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. Last Updated: 07/27/2016

In Case You Missed This Mega-Deal

While Europe was sleeping -- and America fought in Iraq -- the Kremlin has taken a major step toward monopolizing the transit of Caspian energy resources, thus adding to Europe's dependence on energy supplies from Russia (and, at the same time, reducing hopes for Afghanistan's future development). That step would merge Turkmenistan's immense deposits of natural gas with those of Russia, into one export pool under Russian control.

Turkmenistan holds the world's third-largest proven reserves of gas, after Russia and Iran, but the Turkmen deposits are not fully explored or even prospected. Turkmenistan's gas export potential, however, is of an order of magnitude roughly comparable to Russia's. Turkmen gas output (54 billion cubic meters in 2002, 68 billion anticipated for 2003) can, with relatively modest investments and in short order, be restored to the late Soviet-era level of some 90 billion cubic meters annually, almost all of which would be available for export. Russia's current gas exports are not much larger, at approximately 110 to 115 billion cubic meters annually, with a steady tendency to decrease.

On April 11, Presidents Vladimir Putin and Saparmurat Niyazov -- along with Gazprom and the Turkmen state gas company -- signed a set of agreements in the Kremlin which, if implemented, would create a permanent Russian lock on Turkmenistan's gas resources and exports. Turkmenistan is to deliver 2 trillion cubic meters of gas to Russia for a 25-year period (2004-28). Annual deliveries are to grow from a relatively modest 6 billion cubic meters in 2004 to 80 billion cubic meters in 2009.

Under the agreements, Russia would in 2004-06 pay Turkmenistan a paltry $44 per 1,000 cubic meters, made almost risible by the stipulation that only $22 would be paid in cash, and $22 in the form of Russian-made goods and services of a quality not marketable elsewhere for currency. By contrast, Gazprom sells its gas to European countries at prices ranging from $90 to $120 per 1,000 cubic meters -- all cash.

Thanks to the agreement just signed, an increasing proportion of Gazprom's deliveries to Europe will consist of Turkmen gas. The Russian state monopoly will rake in the differential. Gazprom's purchase price for Turkmen gas is to be recalculated in 2007 taking into account the dynamics of international prices -- thus suggesting a possible adjustment by Russia of both the purchase price to Turkmenistan and the resale price to Europe, while basically retaining the existing differential.

At the signing ceremony in Moscow, Putin explained how the massive inflow of Turkmen gas will "benefit the Russian economy: It solves such an important problem as the energy balance in the country, demonstrates that Russia will without doubt honor its gas supply obligations [to Europe] and will help Russia develop an energy partnership with the European Union."

Translation: First, the low-priced Turkmen gas will fill a growing proportion of Russia's internal consumption requirements, freeing up a correspondingly growing proportion of Russian gas for high-priced export to the West. Second, Gazprom will draw on Turkmen gas in order to honor Gazprom's supply contracts with European countries, earning windfall profits even if Russia's gas output and exports stagnate or decline. And, third, by quasi-monopolizing the transit and marketing of Turkmen gas to points West, Russia will be strongly placed to mobilize European Union investments in order to upgrade Gazprom's aging network of transit pipelines across Russia's territory.

The Kremlin and Gazprom are also counting on European investments to overhaul the Soviet-era pipelines that run from Turkmenistan, via Uzbekistan and Kazakhstan, to Russia, plugging into Gazprom's network. Those pipelines across Central Asia are currently capable of an annual throughput of some 50 billion cubic meters of gas, which is about half of their Soviet-era capacity. Putin apparently reckons that once Russia controls the transit of Turkmen and other Central Asian gas, the European consumer countries will have to foot the bill for bringing that gas to Russia.

And that's not all. The easy availability of Turkmen gas will enable Russia to postpone the high-cost development of Arctic and Siberian gas projects, such as the Shtokman and Yamal fields and pipelines. It will also enable the Russian government to perpetuate nonmarket arrangements, such as the state-imposed cap on the price of gas on the internal market at a mere $21.50 per 1,000 cubic meters. This price is so low in relation to the extraction and transportation costs of Russian gas that even Gazprom ends up starved of investment funds. This is one reason why the Kremlin would like to reach into the European Union's pockets for investment in Russian gas development projects. It would be a form of EU subsidy to a giant unreformed sector of Russia's economy.

At present, the EU has strong objections to Russia's artificially low internal price for gas. This practice substantially cuts the production costs of Russian industrial goods, thus enabling exporters to undercut West European industries in EU and other markets. This is why the EU calls for long-overdue reforms of Russia's gas sector as an important precondition to Russia's admission to the World Trade Organization. Now, however, the easy availability of low-priced Turkmen gas will act as an added disincentive for Russia to reform its internal gas market, and may make it more tempting for it to compete unfairly against European goods in European markets.

A little more than a year ago, Putin had called for the creation of a cartel of natural gas exporting countries, to consist of Russia and three former Soviet-ruled countries in Central Asia, foremost among them Turkmenistan. Dubbed an "OPEC for gas," the basic idea is to turn Russia into the sole route for Central Asian gas to Europe, killing the alternative plan for a westbound pipeline out of Turkmenistan. That U.S.- and British-supported project had envisaged a trans-Caspian pipeline for Turkmen gas going West, via the South Caucasus and Turkey and on to the Balkans, on the shortest possible route to European markets. The erratic Niyazov ultimately scuttled that project through outlandish financial demands and capricious gamesmanship with the consortium. The Kremlin then stepped in with an offer that the isolated Turkmen dictator could hardly refuse.

With this, Moscow seems to be winning on another front as well. Turkmenistan's mega-deal with Russia might leave insufficient Turkmen gas for export to and through Afghanistan and Pakistan, at commercially attractive prices. That project is strongly supported by the United States and by the Afghan administration of President Hamid Karzai. It is meant to give Turkmenistan an outlet to the Indian Ocean and to provide a vital source not only of energy, but also of transit revenue in hard currency to Afghanistan. It can also form a major nation-building tool in Afghanistan, with the incentive for tribes and warlords to cooperate in the trans-Afghan pipeline project.

For its part, Russia favors a project to supply Iranian gas to Afghanistan. The two-fold goal is to send Iranian gas away from European markets -- preserving those for Russia -- and to enable Iran to increase its influence in Afghanistan to the West's detriment.

They never stopped playing zero-sum games. With the recent Kremlin agreement with Turkmenistan, elements of the wider Russian strategy are already in place.

Vladimir Socor is senior fellow of the Washington-based Institute for Advanced Strategic & Political Studies. This comment appeared in Friday's edition of The Wall Street Journal Europe.