The election crisis in Ukraine is a microcosm of the problems facing Russia itself. The geographical and political glue that cemented the Soviet Union as an empire of many nations from the 1850s until the 1990s is fracturing. Parts of the old Soviet bloc are falling away and being absorbed into the west, including the Baltic republics, Hungary and Poland. Resource-rich but still-Stalinist states, such as Turkmenistan, Uzbekistan and Kazakhstan are being courted by western investors. A few conflicts, as in Chechnya, have descended into civil war. There is a danger that more may do so.
Beware dozens of "Ulsters" waiting to boil over
Though we hear only about the worst, Russia has dozens of potential "Northern Irelands". Most are simmering with ethnic and political hatred, some with a seasoning of Islamic militancy. Even in picturesque Estonia, I have seen visceral hatred for the ethnic Russians who make up 30% of the population.
Similar resentment against the Russian minority was already stewing when I visited Uzbekistan and Kyrghyzstan in 1991, and has since spilled over into violence. The shadow of Stalin still falls long over many of these peoples who he moved like pieces around the desolate squares of the Soviet chess board. Chechens, Ingush, Kalmyks and many others were forced from their homes and into Siberia or the steppes of central Asia. Millions died, and many were unable to return until the 1960s, or as late as 1991 in the case of the Tatars and Volga Germans. As Nikita Khruschev observed in 1956, Stalin would have moved the Ukrainians too "only there were too many of them and there was no place to which to deport them."
The good old days?
Seeing the old Soviet Union nibbled away, many Russians hanker after the pride and firm rule of the old days. They feel humiliated by the West. Their outrage at the US calling the Ukraine election result "unacceptable" is understandable. How would Americans have reacted to Russian insistence on a re-run of the flawed Florida poll which led to George W. Bush’s election in 2000?
A dangerous groundswell of nationalism has muted opposition to the increasing authoritarianism of Russian President Vladimir Putin. Atrocities like the Chechen slaying of children in Beslan has provided the pretext for the crushing of embryonic democratic institutions. Putin has cracked down on the independent press, brushed aside commercial law in his assault on the largest Russian oil company, Yukos, and has grabbed more powers for himself. There has even been a little Cold War sabre-rattling. Just a few weeks ago, Putin announced that Russia was developing a missile "of the kind that other nuclear powers do not and will not have".
Western military experts identified this as a manoeuverable nuclear warhead, designed to negate President Bush’s highly expensive missile shield. But its real significance is political: Russia is not weak, and cannot be pushed around.
Yet for all these warning signs, western investors have barely looked up from buying. Russian bond prices are buoyant, underpinned by the oil revenues flowing into Kremlin coffers.
While investors often prefer authoritarian stability to uncertain democracy, their returns depend ever more on the Kremlin keeping control, and not changing the rules. Those risks are definitely under-priced.
Although we seem to have stopped worrying about Moscow’s intentions since the end of the Cold War, they actually matter more to us now than ever before. Western Europe already draws heavily on Russian crude oil and will increasingly come to depend on its natural gas. With Britain set to become a net importer of natural gas by 2006 and of oil by 2010, we will no longer be able to shrug off what happens in Moscow.
Claude Mandil, director of the International Energy Agency, has already warned not only the EU, but China and Japan that there are "significant dangers" to depending on Russian gas. You only need to see the map of Ukraine, overlaid with a Clapham junction of pipelines bringing gas and oil from the Caucasus and Central Asian oil fields to western Europe, to see the problem. You don’t need a civil war the size of Chechnya’s to cause problems. Sabotage by a determined half dozen would do it.
Russia can throw its weight around
vWhile politically embattled, Russia’s economic strength matches its Soviet heyday. The world’s second largest oil producer, its output is only just behind the 9.5m barrels per day (bpd) produced by the Saudis. Every $1-a-barrel rise in the price of benchmark Urals blend brings in $1bn a year to Kremlin coffers. This already funds a quarter of all state spending, and has helped bring foreign exchange reserves to $112bn. Russia has managed a public sector surplus for five years in a row.
With oil and gas so vital, Putin is rebuilding state control.
This is at the expense of the oligarchs, the businessmen who corruptly acquired the bulk of Soviet era oil resources and made themselves billionaires. This may be just, but he has torn down embryonic legal frameworks to make it happen. His jailing of Mikhail Khodorkovsky, an oligarch who had political aspirations, has entailed dragging Yukos, which Khodorkovsky controlled, to the verge of bankruptcy in a quest for $20bn of back-taxes. It is culminating in the forced renationalisation of Yukos’s huge gas arm, Yuganskneftgas for as little as $8.6bn, less than half its real value.
It will be bought by Gazprom, which through a merger with state-run oil firm Rosneft, will give Moscow a controlling stake 50.1% in a newly assembled Russian oil juggernaut which will supply most of Europe’s natural gas. So eager are hedge funds to catch this gravy train, that they have fed $4bn into a ‘grey market’ for Gazprom shares operating in Cyprus in anticipation this can be parleyed into a direct stake when restrictions on foreign investment are lifted.
Ukraine is trapped in history
Ukraine’s election crisis has provided another glimpse of the history in which Russia is permanently trapped. Ukraine has always been Moscow’s bread basket. Since Tsarist times the most active Russian naval fleet has always been based at Odessa in the Black Sea — its only access to the Mediterranean. Since World War II that importance grew still further, with a third of the Soviet nuclear arsenal based in the Ukraine.
While that arsenal, excepting that based in submarines, may have been dismantled in the last seven years, observers often overlook the remaining infrastructure. A third of former- Soviet defence industries are still there, and Ukraine is the centre for key technologies like missile guidance, submarines and radar.
Whether Ukraine looks west with Victor Yushchenko or east with Victor Yanukovych matters very much to Russia. With much of Europe’s gas supply running in effect both through the Kremlin and the Ukraine, how all this turns out also matters to us. Read on for a recommendation that will position you to profit from the UK’s new energy-supply vulnerability.
