Russia’s Northern Sea Route: The Superior Course for Maritime Trade in the Arctic

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ABy:  Anthony J. Riddle,  Lynx Global Intelligence

 

The Chinese government intends to redraw the lines of power in maritime trade. In a Chinese-language only report distributed by the Chinese Communist Party (CCP), they signaled their intent to encourage Chinese shipping companies to utilize trade routes in the arctic circle. This will catalyze a paradigm shift in global maritime trade because China is the first major power committed to utilizing the Arctic Circle; setting a new precedent in naval history. Specifically, the CCP prioritizes the increasingly navigable Northwest Passage which crosses through Canadian and American territorial claims. Shortening transit times for maritime shipments is the primary motivation for using emerging Arctic sea routes to link China to European markets. The Chinese Maritime Silk Road ends at the Port of Piraeus, Greece, and leads through the Indian Ocean and Suez Canal. The current route cuts 10 days off the journey to Central or Eastern Europe when compared to routes which lead around the Horn of Africa. [1] Because of this accelerated transit speed “most of China’s $1 billion in daily exports to Europe [now] traverse the Gulf of Aden and the Suez Canal.” [2] The CCP now looks to the Arctic to further expedite shipments to European consumers at a time when China’s “online revenue [is] projected to double to $1.1 trillion by 2020.” [3]

China currently controls fourteen of the top twenty high volume sea ports and has launched the One Belt, One Road Initiative with the intent of establishing new trade routes to bolster its economy and expand its international influence. The maritime component of this initiative initially used a shipping route that ran through the Indian Ocean, the Straits of Malacca, and the Suez Canal. [4] This route, however, forces shipping vessels to transit through three high risk piracy zones which increases shipping costs resulting from the combination of higher insurance premiums and augmented security measures. Costs to shipping companies are increased by $726.1 million a year when transiting just the East African piracy zone because of the additional security merchant vessels require to do so safely. [5] By shifting priority to the increasingly navigable arctic, Chinese shipping companies can effectively bypass these costly and dangerous areas when shipping goods to European markets. China’s Maritime Safety Administration spokesman Liu Pengfei was quoted as saying “Once this [arctic] route is commonly used, it will directly change global maritime transport and have a profound influence on international trade, the world economy, capital flow and resource exploitation.” [6]

The Russian controlled Northern Sea Route will become navigable far sooner than the Northwest Passage according to climate change models; additionally it will have the largest ice free area comparatively to other routes. [7] The Northern Sea Route is also approximately 40% shorter than using the Suez Canal trade route [8] and shortens voyages from Shanghai to Hamburg by 2,800 nautical miles. [9] Such a significant input cost reduction for delivering goods to European markets will be irresistible for shipping companies participating in Chinese trade. An example of how arctic transits create significant savings is “the Nordic Orion, a Danish bulk carrier, [which] saved $200,000 and four days’ transit time by shipping 15,000 metric tons of coal from Vancouver to Finland via the Northwest Passage in 2013.” The Arctic Ocean therefore represents an approximate savings of $50,000 a day in transit costs while simultaneously removing the necessity for Maritime Security teams that are required to safely transit piracy zones. This will drive Arctic and non-Arctic states to compete for access to these lucrative routes that are partly claimed by the United States, Russia, Canada, Denmark and Norway. [10]

122333The Russian government has heavily invested in making the Northern Sea Route navigable for trade to compete with the Northwest Passage. China stated in their 2015 military white paper that they place great importance on “managing the seas and oceans and protecting maritime rights and interests” [11] and, as a result, they made history in 2014 by having the first unescorted commercial vessel transit the Northwest passage which delivered a shipment of nickel ore. [12] This same year China and Russia signed a 30 year and $400 billion dollar deal for GAZPROM to supply China with Russian oil in an attempt to further link Russian and Chinese economies. This deal ultimately was crippled by plunging price of oil from the $100/barrel at the time of the deal and the global supply of Liquid Natural Gas (LNG) which has become more attractive because of the Paris Agreement on climate change. [13] Russia intends to manage their Northern Passage to circumvent western sanctions by taking advantage of Chinese economic growth to repair their own economy and improve Sino-Russo relations. The Chinese decision on which arctic route to rely on will rebalance global relations between the three superpowers.

To successfully attract Chinese shipments, Russia maintains forty icebreakers and has another eleven icebreakers on order to improve the viability of this emerging shipping lane. Additional signs of Russian commitment to controlling arctic trade are found in their four active Arctic combat battalions, recently established dedicated Arctic command, and creation of sixteen ports in the arctic circle. [14] Russia’s State Commission on Development of the Arctic Regions also founded a single company to boost the development of these new shipping routes and will oversee all logistical operations in the area. [15] The Northern Passage has already experienced a 30% increase in commercial traffic from 2008 to 2010. [16] Companies interested in participating in a region that is quickly becoming viable for trade, a first in recorded history, require both familiarity with the agreements between states in the region and to establish a dialogue with new partners already established there.

We are experiencing a paradigm shift in global trade. One that can be capitalized on if effectively managed through careful analysis of real-time competitive intelligence. Companies wishing to take advantage of this development require a dedicated team of subject matter experts who are familiar with the political forces affecting global supply chains. They will also require a network of professional partners who are firmly established in these expanding markets. Without a carefully constructed strategy to mitigate potential risks created by the geopolitical pressures between states, the subsequent volatility could cause irreparable damage to a company’s supply chain.

By introducing an Artificial Intelligence (AI) driven analytical dashboard to assist a diverse team of experts, Lynx Global Intelligence is uniquely positioned to provide the services necessary to successfully emerge from this transition ahead of the competition.

 

 

[1] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf

[2] http://www.huffingtonpost.com/joseph-braude/why-china-and-saudi-arabi_b_12194702.html

[3] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf

[4] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf xi, 21

[5] http://oceansbeyondpiracy.org/reports/sop/summary

[6] http://af.reuters.com/article/commoditiesNews/idAFL3N17N1JK

[7] Scott Stephenson, University of Connecticut, https://www.newsdeeply.com/arctic/community/2016/02/10/scott-stephenson-the-future-of-arctic-shipping

[8] http://www.gallois.be/ggmagazine_2013/gg_02_03_2013_90.pdf

[9] http://www.scmp.com/news/china/society/article/1937327/china-wants-its-shipping-use-faster-arctic-route-europe-opened

[10] http://www.maritime-executive.com/article/rival-claims-to-the-changing-arctic

[11] http://thediplomat.com/2016/04/going-blue-the-transformation-of-chinas-navy/

[12] http://www.latimes.com/world/asia/la-fg-china-ships-alaska-20150902-story.html

[13] http://www.reuters.com/article/us-russia-china-gas-exclusive-idUSKCN0UT1LG

[14] SEN PERDUE (R-GA): Senate Armed Services Committee Holds Hearing on U.S. Southern Command and U.S. Northern Command Witnesses: Gen Lori Robinson (CDR USNORTHCOM) PG 25

[15] http://e360.yale.edu/features/cargo_shipping_in_the_arctic_declining_sea_ice

[16] https://www.afsc.noaa.gov/publications/misc_pdf/iamreport.pdf PG 16-17

Hybrid Warfare: Irregular Soldiers, Political Subversion, “Lawfare”, Cyberwarfare, and Violent Nationalism

With the current European elections, many speculate social influence and interference by Russia

By:  Matthew C. Bebb, Lynx Global Intelligence

 

Violent nationalism as a force of legitimacy

Putin has exercised a unique type of hard power in the past decade with the use of hybrid warfare. This has been evidenced in the 2008 Georgia conflict, the present-day Ukraine conflict, and confrontations with NATO and EU countries. Putin has rejuvenated Russian nationalism by incorporating the Orthodox Church into policy making. The Orthodox Church serves as Putin’s “right hand man” that gives him legitimacy and moral superiority. Furthermore, Putin’s nationalism emphasizes “Russianness” by stating that people who speak the Slavic language are all part of Russia. This gives Putin self-appointed validity when intervening in other sovereign countries such as Georgia and Ukraine. In both conflicts, Putin states that he was coming to the aid of “Russians”. These “Russians” were not Russians, but Ossetians, Abkhazians, and East Ukrainians. However, Putin marries history with language by alleging that these people existed under the Russian sphere throughout history and belong to Russia. Putin’s strong nationalism calls upon “patriots” to enforce nationalism at home (e.g. The Nightwolves motorcycle club, Slav Mobs that beat up foreigners and homosexuals, and xenophobic organizations).

Irregular soldiers, low intensity warfare, and NATO confrontation

Putin, along with many Russians, views the collapse of the Soviet Union as the greatest geopolitical catastrophe of the 20th century. This “catastrophe” was compounded during the Balkan Wars when NATO bombed Serbia. Furthermore, Slavic speaking countries such as Croatia, Slovenia, Albania, Poland and Macedonia pivoted away from Russia after the war and embraced EU relations. Consequently, this further weakened Russia’s sphere of influence in the Slavic world while also bringing his enemies (EU and NATO) into his backyard (Ukraine and Georgia). Thus, Putin has sought to engage in realpolitik strategy in Russia’s near abroad by staging military exercises in sovereign spaces in order to project strength, demonstrate its posture, and deter further encroachment into the Russian sphere. This has taken place in the form of dangerously close flybys of NATO ships, naval drills in the Arctic, flyovers in EU airspace, showing off new military hardware at parades, and threatening the use of its nuclear weapons if provoked.

For all this muscle flexing, Putin is smart enough to know that engaging in formal mil-mil warfare against the West would end in disaster. Instead, Putin has clandestinely sent unmarked Russian troops such as those seen in the Crimea land grab. Or he sends in regular Russian soldiers who pose as civilian rebel fighters such as those seen in East Ukraine. These irregular forces give him plausible deniability while exercising his hard power secretly. On the other hand, if NATO or other Western militaries were to intervene against these regular troops, Putin could react with full force stating that Russians were being attacked and he had no choice but to use military force. Fortunately, these conflicts have been low in intensity and have not yielded international intervention.

Political subversion 

Putin has also supported and/or sponsored movements that cause political volatility such as Euroskeptics parties, the Brexit movement, European ultra-right wing parties, European anti-immigration parties, and secessionist movements with pro-Russian goals. These parties represent a disconnect between the beliefs and values of the European Union and its institutions. Putin thrives on these dissidents because they undermine the legitimacy of the European Union and look to Russia as a model for governance.

Putin’s image of strongman authoritarianism and Russian exceptionalism are propagandized by government-sponsored media outlets such as Russia Today, Sputnik, and Pravda. Each of these sites are hosted in various languages in order to reach a broader audience. The disinformation campaign used by the Kremlin seeks to undercut EU goals and thwart the idea of American exceptionalism. Coupled with his media campaign are Russian cyberwarfare efforts that continually attack American economic and political secrets. This is another type of hybrid warfare that gives Putin plausible deniability by stating that these could be rogue hackers who don’t work for the government. However, it is widely acknowledged that along with Putin’s cyberwarriors are a horde of internet “trolls” who write disparaging comments on social media sites about the West.

Lastly, Russia’s role in the UN is a flagrant hypocrisy. Putin manipulates domestic and international laws in order to achieve his goals (i.e. lawfare). Putin advocates states’ sovereignties. In other words, no foreign power should have a say in another country’s business. That is unless, of course, you are Vladimir Putin. Russia has a habitual veto voter in the UN and undermines the international community’s progress toward addressing many issues. Putin also claims that Russia must maintain its sovereignty by eliminating potential fifth column agents within the Russian state (e.g. NGOs, foreign companies, and tourists).

Recent News Confirming Information Warfare Feb. 21, 2017

Defense Minister Shoigu, backed by his top brass army generals, addressed the State Duma on February 21st. The usual protocol for addressing the Duma on security matters adhered by Shoigu along with his predecessors was a private affair. These plenary sessions were always declared state secrets, and members of the Duma were not allowed to share any information with journalists. However, during last week’s address by Shoigu, there were press present and live stream media provided by the Defense Ministry. Replying to questions from Duma members, Shoigu shared that four years ago Russia secretly created an “information warfare directorate” within the defense ministry. This is a new branch of the military that will be engaged in cyber warfare “counterpropaganda.” Apparently, this will involve hacking into databases and Internet trolling. Duma officials were caught off guard when Shoigu publicly disclosed what was once secret information, now being put on blast for state media.

Colonel General Vladimir Shamanov, a former chief of the Airborne Troops and the current Duma defense committee chair, told journalists these new troops will “protect [Russia’s] national defense interests and engage in information warfare,” including cyber warfare. Retired Colonel General Leonid Ivashov, the former head of the defense ministry’s international cooperation department, insists Russia should be more aggressive in information warfare “to open up concealed Western data in the US and in Germany to expose their lies”. The hacking of e-mail accounts to dump their contents into the public domain could seem to fit the Russian understanding of “information warfare.”

Overview: The Future of the Republic of Turkey Remains Unclear After Failed Coup d’état

Turkish politics have taken a nationalistic turn as domestic affairs spiral out of control. Massive expulsions of bureaucrats, journalists, academics, businesses and political opponents continues to worry the international community.

By:  Zana Silevani, Lynx Global Intelligence

 

Turkey’s significance in the international community

Historically, the Republic of Turkey has served the international community as a commercial hub which has facilitated international trade, communication and intercultural exchange for decades. Modern day Turkey is an extremely valuable partner as it has characteristically carried on it’s traditions of free trade, military cooperation and fortified secular values. Turkey has established it’s presence in the international community—it holds tremendous weight when discussing economic and political affairs. The economic and strategic value of Turkey is attributed to it’s physical coordination as it is situated in a unique geopolitical position. Turkey borders Syria, Iraq, Iran, Armenia, Georgia and Bulgaria with Russia and Ukraine just across the Black Sea.

turkey-2

In 2014, The Republic of Turkey ranked in as the 27th largest economy in the world [2]. The dynamic nature of the Turkish economy has facilitated strong partnerships with it’s primary import trade partners: China ($24.6B), Germany (23.5B), Russia ($14.7B), Italy ($12.3B) and the United States ($11.8B)—it’s largest export destinations: Germany ($16.9B), Iraq ($10.8B), the United Kingdom ($10.3B), France ($7.87B) and Italy ($7.58B) [2]. Furthermore, as a critical member of the North Atlantic Treaty Organization (NATO), Turkey is an important asset for US interests in the Middle East and Europe. Geopolitical configuration and a versatile economy puts partnerships with Turkey at a high priority, but the many successes of the Republic of Turkey overshadow the murky essence of recent Turkish political developments. Turkish nationalists such as President Reccep Tayyip Erdogan and his Justice and Development (AK) party have consolidated executive power after the recent Summer 2016 coup d’etat attempt which has resulted in the arrest and detainment of thousands of people accused of aiding the coup.

 

The failed 2016 coup attempt and a new face for the Republic of Turkey

July 15, 2016—chaos erupted as a faction of the Turkish military took up arms and attempted to overthrow President Erdogan. The military began with the occupation of the Bosphorus bridge which connects the two shores of Istanbul then attempted to control key points in the Turkish capitol of Ankara [3]. The separatist faction which called themselves the Peace at Home Council, were defeated when loyalists to Erdogan’s existing regime thwarted the coup attempt and restored power. Using state operated media (TRT) Erdogan was able to garnish support to abolish the coup and rally his supporters. At least 90 people were killed and nearly 1,100 more were injured during the coup attempt [3]. The coordination of the coup was ultimately blamed on the exiled cleric Fethullah Gulen who resides in Pennsylvania, USA and is a long time opponent of President Erdogan and his Justice and Development party. The coup attempt resulted in massive material losses, but ideological damage in Turkish civil society took the harshest damage as President Erdogan began a campaign aimed at suppressing opposition through detainments and arrests. Thousands of bureaucrats, academics, political leaders and military personnel have been expelled, arrested, or detained as a result of allegations of involvement in the coup.

The failed July 15, 2016 coup d’etat attempt in Turkey shook the foundations of the state and thrusted Turkey away from it’s traditional secularism and towards civic nationalism. President Erdogan has utilizes a parliamentary state of emergency to bypass constitutional provisions and mobilize political power to the executive branch. President Erdogan and his Justice and Development party have undertaken considerable measures to consolidate executive power [1]. After the summer of 2016, the Turkish state has detained over 35,000 individuals thought to have some sort of tertiary involvement in the influence or potting of the 2016 coup d’etat attempt [1]. Over 17,000 individuals have been arrested in connection with the coup attempt—one third of Turkish security forces have been arrested on specific charges. Arrests after the coup are based on allegation of affiliation with the Gulen movement. Ultimately, Erdogan has delineated executive power to suppress Kurdish influence in Turkey. Kurdish mayors, lawyers and activists have been expelled from their posts and accused of having ties to Kurdish separatist organizations. The new far-reaching executive authority has monopolized AK party initiatives.

 

The new US administration and the future of US-Turkey relations

In early February 2017 President Trump and President Erdogan publicly voiced mutual admiration for one another in a late night phone call, but the US has not established a stance on it’s future with President Erdogan. In the phone call president Erdogan remained firm in his stance to influence decisions which favor disarming Kurdish YPG militias in Syria. The US administration has not commented on future endeavors with Kurdish militias in Syria, but continues to maintain Turkey’s NATO status as a crucial geopolitical asset to strategic operations in Syria. Because of the geopolitical importance of Turkey in air/ground campaigns, Erdogan must cooperate and deter interest in weakening the Kurdish front against ISIS.

The US must leverage Turkish cooperation to grant Kurds in Syria resources to continue to engage ISIS on the ground in northern Syria. The YPG have proven to be non-confrontational and malleable to US interests on the condition of material support. The YPG are a crucial indigenous force who provide essential tactical and intelligence support to US Special Operations Command personnel on the ground in Syria. Ultimately, President Erdogan perceives the new US presidency as an opportunity to initiate communication which supplements Turkish interests in cooperation in the Syrian Civil War. Turkey is seeking to strengthen ties with the US to ultimately influence US military cooperation with Kurdish factions in Northern Syria. Through the recent radical political transition in Turkey in the summer of 2016 was drastic, President Erdogan remains opportunistic in seeking to gradually restore US-Turkish relations which experienced significant strain towards the end of 2016 with the departure of president Obama.

Granting Turkey greater autonomy to influence US defense policy will significantly alter US-Kurdish partnership in Syria. Turkey will ultimately remain a formidable and valuable US defense partner. Though Turkey has taken an abrupt nationalistic and at time anti-western turn, the United States needs Turkey as a partner to supplement it’s campaigns in Iraq and Syria. Turkey provides invaluable resources to the US with optimal strategic capabilities in the global war on terror.

 

[1] http://www.newyorker.com/news/news-desk/the-end-of-democracy-in-turkey

[2] http://atlas.media.mit.edu/en/profile/country/tur/

[3] http://www.businessinsider.com/turkey-istanbul-military-bridges-2016-7

[4] (image) https://www.wired.com/2016/07/turkey-coup-livestream-map/

[5] (image) https://twitter.com/alivelshiot/status/499693038328094720

Russia: A Political Risk Assessment (Economic Intelligence)

February 22, 2017

By:  R. Sonny Betancourt, Co-Founder, Lynx Global Intelligence

 

US – Russia Business Talking Points

Key Judgements

Engaging in business with Russia is complex. The United States is currently in a complicated relationship with Russia. The allegations of Russian hacking, influence on the US Presidential election and overall pent up hostility over actions in Syria, Crimea and Ukraine has complicated the relationship even further. The sanctions in place against Russia will require congressional support and consultation in order to be lifted.

Introduction

Doing business in Russia requires understanding the business climate, cultural nuances and ramifications of US-imposed economic sanctions.  Expertise is required to handle the current frameworks as well as this byzantine business maze. Business with Russia requires a business background with proficiency in foreign policy, security and regional dynamics. Currently, both US bilateral trade and investment relations have been obstructed or outright frozen.  This exposes companies to potential political risk in the spheres of political, economic, technological, legal, and regulatory frameworks.

Background

Globally Russia is the 8th largest economy (GDP) and 6th largest purchase power parity (PPP) and has over 142 million potential customers, acute infrastructure needs and is a vital export market for US businesses. Russia has a highly-educated culture that spans 11 time zones but there are significant barriers to entry: sanctions, corruption, burdensome regulations, competition from large state-owned entities and inadequate rule of law. Sanctions against Russia currently are the biggest barrier to entry. The sanctions regime against Russia was put in place in March of 2014 in response to Russia’s invasion and annexation of Crimea and use of force in Ukraine.  The sanctions primarily targeted 14 defense companies, 6 banks and 4 energy companies.  These sanctions include goods, services and credit financing.[1] Since the implementation, the sanctions have already caused Russia well over 100 billion in economic losses.

Sanctions (backgrounder)[2]

  • Executive Order 13660
    • Sanctions put in place restrictions on the travel of certain individuals and officials and showed our continued efforts to impose a cost on Russia and those responsible for the situation in Crimea.
  • Executive Order 13661
    • Prohibiting the provision, exportation, or reexportation of goods, services (not including financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation
    • Sec 3 – Suspended entry of immigrant/nonimmigrant deemed detrimental to United States
  • Executive Order 13964[3]
    • Harm or compromise the provision of services by entities in a critical infrastructure sector;
    • Disrupt the availability of a computer or network or computers; or
    • Cause a misappropriation of funds or economic resources, trade secrets, personal identifiers or financial information for commercial or competitive advantage or private financial gain.
    • Order 13964 Expanded (December2016)
    • Russia’s Main Intelligence Directorate (Glavnoe Razvedyvatel’noe Upralenie or “GRU”);
    • Russia’s Federal Security Service (Federalnaya Sluzhba Bezopasnosti or “FSB”);
    • Special Technology Center (STLC, Ltd. Special Technology Center St. Petersburg);
    • Zorsecurity (Esage Lab);
    • Autonomous Noncommercial Organization Professional Association of Designers of Data Processing Systems (ANO PO KSI);
    • Igor Valentinovich Korobov, Chief of the GRU;
    • Sergey Aleksandrovich Gizunov, Deputy Chief of the GRU;
    • Igor Olegovich Kostyukov, First Deputy Chief of the GRU;
    • Vladimir Stepanovich Alexseyev, First Deputy Chief of the GRU;
    • Evgeniy Bogachev; and,
    • Aleksey Belan.
  • A group of US senators (both Republican and Democrat) and a separate house bill are poised to introduce legislation to prevent President Trump from lifting Russian sanctions

 

Economics (O&G snapshot)

  • Russian oil and gas companies including Rosneft, Transneft and Gazprom Neft have been blocked from securing long-term financing from US banks which has halted numerous large scale oil and gas projects[4]. These projects include expansion in the Arctic.
  • Well over 50% of Russia’s GDP comes from oil and oil activities[5] The sanctions in turn have crippled GDP and have also delayed or completely stalled new O&G development actions.
  • The Yamal LNG project ($27 billion dollars) could not obtain US financing and had to resort to Chinese banks. Chinese financing is less advantageous and is both more expensive and less flexible.
  • Lack of ability to finance exploration and production activities to find new oil plays and restrictions on U.S. technology purchases had a detrimental effect on Russian GDP (half of fracking tech used in Russia comes from the US). These restrictions could impact Russia’s overall O&G competitiveness on a global scale.
  • Import/Export trade constitutes 51% of GDP[6] This area has been significantly impacted due to both US and EU sanctions. The EU represents 8.4% of total Russian imports and is Russia’s biggest trading partner, constituting 48% of total foreign trade. Russia’s exports are dominated by mineral fuels 74.9% which has historically contributed to a Russian trade surplus in the range of 180 billion euros annually. (Notably gas was not under EU sanctions as member states are reliant on Russian gas).
  • All restrictions against IT & cyber-related products against the FSB were lifted on February 1, 2017[7]

 

Business Outlook/Industries

  • Russian Major Industries
    • Oil and Gas
    • Mining
    • Chemical/Petrochemical
    • Metallurgy
    • Agriculture
    • Weapon and Military
    • Aircraft Building
    • Aerospace
    • Transport
    • Pulp and Paper
    • Precious Stones

 

Forecasting

  • Lifting of the sanctions will be a boon for US oil and gas, banking and export industries
  • Easing as opposed to lifting sanctions are more likely to occur
  • Coordination in Syria and counterterrorism-related activities could potentially soften US stance
  • Academic and creative dialogues must be considered to repair foreign relations, security coordination and diplomatic dialogue
  • Opportunities legally exist within US businesses currently engaged in Russia – PepsiCo, Proctor & Gamble, McDonalds, General Motors, Johnson & Johnson, Alcoa, GE, Morgan Stanley and Cargill

 

Takeaways

  • The U.S.-Russian relationship is strained and requires adept, insightful analysis outside typical political dogma. How can we wage peace and reach an agreeable solution? Is it even possible to reach a diplomatic accord?
  • Russia has been buttressed by increased oil prices but has little control over sanction influence of global economy and domestic job losses.
  • How long can Russia continue to have sanctions impact GDP?

 

Historical Russian GDP Growth Rate Trending

A correlation between sanctions and a major drop in Russian GDP growth is clearly illustrated (see graph below). The sanctions will not remain in place indefinitely and need to be addressed before economic realities lead to potential conflict.

The ability to weather the storm requires adept business and geopolitical prowess. Doing business in Russia is possible but requires moving outside the realm of sanctioned sectors and positioning to be prepared when sanctions are lifted. Guidance within these frameworks requires expertise.

russia-gdp

Lynx Global Intelligence – Intelligence for Good

Lynx Global Intelligence provides an outside the beltway approach, dealing in fact, guiding companies currently in Russia to hedge their bets and provides the legal understanding to deal in a complicated geopolitical risk environment.

A looming Russian bank crisis, continued sanctions, reduced foreign direct investment, increased distrust and potential increased belligerency, requires a counterbalanced strategy. Tactics within the strategy should include maintaining open channels of communication, seeking negotiated solutions, and permitting U.S.-Russia foreign affairs to practice the waging of peace. Dealing with Russia requires a strong but respectful approach. The ability to engage in construction dialogue requires a balanced policy. This nuanced reaction requires an aptitude that Lynx Global Intelligence can navigate within security, economic, energy, investment and geopolitical realities to craft a business solution based on the realities on the ground.

[2] https://www.state.gov/e/eb/tfs/spi/ukrainerussia/

[3] http://www.polsinellioninternational.com/blog/2017/1/13/2017-begins-with-additional-us-sanctions-on-russia-for-malicious-cyber-related-activities

[4] http://www.forbes.com/sites/timdaiss/2016/08/19/prolonged-sanctions-rip-into-russia-causing-angst-for-putin/#cd8f3fc4c2f6

[5] http://carnegie.ru/commentary/?fa=61272

[6] http://www.heritage.org/index/country/russia

[7] http://www.usatoday.com/story/news/2017/02/02/us-eases-some-economic-sanctions-against-russia/97399136/

The Contested Caspian Sea: Oil, Gas, and Legal Disputes. An Overview and Forecast.

The Caspian will be a hotly contested piece of water thanks to its oil resources, naval navigation, and access to the Middle East and Europe for pipeline routes.

By:  Matthew C. Bebb, Lynx Global Intelligence

 

The Caspian Sea is surrounded by 5 littoral states: Azerbaijan, Iran, Russia, Turkmenistan, and Kazakhstan. Each has different vantage points and political capital in the region in order to advance their status in the Caspian. Advancing their presence in the Caspian offers access routes and oil extraction from the sea bed. However, the legal status of the Caspian as to whether it is a lake or a sea is disputed. Once the legal definition of the Caspian is resolved, it will create a legal foundation for each of the state to operate (or not operate) in the Caspian. Until then, the Caspian will be a hotly contested piece of water thanks to its oil resources, naval navigation, and access to the Middle East and Europe for pipeline routes.

The problem with the territorial claims among the 5 littoral states of the Caspian Sea starts with the dissolution of the Soviet Union where 3 new states emerged (Azerbaijan, Turkmenistan, and Kazakhstan). These 3 states did not exist at the time during the original 1920 and 1941 agreements over the Caspian Sea between Iran and the Soviet Union. Furthermore, the question of the Caspian Sea’s boundaries or mineral exploitation weren’t broached in the two bilateral treaties between the Soviet Union and Iran. They were concerned mainly with fishing rights and coastal matters. So, the question since 1991 is whether the status of the Caspian Sea is an inland lake or a sea? If it’s a sea, then it would follow the UN Convention of the Law of the Sea that sets out norms. There have been disagreements among the 5 littoral countries over the right to access these natural resources of oil and gas under the sea, which are argued through different interpretations of the law. As often is the case, these countries are using their interpretations of geography and international law as an argument for their national interests. Thus, the opposing national interests have prevented a consensus on the status of the sea.

 

There have been efforts to come to a resolution to this, but discussions are going nowhere. So, what are the main causes of the dispute?

One of the main issues is the way that Iran interprets the status of the Caspian. Iran considers it a “sea” hence using argument of international maritime law, which allows for freer navigation and using that to get a bigger share of the sea. This is problematic for Iran because Turkmenistan and the other countries are satisfied with the preexisting median line. Then there is Russia which has had a conflicting position since the early 90s. Since then, the Minister of Foreign Affairs and Minister of Energy along with oil and gas firms have all taken differing positions. The Russian Ministry of Foreign Affairs tends to be more supportive of it being a “sea” in order to appease its Iranian partner who’s fighting with them in Syria. The Ministry of Energy and Russian energy extraction firms are more concerned about mineral and energy exploitation. They want an agreement to be made as soon as possible in order to begin drilling without political tension. This has gradually emerged into a position that is often referred to as “common waters divided bottom”. With this policy, Russia is able to maintain surface navigational rights, and therefore naval supremacy, which it views as very important in the Caspian. Furthermore, it has taken a more pragmatic approach to the natural gas exploration and ownership thanks to its naval presence. In 2002, Azerbaijan and Kazakhstan agreed to this “common waters, divided bottom” approach by signing agreements with Russia over sectorial claims of the sea bed. It’s in Russia’s interest that this matter remains unsettled so they maintain the status quo and prevent Turkmenistan from developing their Transcaspian Pipeline, which would be give European states an alternative energy source. This makes it more difficult for the Trancaspian Pipeline to be realized, and that gives one less alternative for Europe that bypasses Russian energy resources. It is doubtful that we’ll see any initiative from Moscow on unlocking this issue.

 

This raises the question of whether Kazakhstan, Azerbaijan, and Turkmenistan have a shared interest to counter Russia?

These 3 countries were not countries when the first agreements were made so they weren’t included. However, Kazakhstan and Azerbaijan have already started developing major projects in their parts of the Caspian. Turkmenistan less so, and they haven’t had as much success because of Russian and Iranian pressure. The Turkmen have been developing their own sectors with outside help from some European firms, especially with their big project is the Transcaspian Pipeline. However, this is the only project that the other littoral states have objected to being crated (especially Russia and Iran). It’s interesting that Russia, Kazakhstan, and Azerbaijan make pledges to protect the environment and the sea, but Kazakhstan had a major pipeline leak and no one raised any fuss about it. Then, Turkmenistan has a pipeline leak and everyone raises hell, especially Iran and Russia. Turkmenistan appears to be the odd man out in the Caspian Sea politics thanks to Iranian-Russian pressures.

 

We’ve assessed the former Soviet states positions. What’s the Iranian position then?

Iran has signed a number of agreements concerning maritime resources, security cooperation, search and rescue, and emergency situations. But all of these agreements are hinged on the unresolved legal status of the Caspian sea. So, some of them in a way cant be implemented without resolving this status of the sea. About 68-70% of the Caspian Sea has been divided between Russia, Kazakhstan, Azerbaijan, and Turkmenistan. It only leaves about 30% for Iran, Azerbaijan, and Turkmenistan to fight over within Iran’s disputed area. Nonetheless, it leaves Iran in a minority holding position. Therefore, it’s important for Iran to have the legal status clarified. Turkmenistan and Azerbaijan will not be willing to change their mind over the existing status quo.

Iran is an interesting position because the bit of the Caspian they believe to be theirs is the deepest of the Caspian that holds 2/3 of the water in the Caspian, which is not very favorable for extracting. The extraction would be extremely difficult and not very profitable with current technology. Iran’s interest of oil extraction is focused more toward the Gulf. That being said, they have much on their hands in the middle east with geopolitical turmoil and oil fields to their south. But when the Caspian Sea does become a priority, it will most likely seek close offshore exploitation with the help of foreign investment (e.g. European countries) now that the majority of their sanctions have been lifted. They currently have help from a Swedish company to build submersible platforms for deep sea drilling. That’s not to say they can’t drill for oil. The technology is there. It’s more of a question of the political will to contest the waters, and even if they win, will they invest in expensive deep water extraction technologies?

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Where do western countries stand in this?

There’s not a lot the west can do to unlock this because of the issues in the Middle East and Eastern Europe with Iran and Russia being the two biggest players. The US has very little leverage in this area. America and the EU are not going to want to spend political capital on this the Caspian issue given the back and forth relations with Iran, Russia, and the United States. However, it is in the EU’s interest to find new markets aside from Russia oil and gas. This gives Iran an opportunity to sell to EU if sanctions are rolled back again. It’s in America’s interest that EU has an alternative to Russian oil and gas because it keeps them out of the Kremlin’s grip. Russia can easily cut off oil and gas to certain European countries with their pipeline transit regime, which has security implications…which has NATO implications…which means US implications. Should America have a say in the matter, it would be in America’s interest if the Caspian’s status was deemed with the law of the sea. It’s in America and Europe’s interest for the Transcaspian Pipeline to be realized. Energy resources from Central Asia can be pushed to Europe, but this is a hard feat to accomplish.

Turkmenistan’s foreign policy is not very conducive to working with partners outside of the country even though they need to rally Western support. They have a fairly aloof attitude, “if you a build a gas pipeline to our fields, we’ll give you gas”. However, the EU doesn’t want to be antagonistic toward Russia by supporting Turkmenistan. Turkmenistan doesn’t have a lot of partners on their side to push their project successfully. In order for a legal argument to stop Turkmenistan’s goal of creating a Transcaspian Pipeline would require a proper legal agreement with total consent. However, Russia, Iran, Kazakhstan, and Azerbaijan are not technically in violation of hindering Turkmenistan because there hasn’t been an established law in the sea.

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A pipeline that’s been under the radar, but recently agreed upon is a pipeline under Azerbaijan and Kazakhstan. After ten years of planning, the two countries recently signed an agreement. Russia attempted to block this. Kazakhstan is looking to export their oil. Kashagan Field (Kazakh) oil needs more markets than its current one. The development of Kashgan field has been continuously postponed due to political pressures and pipeline damage. The recent repairs of the Kashgan pipeline will now allow it go online soon. The pipeline will consist of links through Kazakhstan to the Kazakh port of Kuryk (which is under construction to become a multimodal port) to the port of Azerbaijan. Then diverted to the Transcaspian pipeline to Baku where the oil would go to the BTC pipeline and off to the Turkish Mediterranean coasts, and then to Georgia by rail, and tanker to Odessa in Ukraine and then through Poland for world markets. However, Iran is against this pipeline because the legal of the question of the Caspian is still unresolved and would push out Iranian firms. Iran has opposed the unilateral agreements between the rest of the former Soviet Union littoral agreements of the sea bed. The 47th Working Session of the Iran foreign minister has even mentioned that it has Caspian ambitions by shipping it through Iran or Oman.

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There’s a growing military presence in the sea. Russia recently fired missiles into Syria from the Caspian Sea. They’ve also been the backer of regional training exercises in the area with their CTSO partners. Depending on future sanctions relief, Iran could default back to its independent power stance as it returns to the world stage (and not have to rely on Russia for support). Therefore, Iran could be an instigator as a revisionist power in the area. More likely, there could be a misunderstanding on the local level that could spiral out of control between smaller allied countries that would drag in Russia and Iran. However, these are both unlikely. Russia has levers in the region that it can pull to either mitigate risk or escalate tensions (e.g. neighboring FSU countries, Armenia, and Ngoro Karabakh). There’s a lot of noise coming from Azerbaijan and Turkmenistan about possibly butting heads in the Caspian Sea, but neither have the naval force to assert their claims. Their navies are more like a coast guard that are used to intervene with smugglers. That being said, Russia is the main player in the Caspian Sea due to its geopolitical influence and military presence.

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To conclude, this will be unresolved until the middle of the next decade when these projects can be realized. As long as Iran contests the legal status of the sea, the Caspian Sea will not be resolved. There’s an x-factor, and that is if Putin abdicates power or is relieved from his position, which would change the dynamics of the region.