Nick Butler
Nov 02 11:05
© Emmanuel Dunand/AFP/Getty
The deal announced on Friday between Russia, Ukraine and the EU looks to have removed the immediate risk of gas supplies to Ukraine being cut off over the winter. The EU and the IMF will underpin Ukrainian purchases with payment in advance. It is not clear from what has been published so far whether this deal will now become the norm for the future. As it stands for this year at least, the deal is mutually beneficial. The Russians, who need the money, will get paid.
The Europeans, who have no wish for an open conflict, are able to buy their way out of trouble at least for the moment. But this is not the end of the story. While the short-term issue of energy supplies may have been resolved, the question of Ukraine’s longer term status has not.
American and European sanctions have not yet forced Vladimir Putin to abandon his campaign to destabilise Ukraine, let alone to hand back Crimea. At the business level, however, they are starting to have an impact. As the FT reported last week, new investment activity in the Russian oil sector is beginning to slow. Proponents of the sanctions argue that it will take some time before they impact policy, and the partial step of a deal on gas supply is encouraging. Sceptics argue that the gas deal is simply a transfer of money to Russia and does nothing to discourage further aggression.
In the meantime, the way in which the sanctions are being applied risks producing other unintended consequences liable to do more damage to the west than to Russia. Two weeks ago the UK government announced that it would not provide a “letter of comfort” to LetterOne – a Luxembourg-based investment fund which is trying to buy a package of North Sea assets from the German utility RWE. The “letter of comfort” is a technical device, required when a British oil and gas production licence is transferred to a new owner. Mikhail Fridman, the Russian billionaire who is chairman of the Alfa Group, one of BP’s three main partners in the TNK-BP venture, runs L1, which holds a reported $15bn of cash – the money collected by the Russian partners when TNK BP was dissolved two years ago. L1′s strategic objective is to invest in oil and gas properties across the world.
The UK government has been tight lipped about its motivation, but the failure to endorse L1 is clearly related to the sanctions on Russia – even though L1 itself is not a Russian company. The issue cannot be the individuals involved. If they were deemed unfit personally to invest in North Sea assets, the judgement would mark a dramatic change of policy on the part of the UK. The action must be targeted at Russia, even though it is hard to see how excluding a company like L1 from investing in some small scale North Sea assets is going to bring Mr Putin to his knees. L1 itself will no doubt find other assets around the world in which to invest.
The clumsy policy does however carry two specific risks. First, at a moment of price weakness, the application of sanctions to the trade in North Sea properties could be very damaging. The North Sea needs new owners with enough capital to invest in extracting its remaining resources. With oil prices down, that is not going to be easy. If international investors get the idea they could be drawn into political disputes, they will turn away. The world energy market is full of assets for sale.
The second risk is to UK companies with investments in Russia. So far, Mr Putin has clearly and deliberately kept the energy sector out of the quarrel over Ukraine. No western company has been excluded from Russia and no bills or dividends have gone unpaid. His approach convinces me that the crisis in Ukraine will in the end be settled, without producing a new cold war or a fundamental break between Russia and Europe. By escalating the conflict, the UK is in danger of forcing a response from Moscow. Western companies that have generally kept their heads down over the last year are acutely aware that they would have little room for manoeuvre if Mr Putin decides to find some excuse to make current contracts null and void, or if he decides to reopen the whole murky question of how Russian assets were transferred into private hands in the 1990s.
Sanctions on new investment activity in Russia – for instance, by making it difficult, if not impossible, for western companies to access new capital – are clearly beginning to have some impact, which will be reinforced by the fall in prices and the looming cuts in the Russian state budget. As noted in previous posts, Mr Putin is not a completely free agent and not entirely secure. But a clumsy policy could make a difficult situation worse without producing any constructive change in relation to Ukraine.
It seems very obvious that no one – certainly not Germany – is ready to engage in an open conflict over Ukraine. As one dry observer said to me last week, “Ukraine is a large nearby country of which we know too much”. In the end, therefore, there can only be a political settlement, and presumably the sanctions on new investment in Russia are designed to make that more likely. That may possibly mean a federalised Ukraine that remains outside the EU and Nato but continues to receive western financial help to buy gas each winter. Beyond that, there is a need to draw a red line, as Ms Merkel sought to do in her speech over the summer in Latvia, making it clear that the Baltic States were members of Nato as well as the EU and so Nato’s guarantees of collective security applied to them, even if they did not apply to Ukraine.
Pragmatism rules when it comes to containment.
Such an outcome is not exactly pretty but, like the short term deal on gas supply, it is workable, and thus has a greater chance of success than extensions of sanctions to normal business, which are simply self defeating.
It feels as if we are in a situation where the outcome is clear and the way to get to that outcome is blocked. If that is the case, I can only recommend that those in charge of strategy engage Mr Fridman in the process. Mr Fridman is one of the sharpest negotiators with whom I have ever dealt and he will have a special understanding of the situation since he was brought up in Kiev.
If anyone can find a point of mutual advantage between the EU, Ukraine and Russia, he can.
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