From Volume 5, Issue Number 23 of EIR Online, Published June 6, 2006
Russia and the CIS News Digest

Putin to EU: Russia Will Protect Own Interests

At the semi-annual Russia-EU summit in Sochi May 25, Russian President Vladimir Putin spoke to the burning issue of Russia as a reliable partner in energy deals: "The launch of construction of the North European gas pipeline, measures to strengthen the energy security of the continent," he said, "all of this is aimed at achieving the objectives of progress, global and regional development, and the main goal—improving the quality of life of Europeans." Russia's Interfax asked the EU representatives if "the EU would like to consider Russian energy resources its own," and posed to Putin the question of whether it were not harmful to Russia's long-term interests, to keep increasing the extraction and export of resources, to meet European demand: "Aren't there any plans to curtail the extraction of fossil fuels, given what the Russian economy needs to do in innovation?"—a reference to Putin's own emphasis on high-tech manufacturing, in his recent Federal Assembly message.

Putin replied: "I assure you, nobody is laying claim to our property, and we are not about to hand anything over to anybody.... Russia has been, is, and will be a reliable partner for our European colleagues. We have been building up, we are building up, and we shall continue to build up our capabilities in the energy field. And we shall take these resources onto world markets, including European markets. We shall be diversifying the markets where we sell our products. And that does not at all contradict our plans to change the composition of the Russian economy in the direction of innovation. What's more, we are interested in developing our relations with the EU in all areas, and we spoke frankly today about our belief, that if our European partners expect us to let them into the holy of holies of our economy, into the energy sector, ... then we expect reciprocal steps in the crucial, most important areas for our development."

Speaking May 18 in Strasbourg, where Russia assumed the rotating chairmanship of the Council of Europe for the first time, Foreign Minister Sergei Lavrov reportedly told Euro-Parliamentarians that the EU has too often based its stance towards Russia on "unfounded, partial, and unverified information," and "an imperial way of thinking." Minister of Industry and Energy Victor Khristenko, in a May 22 official letter to the EU, appealed for calm in the overly politicized" energy debate. Russian Special Envoy to the EU Sergei Yastrzhembsky said May 24, that Russia has no intention of ratifying the "Energy Charter," as demanded by the EU, this entailing agreement to relinquish Gazprom's total control of natural gas transport out of Russia.

Kremlin Consolidates Control Over Energy Sector

Vedomosti reported May 25 that President Putin has instructed officials to reclassify more of Russian fuel and resource deposits as "strategic," and therefore off-limits to foreign involvement beyond a certain level. The Natural Resources Ministry would present amendments to the Law on Subsoil Use, reducing by half the threshold size for a field to be considered "strategic"—50 million tons for oil and 500 billion cubic meters for gas. On May 25, the Financial Times of London reported that the same Ministry of Natural Resources plans to call for revision of concessions granted in the 1990s, which might be undercutting Russia's national interests. The Moscow Times spelled out on May 26, that at stake are the giant Sakhalin-1 and Sakhalin-2 projects, into which ExxonMobil has sunk $5 billion and a Royal Dutch/Shell-led consortium is investing $20 billion, respectively. The ministry acted on the basis of a report drafted in the Russian Academy of Natural Sciences, according to which, delays and poor performance by those investors has cost Russia $10 billion.

In this setting, the London Economist and the Wall Street Journal are among those calling for big investors to shun the IPO by Russia's state-owned Rosneft oil company, slated for July.

Putin: Cheney's Is Not the Only Game in Washington

Asked at the Russia-EU joint press conference in Sochi May 25 to comment on Dick Cheney's May 4 Vilnius speech, where the Vice President charged Russia with using its energy resources to blackmail its neighbors, President Putin replied with audible sarcasm, "I don't even know what to tell you in reply to the question you have posed. As far as relations with the United States go, this is one of our partners, and we value the development of relations with that country. I am sure that there are a sufficient number of political forces in the United States, who have the same attitude towards the development of relations with the Russian Federation." As for relations with other countries, Putin went on, "we mainly discuss those relations with the relevant countries directly." He added, "We see how the selfsame U.S.A. defends its interests. And we see the methods and means they use."

Chief of Staff: Missiles in Europe Threaten Russia

Russian Chief of the General Staff Gen. Yuri Baluyevsky commented May 24 about U.S. plans to deploy ballistic missiles in Eastern Europe, possibly in Poland and Romania. Baluyevsky said: "The very fact of the deployment of the first-line missile defenses in this region is unequivocally intended to neutralize Russia's strategic potential." He repeated promises of an "asymmetric response"—"asymmetric solutions, which give us grounds to say that our intercontinental ballistic missiles and their warheads will successfully penetrate both existing and nascent missile-defense systems that are being developed today and will be developed tomorrow and in the more distant future."

Moscow Seeks Collective Security Upgrade

On May 24 President Putin received Nikolai Bordyuzha, secretary general of the Collective Security Treaty Organization, to discuss the organization's upcoming summit, scheduled for June 23 in Minsk. CSTO members are Russia, Belarus, Armenia, Kazakstan, Kyrgyzstan, and Tajikistan. Bordyuzha then announced plans to develop a "universal international security system" for member states. This could include "joint emergency reaction forces" for natural disasters and other events, including outside of their immediate area (upon UN mandate). The defense ministries of Belarus and Russia are currently planning joint military maneuvers, Bordyuzha said.

Also intensifying are preparations for the June 15 Shanghai Cooperation Organization (SCO) summit, in Shanghai. At the first-ever SCO inter-parliamentary conference, held in Moscow the week of May 30, Russian State Duma Speaker Boris Gryzlov said that Russians do not want to see the U.S.A. promoting the formation of other, specialized alliances in central Eurasia, such as a mooted anti-drug trafficking organization; the SCO can handle that, said Gryzlov, and "a parallel organization of that kind would be a barrier to cooperation." On May 18, Gen. Yuri Baluyevsky said discussions are under way about possible joint military maneuvers of CSTO and SCO member countries.

GUAM Makes a Move; Crimea Anti-NATO Protests Grow

The leaders of Georgia, Ukraine, Azerbaijan, and Moldova, or "GUAM," met May 23 in Kiev and announced formation of a new Organization for Democracy and Economic Development. Georgia, Ukraine, and Moldova have indicated their intention to leave the Commonwealth of Independent States; Georgia and Ukraine seek to join NATO; Azerbaijan wants to remain in the CIS, while also joining the new organization. Thus the development was less than decisive as a diplomatic move, especially as the meeting took place in Ukraine—which, two months after parliamentary elections, still does not have a government.

Several eastern Ukraine city or regional legislatures have voted their areas "NATO-free zones." In the Crimean port city of Feodosia (Ukraine), thousands of people began demonstrating May 27 against the arrival of the U.S. naval transport ship USS Advantage. The rallies, initiated by Natalia Vitrenko's Progressive Socialist Party of Ukraine, and supported by Communist Party and Party of the Regions politicians, are aimed against the Sea Breeze-2006 Ukraine-NATO maneuvers in the Black Sea, for which rally organizers say the Advantage carried materiel. Russian state television played up the ship's visit as "unsanctioned" and reported that U.S. forces were unable to reach the pier to unload the containers, due to the large number of protesters.

GM, VW Set Up Shop in Russia

General Motors CEO John Wagoner is expected in Moscow in mid-June to announce construction of a Chevrolet assembly plant in Russia. Similar plans for an assembly and parts facility, in the city of Kaluga, have been confirmed by Volkswagen. A number of Russian commentaries about these deals, express concern that Russia is being exploited as a source of cheap labor. Under the headline "General Motors hides from bankruptcy in Shushary" (the St. Petersburg industrial area announced for the GM assembly plant), Rosbalt news agency on June 1 ran a commentary that said, "Market analysts and experts are unanimous in their opinion, that GM is not really going to build a new factory in St. Petersburg, but will simply be shifting facilities here from European countries, where the company has been cutting back production and laying off workers." Rosbalt noted that GM plans to close 12 factories around the world, laying off 30,000 people. The St. Petersburg government granted GM substantial tax breaks—total exemption from the property tax and a reduction of the tax on profit—in order to attract the plant.

Russia's ability to build up its own auto industry was crippled in the mid-1990s, when the Ordzhonikidze machine-tool plant in Moscow, the USSR's only manufacturer of integrated auto assembly lines, once it was privatized, was taken over by interests who stripped out the machine tools and rented used the floor space as a warehouse.

Russian Steel Industry Enters Global Takeover Game

Arcelor, the world's second-largest steelmaker, announced May 26 its agreement with Alexei Mordashov to take over his Severstal company, in return for 38% of Arcelor. The combination would make Arcelor the world's biggest, blocking London-based billionaire Lakshmi Mittal's hostile takeover bid. (Like Mittal, Severstal owns a steel plant in the U.S.—River Rouge in Detroit. Unlike Mittal, Mordashov has not shut down production there, but is operating it profitably.) The stock swap, giving a foreign company co-ownership of one of Russia's largest industrial companies, is no small matter for Moscow. Only the TNK-BP oil merger, several years ago, was on a similar scale. Russian media report that Mordashov met privately with President Putin last week, indicating Kremlin approval of the latest move. Arcelor and Mittal clashed in 2004-2005 over control of Kryvorizhstal, the steel giant in Ukraine, which Orange Revolution leaders ultimately handed to Mittal for cash.

Roman Abramovich, a major Russian financial oligarch, may invest $3 billion into Yevrazholding, a major Russian steel industry group that has been a rival of Severstal. The Financial Times of London suggested that this development could lead to the reopening of partnership talks between Yevrazholding and an Anglo-Dutch steel company called the Corus Group. The FT stressed Russian President Putin's personal role in approving, and even coordinating these moves, noting the Kremlin's evident desire to consolidate a powerful "national holding" in steel. Abramovich's ties with the Kremlin are no secret; he avoided the fate of his ex-partner, Boris Berezovsky (self-imposed exile in London to avoid indictment), by selling his majority ownership stake in Sibneft Oil to state-controlled Gazprom, and his aluminum holdings to the Kremlin-favored oligarch Oleg Deripaska, while remaining Governor of Chukotka and managing his $18.6 billion fortune out his London-chartered Millhouse Capital.

Other Soviet-era facilities, reportedly targeted by Yevrazholding for merger into a steel mega-conglomerate, are the plants at Magnitogorsk and Novolipetsk. Also included could be iron mines owned by Alisher Usmanov, a Corus shareholder. If all these mergers materialize, the Acelor-Severstal and the Yevrazholding-Corus groups could become the top two steel producers in the world.

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