PUTIN'S ENERGY DIPLOMACY: MAY 9-12 VISIT TO

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002166 SIPDIS SIPDIS DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK DOE FOR HARBERT/EKIMOFF/TILLER DOC FOR 4231/IEP/EUR/JBROUGHER NSC FOR MCKIBBEN AND KLECHESKI E.O. 12958: DECL: 05/08/2017 TAGS: PREL PGOV EPET ENRG ECON KZ TX RS SUBJECT: PUTIN'S ENERGY DIPLOMACY: MAY 9-12 VISIT TO CENTRAL ASIA REF: ASHGABAT 464 Classified By: Ambassador William J. Burns. Reasons 1,4(B/D). ¶1. (C) Summary. President Putin appears determined to come back home from his May 9-12 visit to Astana and Ashgabat with a signed document that will guarantee 25 years of Turkmen gas to Russia -- something that the history of Russian-Turkmen gas relations suggests may be a difficult task. Some contacts believe that a trilateral agreement to build a gas pipeline around the Caspian would be a minor diplomatic victory, creditable to the GOR's "Don't Ask" approach to the many shortcomings of Turkmen internal politics and to the smoother GOR relationship with Berdimuhammedov. Our energy contacts are convinced that Russia will end up continuing to receive the bulk of Turkmen gas because of economic and political realities. GOR officials hinted that the participation of Nazarbayev is contingent upon the outcome of his meeting with Putin in Astana. Besides the gas deal, Russia seeks to broaden its economic and political relationship with Turkmenistan while managing frictions surrounding treatment of Russian speakers. End Summary. -------------- Gas, Gas and Gas -- A Brief History -------------- ¶2. (C) In April 2003, Presidents Putin and Niyazov signed a 25-year gas cooperation agreement that laid the general framework for Russian-Turkmen gas relations. At the same time, the two sides signed a contract of sale for Turkmen gas for the same 25-year period and specified that the price would be USD44 per thousand cubic meters (tcm) from January 2004 to January 2006. Half of the price was paid in cash and the other in barter until April 2005 when Russia began to make all-cash payments. Turkmenistan negotiated a higher price (USD65/tcm) beginning in January 2006. ¶3. (C) Throughout 2006, Niyazov pushed to once again renegotiate the bilateral gas deal. He recognized that Gazprom was becoming increasingly reliant on Central Asian gas and wanted a piece of the difference between the cost of Turkmen gas to Gazprom and the price Gazprom received in Europe. In September 2006 Russia acquiesced and agreed to an increase to the current price of USD100/tcm. Turkmenistan has committed to supplying up to 60 billion cubic meters (bcm) in 2007, up to 70 bcm in 2008, and up to 80 bcm in 2009 and thereafter. Russia received 42 bcm in 2006, the bulk of which was trans-shipped to Ukraine by the middleman RosUkrEnergo. -------------- Russian Full Court Press -------------- ¶4. (C) Since the inauguration of new Turkmen President Gurbanguly Berdymuhammedov in February, Russian officials have pressed the GOT to adhere to the terms of the 2003 deal. The day after the inauguration, Russian PM Mikhail Fradkov met with Berdymuhammedov and Gazprom's CEO Alexey Miller met with Deputy PM Gurbanmyrat Ataev. In late March, Russian Deputy Prime Minister Sergey Naryshkin was appointed co-chair of the Intergovernmental Russia-Turkmenistan Commission on Economic Cooperation. He promptly traveled to Turkmenistan in this capacity and looks to be the GOR point man on ensuring Turkmen gas continues to flow north post-Niyazov. ¶5. (C) On April 23 in Moscow, Berdymuhammedov met with Putin who reportedly sought a firm commitment from the new Turkmen leader to deliver the gas volumes his predecessor had promised (reftel). Instead, according to press reports, Putin received only a promise to "continue active cooperation in the gas sphere on the basis of the long-term intergovernmental agreement signed in 2003." In addition, the two sides talked about upgrading the small Caspian littoral pipeline and the Central Asia-Center pipeline, which can handle (at best) 50 bcm/year -- much less than Russia expects to import. Press reports indicate Russia will press to get Kazakhstan and Turkmenistan to agree at the upcoming trilateral meeting in Turkmenistan to build a pipeline skirting the Caspian from Turkmenistan (through Kazakhstan) to Russia. MOSCOW 00002166 002 OF 003 -------------- Belle of the Ball -------------- ¶6. (C) Meanwhile, Berdymuhammedov continues to play the Niyazov-like game of courting customers other than Russia. Both China and Europe (not to mention Iran) would like some of the gas to come their way and the GOT does nothing to discourage this competition. However, many of our contacts here agree that non-Russian customers will find it difficult to break Russia's hold on the gas. Vladimir Milov, former Deputy Energy Minister and President of the Institute for Energy Policy, pointed out that moving the gas east, west, or south entails a much larger investment in infrastructure than maintaining the flows northward. While he noted that Central Asian elites seem to be tiring of Russian maneuvering, he predicted that Turkmen gas will continue going to Russia but that China could see increasing flows. Tatiana Mitrova, head of the Energy Research Institute at the Russian Academy of Sciences, agreed that sending gas west made little economic sense, that China could end up getting some gas, but that Russia would likely remain the dominant customer in the near-term. She noted that the infrastructure is currently not in place to take all of the gas Russia intends to take from Turkmenistan and said that a new gas pipeline around the Caspian would solve that problem. Both Milov and Mitrova mentioned widely-held concerns about the amount of natural gas Turkmenistan truly has. -------------- Gold Rush -------------- ¶7. (C) As if all the geopolitical maneuvering were not enough, Russian and foreign firms are flocking to post-Niyazov Turkmenistan. Sergey Tanaschuk, senior government affairs manager at TNK-BP, told us that his company would send a team in June. He noted that TNK-BP's Executive Director German Khan attended the April 23 Putin-Berdymuhammedov meeting and would likely lead the company's delegation. Tanaschuk added that other Russian companies were represented at the meeting, including Rosneft, Lukoil, and Gazprom. As noted in reftel, Chevron has already visited Ashgabat and BP will send a team soon. -------------- Russophile: Unexpected Bonus for Russia -------------- ¶8. (C) The GOR is pleased with Berdimuhammedov, whom Maksim Peshkov, Director of the MFA's Third CIS Department, described as easier to deal with than Turkmenbashi. Arkadiy Dubnov, a columnist with Vremya Novostey and a member of the Putin press pool, told us that although Berdimuhammedov does not have close personal ties with anyone in Moscow, his pragmatic approach sits well with the Russian leadership. Berdimuhammedov, who was educated in Moscow, was quick to find a common language with GOR officials, he added. Dubnov saw Putin's May 10 visit to Turmenistan as an effort to "cement" the good will created during Berdimuhammedov's April 23 inaugural visit to Moscow. Both PM Fradkov and FM Lavrov since have made trips to Ashgabat. ¶9. (C) According to Dubnov, Berdimuhammedov is more loyal to Moscow than Turkmenbashi, who gave preference neither to Russian nor the U.S., and Moscow wants to take maximal advantage of his loyalty. Dubnov thought that although Berdimuhammedov visited Moscow soon after an initial trip to Saudi Arabia in order to confirm his credentials as an Islamic leader, he is not easily manipulated, as demonstrated by his overtures to Kazakhstan, China, the U.S. and the OSCE. "He accepts everyone and rejects no one," added Dubnov. Aleksey Malashenko, a scholar at the Moscow Carnegie Center, believed Russia's "indifference" to Turkmenistan's human rights record helped it get a better deal. An "obsession" with human rights, an inability to understand the Turkmenistani mentality, and the distance between the two countries places the U.S. at a disadvantage. -------------- Beyond the Gas Deal -------------- MOSCOW 00002166 003 OF 003 ¶10. (C) According to Dubnov, there are several problems in the bilateral relationship, which Russia for the time being is not addressing: -- Russian political prisoners: a handful of Russian citizens, implicated in the Tukemenbashi assassination attempt in 2002, are still in prison; -- Demarcation of the Caspian Sea: Russia has a delicate problem with Iran, which insists on an equal division of the sea among the littoral countries; -- Better treatment of the estimated 100 - 120 thousand Russian-speakers, including Russian-language education. -- Security of the region: Ultimately, Russia wants to re-absorb Turkmenistan into its sphere of influence, and regain access to its Soviet-era military installations. -------------- Comment -------------- ¶11. (C) Russia is focused on securing Turkmenistan as a reliable energy partner because Russia needs every bit of help it can get to plug its looming gas shortfall. Locking up these volumes also ensures that Turkmenistan will not be a direct competitor in Russia's key European market or in the promising Chinese market. Our GOR contacts consider the change in Turkmenistan "positive" for the GOR's Central Asia objectives. In the long run, the GOR hopes to expand its economic ties with Turkmenistan beyond gas and form a strategic partnership as part of its attempt to strengthen its leadership role in Central Asia. BURNS