is that the lines are a little fuzzy (very fuzzy, really) between what is a "purely economic" move by Gazprom and what is Moscow politicking. This was a move that had business-world and domestic political benefits for Moscow's politico-industrial complex; it also had significant drawbacks, as you can see in the heightened German opposition to the Baltic pipeline. So my point: yes, this is globalization, but it still looks pretty non-"flat."

[geo]

Political or hardball business move? All of the above and more. Like the invasion of Iraq, this episode is another milestone as the world moves from a creeping to a full-blown Peak Oil crisis. This is not just any commodity being shorted: it's energy, the very lifeblood of a nation's economy, and the family of nations will increasingly be struggling over who controls the ever dwindling--emphasize Ever Dwindling--resource that fuels all that we are.

Michael Klare, in "Blood and Oil," writes about the frightening military implications as nation's vie for this crucial lifeblood. I'm afraid that the Gazprom dustup is a very tame harbinger of what lies ahead.

[praktike]

Isn't the obvious globalization point that Gazprom is now going to be seen in the international business world as a tool of the Kremlin rather than a real, independent company?

[Dan Kervick]

Heather,

I agree absolutely that there is no sharp line to be drawn between commercial and political activity, especially when those activities occur at such a high level, where state power is used to pursue major commercial goals for giant enterprises, and the commercial success of those enterprises contributes in turn to enhanced state power.

This is equally true in countries like Russia, where there are many state-owned enterprises, and in countries like the United States in which enterprises are privately owned, but secure the services of the state by leveraging their economic power into influence within the governing system. The United States, like most every other country, uses its state powers to further the commercial interests of its stakeholders. And it uses its economic power to advance other "political" goals.

And as I said, I see the Gazprom move as "primarily economic" rather than "purely economic". Nothing Russia has done should appear incongruous to the United States, where a strong working relationship between commercial interests and state power is a long-established tradition. America virtually invented the concept of the trade sanction as a tool of foreign policy; and we are quite accustomed to using our combined economic, political and military powers in order to further our commercial and financial interests - particularly in places like Latin America.

But that there is a reciprocal relationship between state policy and economic activity doesn't strike me as a particularly newsworthy phenomenon, or as a reason for doubting the reality of increased globalization, and the growing "flatness" of the world due to the decreasing significance of national boundaries in trade. It remains true that trade across national borders is more widespread than ever before. In fact Gazprom is a major player in the thoroughly globalized energy industry.

I suppose if a "flat" world is supposed to be a radically laissez faire world in which governments just don't matter to commerce, and all trade takes place entirely independently of state power and state influence, then I would agree that the world is not flat in that radical sense. Is that really what Friedman means by the term? Is a flat world a world in which only private commerical enterprises exert economic power, independently of government control and state assistance? I thought the idea was just that a flat, globalized world is one in which trade moves more freely across national boundaries. But the decreasing importance of national boundaries as barriers to trade is perfectly compatible with the continued importance of state power is promoting the commercial efforts of the multinational businesses that happen to lie inside those national borders.

In the case of a company like Gazprom, Russia happens to be the proprietor of the company. So that just means Russia itself is the main commercial actor in this situation, not just an influential side-participant. But as such, it seems to me, Russia has done nothing that falls outside the norms of global business. It is trying to get a pipeline built, trying to eliminate unnecessary middle men from its supply chain, trying to influence political events inside countries of interest, and trying to beat its competitors to the punch in establishing a stable supply relationship with customers. It is engaging in commercial hardball, played out on a very large international field involving dozens of countries.

You say that the Russian move "also had significant drawbacks, as you can see in the heightened German opposition to the Baltic pipeline." To which I say well, let's see how long that lasts. If the pipeline makes sense for Russia and Germany in the long run, as I suspect it does, then it will happen regardless of these political blips. Indeed, as I said before, I suspect a large motive in Russia's move was to demonstrate to Europeans that the transit of natural gas through Eastern European and Eurasian countries, who each get a cut, are subject to various kinds of politically instability and the whims of their officials, and who may be tempted from time to time to interfere, for internal reasons, with the flow of natural gas through their borders, is a less reliable supply option than an undersea pipleine that goes directly from the suppliers to the customers. In effect, then, this is an effort at breaking down potential barriers to efficient trade that are due to the presence of various problematic national borders.

Let me ask you this: suppose Gazprom was not a state owned enterprise, but was simply a large private energy company in Russia, operating in typical American-style, big business, capitalist fashion. And suppose the gas pipelines through the Ukraine were owned by this company. Wouldn't it still make economic sense for Gazprom to employ a move like the one it used this week to advance its corporate interests? And if so, wherein lies the challenge to flat world globalization? It's not as though Russia has just erected a new barrier to trade.

[Dan Kervick]

Isn't the obvious globalization point that Gazprom is now going to be seen in the international business world as a tool of the Kremlin rather than a real, independent company?

Well, since Gazprom is a partly state-owned company, and Russian government officials are a majority of its board of directors, this is obviously true in a sense. But that doesn't make it any less a "real" company. And the fact that the company is run by the Kremlin doesn't make the parent company "Kremlin/Gazprom Inc." any less of a globalized economic enterprise.

Perhaps the best way to think of it is to view states themselves as large companies. Companies like the US government and the Russian government implement somewhat different business plans. The US government doen't own many subsidiaries, but it instead sells military and regulatory services to other independent US companies, and serves as a kind of consortium which benefits its business clients both individually and collectively. The Russian government is more vertically integrated, and owns a share of many of the companies whose interests it advances.

Compare Gazprom to a company like Random House, which is owned by the German firm Bertelsmann. Random House is obviously not independent of Bertelsmann, and could be viewed as a "tool" of it, in the sense that some important shots are called at the top corporate level, and are part of an overall corporate strategy. Gazprom has something like the same relationship to the Kremlin. Bertelsmann happens not to be part of a government, while the Kremlin is.

Globalization is not the same thing as American-style "private" enterprise, where states are not permitted to play in the game themselves. Nor is globalization the same thing as the "withering away" of the state and decline of state power, in favor of some sort of corporatocracy of private businesses. The term "globalization", as I understand it, refers to the diminishing significance of national borders as barriers to trade, and the consequent expanding volume and geographic scope of global trade. Globalization still seems to be a very real phenomenon, even if some of the players in the global game are themselves states, and even if many of those states possess substantial power as economic actors. It is only when that state power is used to erect national barriers to trade that state power works against globalization. When state power is used, on the other hand, to expand the global trade of some national companies, then it is in fact accelerating globalization, not retarding it.

[Jeff Younger]

The term "globalization", as I understand it, refers to the diminishing significance of national borders as barriers to trade, and the consequent expanding volume and geographic scope of global trade. Globalization still seems to be a very real phenomenon, even if some of the players in the global game are themselves states, and even if many of those states possess substantial power as economic actors. It is only when that state power is used to erect national barriers to trade that state power works against globalization. When state power is used, on the other hand, to expand the global trade of some national companies, then it is in fact accelerating globalization, not retarding it.

I was with you up to this paragraph. State power must erect barriers to trade, no matter how it is used, because the ability to coerce rests solely with the state. Admittedly, corporations, and businessmen generally, are the worst Capitalists because they actively seek to convince the state to use its coercive power for their private interests. In fact, the modern American corporation was created by Progressives for precisely this reason. But always and everywhere, private enterprise must give way to the state juggernaught. Some want this as a positive good, and some despise it, but in all cases the state creates barriers to trade by its every economic act.

Socialist governments, like Russia, are Mercantilist institutions. Mercantilists are monopolists, and that aint' globalization. It's "Social Democracy," or some other oxymoron.

[Dan Kervick]

I suspect you and I agree, Jeff, about the economic harms of monopolies and monopolistic behavior. But it seems to me that the issue of monopolies cuts across the globalization/protectionism issue. We can easily conceive of a situation in which there are very many monopolies in the world, but those monopolies are selling their goods freely across state borders.

Whether state power is used to promote the rise of monopolies and help them secure their position, or to break up monopolies and inhibit their rise, strikes me as somewhat separate from the issue of whether states use their power to erect barriers to trade or break them down. It is also different from the question of whether states themselves choose to engage in trade, by operating state-owned businesses, or leave that business in the hands of private enterprises. All these economic phenomena are interconnected, of course, but there is no direct and simple correlation between the policy in one area and the policy in another.

Compare global trade to trade inside the United States. There have been times in US history when monopolies thrived, and when commercial and financial power has been heavily concentrated. There have been other times when people acted to break up and prevent monopolies, to foster competition and to distribute economic power more widely. But whether monopolistic behavior has at any given time been waxing or waning has not had much to do, so far as I know, with barriers to interstate commerce inside the United States. Monopolies can arise fairly naturally in a geographical area even when there is a completely wide-open trading environment in that area, and it then requires state power to break them up. And protectionist barriers can be used to prevent monopolization of an industry as much as to promote it.

Clearly states around the world continue to practice some mix of protectionism and free trade, although the trend in recent decades has been in the direction of free trade. But the Gazprom incident is not one that on its surface involves erecting a new protectionist barrier to trade, so I don’t know why that should be put forward as an example of a challenge to globalization.

The notion that the state possesses a monopoly on coercive violence is in many parts of the world more a statement of principle than actual fact. Banditry, warlordism, piracy, strong-arming, and organized crime and gang violence all inhibit free trade. The trader may find his goods stolen, his assets sabotaged, his traders attacked, or be forced to pay protection or a transit fee. In such cases, state power is actually used to promote free trade and establish property rights and marketplace rules. Classical imperialism also gives many example of states using their coercive power both for protectionist purposes, and to destroy barriers to free trade, and to forcibly open up markets.

I don’t think it follows that because a state establishes a monopoly on legal violence within its own borders, that it will aggressively pursue protectionist policies.

[J Thomas]

Suppose that Gazprom charged market rates to everybody.

And suppose that the Russian government gave money to its special friends on the condition that they spent it on Gazprom, so their effective rates for gas were considerably lower.

Wouldn't that have just the same effect as the current situation where they charge market rates to some buyers but not to others?

Why is there any ideological issue here?

[Robert M]

The issue isn't globalization. That meme is about the spread of education and information with the end point being to put it to work. A great example is the so-called engineering gap between the USA and PRC and Indian engineers. The latter basically lack quality; how long before they catch up is the real question.

What Imperial Russia tried was a pure political move using economic resources. They sought to influence Ukrainian behavoir by offering the carrot and stick of gas prices which are currently artifically low in the Ukraine. It backfired because the pipeline that provides gas to the Ukraine does not end at some point on the Ukraine border where a valve could be closed on the Russian side with consquences only for the Ukraine.

The pipeline crosses the Ukraine and continues into others to feed Europe and has points where gas can be siphoned off inside the Ukraine. When the Ukraine showed great balls because this is an act of war, think Imperial Japan when the US began cutting off scrap metal and other industrial inputs prior to Pearl Harbor, by diverting gas bound for Europe into its domestic lines the Ukraine made a large number of people realize Russia was not only not a reliable supplier but someone whom was capable of threatening their economic and political security by not buying into the notion of EUROPE as an economic and political power to be reckoned with.

Europe surprising let Russia know that wasn't the rules of the game. The result of this maybe more funding for European military aims especially short range missles as well as more attempts to coopt other border states within the European plain. I would also look for the France's force d'frappe and England nuclear sub forces to be quietly updated and modernized as a reult of this action. It is one thing to domestically change the rule of law and contracts, think the Jew Putin Putin jail-I use that word deliberately because part of the silence in Europe regarding him is the anti-Semitic spine that runs in Europe, but quite another to do it on an international level.

[J Thomas]

Robert M, I'm not clear quite what you're saying here.

Mmm. Let's imagine this a different way. Imagine that the USA ad some resource we were selling to all of south america, and it needed to go through mexico. And traditionally we charged mexico half the cost of production for their own use, and they let us ship through to others.

And then for one reason or another we wanted to raise the price to mexico, bring it up to what we were charging the other customers. No long-term contract in place to say we couldn't. That ought to be fine, shouldn't it? And ideally we ought to negotiate with mexico about what they charge for permission to send the product onward. Without a longterm contract they have the right to change what they charge us for that privilege....

But instead of negotiating, mexico simply steals some of the product we send on. And we threaten to cut off mexico's share of the product.

If I was living in south america, *of course* I wouldn't consider my source secure. It depends on a couple of clowns who can't get it together. For all I know they might get into a military dispute that would destroy the pipelines. If I trusted the USA without mexico, I might look into ways to bypass mexico. And if I didn't trust either one I'd look for an alternative source or an alternative product.

Somehow a lot of us are talking like this is just the USA's fault and mexico is being all heroic. But it's just a couple of clowns who can't get their act together.

[Dan Kervick]

Somebody correct me if I'm wrong. But I believe "the pipeline" that runs through the Ukraine is actually a network of pipelines. Russia had taken steps before shutting down the Ukraine's gas, the gas that flows through those parts of the network that are designed to supply the Ukraine, to make sure that the gas destined for Western Europe continued to flow. What the Ukraine apparently did was divert gas that does not belong to them for their own use.

If the supplies running through Eastern Europe are not secure, it is because of the potential for the transit countries to tamper with the flow. This seems to buttress Russia's claims that (i) they, not the Ukraine, should have control of the pipelines themselves, and (ii) it would be good to have an undersea pipeline that avoids these transit countries altogether.

While I do believe that the desire to impact Ukraine's election played some role here, I continue to think people are missing the more obvious elements of economic hardball. This move is mainly about gas and money and Gazprom. I continue to believe that the desire to influence Ukraine's politics, while certainly very real, was in this particular instance secondary.

[David Shorr]

Am I on the old side of young, or have I slid over to the young side of old? Either way, I think I remember Gen. Haig's 1982 resignation as SecState having something to do with the controversial pipeline plans. He was more Atlanticist and Euro-sympathetic than the rest of the Reagan Admin. Anyone? Bueller?

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