TNK-BP spy arrest allegedly connected to Ukraine’s gas negotiations

Recent espionage intrigue at TNK-BP may relate to the Russia-Ukraine gas negotiations (what else?), rather than tensions between London and Moscow – From lenta.ru

Last month two Russian brothers, Ilya and Alexander Zaslavsky, were arrested and charged with industrial espionage, allegedly passing on strategic energy-sector secrets to a foreign entity.

Ilya worked for TNK-BP, whose Moscow offices were raided in connection to the charges. Alexander was a leading member of the British Councils alumni club in Moscow. Both had attended Oxford and hold dual US-Russian citizenship.

BP’s representation in Russia was simultaneously hit with alleged immigration violations forcing the company to suspend about 150 employees.

These actions come in the midst of TNK-BP and Gazprom finalizing a deal that would cede control over the giant Kovykta gas field to Gazprom, the end result of months of pressure on the project being headed by the joint Russian-British venture.

The combination of these circumstances led many observers to assert that the Kremlin has begun to crack down on TNK-BP, particularly the company’s foreign representation. Rumors of TNK-BP’s eventual take-over by the state-owned firms Rosneft (unlikely) or Gazprom (more likely) have been spinning for at least a year, though they have usually concentrated on the Russian TNK side of the company selling out. The new pressure on the British side of the venture has been taken as evidence of a further degredation of Russia’s oil and gas investment climate for foreigners.

The moves against BP also contribute the current upswing of tensions between England and Russia, in particular stemming from the unresolved poisoning of Aleksandr Litvinenko.

However, a newspaper article published last week suggests that the arrests of the two brothers is unrelated to British-Russian intrigue. Instead, the espionage allegations are being connected to the recent negotiations between Gazprom and Ukraine over the supply of natural gas.

According to the Russian paper Tvoy Den (Your Day), which was quoting information from sources within Russia’s special forces, “the Zaslavsky brothers were arrested for attempting to sell a secret supplement to the Energy Strategy of Russia through 2020, in which the development plan of Gazprom was detailed.”

The information was passed to Ukrainian hands right before gas negotiations during Yushchenko’s visit to Moscow on February 12th.

During the talks, the Russian negotiating side was surprised at some of the confidential information that the Ukrainians were using in their bargaining. As a result, suspicion of a mole arose and led to the investigation that fingered the Zaslavsky brothers.

In the meantime, the insider information has proven beneficial to the Ukrainian negotiating stance:

According to TD’s source, it was the possession of Gazprom’s plans that allowed the Ukrainian PM Yulia Tymoshenko to puff up the gas scandal with Russia and for some time successfully boycott the agreement of the Russian and Ukrainian presidents on the fulfillment of Ukrainian debts and terms of the delivery and transit of Russian gas.

This assertion has led to headlines the like of which proclaim that “Tymoshenko was victorious over Gazprom thanks to spies from TNK-BP.” I have yet to see any English-language coverage, though.

There are more than a few issues raised by Tvoy Den’s article which I will delve into later — I just wanted to get this info out there for now.

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Polar expedition follow-up

President Putin praised the Russian polar expedition as it returned to Moscow yesterday having succeeded in both collecting scientific samples and symbolically placing a Russian flag and other memorabilia on the ocean floor, a mission steeped in geopolitical maneuvering that I wrote about last week.

The Washington Post has an article touching on effect the expedition has on other nations attempting to lay claim to territory around the North Pole — and the resources that are becoming more accessible there. Russia’s actions have caused increased posturing from Canadian politicians seeking to bolster the country’s northern presence:

In the view of opposition leader Jack Layton, head of the New Democratic Party, the government has responded with little more than rhetoric to threats to Canadian sovereignty in its frozen backyard. “Canada must move quickly and make immediate, strategic investments in its Arctic,” Layton said Sunday.

True enough, the Kremlin-backed polar expedition has “generated a new source of international tension, seemingly out of the blue,” which is ironic since the vast majority of previous polar scientific missions had been accomplished with key international cooperation.

An email from Kathy Crane of the NOAA in today’s Johnson’s Russia List highlights some of the key past and future examples of cooperation between Russian and Western researchers.

What caught my attention was the tendency of the media to pit one country against another. This reality is different.

During the International Polar Year, many nations will be working together in the Arctic. A notable program will be RUSALCA 2008 (Russian-American Longterm Census of the Arctic) where scientists from many Russian institutions and agencies will join with scientists from many U.S. institutions and agencies to carry out exploration and monitoring of Climate Change in the waters shared by our two countries. There are also plans to incorporate the participation of China, Korea and Canada into a larger program.

It is clear that our future as an Arctic nation lies in collaboration with our neighbors, not in extreme nationalism, for no man lives alone on this planet.

She also notes how the planting of a nation’s flag on the bottom of the ocean floor is a rather meaningless gesture:

Flags have been planted all over the Arctic seafloor… It seems to be something that people like to do…. like climbing Mt. Everest.

For example, one multinational expedition to the Canada Basin in 2002 (partly NOAA funded) left behind the flags of Canada, U.S. China and Japan.. also in international waters. If Russia had been with us on the ship, we would have put that flag down as well.

And while she praises the technical accomplishments of the expedition, she goes on to say that the actual sampling that was accomplished will not be sufficient to back up a Russian claim of territorial continuity:

All marine geologists and international law specialists know that just visiting the seafloor in one small location will not provide enough information to actually go out and claim the territory. The MIRs are actually great submersibles, and provide platforms for a multitude of ocean floor experiments. However, the information needed for an UNCLOS submission, requires seismic exploration to determine the nature of the subjacent crust, the sediment thickness, in addition to high resolution bathymetric data. This information cannot be obtained during a submersible dive.

Pavel Baev at the EDM goes into more of the repercussions of the trip in terms of the oil and gas resources up for grabs, emphasizing Russia’s current lack of investment into hydrocarbon development, and its preference to sit on the major resources it controls:

The hidden feature that might prove to be the most significant in this context is Russia’s proven — but still astounding lack of interest in developing — natural resources. The super-monopoly Gazprom is the main culprit behind this phenomenon, and it has recently announced a reduction of its investment program for 2007-2008, first of all in the new projects such as the Shtokman gas field in the Barents Sea (Nezavisimaya gazeta, July 24).

This reticence for major investment (very likely stemming from the rather large debts that both Gazprom and Rosneft are facing — an issue I hope to write about soon), combined with a lack of technical ability for undertaking any sort of development in the harsh polar conditions suggests that even if Russia gained control of the region, any extraction of the resources there is a long ways off (and could likely be undertaken by outside firms on the Kremlin’s terms).

On the lighter side of the issue, the JRL has an article from the Moscow Times on the “Top 10 Reasons to go to the North Pole if you are a Russian Leader.” Number 10 touches on the point above:

10) If you don’t have the technology to exploit the Shtokman deposits, claiming another large, ice-bound hydrocarbon source will help you learn.

A couple are pretty funny, in an ironic it-could-almost-actually-happen, way:

8 ) If the Russians do not claim the North Pole, Hugo Chavez might beat them to it.

…

2) Russia’s leaders are determined to diversify the Russian economy and build an information society. Increasing the country’s supply of natural resources is the first step in this process.

One last note–receiving far less press is a recent British-led expedition to the North Pole which should also be commended for its technological achievements. The popular British automotive show “Top Gear” had an episode featuring a race between a dog-sled and a tricked out Toyota pickup to get to the North Pole. In the process, the Brits became the first people to ever drive to the North Pole. Luckily, they went to the magnetic pole, rather than the pole based on the rotational axis of the Earth, thus not interfering with the Russian expedition. Had they met there, it almost certainly would have led to a further deepening of the current Russian-British spat.

Russia’s polar quest

Russian ships, including an atomic icebreaker and a research vessel, have reached the North Pole and are in the preparing to drop two mini subs over 13,000 feet to place a capsule holding a Russian flag on the ocean bottom at the pole. The expedition is led by the Russian explorer and politician Artur Chilingarov, and ties in some scientific goals with the larger aim of solidifying Russia’s claim on a vast stretch of undersea territory stretching from the country’s northern borders up to the North Pole. Estimates have placed up to 10 billion tons of oil and gas reserves in the 460,000 square mile area of ocean shelf.

Chilingarov emphasized the expedition’s role in securing Russia’s territorial claim to this region, an assertion based on the idea that the Lomonosov Ridge–a thousand mile underwater mountain range that crosses the polar region–is an extension of Russia’s continental shelf:

“The Arctic is Russian…We must prove the North Pole is an extension of the Russian coastal shelf.”

Some of the scientific activities of the trip are focused on finding evidence to back that claim up. However, the dropping of the capsule-encased flag is more of a symbolic gesture. Sergei Balyasnikov, the spokesman for the Russian scientific institute coordinating the expedition, beamed about the accomplishments:

“For the first time in history people will go down to the sea bed under the North Pole,” Balyasnikov told The Associated Press. “It’s like putting [a] flag on the moon.”

Such a statement emphasizes the third motivation (besides scientific research and securing mineral rights) behind this expedition–renewed nationalism, particularly in the face of potential competition for the rights from the West. Denmark asserts that the shelf is an extension from Greenland, and as such should be considered Danish territory. Canada is in the process of beefing up its arctic presence with aims at acquiring extended territorial rights. The US is also considering adding to its icebreaker fleet, increasing its ability to project into the Arctic Ocean.

All of this is becoming more of an issue now, given that global warming (or natural temperature fluctuations, if global warming isn’t your thing) has caused ice floes to recede, increasing access to the region–and the region’s natural resources.

Russia already controls the rights to the giant Shtokman gas field in the Barents Sea, and has recently reached an agreement with the French firm Total to assist in extracting the natural gas from the difficult arctic environment. However, recent Gazprom statements have suggested that even this partnership will not be enough, and the company may soon add another international investor to the project.

Despite the difficulties involved in running an arctic, off-shore project, Gazprom is excited about the expedition and the promise of “major new discoveries,” according to company spokesman Sergei Kupriyanov. Gazprom lacks the technology or capital necessary to develop any of these potential oil or gas deposits it expects to find, but that isn’t the point. Having control of the reserves is much more important at this point than actually extracting them, because access to large deposits is the one thing the international energy firms lack, and the single largest bargaining chip Russia can play when negotiating over foreign investment.

That has already played out to a certain extent with the negotiations over access to the Shtokman field, with Total agreeing to a shared ownership in the subsidiary that will run the extraction, which does not grant them assurances on the reserves themselves. This is a departure from deals in the past, where the international firms typically banked on control over a portion of the deposit in order to guarantee a return on the investment being undertaken. This is a symptom of the global shift in power away from the established international oil companies (IOCs) and towards those firms–typically government-run–that have control over the resources. The expertise needed to extract the resources is a much more elastic good at this point than the resources themselves, especially as the IOCs begin falling over themselves to secure involvement with the next round of (challenging) oil and gas projects.

Given all that, any sort of resource extraction from the polar region now being explored is still decades away, and may in fact never become fully viable. This would especially be the case if no one lines up to partner with Gazprom (assuming it is granted the rights to the future off-shore projects–the other option would be Rosneft, but that is a story for another post) to develop these risky, expensive projects.

Recent news roundup

Ministers will block Gazprom move on UK (The Observer/Guardian)

The government has given its strongest indication yet that it would block an attempt by the Russian energy group Gazprom to take a significant stake in a UK energy company.

Putin puts policy bluntly to EU (The Chicago Tribune)

VOLZHSKY UTYOS, Russia — President Vladimir Putin, emboldened by Russia’s vast oil and natural gas wealth, bluntly rejected European criticism of his crackdown on political foes, saying Friday that “like it or not,” Russia’s Western neighbors would have to accept it as a partner.

“Both Russia and the EU are interested in the development of relations with each other, and they will develop whether we like it or not,” Putin said apparently referring to Europe’s growing reliance on Russian energy resources.

EU must see Putin is not a democrat (The Telegraph)

…As EU leaders met for the second day of a summit with Mr Putin in Samara, a city in the Urals, Mr Kasparov and 26 activists and western reporters were detained in Moscow after allegations that their tickets were forged meant they missed their flight.

…Members of the pro-Kremlin youth wing Nashi, dressed in white coats and presenting themselves as medical orderlies, handed out leaflets suggesting that Mr Kasparov was deranged.

After more than five hours – minutes after the last flight to Samara had departed – the group was released. A police official at the airport reportedly blamed a computer problem that meant Mr Kasparov and his companions could not be issued with a ticket.

Russia sues US bank; laundering case cited (New York Times)

The Federal Customs Service of Russia is seeking $22.5 billion in damages from the Bank of New York Company over accusations of money laundering in the 1990s.

The bank “committed violations of Russian law that resulted in damages of $22.5 billion to the state” from 1996 to 1999, Maxim Smal, a lawyer for the service, said by phone after filing the lawsuit in the Moscow Arbitration Court yesterday. Andrei Stukov, head of the Customs Service’s legal department, confirmed the amount of damages sought, via a spokeswoman.

Mr. Smal said the suit was “almost entirely based” on an investigation in the United States that ended in 2005 with the bank agreeing to pay $38 million to settle two criminal investigations and admitting it failed to report $7 billion in suspicious Russian transactions. The American investigation “uncovered very serious violations,” Mr. Smal said, but he declined to elaborate, saying more details will be revealed today at a news conference in Moscow.