As leaders of the old G7 club of industrial democracies prepare for top-level discussions on energy at the G8 summit in St Petersburg, they are uncomfortably aware that the humiliated Russian eagle they invited into their nest as a gesture of encouragement a few years ago has developed a sharper beak and stronger talons than anyone could have imagined.
Under President Vladimir Putin, a combination of steely political will and sky-high oil prices have transformed Russia into a more centralised, self-confident and focused nation state, albeit still vast and multiethnic. National interest, not ideology, is the new leitmotiv. Greater democracy, at least in a form recognisable as such by the old G7, is no longer on the agenda. Neither, apparently, is it widely desired, judging by the solid domestic support for Putin from a largely passive electorate used to the smack of strong government, lulled by a controlled electronic media and enjoying the fruits of a rapidly emerging consumer society. Dissident voices are either suppressed, barely tolerated—or ignored.
The goal set by Putin at the start of the year was not to make Russia a democracy but what he calls an energy "super derzhava" (superpower). Putin wants the G8 summit to mark acceptance of this rebranding of Russia. Traditional G7 members, led by the US, who wanted Russia's acceptance of the existing democratic rules, are not happy. Moscow's conditional support for the latest US and EU-led proposals to persuade Iran to limit its nuclear ambitions, and moves to curb the influence of the more hardline nationalist "siloviki" domestically, were calculated to improve what is still likely to be a tense atmosphere at the summit.
Europe woke up to the new power of Russia at the new year when Gazprom turned off the gas taps to Ukraine and Moldova. But the US has been looking on the more self-assertive Russia with misgivings for some time. Vice-president Dick Cheney was among the architects of President Reagan's tough line against the Soviet "evil empire." For Cheney, Putin's steady dismantling of democratic and media freedoms looks like a return to the past. But there is also frustration at the tighter restrictions Russia is now placing on investment by US and other energy companies.
As an oilman, Cheney is well aware that this is part of a global shift in favour of energy and resource producers after decades when commodity surpluses favoured consumers. But Russia used to be one of the more open environments for foreign investors in energy resources. Not any more. Earlier in the decade, BP could still form a 50-50 joint venture with Russia's TNK to squeeze more oil out of depleted Soviet oilfields in western Siberia. Complex production sharing agreements were concluded with Shell, Exxon and other foreign companies to develop new oil and gas deposits on an offshore island in the Russian far east.
A series of high-profile developments in recent years have radically changed the situation, starting with the jailing of Mikhail Khodorkovsky and confiscation of the main Yukos oil company assets. In the process, Gazprom and Rosneft have been transformed into national oil and gas champions. They may end up as bloated, superficially modernised versions of the old wasteful Soviet oil and gas ministries. But they may not. Gazprom, and Rosneft too if its upcoming London IPO is successful, may be state-directed, but they are not fully state-owned monopolies. Both have foreign minority shareholders willing to pay good money for what they hope will be profitable energy companies which reward all shareholders reasonably, even though as minority owners they have little control over the way the companies are managed.
In its way, the Rosneft IPO is a classic example of KGB-style cynicism. In Soviet days the rules were made so that everybody was guilty of something. By investing in a Rosneft made up largely of assets expropriated from Mikhail Khodorkovsky's Yukos, the new foreign owners become effectively co-conspirators in the heist of the century.
The Kremlin has also been busily forging closer ties with the energy-rich, but still politically semi-dependent, former Soviet central Asian states and is looking for new partners in the east. The emergence of big new players such as China and India has opened up new markets and created potential new, less demanding investors in energy projects. This gives Russia a much stronger bargaining position, especially with traditional European consumers of Russian gas.
Up to now, oil and gas pipelines have pointed west. Earlier this year Putin put his weight behind a 4,100km pipeline to carry oil from new fields in eastern Siberia to China and Japan, and promised to supply China with up to 60m tonnes of oil a year within a decade. He personally dictated a change in the route to avoid the risk of polluting Siberia's Lake Baikal—pleasing environmentalists and humiliating the head of Transneft, the oil pipeline monopoly at the same time. His gesture reminded everybody that the Kremlin, not the industry bosses, was in charge.
The question the old G7 leaders would like Russia to focus on at St Petersburg is whether Russia's aims are best achieved by a more open, democratic system and market-based investment decisions, or by a centralised, authoritarian system controlling an energy policy aimed at achieving wider geopolitical objectives. Putin clearly believes in the latter approach, confirmed by the new year cut-off in gas supplies as well as extremely tough bargaining around a series of major new projects.
Russia still needs the technology and organisational skills of the big international companies and the marketing skills to help its oil and gas exporters break into new markets. But Russian negotiators are becoming more ruthless in playing one company off against another. They know that the traditional oil companies badly need to top up their reserves and want to diversify out of the middle east. In return, Russian negotiators increasingly want a share in the international oil companies' existing projects and marketing operations outside Russia to speed up their own transformation from purely Russian into international companies. Gazprom in particular wants to become a fully integrated gas company—from gas field to final consumer thousands of kilometres away. This is the logic behind its interest in companies like Centrica, with over 11m industrial and retail customers and Britain's largest gas storage facility. At the same time, the Kremlin is restricting the potential development of existing foreign operations, or demanding a major stake in them for Russian companies. The oil companies keep doggedly negotiating.
Months of growing US administration irritation with all this showed recently when Cheney accused Russia of using "intimidation and blackmail." These words—spoken in Lithuania to an audience of leaders from nine former Soviet bloc countries—did not go down well in Moscow.
Putin is neither an ageing Brezhnev nor a shambolic Yeltsin. He is the kind of leader the Soviet Union needed but was unable to find. Sober above all, he is still relatively young but experienced after six years in office. He is disciplined, diligent, well informed and proud. He is not the type to be lectured to, especially by the US. Russia is now ruled by people for whom the chaotic transition years of the Yeltsin regime are seen as Russia's equivalent of the German Weimar republic. Restoring pride in Russia has been a key policy aim of the Putin years and the soaring oil price has greatly reduced the time needed to recover self-confidence. Oil and gas pipelines, trade and investment have replaced ideology and military force as the instruments of policy.
Seen from the Kremlin, the US, despite its huge military and powerful economy, is suffering from the kind of imperial overreach which once afflicted the Soviet Union. Russia learnt the hard way that "soft power"—including economic power—is more effective than too much reliance on military hardware, even if wielded brutally on occasions.
Russia is piling up billions of dollars from its oil-induced trade surplus into its reserves, while the US grapples with its growing deficits and rising imported energy dependence. In his latest address to the nation in May, Putin pledged to modernise the armed forces but also to raise social spending and tackle the alarming decline in population. In an ironic reference to what he called "comrade Wolf," he said it was now the US which spent 25 times more on defence than Russia and accused it of hypocritically advocating democracy and human rights while ruthlessly pursuing its own national interests.
The exchange of cold war rhetoric ended there, and Russia's new-found oil wealth still masks huge underlying social and economic problems inherited from 75 years of Soviet rule and isolation. But, as Lilia Shevtsova, a perceptive Russian academic, observed, "the model in which Russia imitates democracy, and the west responds by imitating partnership, is over."
This brings the former G7 members back to the old question of how to deal with a Russia which is too big, powerful and different to be fully integrated into Europe. Five years ago there was still hope that Russia would "become more like us." Now its growing importance as an energy supplier to Europe, as a transit route for oil and gas from the Caspian and central Asia and as a major future supplier of liquified natural gas and oil to Asia and the US, gives it a clout it never had when the Soviet Union was a military superpower but economic pygmy. The forthcoming G8 summit will make this clear. But it is unlikely to illuminate what to do about it.
