The Heat Is Online

Russia to Kyoto: "Show Me The Money"

Russia: Show me the Money

The Asia Times, Dec. 9, 2003

MOSCOW - Russia first said "yes" to the Kyoto Protocol, then "maybe", then "no", then "yes" again, then another "no" last week. This pattern of mercurial behavior, far from being a sign of indecisiveness, is an indication of hard-nosed bargaining, with Moscow trying to use its Kyoto vote as a bargaining chip.

Such flip-flopping has fueled speculation that Russia's threats to derail the Kyoto Protocol are a tactical maneuver to receive concessions, and possibly guarantees of financial incentives, from the European Union and Japan - two of the protocol's most ardent and affluent backers. Hence a Russian "yes" to Kyoto may mean big yen and euros.

The Kyoto Protocol came out of the United Nations Framework Convention on Climate Change in a December 1997 meeting held in Kyoto, Japan. Under the agreement, industrialized nations must reduce their emissions of greenhouse gases (GHG) by an average of 5.2 percent (from 1990 levels) by the period of 2008 to 2012.

The 120 nations that have ratified the Kyoto Protocol since it was drawn up are counting on Russia's support because it accounted for 17 percent of greenhouse gas emissions at 1990 levels. The protocol must be ratified by industrial nations that produce 55 percent of greenhouse gases for it to take effect. The United States, the world's biggest producer of such pollution with 36 percent of 1990 emissions, has rejected the treaty. If Russia joins Australia and the US in their rejection, the accord will not have the support it needs to be implemented globally - essentially meaning Russia holds the trump card in the Kyoto game.

Initially, Russia had expected to benefit from the treaty. Kyoto provides for setting up a market in which countries could sell unused pollution "quotas" - or emissions-reduction "credits" - to defaulting nations that are heavy polluters. The trade in emission quotas is designed to reward clean industries - Russia has already met its targeted reduction of GHG - and to serve as an incentive for dirty industries to invest in more environment-friendly technologies. According to the Energy Ministry, Russia had hoped to gain between US$500 million and $4 billion a year by selling these emission quotas to other countries.

However, the lack of US participation in the treaty brings down the potential funds available for Russia and so this is being cited as one of the main reasons for its reluctance to ratify the pact. Kremlin officials have said Moscow wants guarantees from Western nations that they will buy Russia's emission quotas if it does ratify the treaty.

When Andrei Illarionov, Russian President Vladimir Putin's economic advisor and a long-standing critic of the protocol, sent shock-waves all over the world last week by stating that Russia would not ratify the protocol, he incidentally lashed out at some major polluters. However, Illarionov added that Moscow might be willing to reconsider an amended protocol. Hence, he acknowledges that nothing is set in stone, indicating that that Russia is open for bargaining and its position could change.

Among would-be amendments, Illarionov pointed to the fact that Kyoto does not require some major polluters, notably China and India, to meet emission reduction quotas. As developing countries, India and China are not required to reduce the emissions of GHG. Rather, they are expected to benefit from the transfer of technology and additional foreign investment into sectors like renewable energy, energy generation and afforestation projects if the protocol comes into force. Polluters bigger than Russia should also be required to meet emission reduction quotas before Moscow would consider ratification of the protocol, Illarionov said.

A day later, Putin's deputy minister for economic development, Mukhamed Tsikanov, changed gears. "Russia will ratify the protocol if it proves to be in our interest," said Tsikanov, whose ministry is in charge of Kyoto negotiations. Tsikanov echoed the financial argument when asked what approval depended on.

"You should put this question to Japan and the EU about when they will start to speak to us in economic language," he said. Polluting countries "are yet to express any interest in buying quotas", Tsikanov said. "Movement towards ratification of the protocol depends on this," he added. The warning came as representatives of 180 countries met in Milan, Italy, to discuss the pact.

Until recently, Moscow pledged to support the protocol. Last year, Russian Prime Minister Mikhail Kasyanov told the World Summit on Sustainable Development in South Africa that ratification would take place "in the very near future". This is why Illarionov's latest threat to jettison the protocol came as a bolt from the blue.

Putin has so far failed to comment or to clarify his country's position. Last September, Putin surprised the Moscow conference by saying: "If it were two or three degrees warmer, this would be no big deal. Maybe it would even be a good thing - we would spend less money on fur coats." In other words, Russia does not mind a bit of global warming.

Another reason for Russia's indecisive behavior could have been that polls for the lower house of parliament were imminent, and that presidential elections are due next March. With Russian industries split over the pact, Putin may see ratification as a political risk he just isn't willing to take.

But Russia's bargaining on the Kyoto Protocol could bring undesired results, including calls for trade sanctions against countries refusing to cut their emissions of greenhouse gases. The New Economics Foundation, a British independent think tank, reportedly urged the EU to tax imports from these countries because they enjoy a competitive disadvantage as energy costs increase.

Japan has expressed hope that Russia will ratify the Kyoto Protocol after all, and is expected to remind Moscow of the protocol's financial prospects during Kasyanov's visit to Tokyo from December 15 to 17, when he is set to meet with Japanese Prime Minister Junichiro Koizumi.

Pipeline pondering
Issues other than the Kyoto Protocol are not exempt from Russia's high-stakes bargaining tactics, with Moscow quick to recognize when it has the upper hand. For instance, China and Russia have been discussing the 2,400-kilometer Daqing link since 1994. The pipeline is expected to transport 700 million tons of Russian crude in eastern Siberia to northeast China over 25 years. The countries signed the framework agreement on the project in March 2003.

However, in yet another spat of sure-nyet-maybe policy, the Russian Ministry of Natural Resources came up with a big nyet - or no - in September, saying that it might block the planned route for the Angarsk-Daqing pipeline due to environmental reasons. In other words, it was tacitly stated that Russia might be willing to bargain on the issue. Later in September, Kasyanov then said yes, indicating that Russia would stand by an agreement to build a pipeline to China during a meeting with Chinese Premier Wen Jiabao in Beijing.

Bargaining is always an option for Russia, notably when big oil profits are at stake. China is one of the world's largest oil consumers, while Russia is one of the world's largest oil producers. China wants Russian oil so it can cut its reliance on the Persian Gulf and maintain its high rate of economic growth.

Meanwhile, the current troubles of the Russian oil giant Yukos, which happened to be the main advocate of a Chinese pipeline, made it urgent for China to speed up discussions. Chinese officials have voiced hope that the Yukos affair would not have any impact on the China-Russia oil pipeline project. Incidentally, following arrests of Yukos top executives, the Kremlin said that there would be "no bargaining" over the enforcement of Russian law.

It has been understood that Russia's wavering over the Siberian oil pipeline might be, at least in part, the result of hard lobbying by Japan for a rival pipeline bypassing China and stretching to Russia's Far East port of Nakhodka.

China and Japan - competing for Russian oil - are sponsoring rival pipeline routes. China National Petroleum Corp is backing a $2.8 billion link to China's northeast city of Daqing. Meanwhile, Tokyo has offered to fund the $5.8 billion cost of building a pipeline to the port of Nakhodka on Russia's Pacific coast. At some point, Russian officials floated an idea to combine both Daqing and Nakhodka routes.

Since both China and Japan seem interested in limiting reliance on the Middle East's oil supplies, Moscow does have bargaining power vis-a-vis potential East Asian importers of Siberian oil. If Russia skips either the Daqing or Nakhodka route, it could come as a sort of blow to oil import plans for China and Japan.

Moreover, another major pipeline project has been under discussion for eight years, indicating that a lot of bargaining has been going on. The planned 4,887-kilometer gas Kovykta pipeline would cost up to $17 billion. The longest of its kind in Asia, it would link the Kovykta gas field located in the Irkutsk Oblast in Russia's East Siberia to the cities of Shenyang, Beijing and Dalian in China and will finally reach Pyeongtaek in South Korea via a sub-sea pipeline.

China and South Korea are expected to import 600 billion and 300 billion cubic meters of gas, respectively, from Russia over a 30-year period. But a formal deal is yet to be clinched, hence a lot of space remains for yes and no bargaining.

Moscow mulls other ambitious projects in East Asia as well. On December 5, Russian Atomic Energy Minister Alexander Rumyantsev announced that Russia would seek new contracts to build more nuclear reactors in China.

What remains to be seen is whether Russia will continue its flip-flop maneuvering concerning the future of potentially lucrative projects, and if so, just how much waffling potential partners are willing to accept before they look elsewhere.
Russia: Show me the Money

The Asia Times, Dec. 9, 2003

MOSCOW - Russia first said "yes" to the Kyoto Protocol, then "maybe", then "no", then "yes" again, then another "no" last week. This pattern of mercurial behavior, far from being a sign of indecisiveness, is an indication of hard-nosed bargaining, with Moscow trying to use its Kyoto vote as a bargaining chip.

Such flip-flopping has fueled speculation that Russia's threats to derail the Kyoto Protocol are a tactical maneuver to receive concessions, and possibly guarantees of financial incentives, from the European Union and Japan - two of the protocol's most ardent and affluent backers. Hence a Russian "yes" to Kyoto may mean big yen and euros.

The Kyoto Protocol came out of the United Nations Framework Convention on Climate Change in a December 1997 meeting held in Kyoto, Japan. Under the agreement, industrialized nations must reduce their emissions of greenhouse gases (GHG) by an average of 5.2 percent (from 1990 levels) by the period of 2008 to 2012.

The 120 nations that have ratified the Kyoto Protocol since it was drawn up are counting on Russia's support because it accounted for 17 percent of greenhouse gas emissions at 1990 levels. The protocol must be ratified by industrial nations that produce 55 percent of greenhouse gases for it to take effect. The United States, the world's biggest producer of such pollution with 36 percent of 1990 emissions, has rejected the treaty. If Russia joins Australia and the US in their rejection, the accord will not have the support it needs to be implemented globally - essentially meaning Russia holds the trump card in the Kyoto game.

Initially, Russia had expected to benefit from the treaty. Kyoto provides for setting up a market in which countries could sell unused pollution "quotas" - or emissions-reduction "credits" - to defaulting nations that are heavy polluters. The trade in emission quotas is designed to reward clean industries - Russia has already met its targeted reduction of GHG - and to serve as an incentive for dirty industries to invest in more environment-friendly technologies. According to the Energy Ministry, Russia had hoped to gain between US$500 million and $4 billion a year by selling these emission quotas to other countries.

However, the lack of US participation in the treaty brings down the potential funds available for Russia and so this is being cited as one of the main reasons for its reluctance to ratify the pact. Kremlin officials have said Moscow wants guarantees from Western nations that they will buy Russia's emission quotas if it does ratify the treaty.

When Andrei Illarionov, Russian President Vladimir Putin's economic advisor and a long-standing critic of the protocol, sent shock-waves all over the world last week by stating that Russia would not ratify the protocol, he incidentally lashed out at some major polluters. However, Illarionov added that Moscow might be willing to reconsider an amended protocol. Hence, he acknowledges that nothing is set in stone, indicating that that Russia is open for bargaining and its position could change.

Among would-be amendments, Illarionov pointed to the fact that Kyoto does not require some major polluters, notably China and India, to meet emission reduction quotas. As developing countries, India and China are not required to reduce the emissions of GHG. Rather, they are expected to benefit from the transfer of technology and additional foreign investment into sectors like renewable energy, energy generation and afforestation projects if the protocol comes into force. Polluters bigger than Russia should also be required to meet emission reduction quotas before Moscow would consider ratification of the protocol, Illarionov said.

A day later, Putin's deputy minister for economic development, Mukhamed Tsikanov, changed gears. "Russia will ratify the protocol if it proves to be in our interest," said Tsikanov, whose ministry is in charge of Kyoto negotiations. Tsikanov echoed the financial argument when asked what approval depended on.

"You should put this question to Japan and the EU about when they will start to speak to us in economic language," he said. Polluting countries "are yet to express any interest in buying quotas", Tsikanov said. "Movement towards ratification of the protocol depends on this," he added. The warning came as representatives of 180 countries met in Milan, Italy, to discuss the pact.

Until recently, Moscow pledged to support the protocol. Last year, Russian Prime Minister Mikhail Kasyanov told the World Summit on Sustainable Development in South Africa that ratification would take place "in the very near future". This is why Illarionov's latest threat to jettison the protocol came as a bolt from the blue.

Putin has so far failed to comment or to clarify his country's position. Last September, Putin surprised the Moscow conference by saying: "If it were two or three degrees warmer, this would be no big deal. Maybe it would even be a good thing - we would spend less money on fur coats." In other words, Russia does not mind a bit of global warming.

Another reason for Russia's indecisive behavior could have been that polls for the lower house of parliament were imminent, and that presidential elections are due next March. With Russian industries split over the pact, Putin may see ratification as a political risk he just isn't willing to take.

But Russia's bargaining on the Kyoto Protocol could bring undesired results, including calls for trade sanctions against countries refusing to cut their emissions of greenhouse gases. The New Economics Foundation, a British independent think tank, reportedly urged the EU to tax imports from these countries because they enjoy a competitive disadvantage as energy costs increase.

Japan has expressed hope that Russia will ratify the Kyoto Protocol after all, and is expected to remind Moscow of the protocol's financial prospects during Kasyanov's visit to Tokyo from December 15 to 17, when he is set to meet with Japanese Prime Minister Junichiro Koizumi.

Pipeline pondering
Issues other than the Kyoto Protocol are not exempt from Russia's high-stakes bargaining tactics, with Moscow quick to recognize when it has the upper hand. For instance, China and Russia have been discussing the 2,400-kilometer Daqing link since 1994. The pipeline is expected to transport 700 million tons of Russian crude in eastern Siberia to northeast China over 25 years. The countries signed the framework agreement on the project in March 2003.

However, in yet another spat of sure-nyet-maybe policy, the Russian Ministry of Natural Resources came up with a big nyet - or no - in September, saying that it might block the planned route for the Angarsk-Daqing pipeline due to environmental reasons. In other words, it was tacitly stated that Russia might be willing to bargain on the issue. Later in September, Kasyanov then said yes, indicating that Russia would stand by an agreement to build a pipeline to China during a meeting with Chinese Premier Wen Jiabao in Beijing.

Bargaining is always an option for Russia, notably when big oil profits are at stake. China is one of the world's largest oil consumers, while Russia is one of the world's largest oil producers. China wants Russian oil so it can cut its reliance on the Persian Gulf and maintain its high rate of economic growth.

Meanwhile, the current troubles of the Russian oil giant Yukos, which happened to be the main advocate of a Chinese pipeline, made it urgent for China to speed up discussions. Chinese officials have voiced hope that the Yukos affair would not have any impact on the China-Russia oil pipeline project. Incidentally, following arrests of Yukos top executives, the Kremlin said that there would be "no bargaining" over the enforcement of Russian law.

It has been understood that Russia's wavering over the Siberian oil pipeline might be, at least in part, the result of hard lobbying by Japan for a rival pipeline bypassing China and stretching to Russia's Far East port of Nakhodka.

China and Japan - competing for Russian oil - are sponsoring rival pipeline routes. China National Petroleum Corp is backing a $2.8 billion link to China's northeast city of Daqing. Meanwhile, Tokyo has offered to fund the $5.8 billion cost of building a pipeline to the port of Nakhodka on Russia's Pacific coast. At some point, Russian officials floated an idea to combine both Daqing and Nakhodka routes.

Since both China and Japan seem interested in limiting reliance on the Middle East's oil supplies, Moscow does have bargaining power vis-a-vis potential East Asian importers of Siberian oil. If Russia skips either the Daqing or Nakhodka route, it could come as a sort of blow to oil import plans for China and Japan.

Moreover, another major pipeline project has been under discussion for eight years, indicating that a lot of bargaining has been going on. The planned 4,887-kilometer gas Kovykta pipeline would cost up to $17 billion. The longest of its kind in Asia, it would link the Kovykta gas field located in the Irkutsk Oblast in Russia's East Siberia to the cities of Shenyang, Beijing and Dalian in China and will finally reach Pyeongtaek in South Korea via a sub-sea pipeline.

China and South Korea are expected to import 600 billion and 300 billion cubic meters of gas, respectively, from Russia over a 30-year period. But a formal deal is yet to be clinched, hence a lot of space remains for yes and no bargaining.

Moscow mulls other ambitious projects in East Asia as well. On December 5, Russian Atomic Energy Minister Alexander Rumyantsev announced that Russia would seek new contracts to build more nuclear reactors in China.

What remains to be seen is whether Russia will continue its flip-flop maneuvering concerning the future of potentially lucrative projects, and if so, just how much waffling potential partners are willing to accept before they look elsewhere.