U.S. And Russia: Friends Or Foes?

This is an interesting article...

Taken from www.kiplingerforecasts.com, Nov. 20, 2006
By Jim Ostroff

On the surface, it looks as if the U.S. and Russia are cozying up. After years of tough haggling, the White House has just blessed Russia's bid to join the World Trade Organization (WTO).

President Bush will also soon head to Congress with a request that lawmakers normalize trade relations with the former Soviet state. This largely symbolic move, recognizing Russia's emergence as a functioning market economy, is a prerequisite for the country's WTO membership.

Underneath, a new cold war is brewing—with a focus on energy, not ideology, as Russian policies on oil and natural gas heighten alarm in Washington and other Western capitals.

Moscow's drive to consolidate national control over its energy resources—and to use fuel exports as a foreign policy bludgeon—doesn't bode well for the energy price outlook. Russia seems to be taking its policy cues from the Organization of the Petroleum Exporting Countries: Buy our oil and natural gas on our terms, and respect our newfound global muscle, or we'll make life difficult for you. This approach is bound to cause increased tensions with the U.S., Europe and Japan.

The bottom line: Energy prices will trend higher than they might otherwise during the next dozen or so years, dashing the long-held hopes of the U.S. and western European nations that Russia would vie with Middle Eastern exporters for market share and exert downward pressure on energy costs.

Russian President Vladimir Putin is calling the shots in this high-stakes energy game. His willingness to halt natural gas deliveries to Ukraine and Georgia last winter was the most visible sign that Russia is using energy as a tool to further its political aims. Most recently, Moscow threatened to sharply increase the price of gas it ships to Georgia, just as the two countries are sparring over the future of South Ossetia, a breakaway province of Georgia that aligns itself with Russia.

Fuel cutoffs are warnings of worse to come for the former Soviet republics unless they stop getting too chummy with the West. Indeed, previous Kremlin threats to interrupt energy supplies have succeeded in bringing some former satellites back into Russia's orbit. For example, Uzbekistan gave a U.S. air base the heave-ho, while Kyrgyzstan and Tajikistan allowed Russian troops to reoccupy bases they had abandoned after the Soviet Union's collapse in 1991.

Russia's energy leverage will soon extend beyond its own backyard into western Europe and Asia. Germany has concluded a deal to obtain Russian natural gas via a Baltic Sea pipeline, while China will purchase crude supplies from across the border. These countries' leaders aren't blind to Russia's wanting to create a new sphere of influence, but few if any other countries can satisfy their ravenous energy appetites.

Russia has the world's largest natural gas reserves and the second-largest oil reserves after Saudi Arabia, and the Kremlin will exploit this to the hilt. "It's about reasserting geopolitical power. And, stripped of niceties, Russia is saying that if you want our energy, you're going to have to come to the Kremlin hat in hand, kiss the ring and open your wallet," says Tim Evans, an energy analyst at Citigroup Global Markets.

Congress will bristle at Moscow's fuel politics. It is by no means certain that lawmakers are going to fulfill Bush's request to normalize trade relations with Russia—particularly when Democrats assume control of both the House and the Senate. The Democrats played the trade card in the midterm elections, appealing to voters' concerns about the impact of market-opening moves on domestic jobs and salaries. As such, the Democrats will be in no mood to do favors for other countries seeking trade advantages.