BACKGROUND: “Friendly interaction and businesslike cooperation are the characteristic features of our relations with Turkmenistan,” Interfax quoted Russian President Vladimir Putin. He probably also referred to a security agreement with Turkmenistan signed on January 2, 2003, in Ashgabat. Geopolitical and economic repercussions of this “deal of the century”, however, are broader than its gargantuan size. The gas agreement is unprecedented, as it will generate over its lifetime $300 billion for Russia and $200 billion for Turkmenistan, according to Russian sources. Alexei Miller, the head of Gazprom, has announced that Russia is to buy 6 billion cubic meters in 2004, 10 billion in 2006, and up to 80-90 billion cubic meters a year in 2009. The two sides will have an option to renegotiate the price in 2007. Geopolitics and political psychology were key to clinching the agreement. Russia shrewdly played to Turkmenbashi’s insecurity and paranoia. In November 2002, many experts believe, Turkmenbashi staged a failed “coup” to justify a crackdown on the opposition. The plot led to the capture and incarceration of Boris Shikhmuradov, the former Foreign Minister, who was considered pro-Russian. The Turkmen leader, nevertheless, demanded and received a statement from Russia, announced by the Russian Security Council Secretary Vladimir Rushailo, that the coup was genuine, and, moreover, represented “an act of international terrorism.”

IMPLICATIONS: Talk is cheap; Russia, which had sheltered the Turkmen opposition, made a tactical retreat in January by making a statement to the press on the “coup”. It reaped the political and economic dividends in April, with the gas deal which will reverberate throughout Eurasia and beyond, for years to come. Russia will benefit from the contract in at least four different ways. Firstly, it will effectively be buying Turkmen gas at half price. This means one hundred percent profit before expenses, which is high by any standards. Second, the deal stimulates Russian economy by allowing Gazprom to continue selling gas in the domestic market at $21.5 for cubic meter, effectively providing Russian industry a subsidy of about $60 per each cubic meter of gas it consumes. Add to this a domestic oil price as cheap as $6-8 barrel, and the picture is clear. The Russian government is using its abundant energy reserves to subsidize its otherwise obsolescent industrial base. For key Russian manufacturers, which consume huge amounts of electric energy, such as the aluminum smelters, this subsidy is vital, as it keeps whole industries competitive. As Putin said, this is job creation all right. Third, by signing the agreement, Gazprom can much delay multi-billion dollar capital investments into the northern fields such as Yamal and Shtokman, while substituting Turkmen gas for its own production from high-cost Siberian fields. Finally, it additionally stimulates the economy and creates jobs by promoting imports of uncompetitive Russian goods to Turkmenistan. Geopolitical gains for Russia are equally impressive. The agreement puts the Kremlin in control of the transportation and marketing of Turkmen natural gas to Russia, the European Union, and Turkey. It practically kills off the idea a trans-Afghanistan pipeline from Turkmenistan to Pakistan, which the U.S. and Great Britain supported for a while. On December 27, 2002, Afghan President Hamid Karzai, Niyazov and Pakistani Prime Minister Zafarullah Khan Jamali signed an agreement to construct a 1,400 km, $2.5 billion pipeline from the Daultabad field to Pakistan. Without the large Indian market, however, such a pipeline is not viable. In spite of recent moves to soften tensions between Pakistan and India, a gas link from Pakistan to India is unlikely to emerge. Pakistan’s continued support for Kashmiri separatists has made the pipeline effectively unviable, while India is aiming to circumvent Pakistan through Iran. The Russian April coup-de-grace also left in the dust the gas pipeline project from Turkmenistan to Turkey via Azerbaijan and Georgia, supported by the oil major Royal Dutch/Shell and the U.S.-based construction giant Bechtel, which was sidetracked earlier by Turkmenbashi. Finally, Russia is effectively directing future sales of Iranian gas from the giant South Pars field to India, thus preventing Iran from becoming a major competitor in Turkey and Europe. This, however, may change if and when pipelines might be constructed to carry Iraqi, and possibly Iranian gas to Europe via Turkey and Greece.

CONCLUSIONS: The EU, already nervous because of dependency on Russian gas -- 36 percent of consumption in Western Europe, and over 50 percent in Central Europe – is likely to be doubly suspicious of continuous subsidization of the Russian industry. The EU will probably step up its opposition to Russian membership in WTO if the subsidization through artificially cheap energy prices is not resolved. The gas deal of the century signifies Russia’s coming of age as a key geo-economic player in the energy field, and a market leader in natural gas sales. By playing multi-dimensional chess of energy and geopolitics, and catering to Turkmenbashi’s paranoid proclivities, Russia positioned itself to become a market maker in natural gas – a position which can be only compared to that of the Kingdom of Saudi Arabia in the oil market.