TFGG01: ENERGY AND THE CONFLICT IN GEORGIA

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002426



SIPDIS



DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT

EUR/CARC, SCA (GALLAGHER, SUMAR)

DOE FOR FREDRIKSEN, HEGBORG, EKIMOFF

DOC FOR 4231/IEP/EUR/JBROUGHER



E.O. 12958: DECL: 08/15/2018

TAGS: EPET, ENRG, ECON, PREL, GG, RS

SUBJECT: TFGG01: ENERGY AND THE CONFLICT IN GEORGIA



REF: A. BAKU 740

B. ASHGABAT 1039

C. YEREVAN 646



Classified By: DCM Eric S. Rubin for Reasons 1.4 (b/d)



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SUMMARY

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1. (C) Pundits around the world have linked Russia's energy

ambitions to its actions in Georgia. However, our contacts

here largely believe energy is an afterthought. Despite

various press reports suggesting Russia has targeted the

Baku-Tbilisi-Ceyhan (BTC) pipeline, absolutely none of our

contacts believe that to be true. That said, there can be no

doubt there are energy ramifications to this crisis. The

conflict has raised uncertainty about the security of

transport routes through Georgia and put Azerbaijan and

Central Asia in a more delicate position with respect to

Russia. Some of our contacts believe it may have also done

damage to prospects for foreign investment in Russia's own

energy sector. On a related note, we have heard reports that

Russia has cut gas supplies to Georgia (ref C),but have not

been able to verify them. End Summary.



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SAAKASHVILI TARGET, NOT PIPELINES

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2. (C) From the West's view, the primary energy concern

related to the conflict is the security and stability of oil

and gas transit through Georgia. BTC, the most critical

link, or the other pipelines in the corridor, would be

obvious targets for the Russian military, if its intention

were to disrupt energy supplies to global markets. There

have been press reports that the Russians targeted, and

either hit or missed (depending on the report),BTC. The GOR

has publicly denied that it has targeted any pipelines. BP

has also reportedly denied that the pipelines it operates

have been targeted. Everyone with whom we have spoken about

this issue believes Russia is certainly capable of damaging

the pipeline and therefore discounts reports that it

"missed." Most also believe that a deliberate attack on the

pipeline by Russia would be counterproductive to Russian

interests.



3. (C) Former Deputy Energy Minister and now opposition

political activist Vladimir Milov told us August 12 that he

does not believe the Russians deliberately targeted BTC. If

they had, he said, they would have damaged it. Even if they

missed the first time, he explained, the Russian military

would have just kept bombing until they hit it. Milov also

does not believe that energy considerations motivated

Russia's actions in Georgia. Instead, according to Milov,

the conflict was largely driven by Putin's personal and

long-term animosity toward Saakashvili, stemming back to the

Rose Revolution, and that this was Putin's way of advertising

to regional leaders that they should not "mess with Putin."

Milov added that he was surprised by Georgia's

"miscalculation," noting that Russia's likely response should

have been obvious. According to Milov, while energy issues

were not a motivating factor, replacing Saakashvili with

someone less hostile to the Kremlin, and perhaps more

pliable, would certainly suit Russian energy interests.



4. (C) Jerry Rohan, long-time head of the energy practice at

PriceWaterhouseCoopers in Russia and now an independent

consultant, told us August 11 that if Russia were to attack

energy infrastructure, it would immediately discredit its

long-standing claims that it does not use energy as a

political weapon. The same would hold true for other

potential oil and gas infrastructure including the

Baku-Tbilisi-Erzurum (BTE) gas pipeline, the Baku-Supsa oil

pipeline, and relevant shipping ports. Even if the

hostilities were to continue to escalate, the harm to

Russia's already bruised reputation would be very great were

it to deliberately disrupt one of the major oil routes

through the region.



5. (C) Western diplomats with whom have discussed the issue

also believe that Russia would not have missed BTC if it had



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chosen to deliberately target it. One EU diplomat who

closely follows the energy sector suggested that blowing up

BTC would make "absolutely no sense" given Russia's interest

in securing Azeri gas. Since BTC is an economic lifeblood

for Azerbaijan, a Russian attack on BTC would kill any Azeri

interest in cooperating with Russia on gas transit and sales.

This diplomat believes energy issues are only of derivative

interest in the conflict, "not a main consideration."

Another EU diplomat responsible for energy and transportation

issues suggested that even if Russia did not have adequately

precise bombs to hit BTC from a distance, it could have used

guerrilla tactics to damage BTC or other pipelines. He also

agreed that energy was not a driving factor of Russia's

actions in Georgia, but that Russia would have understood

that its military action could potentially be beneficial to

its regional energy interests by ratcheting up risk and

uncertainty.



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ADDED RISK

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6. (C) The conflict in Georgia has clearly added uncertainty

about the security and stability of future energy transport

through the Caucasus corridor, which could play to Russia's

advantage. Whether energy was motivation for Russia's attack

or not, there is little doubt that players in the region are

taking a second look at the vulnerabilities of energy

transport through a region which is now directly involved in

military conflict. In particular, security concerns have

been thrust to the top of investors' lists in thinking about

the region's energy infrastructure. Many investment house

analysts have noted the added political risks to the sector

regionally due to the Georgia conflict. (Note: As reported

in ref B, the GOTX has already raised infrastructure security

concerns related to future cooperation with Azerbaijan on

energy transport through the region. End note.)



7. (C) Alf D'Souza, Vice President at Shell Russia, suggested

one benefit to Russia could be that Central Asians weigh

potential Russian investment in energy more favorably and

western investment less favorably than before. He added that

the events in Georgia could also give China a stronger hand

in Central Asian energy. Another western oil and gas

executive, who requested not to be identified, had predicted,

prior to this episode, that an event such as the ongoing

conflict in Georgia would lead Turkmenistan, for example, to

be less inclined to challenge Russian energy interests.



8. (C) However, another energy-related casualty of the

conflict could be investor confidence in Russia's own energy

sector. Along with general oil price declines globally, the

Georgian crisis has pummeled the Russian stock market in

recent days. This stems partly from the fact that many

investors perceive the conflict as having strengthened the

hand of economic nationalists and weakened that of liberal

reformers. Cambridge Energy Research Associates' Russia

specialist John Webb told us August 11 that he thinks the

conflict "rings alarm bells for energy investors," adding

that it raises questions about policy control in Russia. If

people see Putin giving the orders, they understand that

Medvedev, for all his talk of reform, still must defer to

Putin.



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GAS TO GEORGIA

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9. (C) Milov said he has heard in the last few days that

Russian gas supplies to Georgia have been "reduced" by as

much as 75 percent. He also noted that he had recently been

in Armenia, before the current crisis, and was struck at how

strongly the Armenians fear that Russia would "ignore"

Armenian interests in secure gas supplies in the event of

hostilities between Russia and Georgia. (Note: While we

have no way of verifying the volumes of gas flows to Georgia,

ref C reports that supplies to Armenia from Russia through

Georgia are down by up to 50%. End note.)



10. (C) Russia could use gas supplies to inflict some direct

pain onto Georgia. According to Gazprom statistics, Russia's

share of Georgian gas supplies dropped dramatically from 2006



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to 2007 (73% to 41%) with new Azeri supplies through the BTE.

But even at that level, Russia could cause disruptions to

Georgian consumers as winter approaches, especially if, as

reported in ref A, Azerbaijan doesn't have additional

supplies available to fill the demand.



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COMMENT

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11. (C) Russia has a long-term interest in securing Central

Asian oil and gas supplies for its own consumption and to

meet its export commitments. It also has an interest in

controlling, to the extent possible, the transit of Central

Asian oil and gas in order to minimize competition and

maximize its own economic gains and political clout.

However, despite various global opinion pieces to the

contrary, it is not clear that Russia's energy ambitions were

a significant driver in its foray into Georgia. Rather, the

benefits to Russia's regional energy interests are, in the

Kremlin's view, welcome by-products. We can expect Moscow to

follow up strongly, especially in Central Asia, where the

Kremlin probably believes energy suppliers are now less

likely to seek closer ties to the West. End comment.

BEYRLE