Werewolves and the price of Urals crude

Update (10/5/08): Check out pictures of production underway in Russia on a movie version of “Generation P.”

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I first read Victor Pelevin for a modern Russian literature class my senior year of college.  I wrote a paper on his “Homo Zapians” (”Generation P,” for the Russian version), calling the book “a post-modern pastiche of Western consumerism interacting with remnants of the ‘Soviet mentality.’” (Excuse the verbosity–I was stretching my comp-lit synapses after having just finishing my 200-page “Gazprom and the Russian State” thesis.)

Pelevin describes a “phantasmagoric and surreal exposition on the intersection of post-Soviet and Western culture within late 1990s Russia” where the protagonist evolves from a translator to an advertising copywriter and eventually, drawing upon Pelevin’s connection to eastern mysticism, to the figurative husband of the Sumerian goddess Ishtar.

I concentrated on fitting this narrative into “a new iteration of the traditional ‘Russian question,’ which postulates on the location and natural tendencies of the Russian people and their nation.”

Saddled between two continents, Russia is continuously torn between Asian and European influences. Just as a distinctly Russian identity was crystallizing in the form of the Soviet man, the Western ideals of capitalism and commercialism came crashing in, reigniting the debate—if, indeed, it was ever truly silent.

One of the keys to understanding the boundary along this changing world is through embracing the individual evolution within oneself. To explore these transitions, Pelevin utilizes transformative processes on characters to elicit altered states. This metamorphosis is necessary as a “means of survival in a breathtakingly rapid and arbitrary succession of phantom realities.”

Pelevin’s new book, “The Sacred Book of the Werewolf,” is reviewed today in the New York Times by Liesl Schillinger.  While I haven’t yet read the book, it appears to re-visit this theme of transformation, with the heroine being a werefox/prostitute and the hero a werewolf/FSB agent.

What caught my attention from the review, and why I’m posting about it in this energy-themed blog, is a description of a meeting between FSB werewolves on the Siberian tundra:

He likes to rally with other F.S.B. werewolves in the frozen north, howling at a cow skull on a stake in hopes of necromantically summoning oil from the substrate into Mother Russia’s waiting pipelines. Watching this scene, seeing the cow’s skull, A Hu-Li [the heroine] is reminded of a grim Russian fairy tale about a slaughtered cow who takes pity on an orphan and sends the girl gold from the grave. Touched, A Hu-Li adds her own soulful lament to the cacophony: “We were all howling, with our faces turned to the moon, howling and weeping for ourselves and for our impossible country, for our pitiful life, stupid death and sacred $100 a barrel.” In response to her emotion (she thinks), oil comes burbling up the stake. Shurik laughs at her sentimentality. “It’s my job to get the oil flowing,” he scoffs. “And for that, the skull has to cry.”

Anyway, a bit of a break from the usual themes. I recently finished reading “Watchmen,” (also off-topic) and am also currently reading Steve Levine’s “The Oil and the Glory” — which is very much on topic.  I recommend both.

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Gas talks on hold

In the US, John McCain is suspending his campaign to address the country’s distressful economic situation.  In Ukraine, Yulia Tymoshenko has suspended key natural gas price negotiations due to the country’s distressful political situation.

From Monday’s Kommersant:

On Friday Prime Minister Yulia Tymoshenko communicated that negotiations with Russia on the price of gas in 2009 have been halted because of the political crises.  Naftogaz intends to use this pause to wait out for the December lowering of world hydrocarbon prices, which theoretically allows it to get gas at a more advantageous price.  Analysts figure that this expectation is not unfounded — if oil quotes, to which gas prices are connected, will continue to drop, than the cost of gas could end up being lower by 25%.  But if the pricing market isn’t favourable, it threatens to be a significant loss.

The head of the government, Tymoshenko, announced to journalists that because of the political instability in Ukraine, negotiations with Russia on the supply of natural gas have stopped for the time being.  “Without question, when there is an uncertain situation in Parliament, an uncertain situation with the coalition, holding negotiations doesn’t work out [не получается],” noted Tymoshenko.  A highly-placed source in Gazprom confirmed to Kommersant that the Ukrainian side has for the time being halted consultation on the price of gas.  “Next week representatives of Naftogaz were supposed to arrive to reach agreement on the pricing fromula and concrete points in the agreement.  But the visit was put off for an unspecified amount of time without explanation,” said the source.

Oleg Dubina, the head of Naftogaz, explained the delaying of negotiations not as political, but with completely comercial justifications.  According to him, the later that a contract is reached, the less the price of gas for Ukraine could be.  Based on the price-setting formula that Gazprom uses, the price of gas is connected to the price o oil, which gets lower as we approach December, asserted Dubina on Friday.  Correspondingly, gas for Ukraine also would become cheaper.  Therefore, Naftogaz figures that “it’s not worth it to rush into signing [an agreement].”

Should give Naftogaz a bit more time to try to secure another loan to buy the fuel it needs for the upcoming heating season.

There’s more to it than just relying on this “December price drop”…

More seeps out on Vanco’s partners

Update (9/21/08): A bit more on Khmelnitsky, the alleged figure behind Integrum, is appended below.

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A very intriguing article in today’s Eurasia Daily Monitor by Myroslav Demydenko digs into possible organized crime connections to one of the investors in the Vanco-led Black Sea oil and gas project.

Through an offshore subsidiary, the US-based Vanco makes up about 1/4 of the joint venture established to run the development of the 13,000 square km offshore tract.  The other partners were revealed to be the Rinat Akhmetov-owned DTEK, the anonymous Austrian investment firm Integrum Technologies (more on them later), and Shadow Light Investments, owned by Evgeny Novitsky–who, according to Demydenko’s article, has connections to a Russian mafia outfit:

According to a number of reports in the press and the book Darkness at Dawn-The Rise of the Russian Criminal State by David Satter (Yale University Press, September 2004), Evgeny Novitsky is alleged to be a member of, or very close to, Russia’s Solntsevo organized crime gang.

Satter wrote that Solntsevo had close ties to a Russian company called Sistema [I would classify being “director” as having “close ties”], which is linked to Moscow Mayor Yuriy Luzhkov and to the IVK, the information technology company, of which Novitsky was director. Solntsevo, working through the company SV-Holdings, eventually came to own a large share of IVK.

… Kommersant wrote on July 22, 1997, that an unnamed official of the FBI had revealed the names of three individuals suspected of being “shadow bankers” for the Solntsevo mob, one of whom was Evgeny Novitsky.

There are more connections and citations listed by Demydenko to reiterate Novitsky’s supposed connections to the mob, including tantalizing references to infamous gangster Semyon Mogilevich, who some claim is in deep with RosUkrEnergo.

As for Integrum:

Integrum Technologies has refused to disclose its main investors, and Vanco executives have admitted on a number of occasions that they do not know the identities of the owners of Integrum…Evidence suggests, however, that Kyiv Investment Group, a company owned by Ukrainian oligarch Vasyl Khmelnytsky, is one of the hidden partners of Integrum.

Update (9/21/08): Khmelnitsky is a former Tymoshenko supporter who has since switched over to the Party of Regions.  However, their separation was reportedly relatively amicable and without scandal.  Khmelnitsky’s main investments are within the Kyiv property sector.

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Meanwhile, the Cabinet of Ministers passed a resolution to divide up another large Black Sea shelf plot into 33 smaller sections, rather than license it off as one large structure.  OMV had reportedly early expressed interest in the project, but it’s unclear how this–and the ongoing scandal surrounding Vanco–could affect their viewpoint…

Gas and Politics

So it seems that I have left Kyiv just as things are getting interesting.

My Fulbright scholarship ended this summer and I have moved to Washington DC to begin working in the energy consulting field. Events in Ukraine’s energy and political fields continue to draw my attention, though, and I hope to keep this blog updated—certainly more frequently than I have for the past month.

Perhaps the key issue in the energy sphere now is how the deepening political crisis will affect the ongoing talks between Naftogaz and Gazprom concerning the price of imported natural gas for Ukraine. Last year’s negotiations happened between the transition of the Party of Regions-led Rada and the tenuous Democratic Coalition (headlined by Tymoshenko at PM). PoR deputy Yuri Boyko negotiated the deal in October 2007, but Tymoshenko immediately voiced objections and began pulling strings to put her own stamp on the agreement. That led to rounds of protracted and contentious negotiations that lasted well into 2008 before a key deal was signed in mid-March. Until then, in an unstable and imperfect arrangement, gas was being supplied to Ukraine without a contract.

Negotiations for next year’s contract began months ago, tied in with Tymoshenko’s goal for a long-term deal with Gazprom. While a multi-year contract is unlikely at this point, progress is continuing on next year’s deal. This big question is the price charged to Ukraine, guaranteed to rise from the current $179.50 per thousand cubic meters (mcm). Predictions run from $250-450, and they tend to be connected to various “concessions” granted to Russia, running from the status of the Russian Black Sea Fleet in Crimea to maneuvers for Ukraine’s 2009/10 presidential elections.

The fracturing political landscape affects the mandates of the various actors involved. As I mentioned, last year’s deal was principally negotiated by Boyko, who was then the Minister of Fuel and Energy. This year’s negotiations have mainly been conducted by Oleg Dubina, the head of Naftogaz, a position beneath the ministerial level. Both positions, though, ultimately report to the Prime Minister, Tymoshenko.

She herself has gotten involved in the negotiations, and one of the issues raised is how she accepts directives passed on to her from the president. Yushchenko has traditionally given the Ukrainian negotiators instructions for their meetings with the Russian side, but as he and Tymoshenko continue their drift apart, it seems more and more unlikely that the two will be able to cooperate. They had already bickered about this issue last winter, with Tymoshenko proudly proclaiming that she had talked with the Russian delegation “without directives,” only to be confronted with the list of instructions passed to her from the President after it was posted on the Presidential Secretariat’s website.

Yushchenko himself is not a good negotiator for natural gas deals. His former nickname within Gazprom upper management was reportedly “The Artist” because of his finicky and aloof manner. During meetings following the Orange Revolution he gave no indication of understanding the complexities of the gas business, and did not appear to be too invested in the outcome.

Since then, Yushchenko has taken the task more seriously for a variety of reasons.

• He witnessed the effect of unpopular deals after outrage at the 2005 agreement helped contribute to the split of the Orange Coalition.
• He recognizes the boost in popularity gas deals can bring to the figures involved, and seeks to capitalize it—or at least prevent Tymoshenko from solely benefiting from it.
• He resists ceding any more authority to the Prime Minister, using his directives to emphasize the political pecking order he is trying to maintain.
• He respects the economic impact of gas deals and, drawing on his background as a successful economist, positions himself as more in touch with the realities of the financial ramifications. (This economic experience is generally contrasted with Tymoshenko’s aggressive social spending plans.)

The two sides have both asserted that they will be able to present a unified front in the ongoing negotiations, and keeping the talks at company-level (i.e., between Dubina of Naftogaz and Alexei Miller of Gazprom, rather than Tymoshenko and Putin or even Yushchenko and Medvedev) should theoretically help keep the political fallout at arms length.

In reality, there is no way to completely divorce the maneuvering of Ukraine’s politicians with the natural gas negotiations, and every twist and turn will be used as “proof” of Tymoshenko’s alleged deal with Putin or Yushchenko’s rumored affinity to RosUkrEnergo. Politics has been deeply intermingled in Ukraine’s natural gas relations with Russia and Central Asia since the breakup of the Soviet Union, and it is unlikely to cease being so at this point.

As a footnote, I expect the price to be between $300 and $350 per mcm, though this is of course speculation at this point. A lot depends on how the costs are derived, as I explained in an earlier post.

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Also worth mentioning is that Ukraine’s main stock market, the PFTS, has declined over 60% since January 1st, 2008, making it the worst performing stock market in the world. The PFTS performed extremely well last year, perhaps leading traders to feel that it was over valued at the start of 2008. Unhealthily high inflation, poor regional financial performance, geopolitical worries exacerbated by the Georgian conflict, and the upswing in domestic political instability have all contributed to the decline.