Could Energy Resources Cause Russia to Spark a Naval War in the Caspian?

Could Energy Resources Cause Russia to Spark a Naval War in the Caspian?

In the past three decades the Islamic Republic of Iran has developed a well-earned sense of paranoia. First, in September 1980 Saddam Hussein invaded Iran in what he thought would be a quick military victory, but which quickly turned into an eight-year bloody slugfest, leaving an estimated 500,000-1,000,000 dead before the guns fell silent.

More recently Iran has been subjected to increasingly militant rhetoric from both Tel Aviv and Washington over its civilian nuclear energy program, with thinly veiled threats of possible military action if Tehran does not abandon its efforts, even though they are completely complaint under the terms of the Nuclear Non-Proliferation Treaty (NPT), which Iran has signed.

Now however, potential is brewing for Iran from an unexpected direction - the north.

Russia is sharply increasing its military presence in the Caspian. Russian Federation Navy Commander in Chief Admiral Vladimir Vysotskii has stated that Russia's Caspian Sea Flotilla will receive up to 16 new ships over the next decade, while some aviation units will be transferred to the Navy from the Russian military's southern operational-strategic command. What has really got to have the mullahs in Tehran fingering their worry beads however is Vysotskii's promise to provide the Caspian Sea Flotilla with Bastion shore-based missile systems armed with Yakhont hypersonic missiles, which are designed to destroy surface targets at distances of up to 200 miles.

Russia's Caspian Sea Flotilla flagship, the Tatarstan frigate, is already the most powerful vessel on the Caspian, armed with Uran missiles with a range of 100 miles. Later this year the Tatarstan will be joined by a sister ship, the Dagestan.

The Caspian Sea Flotilla is also taking delivery of the first in a series of new Project 21631 Buyan-M-class rocket-artillery ships, along with three amphibious assault ships.

The Iranian Navy has a total of approximately one hundred, mostly small combat and supports ships on the Caspian. They include three Iranian-made midget submarines (of a North Korean type that can transport a group of combat divers and have a range of 1,200 miles), an outdated Salman-class minesweeper (American-made), and patrol cutters.

Russian analysts believe that Iran however has the ability to increase its Caspian naval forces by 50 percent in short order by relocating craft from the Persian Gulf.

As for the other Caspian littoral states - Azerbaijan, Turkmenistan and Kazakhstan, their naval forces are negligible, to be polite.

So, why is Russia beefing up its naval presence?

The most likely reason is the one that has bedeviled the region for the last two decades - a final treaty delineating the ownership of the Caspian's offshore waters and seabed has yet to be signed. While Moscow and Tehran might agree about keeping the U.S. locked out of exploiting the Caspian's energy resources, worth an eye-watering $3 trillion, they remain at loggerheads over the issue of dividing the Caspian, with Russia insisting that each nation receive offshore waters in proportion to its coastline, while Iran insists that all five nations receive an equitable twenty percent apiece. Under the Russian definition Iran's share would be 11-13 percent.

Complicating the issue is that international law has yet to definitively designate whether the Caspian is an inland "sea" or a lake, an adjudication which has enormous implications for both the applicability of the 1982 U.N. Convention on the Law of the Sea and negotiation of the boundary demarcation regime affecting the littoral states' rights to significant undersea oil deposits.

Ironically, Iran has itself played the "gunboat diplomacy" card in the past. On 23 July 2001, an Iranian warship and two jets forced two Azeri research vessels, the Geofyzik -3 and the Alif Hajiyev, operating in what Azerbaijan calls the Alov oilfield on behalf of BP-Amoco, to leave the field where they were conducting surveys, which lies 60 miles north of Iranian waters. BP-Amoco immediately announced it would cease exploration activities and withdrew the research vessels. Azerbaijan denounced the move as a violation of its sovereignty and on 31 July charged that an Iranian reconnaissance aircraft had violated Azeri airspace and come within 90 miles of Baku. Ramping up the pressure, Iranian former Pasdaran Commander Mohsen Reza'i pointedly reminded Azerbaijan that the whole country had once been Iranian territory and that Iran might decide to take it back, even as the Iranian press speculated that the whole thing was a provocation cooked up by Azerbaijan who was scheming to bring about American intervention in the Caspian.

In the unlikely event that hawks in Washington ever considered, then or now, to fly the Stars and Stripes on the Caspian while taking a few potshots at the evil Russkies or the even more perfidious Axis of Evil mullahs, then geography seems to have thrown a spanner in the works, as the Caspian's sole exit point, the Volga-Don canal, is controlled by... Moscow.

What seems to be happening is that Russia has decided that gunboat diplomacy has its uses, and an upping of its naval presence in the Caspian might finally persuade Iran's obstinate mullahcracy that it's time to divvy up the Caspian pie according to Moscow's formula.

And, after all, 11-13 percent of $3 trillion is no small chunk of change, even to an OPEC member.

Source: http://oilprice.com/Energy/Energy-General/Could-Energy-Resources-Cause-Russia-to-Spark-a-Naval-War-in-the-Caspian.html

By. John Daly of http://oilprice.com

National Economic Trends

Russia Raises Privatization to Six Tln Rubles, Vedomosti Says

Russia is to increase the size of its privatization program to six trillion rubles ($211 billion) from 2012 to 2016, Vedomosti reported, citing unidentified people who attended a meeting between President Dmitry Medvedev and businessmen yesterday.

If approved, the new program will bring in revenue of 1.2 trillion rubles a year, according to one of the people cited by Vedomosti. The draft budget for 2012-2014 currently provides an annual income from privatization of 300 billion rubles, the newspaper added.

To contact the reporter on this story: Jason Corcoran at Jcorcoran13@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

The Privatization Plan: More Ambitious, but Further Away

http://www.bne.eu/dispatch_text16131

Alfa Bank

In response to President Medvedev's request to intensify the privatization process, the original list of 10 large companies to be privatized before 2015 may now be extended to 20 in total. The big news is that the cabinet is ready to fully exit 11 companies from the list. However, the deadline has been moved further back to 2017, and in some cases the state is willing to extract the present state functions from the privatized companies and/or maintain a golden share. The amended plan thus highlights the risk that the state is not ready to release its influence over the real sector.

The Facts
Privatization list extended: After the president's recent request to intensify the privatization process, the list of 10 companies approved in November 2010 could be extended by another 10, according to the media. While Inter RAO, Alrosa, United Shipbuilding Company and United Aircraft Company represent new entries, Svyazinvest, Zarubezhneft, Sheremetyevo, Aeroflot, Transneft and MRSK Holding had already been under consideration for quite some time.

State to fully exit from 11 companies: The new plan extends beyond previous plans, which contained only minority stakes for sale. At the same time, a number of counter-balancing amendments were also discussed, beginning with the deadline delay. Secondly, the state wishes to divide privatized assets in order to retain key responsibilities under the state's umbrella. Finally, for four companies on the list (see table) the state intends to maintain golden shares to control the companies' strategic decisions even after privatization.

Extension of the privatization list lacks implications for the budget: The privatization discussion still plays little role in financing budget needs. Privatization revenues are expected to stay at around RUB300bn per year in 2011-2014, only 20% of the next year's budget deficit of 2.7% of GDP under $93/bbl oil prices.

Our Take
Most of the new names are not really new: We believe the discussed amendments to the privatization plan are very long-term plays, especially given the deadline extension. Most of the new entries represent names that were considered previously but had not made it onto the original short list. The most notorious example is Svyazinvest, which has been subject to privatization rumors for the last 10-15 years. This suggests that the proposed enlargement of the privatization list is rather a technical response to Medvedev's request, at least for this time.

Golden share approach will reduce value: While the intention to exit 11 companies is big news, the deadline seems distant and the state does not wish to release its influence completely. Maintaining golden shares, i.e. the right to state intervention in the companies' strategic decisions, is creating huge uncertainties for the four companies considered. The idea to divide state assets in the agriculture sector means that a state agency may be created to replace the companies at least in part, thus reducing the value of the assets.

Implementation will depend on management interests: Our take on the recent changes is that the privatization plan creates risks that the state is willing to privatize companies without truly exiting supervision over the assets. In this case, we believe that privatization will proceed only in companies where management holds interest in the process. Sberbank seems the first and obvious candidate, while companies like Inter RAO and Aeroflot may follow. We are much less certain in the cases of the other names listed.

Natalia Orlova

Fitch reminds that the privatisation of CIS corporates might sometimes trigger negative rating actions

http://www.bne.eu/dispatch_text16131

July 11, 2011

News: Last week, Fitch released a commentary titled Privatisation of State- Owned Entities in Russia and Other CIS Countries May Have Negative Rating Impact. The rating agency reminded everyone that privatization might result in weaker state support and, consequently, negative rating revisions. Fitch preliminarily indicated that some 60% of rated state-owned companies could in theory be downgraded. At the same time, Fitch made a series of disclaimers explaining that reduced government participation might in many cases be rating-neutral (Gazprom is mentioned as one example).

OurView: Fitch's comments do not come as a surprise, nor do they suggest any imminent rating actions. Hence, they will likely be ignored by the CIS bond market. The report contains a useful table as a reminder of the rating approach used by Fitch for rated state-controlled corporates. Unfortunately, it does not cover financial institutions.

One important consideration omitted from Fitch's publication is that during the recent financial crisis, not only state-controlled corporates and banks from the region had access to financial aid provided by the state, but so did privatelyowned borrowers of critical size.

Mikhail Galkin

11 july 15:45

http://premier.gov.ru/eng/events/news/15867/

“We want to be appraised of every possible perspective. Even if at first glance they seem incompatible and diametrically opposed, I believe that we should be aware of all possible approaches to these issues. Only by holding a broad professional dialogue will we be able to find balanced solutions and eventually guarantee an effective programme of national development.”

Vladimir Putin's opening address:

Good afternoon,

We've gathered here today to discuss economic issues. But, as you know, there was a terrible tragedy yesterday – a cruise ship sank on the Volga River. These people were vacationing with their families and children. It is already clear that dozens lost their lives. I'd like to express our support for the victims and my most sincere condolences to the families of those who were lost. Let us now take a moment to pay tribute to their memory. (A minute of silence follows, everyone stands.) Thank you.

As I said, we've gathered here to discuss issues of national development. In attendance are members of the Russian Academy of Sciences' economics branch, prominent scholars, and representatives of the most diverse movements and schools of thought. We realise that the recent global economic crisis affected the agendas of many countries and seriously altered the course of world economic development. Today, we bear witness to gradual recovery in many countries and in the world's leading economies, but there are still many challenges we have yet to face. Some measures have been taken, but they are only stopgaps. Their inadequacy as a lasting solution is borne out by problems in the labour market and continuing financial trouble in some European economies. We see how difficult these issues are and the kinds of social effects they produce. People are extremely worried and far from ready to sacrifice their immediate interests in order to address medium-term, not to mention long-term problems.

We were beset with problems during the crisis as well. Needless to say, we also sustained losses in many industries, but we still managed to keep our economy afloat, maintain key social institutions, and, most importantly, preserve our development potential.

It is very important to scrutinise what happened in the world economy – to study the circumstances in which the crisis unfolded, find a cure, and draft measures to preventing such adverse developments in the future. We must make our national economies reliable and productive, and protect them against all kinds of negative factors, risks, and potential pitfalls. Practically every country in the world is now tackling these problems. Our government is no exception.

As you know, we've decided to implement the Strategy for Socio-Economic Development up to 2020. I'd like to emphasise that we will continue pursuing its primary objectives: to improve the living standard and guarantee dynamic economic advancement through the introduction of innovation.

This year, we expect our experts to draft specific proposals designed to help us achieve key goals in economic modernisation and the effectiveness of social services, government management, and budgetary spending. We must involve as many specialists in this work as possible. I'm referring to independent experts, representatives of the regions and of businesses, public associations, and, last but not least, academics. We want to be appraised of every possible perspective. Even if at first glance they seem incompatible and diametrically opposed, I believe that we should be aware of all possible approaches to these issues. Only by holding a broad professional dialogue will we be able to find balanced solutions and eventually guarantee an effective programme of national development.

Your vision is of particular importance because you are engaged in fundamental research. You have the opportunity to look beyond the immediate horizon and calculate all possible outcomes. Therefore, I'd like us not only to discuss current economic issues but also look at the medium-term and at more remote perspectives.

It goes without saying that such long-term forecasts can be a fruitless endeavour, but we can predict what will happen in individual industries based on the general trends of global markets and national economic development with a greater or lesser degree of accuracy. I'm referring to investments made in different spheres. Proceeding from how we manage specific industries, we can even look beyond the horizon of 20 years. I look forward to hearing such estimates today.

Let's also talk about budgetary policy and macroeconomics as a whole. Now, after the crisis, it is important for us to set our priorities straight and considerably enhance the return on government investment. In this context, we should exchange our opinions on the following issues: which industries have the strongest trends towards growth and which industries can become the engines of our economy.

Our next task is to ensure the expansion of balanced and stable development across our vast territory. We view all of our constituent entities with equal importance, but we understand very well that it is now critical to guarantee the dynamic development of Siberia and the Far East. The depopulation that has taken place there over the past few decades is a very dangerous trend, and we must do all we can to prevent it in the future. The relevant programmes and government commissions are in place, but they are strictly administrative and bureaucratic. We must study this issue more thoroughly and make comprehensive decisions on these territories. We must prevent all kinds of environmental, demographic, and social imbalances in this respect and correctly identify ways to build regional clusters and effectively use our natural resources.

Our manpower potential is closely linked with this issue. The multiplication of enterprises and the expansion of production will require a more active policy on the labour market. This boils down to the development of the so-called human factor and is consistent with the implementation of our plans in healthcare, education and culture, or, in brief, with new living standards in Russia.

I'd also like you to speak about integration. In the years since the collapse of the Soviet Union, we have merely been marking time. However, with the formation of the Customs Union and the Common Economic Space, economic integration in the post-Soviet space has now acquired a real outline.

This morning, I talked with our Ukrainian colleagues, and I spoke just now with the Ukrainian president. Our government experts are actively analysing their proposal for a "3+1" arrangement: that is, the three members of the Customs Union – Belarus, Russia, and Kazakhstan – plus Ukraine. We are still unable to say what decisions this joint effort may produce. Our experts are actively reviewing the Ukrainian proposals, and I hope that future progress along this track will be important and beneficial to all parties. I'd like to hear your opinions on this score as well.

That's everything I wanted to tell you before we begin.

* * *

Let's bring things to a close. In conclusion, I'd like to say that today we discussed some truly fundamental issues. The country's future will largely depend on how we address them – and that is no exaggeration.

To begin with, however, we must agree on our definitions. When talking about strategic planning, we are not at all referring to the Soviet-style economic planning of old. When speaking about excessive liberalism, we do not mean that we are against liberal values. Let's be frank: over the previous few years, our economic policy has been fairly liberal, and during the crisis we remained confident not only because of our accumulated reserves but because our economy had grown severalfold since the early 1990s.

After the collapse of the Soviet Union and what took place in the decade that followed, our economy did not diversify as rapidly and broadly as we would have hoped. But take, for instance, the changes in agriculture: before, one could hardly speak of Russian agriculture so much as of dying villages. Now we have become the world's third largest grain exporter and are close to ranking second. We've seen similar achievements in other areas as well. All this helped us to surmount the very peaks of the crisis with confidence but it does not mean that we can continue to rely successfully upon what we have done in the past. On the contrary, we must look at today's realities and prospects for the future and then elaborate the most effective regulatory methods possible.

First, I'd like to thank you all for today's discussion. Second, I'd like to ask you, Mr Glazyev, to make a brief report and you, Mr Fetisov, and your colleagues to draw up separate notes on regional policy, economic projects, and your proposals in that regard. Please, don't make them too long. Just get at the heart of the problem to which you would like to attract the attention of the government, making point-by-point notes on each issue. That will be more effective.

Mr Glazyev, you used to be a minister, and you know that every document requires a note or resolution to make it work. If the note is too general, it will tumble about endlessly in the bureaucratic corridors. But if we separate each point, the effect may be seen much more quickly.

Moreover, I hope that this is not our last discussion. After you have submitted your proposals, we will review them and decide on a format. Agreed?