MOSCOW, September 3 (RIA Novosti) Moscow seeks CIS backing for its Caucasus policy / The West could hit Russia's economy hard / Uzbekistan ups gas prices, Gazprom pressures Ukraine for concessions / Russia, Turkey stop short of customs war / Russia reconsiders building Iran-Armenia rail line / Chrysler set to cooperate with Russia's GAZ Group
Moscow seeks CIS backing for its Caucasus policy
Russian officials are now negotiating with the leaders of Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, members of the Collective Security Treaty Organization (CSTO), trying to explain Moscow's actions in Georgia and to garner support for the Kremlin's Caucasus policies.
Russia hopes that CSTO countries will formulate a common stance on the South Ossetia crisis prior to the organization's Friday summit. It will then become clear whether Russia still has any loyal CIS allies left.
However, far from every partner wants to aggravate its complicated relations with the West and to support the Russian position.
"Instead of denouncing Georgia, many Russian partners are only ready to support Moscow's peaceful moves," a Russian diplomatic source close to the talks told the paper.
He said the situation resembled the August 28 Shanghai Cooperation Organization summit when all delegates supported Moscow but eventually attached priority to the territorial integrity principle.
Moscow now wants the summit to justify its expectations. The Kremlin has tried to find an individual approach to each CSTO leader, so that the organization can voice a tough joint anti-Georgian stand.
Armenian President Serzh Sargsyan was invited to Russia several days before the CSTO Council's meeting and received by President Dmitry Medvedev in Sochi on September 2.
On August 20, Medvedev explained Moscow's motives to Belarusian President Alexander Lukashenko and promised to charge less for Russian gas and to issue a $2 billion long-term loan to Minsk.
Sources in the administration of the Russia-Belarus Union State said Belarusian authorities had promised to recognize the independence of the break-away South Ossetia and Abkhazia in exchange for Russian preferences.
Our source close to Lukashenko said the Belarusian leader could do this only after the September 28 parliamentary elections because the West could otherwise declare the new republican parliament illegal.
Minsk also agreed to sign a Belarusian-Russian agreement on setting up a joint missile defense system that would counter elements of the U.S. missile shield in Europe.
It appears that the Russian government has reconciled itself to the fact that no other country has recognized the independence of South Ossetia and Abkhazia. Prime Minister Vladimir Putin said yesterday the reluctance of other states to recognize the independence of the breakaway Georgian territories was not critical.
The West could hit Russia's economy hard
Although the latest EU summit on the situation in the Caucasus did not raise the issue of sanctions against Russia, the possibility of the West adopting measures against Russia in the wake of its recognition of Abkhazia's and South Ossetia's independence cannot but cause concern.
The widely held view in the West that Russia's moves must not be left unanswered should be taken in all seriousness, writes Vladimir Milov, head of the Institute of Energy Policy, an independent think tank.
Are real sanctions against Russia possible? Although Russia is unlikely to be subjected to broad embargoes, Western countries are well able to deliver a series of painful and pinpoint blows.
The most obvious sanctions are a cap on Russian investments abroad and higher trade barriers to value-added goods. The latter measures could get second wind following Moscow's demonstrative curtailment of its WTO entry efforts. If such measures are taken as one-sided and not always widely publicized steps by individual countries, rather than as EU collective measures, they will undercut Moscow's ability to give a full-scale response. The effects on Russian value-added exports and international expansion of our companies will be unpleasant.
Restricted access to Western credit for the Russian corporate sector - for example, for Gazprom or Rosneft, whose combined debt is about $90 billion, and a considerable part of it is short-term liabilities - could have severe impacts. In such a situation, large-scale state support will have to be used to prevent a default. It would be possible to save these companies, but only at the expense of a heavy drain on the financial resources gathered by the state.
Sanctions against individual officials, businessmen close to the government, and members of their families could prove the least painful for the Russian economy and most sensitive for the Russian ruling class: freezing of personal accounts, blocking of investments, refusal to issue entry visas to Organization for Economic Cooperation and Development (OECD) countries and especially probes into origins of the money held by the "new Russian oligarchs" and criminal corruption cases. But it is not impossible that these measures might have a backfiring effect in angering the Russian leadership and inciting it to isolationism, although it is hard to say how far the Russian authorities can go in seeking real, not pretence, isolationism.
Uzbekistan ups gas prices, Gazprom pressures Ukraine for concessions
Russia will now have to buy natural gas from Uzbekistan at average European prices, which means it will now cost Gazprom twice as much as before. Ukraine, which buys gas from Russia, won't be able to pay so much - it would wreck the country's economy.
Analysts now expect the Kremlin to start pressuring Ukraine for political concessions in exchange for discounts.
"The cost of Uzbek gas will be equal to the average European price minus transportation costs minus Gazprom's service markup," explained Svetlana Savchenko, head of investment planning at 2K Audit-Business Consultations. "The parties only have minor details to agree on."
She said Gazprom wouldn't be hit too hard by the new pricing formula because it resells the gas purchased from Central Asia to the CIS countries. "However, it will lose room for maneuver in negotiations with its CIS customers. Cheap Central Asian gas had enabled the Russian monopoly to bargain and diversify prices among customers, which it will no longer be able to do," Savchenko added.
Instead, the Russian government will have certain political advantages, primarily in dealing with Ukraine. If it offers Ukraine a discount, Gazprom will be in a position to demand certain privileges.
Dmitry Abzalov, an analyst at the Center for Current Politics think tank, said the change would strip Ukraine of a key tool it used to pressure Russia. "Earlier Ukraine was constantly complaining to the European Union of Gazprom's price hikes, but it won't be able to do so now, because the producer will be hiking prices, not Gazprom," he said.
Analysts estimate that the price Ukraine pays for gas will grow to $370 per 1,000 cu m from the current $179.5, which will be a crushing blow to its energy-consuming economy. Ukraine earlier said it could agree to no more than $321. However, Gazprom's negotiations with Ukraine are still underway.
It seems Russia can put forward a wide range of political demands due to the unstable international situation caused by the conflict in South Ossetia. For example, Russian negotiators could use Prime Minister Yulia Tymoshenko's gas interests. The high gas price is bound to make her more compliant, and Ukraine will have to heed Russia's demands.
Russia, Turkey stop short of customs war
Russia and Turkey have just stopped short of sliding into a major customs war.
Turkish media reported that "thousands of Turkish trucks" had been arrested at the Russian border late last week. This happened because Russia tightened its customs regime after Turkey gave American warships permission to pass through the Bosporus into the Black Sea. Turkey then said cargoes arriving from Russia should be inspected more thoroughly.
However, in the past few days the two countries have exchanged statements affirming that neither of them is interested in straining relations.
Analysts believe Turkey would have more to lose if the conflict were to escalate into a fully fledged trade war. Russian exports to Turkey are dominated by mineral resources: Russia accounts for 29% of oil and 63% of natural gas consumed by the country. These products do not require long customs clearance, and Turkey will have a problem trying to find an alternative source of fuels.
Turkey, in turn, exports manufacturing products to Russia: textiles, equipment, vehicles, chemicals and foodstuffs. It will be harder for Turkey to find other markets for those products than for Russia to find other customers for oil and gas.
Further on, more than 150 Turkish construction firms are currently operating in Russia. They have completed over 800 projects here since the late 1980s. These firms have already suffered from the aftermath of the Georgian crisis.
Enka Insaat & Sanayi, Turkey's largest construction company, has lost 20% of its market capitalization since the conflict flared up on August 8 due to expectations of a cooling in ties between Russia and Turkey. More than half of its assets and projects are located in Russia and the CIS countries, and its investors began divesting the moment they heard the announcement of a suspension of NATO-Russia relations.
Alexander Shtok, due diligence chief at 2K Audit-Business Consultations, said: "Neither Russia, nor Turkey is interested in a cool-down of trade relations. Russia uses Turkey as a convenient corridor for developing trade relations with countries in Northern Africa and Iran. Therefore, Russia won't be happy to lose Turkey as a friendly neighbor."
Ankara is even less interested in tensions with Moscow, one of its main trade partners, he added.
Russia reconsiders building Iran-Armenia rail line
One consequence of the crisis in the Caucasus could be the re-starting of a project to build a rail link between Iran and Armenia. Experts say a political decision could be made on the project.
At his meeting with Armenian President Serzh Sargsyan at the Bocharov Ruchei presidential residence on Tuesday, Russian President Dmitry Medvedev expressed his regret that the "thoughtless aggressive action of Saakashvili's regime" had affected the integrity of Russian-Armenian transport links passing through Georgia, Presidential Aide Sergei Prikhodko said.
Prikhodko said the meeting was devoted to discussing the launch of new transport routes and collaborating in the railway transportation sector, as well as in the fuel and energy industry.
Currently, the sides are considering restarting a project to build a rail line to directly link Iran to Armenia, Prikhodko said. The Armenian railway has been managed by Russian Railways under a concession agreement since June 1, 2008.
Previously, the project had been considered too expensive, but now a certain political decision might be initiated to kick off its implementation, said Shushan Khatlamadzhyan of Yerevan's Institute for Civilian Studies and Regional Development. The routes that have been in operation all stretch either across Turkey or Azerbaijan, he added.
The project of the Iran-Armenia railway was initially presented in 2006. The following year, Armenian Transport and Communications Minister Andranik Manukyan announced that the two countries were seeking a third-party investor due to the project's high expense. In March 2008, Russian Railways chief Vladimir Yakunin arrived in Iran to "discuss issues of cooperation in the rail sector," official reports said.
The project might reach $1.5 billion, Arminfo agency reports said in June.
As Armenian Railway is a subsidiary of Russian Railways, the railway project might be considered and restarted due to the changes that have occurred since 2006, Russian Railways spokesman Dmitry Pertsov said.
Chrysler set to cooperate with Russia's GAZ Group
U.S. automotive giant Chrysler and GAZ Group, Russia's second largest automaker, could launch an ambitious cooperation program by assembling the Dodge Caliber compact car, the most popular Chrysler vehicle on the Russian market.
However, only 2,800 Dodge Calibers were sold in January-June 2008, giving them 32nd place on local dealers' balance sheet. But their sales soared by 82% on January-June 2007; and Chrysler said it would try and boost demand by assembling the vehicles in Russia.
Although the project would allow GAZ to expand production, the company is also negotiating a partnership agreement with General Motors that, unlike Chrysler, offers several inexpensive car models, including Korean-made Chevrolets.
Mikhail Pak, an automotive analyst at Metropol Investment Financial Company Ltd., said GM was a more attractive partner, and that Chrysler had far weaker positions in Russia. In January-June 2008, GM sold 114,500 new Chevrolet models in the country, leading the new foreign-car market.
GAZ called Chrysler a possible strategic partner, saying both sides could assemble the entire range of its cars in Russia. According to experts, GAZ does not sell enough of its Volga passenger cars, and that the Volga Siber vehicle on a Chrysler platform would only last five years on the market.
GAZ said it wanted to find a partner who would help boost annual production to 300,000 modern Volga-brand cars on a foreign platform, and that it was ready to invest up to $1 billion.
Corporate officials said off the record that it would be too early to talk about a strategic partnership with Chrysler because this was a pilot project.
Ivan Bonchev, an automotive analyst at Ernst & Young, said this was reasonable, and that Magna, Canada's largest automobile parts manufacturer supplying the bulk of car components to Chrysler, would also join in.
GAZ and Magna could set up a joint venture because the Canadian company has also considered assembling Chrysler vehicles in Russia.
Russkiye Mashiny (Russian Machines), the automotive unit of the holding company Basic Element controlled by billionaire Oleg Deripaska, said GAZ could contribute its car-production facilities to the new venture.
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