The Russian Federation is now reasserting itself, pushing back into the former colonies of the Soviet Union, the "near abroad," and it has discovered a seemingly dull but powerful weapon: petroleum pipelines.
When Kazakhstan and Azerbaijan declared their independence, there was great optimism based largely on oil and gas. Azerbaijan is one of the oldest oil-producing regions in the world, but for 75 years Russia siphoned off these oil riches. Now the Azeris are seeking Western capital to develop their fields.
In Kazakhstan, huge oil discoveries were made by the Russians. Since independence, the Kazakhs have also turned to Western companies, hoping for billions of dollars of investment to increase their petroleum production. Chevron is now committed to developing the giant Tengiz oil field, similar in size to Alaska's Prudhoe Bay. Given the importance of this deal, President Clinton celebrated the signing of an agreement at the White House.
For Western companies, negotiations have been difficult in both countries, particularly in Azerbaijan, due to the lack of legal and tax regimes, corruption and political instability. But progress is being made.
A glance at the map, however, identifies a problem. Kazakhstan and Azerbaijan do not have access to markets for their oil and gas. To get it out they must go through Iran, Russia or unstable areas in the Caucasus to reach export terminals in Turkey. The U.S. government -- wisely or not -- will block any banks or U.S. companies from an Iranian project.
Russia is thus the only realistic exit route, and Russia is squeezing Kazakhstan and Azerbaijan hard. As one chortling Russian said to me, "We have them by their pipelines." Russian companies are now being forced into the consortia that will operate these huge fields, although they cannot offer either capital or technology. Large transit fees are being sought, as well as the insistence that the oil be loaded at a Russian Black Sea port, probably the stormy and unsuitable harbor of Novorossiisk.
Not only do the Russians want the money from the projects in equity and transshipment fees, but they also want power. Control over the oil and gas from its former colonies will give the Russians control over the only hard-currency-generating asset of either country, petroleum. The Russians will be able to use the pipelines to force both nations into line so that they make important political concessions on issues such as weapons and the rights of Russian minorities.
The Russians do not wish the Azeri and Kazakh oil industry well, given the success of these countries -- which they regard as inferior -- in attracting Western capital. Nor do they welcome competition, particularly in European gas markets.
Until recently, Western observers assumed that once the petroleum reached the Black Sea, its access to markets was ensured. After a spectacular collision in the Bosporus in March, however, the Turks have increased objections to more tanker traffic, demanding new pipelines across Turkey. Russia is insisting on its rights of passage under the Montreux Convention of 1936. The Turks respond that the convention was signed with the Soviet Union, not the Russian Federation. Intense controversy and potential friction can be expected.
The pipeline politics of Central Asia are a high-stakes game. At a minimum, huge investments and potential dividends are at risk. More important, the future of several countries and the stability of the region may hang in the balance. The industrialized nations and their banks, as well as the World Bank and the European Bank for Reconstruction and Development, should put pressure on the Russians, using such leverage as export credits to their petroleum sector, to stop this blackmail. Russia should not be allowed to hold hostage yet again those struggling new nations that it had commercially plundered and environmentally demolished in the past.
J. Robinson West, a former assistant secretary of the interior, is president of the Petroleum Finance Co., international oil and gas strategists. He contributed this comment to The Washington Post.
When Kazakhstan and Azerbaijan declared their independence, there was great optimism based largely on oil and gas. Azerbaijan is one of the oldest oil-producing regions in the world, but for 75 years Russia siphoned off these oil riches. Now the Azeris are seeking Western capital to develop their fields.
In Kazakhstan, huge oil discoveries were made by the Russians. Since independence, the Kazakhs have also turned to Western companies, hoping for billions of dollars of investment to increase their petroleum production. Chevron is now committed to developing the giant Tengiz oil field, similar in size to Alaska's Prudhoe Bay. Given the importance of this deal, President Clinton celebrated the signing of an agreement at the White House.
For Western companies, negotiations have been difficult in both countries, particularly in Azerbaijan, due to the lack of legal and tax regimes, corruption and political instability. But progress is being made.
A glance at the map, however, identifies a problem. Kazakhstan and Azerbaijan do not have access to markets for their oil and gas. To get it out they must go through Iran, Russia or unstable areas in the Caucasus to reach export terminals in Turkey. The U.S. government -- wisely or not -- will block any banks or U.S. companies from an Iranian project.
Russia is thus the only realistic exit route, and Russia is squeezing Kazakhstan and Azerbaijan hard. As one chortling Russian said to me, "We have them by their pipelines." Russian companies are now being forced into the consortia that will operate these huge fields, although they cannot offer either capital or technology. Large transit fees are being sought, as well as the insistence that the oil be loaded at a Russian Black Sea port, probably the stormy and unsuitable harbor of Novorossiisk.
Not only do the Russians want the money from the projects in equity and transshipment fees, but they also want power. Control over the oil and gas from its former colonies will give the Russians control over the only hard-currency-generating asset of either country, petroleum. The Russians will be able to use the pipelines to force both nations into line so that they make important political concessions on issues such as weapons and the rights of Russian minorities.
The Russians do not wish the Azeri and Kazakh oil industry well, given the success of these countries -- which they regard as inferior -- in attracting Western capital. Nor do they welcome competition, particularly in European gas markets.
Until recently, Western observers assumed that once the petroleum reached the Black Sea, its access to markets was ensured. After a spectacular collision in the Bosporus in March, however, the Turks have increased objections to more tanker traffic, demanding new pipelines across Turkey. Russia is insisting on its rights of passage under the Montreux Convention of 1936. The Turks respond that the convention was signed with the Soviet Union, not the Russian Federation. Intense controversy and potential friction can be expected.
The pipeline politics of Central Asia are a high-stakes game. At a minimum, huge investments and potential dividends are at risk. More important, the future of several countries and the stability of the region may hang in the balance. The industrialized nations and their banks, as well as the World Bank and the European Bank for Reconstruction and Development, should put pressure on the Russians, using such leverage as export credits to their petroleum sector, to stop this blackmail. Russia should not be allowed to hold hostage yet again those struggling new nations that it had commercially plundered and environmentally demolished in the past.
J. Robinson West, a former assistant secretary of the interior, is president of the Petroleum Finance Co., international oil and gas strategists. He contributed this comment to The Washington Post.