By Robert M Cutler
MONTREAL - Negotiations this month have opened the way to conclusion of a Gas Sales Price Agreement for the Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline, despite a number of obstacles still remaining.
On August 18, a Turkmenistan-Afghanistan meeting at the level of technical experts from the two countries' competent ministries reached agreement on a number of implementation and construction issues, also including their economic provisions, according to reports by the State News Agency of Turkmenistan.
Agreement has also been reached bilaterally between Turkmenistan and India over the price of the former's natural gas to the latter. India had proposed a price of US$460 per thousand cubic meters (tcm) to Ashgabat, which had counter-offered $505-$525/tcm. New Delhi did not want to pay a price making TAPI gas more expensive than the liquefied natural gas (LNG) that it already imports, mainly from Qatar. Natural gas represents only 6% of India's total energy consumption, and the country is keen to increase that proportion.
The four countries signed in Ashgabat last December 11 an intergovernmental agreement that was complemented by a framework document approved by the respective energy ministers. According to Turkmenistani sources, it confirmed that the 1,735-kilometer pipeline would be built in Afghanistan alongside the road from Herat to Kandahar (and at least partly underground to deter terrorist attacks), then routed by way of Quetta and Multan in Pakistan to reach the Indian border town of Fazilka.
The pipeline would carry 33 billion cubic meters per year (bcm/y) of gas, and the approximately $7.6 billion cost would be one-third financed by the Asian Development Bank (ADB), which is willing to provide a large part of Pakistan's equity in the project. The country desperately need to import energy to satisfy growing domestic demand.
The framework document foresaw that Turkmenistan would hold three bilateral meetings with each of the other participating states to discuss prices, transit tariffs and other supply conditions. Following those consultations, another joint meeting of the four was planned to coordinate all the sales and purchase contracts and sign them together.
The bilateralism of the preliminary consultations has given a certain advantage to Turkmenistan. Afghanistan, India, and Pakistan had continually sought a uniform price deal from Turkmenistan, which wanted to negotiate individually with each of the other three. Pakistan in particular asserted it would cause political problems for Islamabad if there were different prices for different countries.
Now that Turkmenistan and India have reached a bilateral agreement, unnamed top officials in Pakistan have told the Islamabad news agency The News that "it seems Turkmenistan is not inclined [to sell] gas to Pakistan at the same price at which it is selling to India", so they have informed Turkmenistan "Pakistan will match the lowest gas price between the seller and buyer country". Bilateral talks scheduled earlier this week in Ashgabat have been postponed for a month.
There is still wiggle room, as Turkmenistan has announced that it will have to build a plant to take sulfur out the gas that it produces before the gas enters the pipeline (otherwise corrosion becomes a greater risk over the longer term), and that as a result the prices to all parties will be increased.
It was originally thought that the gas for TAPI would come from Turkmenistan's Dauletabad deposit, but last year Ashgabat informed its partners that gas would instead come from the newer South Yolotan-Osman field that is already also supplying gas to China. This facilitates an eventual decision for Turkmenistan to participate in the planned Nabucco natural gas pipeline (from Azerbaijan through Turkey to southeast and central Europe), because it frees up product from Dauletabad in Turkmenistan's southeast to transit the 900-kilometer domestic East-West Pipeline (EWP) that Ashgabat is now rebuilding and which ends close to the country's Caspian Sea coastline.
The EWP, projected to carry a volume of 30 bcm/y, could be connected up to an eventual undersea Trans-Caspian Gas Pipeline (TCGP). Good progress has been made over the past two years in TCGP negotiations with Azerbaijan, particularly since Turkmenistan's President Gurbanguly Berdimuhamedow declared last December in Baku that he did not think permission for its construction was required from any other Caspian Sea littoral states. The TCGP would in turn contribute to Nabucco's volumes.
Separately from the TAPI project, Turkmenistan has built a gas processing plant on its Caspian Sea coastline to handle 5-10 bcm/y from an offshore block that has been developed by the Malaysian firm Petronas. Turkmenistan's state media reported early last week that this gas will soon be exported, although it has not specified the route.
Candidates include the Azerbaijan-Georgia-Romania Interconnector (AGRI) project across the Black Sea for LNG and a separate compressed natural gas (CNG) project across the Black Sea to Bulgaria, in addition to the eventual Nabucco pipeline.
The volatile turbulence that battered the world economy last week should have passed Russia by, but it did not. Indeed, Russia is not burdened by a massive debt, is spared political feuds about budget cuts and is not even exposed to the looming Greek default; nevertheless, its stock exchange fell deeper than most.
In the United States, the Dow Jones Industrials Average opened this Monday on about the same level it was a week ago, while in Moscow the RTS slipped from the plateau of about 11,600 to a low of 9,600 and barely bounced to 9,900 on Friday. Certainly, the speculative games are only a symptom, and not necessarily a reliable one, of the real economic trends, but statistics suggest that Russia's economic growth slowed down in the second quarter, and experts argue that the country is entering into the new phase of turmoil, for which it is no better prepared than it was in mid-2008.
Most world leaders frequently hold emergency sessions of their cabinets and try to convince opposition parties to accept austerity packages, but Prime Minister Vladimir Putin remains supremely relaxed. He made a few headlines with a loose remark about US "parasitism" on the global economy and advised scared markets to calm down, but obviously sees no burning need in his trademark "manual management".
It was his diving in the Black Sea that received most media attention, when he discovered two ancient amphorae in a shallow bay that had been thoroughly searched by archeologists and combed by the security service, a feat that has given much joy to Russian bloggers. Perhaps playing these PR-games is indeed the best Putin could do in a situation where the US dollar and the euro are seriously unstable, but the rouble is "unpatriotically" depreciating against both.
It is exactly Putin's confident steering that has made the Russian economy so vulnerable to the swings of markets' moods because he took particular pride in rising pensions and other social programs, which has made the budget seriously over-loaded with irreducible obligations.
In the next few years, steep increases of funding for law enforcement and rearmament are earmarked, but the stagnation of revenues guarantees the execution of severe cuts in populist and militarist commitments, which could hardly be postponed longer than a few months after the presidential elections in spring 2012.
The foreboding in the middle classes translates into the deepening and widening urge to move away from the crumbling "stability". It also drives the discontent with the too generous federal funding for the North Caucasus where the smoldering civil war has become a profitable business for local elites.
Russian corporate debt is now higher than it was in 2008, and the reserve fund is depleted, so the solvency is entirely a function of high-and-rising petro-revenues, which are in fact flat with a tendency to fall. Russian oil companies are bracing for lower profit margins, but it is the almighty Gazprom that feels threatened by the shrinking demand in Europe and the falling prices on the spot market.
Sticking to the letter of its treasured long-term contracts, Gazprom has shown so little flexibility on prices that now even its trusted German partner E.ON is taking it to court for abusing its monopolistic position. Desperate demands for price cuts come also from Ukraine, where former prime minister Yulia Timoshenko is even behind bars for signing an allegedly detrimental gas deal with Russia in January 2009.
Moscow is not impressed with this politicized investigation, and the meeting between President Dmitry Medvedev and Ukraine's President Viktor Yanukovych in Sochi last week brought no compromise. Russia has no interest in pushing Ukraine to bankruptcy and it is not even pressing Putin's proposal for Gazprom's "big-brotherly" takeover of Ukrainian Naftogaz; it appears to pursue the simple aim of revenue maximization.
This reduction of the political agenda to securing the inflow of petro-dollars shows that Russian rulers believe that in the dawning era of market volatility and "quantitative easing" of major currencies the value of oil and gas as secure assets is set to grow. This goes against Medvedev's "modernization" discourse based on the lesson from the painful contraction of 2008-2009, which pointed to the unacceptable risk of over-dependency upon energy exports.
The key pre-condition for modernization is investment, but entrepreneurs showed only superficial enthusiasm for Medvedev's "innovations", while strategically moving their money out of Russia. In the last week, this trickling-out turned into a current, as investment funds evacuated from the Russian market more than $400 million.
Even in the energy sector, modernization is not happening, and the failed attempt to build the "Bolshoi Petroleum" alliance between the BP and Rosneft, torpedoed by vicious business-political intrigues, testifies to that.
Anxiety about Russia's entry into a new phase of economic crisis is inevitably influenced by the reflections on the collapse of the USSR, because this week marks the 20th anniversary of the military putsch that sought to rescue the imploding super-power and instead precipitated its demise.
Public opinion remains divided and more sour than celebratory about that event, and Putin is hardly going to orate about it, but it has definitely left a deep scar on the national psyche. The shock from seeing tanks in Moscow streets has long been erased by impressions from too many other tanks burning in the squares of Grozny or rolling towards Tbilisi, but the sinking feeling of living through a state failure is back.
It was the military-industrial complex that bankrupted the oil-based Soviet economy in the 1980s, and now it is the corrupt bureaucracy that proceeds along the same track. Putin is both the master and the servant of this system that has extracted from Russia value exceeding the limits of economic self-reproduction, and he is set to preside over the unraveling.
Dr Pavel K Baev is a senior researcher at the International Peace Research Institute, Oslo.