Term Project about US foreign policy regarding North Korea's nuclear program

Russian Energy and the Korean Peninsula

Stephen Blank

Received: 28 March 2007 /Accepted: 31 October 2007 / Published online: 1 December 2007 # Springer Science + Business Media B.V. 2007

Abstract The recent agreements concerning North Korea’s nuclear program raise possibilities for providing North Korea with energy (oil and gas) to compensate for the termination of its nuclear program and of integrating it more broadly into the Northeast Asian economy. Russia has long wanted to play the role of provider of oil and gas to North Korea and these agreements open up new opportunities for it to do so. However, serious obstacles in the nature of North Korea’s precarious economic situation and its consequences, international rivalries in Northeast Asia, and Russia’s own energy policies present serious obstacles to the realization of Russia’s ambitions as regards North Korea and as energy provider to Northeast Asia as a whole.

Keywords China . North Korea . Northeast Asia . Oil and gas . Russia . South Korea

Introduction

The February 13, 2007 six-party agreement on North Korean denuclearization represents only a first step towards resolving any of the serious issues of security on the Korean peninsula and in Northeast Asia. A crucial dimension of this process is deciding who will provide North Korea with sufficient hydrocarbon, electric, and/or peaceful nuclear energy to ensure it has enough peaceful sources of energy and control over its nuclear program. Once that is settled a decision must also be reached upon the financing, duration, terms, and modalities by which these supplies will reach the DPRK. Nobody should dismiss the importance of this point. North Korea has consistently demanded energy compensation for the expected loss of nuclear energy from any agreement. And at times the question of who is going to guarantee

East Asia (2008) 25:7–33 DOI 10.1007/s12140-007-9030-z

NO9030; No of Pages

S. Blank (*) U.S. Army War College, Strategic Studies Institute, Carlisle Barracks, PA 17013-5244, USA e-mail: [email protected]

the provision of this energy, most notably in the form of a light-water reactor (LWR), has been seen as a crucial, if not the, crucial issue in the six-party talks.1 Thus the conclusion and implementation of the February agreement accords both forces the issue of energy sales onto the agenda and opens up the possibility that one or more of the other five parties can become a major energy supplier to North Korea. The accords and subsequent implementation thus create possibilities for braking up the logjam that impeded the DPRK’s economic collaboration with other states.

Russia, as a major oil and gas producer, is a likely contender to sell North Korea energy as part of any comprehensive solution to the proliferation issue. However, this paper argues that serious obstacles exist to the realization of this Russian ambition. Thus it focuses largely on oil and gas not nuclear power or electrical energy. These obstacles lie in the nature of the already developing relationships among North and South Korea, China, and Russia, as well as potentially America and Japan. Second, Russian energy policies themselves have created a situation whereby it already is difficult for Asian buyers to put faith in credible Russian commitments to sell large quantities of energy to North Korea, or anyone else in Asia for that matter. Third, North Korea’s own unresolved economic relations with Moscow and its internal conditions place numerous difficulties in the way of obtaining Russian energy as part of a comprehensive solution.

Since 2003 DPRK spokesmen have tied the provision of nuclear, hydrocarbon, and electric energy to compensate for the loss of nuclear power to any solution of the nuclear weapons issues.2 Because the February 13 agreement does not specify the means by which the other parties will provide North Korea with energy these agreements stimulate a competition over who will supply North Korea with energy and thus gain influence over its economy and politics. Russia has long indicated its readiness and willingness to provide North Korea with electric, hydrocarbon, and even peaceful nuclear energy.3 Indeed, Russian officials argue that North Korea cannot do without peaceful nuclear energy since it has poor quality coal and no rivers to generate hydroelectric power or indigenous oil and gas holdings.4

Russia’s eagerness to sell energy to North Korea if Pyongyang renounces its nuclear weapons program and returns to the Non-Proliferation Treaty, IAEA inspection regimes, and accepts the verification agreements that will come out of the February 13 agreement is palpable. North Korea’s previous commitment to building nuclear weapons has been a major obstacle to the realization of Russia’s ambitions of playing a major role in further developing North Korea and enhancing its own role in Asia. The recent agreements open the way towards reopening Moscow’s preferred agenda regarding ties to Pyongyang. One Russian expert opined

1 “Interview With Shi Yinhong,” Beijing Beijing Review Internet Version, August 19, 2005, Foreign Broadcast Information Service Central Eurasia (Henceforth FBIS SOV), August 19, 2005 2 Kim, Samuel S. (2006) The Two Koreas and the Great Powers, 261, Cambridge: Cambridge University Press 3 Deputy Foreign Minister Grigory Karasin, “Our Concept is ‘Security Through Economics,’” Nezavisimaya Gazeta, March 26, 1999, Current Digest of the Post-Soviet Press (Henceforth CDPP), LI, No, 12, May 3, 1999, p. 14; Bazhanov, Evgeny P (2006)., Korea in Russia’s Post-Cold War Regional Political Context, Charles S. Armstrong, Gilbert Rozman, Samuel S. Kim, and Stephen Kotkin, Eds., Korea at the Center: Dynamics of Regionalism in Northeast Asia,, p. 221 Armonk, N.Y. M.E. Sharpe Inc. 4 Moscow, Interfax, in Russian, April 18, 2007, FBIS SOV, April 18, 2007

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that the February agreements could create the conditions needed to implement “a series of major multilateral projects with the participation of both North Korea and Russia.” These would include oil and gas transit, electricity transfers, and the so- called TKR-TSR project connecting a Trans-Korean railway with Russia’s Trans- Siberian railway and which is the centerpiece of Russian transport policy for Asia.5

Significantly this source saw these projects as benefiting not just Moscow and Pyongyang, but also Seoul.6

Already in 2004 Sergei Darkin, the governor of Russia’s Maritime Province (Primorskiy Krai) said that Russia was building energy transmission lines to the border with North Korea that could then be extended even to South Korea if President Putin gave the order. Darkin also claimed that Russia was completing plans for exporting excess electricity from Russian hydroelectric dams to North and even South Korea. Russian and Korean planners were already studying plans for an extension to the Korean peninsula of a gas line that was already under construction from Sakhalin to Khabarovsk. Apart from receiving energy North Korea could profit from the transmission fees for pipelines or transmission lines through its territory.7

Meanwhile Russia has already been selling uranium, oil, and gas to South Korea since 2003 if not earlier so it already participates in South Korean energy markets.8

Finally participation in North and South Korea’s continuing development, particularly in regard to energy not only ensures that Russia will have a voice in future Korean affairs, and by extension Northeast Asian security issues, it also galvanizes the development of Russian Asia and Siberia.9 Indeed, Moscow sees such deals as the only way for Siberia’s development. Thus Foreign Minister Sergei Lavrov wrote in 2006 that,

Russia can join the integration processes in the vast Asia-Pacific region only through the economic growth of Siberia and the Russian Far East; in other words, the modernization of these regions is an axiom. Therefore, there does not exist any contradiction between the general vector of Russia’s internal development, described as “the European choice,” and the objectives of our policy in Asia. — Moreover, our domestic and foreign policy interests converge in Asia as in nowhere else; because without economic progress there cannot be a solid foundation for our policy in this region. In turn, this policy directly depends on the social, economic, and infrastructural, and other development of Siberia and the Russian Far East.10

5 Moscow, ITAR-TASS, in Russian, February 13, 2007, FBIS SOV, February 13, 2007 6 Ibid. 7 James Brooke, “Russia Wants to Supply Energy to North Korea,” New York Times, July 4, 2004, www. nytimes.com 8 Moscow, ITAR-TASS, in English, February 5, 2003, FBIS SOV, February 5, 2003 9 Takeda, Yoshinnori, (2006) Putin’s Foreign Policy Toward North Korea. International Journal of the Asia-Pacific, 6, No. 2, 2006, 94 10 Lavrov, Sergei (2006) “The Rise of Asia and the Eastern Vector of Russia’s Foreign Policy,” Russia in Global Affairs, 4, No. 3, July–September, 2006, pp. 70, 77

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However Russia has also had to concede that Japan, China, and/or South Korea could join with it in providing nuclear power to North Korea.11 Similarly, at present and at various times during those talks, South Korea has both offered and delivered energy to North Korea. It is not clear if these earlier offers of energy deliveries involve the ROK’s shipping of Russian gas or for gas from other sources.12 There also is abundant talk that China and/or America might follow suit and give more energy to the North.13 Meanwhile China remains the DPRK’s largest supplier. Thus all these states are in some sense are consciously competing to be the DPRK’s main energy provider and trade partner even as they work out the modalities of doing so.

For instance,

In the six-month period from January to June 2005, when Pyongyang had declared itself to be a nuclear state and Washington was sharply criticizing Beijing to increase pressure on Pyongyang, China was, in fact, increasing its exports of oil and food to North Korea – crude oil exports by 45 percent and cereal exports by 96 percent.14

Similarly all forms of Sino-DPRK trade and investment, including construction projects, have, by North Korean standards, mushroomed rapidly since 2003.15 South Korean investment and trade with North Korea, also undertaken for geopolitical purposes to stabilize North Korea and avert either war or state collapse, is right behind China’s in terms of its scope and fast growth.16

Examples of this rivalry abound. For example in 2005 China complained to America that it could not persuade North Korea to return to the six-party talks because South Korea was continuing its “appeasement” of the DPRK.17 This aid also apparently also irritated Washington.18 Under the circumstances and given the historic rivalries among all these actors for influence in North Korea, the outcome of this rivalry logically entails political and even strategic consequences for all the parties. This last point is particularly significant for Russia since energy exports to the DPRK and to Northeast Asia in general are its main vehicle for reentering the Asian security system as a co-equal player and maintaining its position there. Arguably much of Russia’s Asian policy is essentially an energy program as well

11 Moscow, Interfax, in English, April 10, 2007, FBIS SOV April 10, 2007 12 Seoul, Yonhap, in English, March 31, 2003, FBIS SOV, March 31, 2003; Andrew Ward, “Deal for Gas Pipeline Could Solve Korean Nuclear Crisis,” Financial Times, March 31, 2003, www.ft.com; and more recently Seoul, Hankyoreh, Internet Version, in English, April 17, 2007, FBIS SOV, April 17, 2007 13 Seoul, Yonhap, in English, April 15, 2007, FBIS SOV, April 15, 2007 14 Pritchard, Charles L. (2007) Failed Diplomacy: The Tragic Story of How North Korea Got the Bomb, 112, Washington, D.C.: Brookings Institution Press, 15 Kim, Samuel S., (2007)North Korean Foreign Relations in the Post Cold War World, Carlisle Barracks, 16–19, PA: Strategic Studies Institute, US Army War College 16 Ibid.. pp. 74–80 17 Seoul, Yonhap, in English, May 25, 2005, FBIS SOV May 25, 2007 18 Gordon Fairclough, “South Korean Aid to North Increases Tensions With U.S.,” Wall Street Journal, March 11, 2005, p. 1

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since there is no other form of investment that will permit Siberia and the Far East to develop reasonably soon and fulfill Lavrov’s vision other than energy.19

Thus the opportunity to provide North Korea and through it South Korea with reliable sources of energy is essential if Russia is to be a continuing equal presence in the Korean peninsula and Northeast Asia’s regional security order. Even if Russia is not currently North Korea’s main partner in Northeast Asia, engaging Pyongyang in 2000 opened the door to its return to the region. Failure to play a major role in its future economic and political direction would severely diminish Russian hopes for a lasting position in Asia. And, some observers argue that if Russia cannot play a major role in Northeast Asia because it cannot contribute to the region’s development, its proposals for a multilateral regional order will also fall by the wayside. Thus Dr. Kang Choi of South Korea’s Institute of Foreign Policy and National Security (IFANS) has written that,

Russia will be the front-runner in promoting a multilateral security framework as it did in the past. But it is unclear whether Russian proposals or initiatives can be met positively by other regional states. It might depend upon the level and scope of the physical contribution and substantive support Russia can provide in dealing with issues of peace and stability on the Korean peninsula and beyond.20

For the same reasons a critical component of Russia’s policies towards South Korea also revolves around the provision of energy. But the context here is utterly unlike that surrounding the DPRK. The ROK is not a threat to its neighbors. Rather its economic health, and with it Seoul’s grandiose political vision of its future role as an economic hub and political balancer in Northeast Asia depends upon access to reliable and adequate energy supplies.21 The problem here is of a wholly different magnitude than the problems of selling energy to North Korea. Seoul can and is willing to pay market prices for energy, but the issue is getting it from Russia to South Korea. However, as we shall see below, there are more problems doing so than might otherwise be imagined.

19 Nodari Simoniia, (2006) “Russian East Siberia and The Far East,” Global Asia, I, No. 1, 71–79; Vladimir Ivanov, (2006) “Russia’s Energy Politics: Focusing on New Markets in Asia,” Joint U.S.-Korea Academic Studies: New Paradigms for Transpacific Collaboration, Vol. XVI, 2006, Washington, D.C.: Korea Economic Institute, 2006, 61–79 20 Kang Choi, (2005) “Six-Party Talks and Multilateral Security Cooperation,” the 15th IFANS-IMEMO Conference on the Current Situation in Northeast Asia and Russian-Korean Relations, 12, Seoul: Institute of Foreign Relations and National Security 21 Seoul, Yonhap, in English, February 27, 2003, FBIS SOV, February 27, 2003; Moscow, ITAR-TASS, in English April 26, 2006, FBIS SOV, April 26, 2006; Erik Heikkila, (2003), “Seoul Regional Realities and Global Ambitions,” Joint U.S.-Korea Academic Studies: The Newly Emerging Asian Order and the Korean Peninsula, Symposium sponsored by the Asia/Pacific Research Center, Stanford University, the Korea Economic Institute, and the Korea Institute for International Economic Policy, XIV, October 22–24, 2003, Washington, D.C.: Korea Economic Institute, 2004, 139–157; Yoon-Churl Jeon, (2002) "Globalization and Its Impact on Korea," Speech Given at the 15th Korea-U.S. Business Conference, June 4, 2002, Journal of East Asian Affairs, XVI, NO. 2, Spring-Summer, 192–197

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Obstacles to Russian Success

Indeed, several obstacles block Russia from being the main energy provider for both Koreas. First, Russia’s East Asian energy programs are and have been notoriously unreliable with numerous delays and broken promises.22 These delays invariably raise the costs of building the necessary infrastructure even as consumers’ hope of receiving needed energy is postponed again and again. Neither is it likely that Russia will emerge as a major supplier of gas to South Korea and even China by 2015-20.23

This record of broken promises and delays of scheduled projects in the context of growing demand has already forced South Korea, Japan, and China to intensify their quest for foreign energy, e.g., in and around the Caspian.24 Meanwhile Russia even now adds to that record of unreliability. These delays and unfulfilled promises reduce Russia’s ability to establish its position in a newly defined Northeast Asian regional order. For as this six-party agreement strongly implies, the working groups it establishes point the way to new possibilities for a new effort at successful regionalism in Northeast Asia that has hitherto eluded all the participating governments.25

Second, Russia’s energy behavior has also heightened global anxieties about its proclivities for politicizing the sale and transmission of energy to its customers. It is noticeable that despite proclamations in 2005 to the effect that henceforth Russia would charge all of its customers market prices for energy sales, the fact remains that even now it maintains different prices for its customers. Moreover, there is abundant evidence of political motivations in energy sales. Thus in October 2007 on the morrow of the electoral victory by Yulia Timoshenko’s bloc in Ukraine, Moscow suddenly announced a billion dollar debt that Ukraine owed Gazprom. This ploy was instantly recognized for what it is and the Belarus case is similar as it has forced the Belarusian government to sell to Moscow key ownership stakes in Beltransgaz, giving Moscow powerful leverage over its economy, akin to the kind of leverage it has also sought throughout Eastern Europe and throughout the CIS.26 Nevertheless Russia continues to insist that it does not use economic levers against CIS members.27

Thus in 2006 alone it tried to impose enormous, politically motivated, and impose enormous, politically motivated, and unaffordable price rises on Ukraine for natural gas, threatened to double the price of gas to Georgia and even cut it off, imposed

22 Blank, Stephen, (2006) Russo-Chinese Energy Relations: Politics in Command, London: Global Markets Briefing 23 Roman Kupchinsky, “Russia Mulls Its China Energy Strategy,” Radio Free Europe Radio Liberty Features, September 8, 2006 24 Stephen Blank, (2007) ”East Asia Meets Central Asia: The Global Energy Crisis as a Spur to Globalization and Regional Integration in Asia,” Korea and World Affairs, 31, NO. 1, Spring, 2007, pp. 39–63 25 Rozman Gilbert, (2007), Security Challenges to the United States in Northeast Asia: Looking beyond the Transformation of the Six-Party Talks, Strategic Studies Institute US Army War College, 2007 26 Adrian Bloomfiield, “Gazprom-Ukraine Rift Threatens EU Gas Supply,” www.telegraph.co.uk, October 4, 2007; Vladimir Socor, “Gazprom Taking Over the Pipelines in Belarus,” Eurasia Daily Monitor, October 4, 2007 27 Moscow, Interfax, in English, April 14, 2006, FBIS SOV, April 14, 2006

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sanctions on Moldova, threatened Europe that if it did not accept Russian terms, it would turn to Asia (although that is practically impossible for a long time to come), and moved forward on the North European Gas Pipeline bypassing the Baltic states, Poland, and Ukraine to compel them to accept an economic and probably political dependence upon Russian energy. All this came after many attempts to use energy as a political instrument across Eastern Europe going back several years.28 Since then it has again acted in punitive ways towards Georgia, Moldova, and Belarus and is cutting energy supplies to Estonia for political reasons. Naturally these policies have led officials and analysts in China, Japan, and South Korea, and even India to greater anxiety concerning the reliability of Russian energy supply and the terms under which it might be offered to dependent consumers.29

Third, these trends also underscore the fact that Russia’s concept of energy security, where it alone can determine prices, pipeline routes, and conditions of foreign purchase and/or investment in Russian energy supplies diverges considerably from those of Northeast Asia’s market economies and from China which has sought to get long-term equity in energy holdings of its suppliers and if possible at below market prices.30 Indeed, one major reason for the delays in Sino-Russian energy deals has been the standoff between China’s demand for low prices and Russia’s equally obstinate demand for market prices that are much higher.31 Because China remains Russia’s main partner in Asia and because of the fact that it shares a border with Russia, this standoff slows completion of contracts and energy deliveries to all other East Asian markets as well. Therefore Russian energy relations with East Asian countries have been much rockier than would otherwise have been expected despite Russia’s stated intentions of becoming a major supplier of energy to Northeast Asia in the next decade.32

Fourth, the inherent tendency of the Russian energy industry is towards state control, autarchy, the exclusion of foreign investors, and monopoly. The experi- ence of Yukos, the Shtokman gas project, Nordstream, Burgas -Alexandropoulos, Sakhalin-2 and now Sakhalin-1 all show that Russia intends to keep majority ownership in its government’s hands and drive out foreign competition. In other words it deliberately embraces autarchy, inefficiency, monopoly, falling production, and autarchy to use energy as a strategic political instrument rather than as a

28 Bugajski Janusz , (2005) Cold Peace: Russia’s New Imperialism, Washington, D.C. and Westport CT.: Praeger Publishers; Krickus, Richard J. , (2006) , Iron Troikas to be Carlisle Barracks, PA: Strategic Studies Institute, US Army War College,; Smith, Keith C. (2004), Russian Energy Politics in the Baltics, Poland, and the Ukraine: A New Stealth Imperialism?, Washington, D.C.: Center for Strategic and International Studies, 2004; Leijonhielm Jan and Larsson Robert , Russia’s Strategic Commodities: Energy an Metals as Security Levers, 116–129, Stockholm; Swedish Defense Research Agency, 2004 29 “Russia-Ukraine Row: China and Japan Worry Same May Happen to Them,” Alexander’s Gas and Oil connection, www.gasandoil.com/goc/news/nts60458, January 26, 2006 30 For example, Tokyo, Kyodo, in English, January 27, 2003, FBIS SOV, January 27, 2003; Tian He “What Do Difficulties in Sino-Russian Energy Cooperation Indicate,?” Hong Kong, Hong Kong Hsian Kang Shang Pao, in Chinese, January 14, 2003, FBIS SOV, January 14, 2003; “No Agreement Yet on the Price of Russian Gas for China,” Eastweek, No. 23 (88), June 20, 2007, www.osw.waw.pl 31 Sergei Blagov, “Russia Prods China to Pay for Siberian Pipeline,” Eurasia Daily Monitor, July 18, 2007 32 Blank, (2006) ; Stephen Blank, ”Kovykta: Russian Gas and Asian Markets,” Northeast Asia Energy Focus, Korea Energy Economics Institute, 3, NO. 2, May, 2006, pp. 34–42

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commodity traded on markets. The continuing examples of failure to raise production or invest in energy infrastructure at a time of huge and growing global demand suggests an energy sector that is unable to respond efficiently to market stimuli. The ensuing sub-optimal results entail delays, higher prices and production shortfalls at home and abroad. These political trends also encourage bureaucratic rivalry and despotisms which make the problem of credible Russian commitments acute and undermine its reputation for reliability.33

Fifth, Russo-DPRK mutual economic weakness, including the critical issue of North Korea’s still unresolved debts to Russia, precludes Moscow from further subsidizing North Korea’s energy purchases or from selling it energy since Pyongyang still cannot pay for any energy that it might obtain from Russia. And until such time as the DPRK’s existing debts to Russia are resolved, it would be foolish for Russia to offer it more credits. This leaves only one solution open to Moscow, i.e., a third party must pay Russia for it to ship energy to and/or through North Korea and that third party will obviously seek political and economic compensations for those payments. Likewise, North Korea’s debts to Russia must first be solved to devise a viable mechanism for financing Russian energy exports. Finally, given the competition among Seoul, Beijing, and Moscow for influence in Pyongyang, it is not at all clear that the other two states will accept Russian primacy in providing energy to the DPRK. Thus Russia faces serious obstacles to realizing its energy and strategic ambitions vis-à-vis both Korean states.

Russia’s Asian Program in Context

Precisely because energy is Russia’s most valuable and useful card in approaching all of East Asia so much rides on its energy program for the region. The 2002 UES electricity firm’s Draft Russian Energy Reform Program began by stating that,

Russia possesses substantial reserves of energy resources, enabling the development in the country of a powerful fuel-energy complex that is the foundation not only for the development of the national economy, but also serves as an instrument of foreign policy. In large measure, the role of the country in world energy markets determines the country’s geopolitical influence.34

Similarly the 2003 Energy Strategy of the Russian Federation to 2020 begins by stating that Russia’s energy and fuel complex is an “instrument for the conduct of internal and external policy” and that the role of the country in world energy markets to a large extent determines its geopolitical influence.”35

Russia’s energy strategy and policy are also geared to raising exports to the Asia- Pacific region indicating Russia’s determination to reenter Asian politics in a big

33 Blank, (2006) 34 Quoted in Gregory Gleason, “Russia and the Politics of the Central Asian Electricity Grid,” Problems of Post-Communism, 50, No. 3, May–June, 2003, p. 45 35 Ministry of Energy of the Russian Federation, The Summary of the Energy Strategy of Russia for the period of Up to 2020, Moscow, 2003, p. 1

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way through the use of the energy card, and Asian societies’ spiraling energy demand.36 As most recently stated, Russia intends to raise its share of oil supplies to East Asia from 3% to 10% by 2016. It plans to increase the number of Asia-Pacific countries to whom it exports oil and natural gas ten and five-fold respectively by 2020. Thus the share of Asia-Pacific countries who receive its exports will increase to 30% by 2020 and natural gas will go from 5% to 25%. Obviously these figures depend on implementation of both new and developed energy projects, including those in Sakhalin.37 Industry and Energy Minister Andrei Dementyev also said that,

A program for the development of natural gas resources in East Siberia and the Far East would be submitted to the Russian government in 2006. A single system of gas production, transportation, and supplies will be created in the region, with account for exports to the markets of China, the world’s largest energy consumer, and other Asia-Pacific countries.38

According to Dementyev, construction of the East Siberian Pacific Ocean (ESPO) pipeline whose estimated cost was $11.5 Billion began in April 2006. Since then over 100 kilometers have been built and 330 kilometers have been prepared for pipe installation. ESPO is supposed to pump 60–80 million metric tons of oil annually with 30 million going to China via an offshoot of ESPO whose construction has already begun and the rest will go to other markets including East Asia.39 Russia is also vigorously pushing Putin’s idea for building an international center for spent fuel and nuclear energy, and nuclear waste in Russia and the construction of atomic power centers in Asia, hoping to raise its profile in the export of nuclear energy to the global market, and reach orders of $25 Billion.40

More recently, in 2007, Dementyev said that the new government program to develop an integrated gas production complex in East Siberia comprising production, transportation, and supply to both Siberia and the Far East will require 2,400 bilion rubles ($92 Billiion or 2.4 trillion rubles). Gas production centers would be established on Sakhalin, and in Yakutia, Irkutsk, and Kranoyarsk regions. Russian gas exports to China and South Korea after 2020 will amount to 25–50 BCM (bilion cubic meters) annually.41 These investments include geological surveys to raise proven reserves in Eastern Siberia and the Far East. By 2030 gas production in those two regions would total 160 billion cubic meters (BCM) while liquefied natural gas (LNG) production would amount to 20BCM a year. Gazprom believes that gas production could even reach 200 BCM annually afer 2030 and is formally asking the government for licenses to develop new fields in Yakutiya and Sakhalin and insists

36 Moscow, Ministry of Energy of the Russian Federation, The Energy Strategy of the Russian Federation up to 2020, Moscow 2003, passim 37 “Russia to Drastically Raise Oil Exports to Asia-Pacific-President,” RIA Novosti, September 17, 2006 38 Ibid. 39 Ibid. 40 www.president.ru. January 25, 2006; Moscow, ITAR-TASS in English, April 6, 2006, FBIS SOV, April 6, 2006 41 “Russia Needs 92 Billion Dollars to Develop Eastern Gas Deposits by 2030,” Energy Daily, June 22, 2007; Sergei Blagov, “Moscow Considers Enormous Investment in Eastern Russia’s Gas Sector,” Eurasia Daily Monitor, June 19, 2007

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that it could raise annual production to 570 BCM in 2010 and 670 BCM in 2020 a 14% increase over present projections.42

Dementyev’s and Putin’s statements clearly indicate that Russia regards China as its primary intended partner in Asia, but does not confine itself to an exclusive energy relationship with China. ESPO may yet produce energy for Japan and South Korea, or at least it is regularly stated that it will do so. But serious problems have now appeared with regard to ESPO. Indeed, it is now reported that South Korea will have to use ESPO and pay market price for the oil it receives in order to get its energy from Russia. This is also because China stubbornly holds out for a below market price for its energy which Russia opposes.43 And there are now reports that due to massive reevaluations of the cost of this pipeline that were foreseeable, breakdowns, etc. that it will not be ready until 2015 not 2011. Indeed, estimates now go beyond $16 Billion for construction of ESPO and those estimates too are probably too low.44 Such reports obviously greatly irritate the Russian government but they are largely due to the political economy of Russian energy and the overly optimistic reports that were first made as well as the delays due to bureaucratic infighting in Russia that have driven up prices.45 Meanwhile, due to Chinese pressure for energy deliveries and the fear of losing China as an economic and political partner, Russian firms and the government are pledging ever higher oil deliveries to China even though it is unlikely they can come from fields that will be fully on line by 2008–2011.46 If Russia cannot meet its production targets or deadlines for oil, there is little doubt that China will have first claim on whatever is proudced, leaving everyone else to fend for themselves. Since Russia must retain its ties to China, Seoul may have to pay for that political decision. Therefore the ROK’s subsidy is necessary to justify the cost of the ESPO, a telling example of the bizarre political and anti-economic logic that apparently is now de rigueur in these deals.47

Similarly Gazprom is now trying to get out of its plans to sell gas to China.48

Likewise, the Ministry of Industry and Energy could not meet the deadline of devising an integrated or unified gas program by the end of 2006 because it could not coordindate the many and rivalrous bureaucracies inside Russia that are involved in this project.49 Although this program has again been announced, one should not expect that it will be completed on time or in its complete draft form. All these

42 Ibid. 43 Remarks of Julia Nanay at the program on Prospects for Turkmenistan After Niyazov, The Heritage Foundation, January 16, 2007 (Henceforth Nanay Remarks) 44 “Transneft Facing Sharp Cost Increase in ESPO Line-Russia,” Worldwide Energy News, July 22, 2007 http://enenrgy.ihs.com/News/; “Russian Official: Phase 2 of ESPO Could Be Online in 2015–2017,” Xinhua Financial News, July 19, 2007 45 Moscow, ITAR-TASS in English, March 13, 2007, FBIS SOV, March 13, 2007; 46 Blagov (2007a); Russo-Chinese Energy Relations: passim 47 “South Korea to Pay for Russian Pipeline to China,“ Alexander’s Gas and oil Connection, 11, No. 21, November 9, 2006, www.gasandoil.com/goc/company/cnr64593.htm; Neil Buckley and Richard McGregor, “Moscow, Beijing, Face Pricing Rift in Natural Gas Agreement,“ Financial Times, March 23, 2006, www.ft.com 48 “Gazprom Bid to Cut off China Gas,” BBC News, June 19, 2007 49 Moscow, Interfax, in English, December 12, 2006, FBIS SOV, December 12, 2006

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problems also rebound upon hopes for gas sales to Seoul and Tokyo, not to mention Pyongyang.

The goals announced by Dementyev and Putin in September, 2006 envisage the completion over a decade of huge pipelines and equally enormous deals with Asian consumers for energy that would go far to validate Russia’s ambition of becoming “an energy superpower in the Asia-Pacific region.”50 Indeed, these deals, if they were to be consummated with intended Asian partners would span China, Japan, and both Koreas. Finally large-scale energy, power, and infrastrucutral deals with East Asia, including the TKR-TSR railroad, are fundamental components of Putin’s strategy to revitalize Siberia and Russian Asia.51 Putin formulated this vision of such programs as a way to overcome Russia’s previous marginalization in the region in 2000–2001. Moscow saw the need to create large-scale international consortia to develop energy, electricity, and power engineering projects.52 These projects for energy development in Siberia and Sakhalin, large-scale electric power and engineering deals have since been discussed with China, Japan, South Korea, and even India regarding Sakhalin’s oil.

In 2000–01 Putin announced a broad vision of Russia’s economic-political place in Asia. He particularly stressed Russia’s “natural” role as geographic bridge and hub linking Asia, Eurasia, and Europe. This linkage was to be accomplished by the joint development of major projects. These projects go beyond energy, electricity, and power engineering, including whatever high-tech Russia can bring to those fields to include all forms of transportation including rail, sea, air, and space satellites and communications.53 The success of Russia’s Asian policy hinges on the timely and effective completion of these projects which center around energy sales and the development of the requisite infrastructure in Siberia and Russian Asia. Indeed, it may be the last chance for some time to carry out this “civilizational” task. Thus the consummation of major trade and energy deals with both Koreas is an important part of not just Russian foreign policy strategy, but of Russia’s internal revitalization. Likewise, an effort to persuade North Korea to move towards market reforms is part of the Russian plan and policy because Moscow believes that is the only way to overcome the North’s economic problems which obstruct its trade with Russia and its overall security. However, at the same time such reforms, pace China’s and/or South Korea’s example, could safeguard the DPRK’s sovereignty as an authoritarian though not totalitatiarian state..54

At the bilateral level Moscow seeks an active expansion of its economic and energy ties to both Koreas. Moscow’s energy plans are only part of a vast scheme for the economic regeneration of Russian Asia and the enhancement of Russia’s overall

50 Ivanov, (2006, pp. 61–79), Simoniia, (2006, pp. 71–79) 51 Ibidem;Stephen Blank,(2002) "Economics and Security in Northeast Asia: The Iron Silk Road, Its Context and Implications," Global Eocnomic Review, 31, 3, pp. 3–24 52 Duckjoon Chang, (2002) "The Russian Far East and Northeast Asia: An Emerging Cooperative Relationship and Its Constraints," Asian Perspective, 26, No. 2, pp. 41–75 53 Vladimir Putin, "New Perspectives in the East," Nezavisimaya Gazeta, November 14, 2000 FBIS SOV, November 14, 2000 54 Vorontsov, Alexander (2007), ”Current Russia-North Korea Relations: Challenges and Achievements,” Brookings Institution, Center for Northeast Asian Policy Studies, CNAPS Papers, p. 19

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strategic position in Asia. The idea of the TKR-TSR program and supposedly trumping the European Union and China’s projected Eurasian railroad program is still very present in the minds of Russian policymakers.55 This proposal for an “iron silk road” is not only the centerpiece of a vast Russian strategy for revitalizing its infrastructure, trade, and transport through Central and East Asia to exploit Russia’s geographical setting, it also is a counter to a feared Chinese domiantion of Asiatic cargo traffic that will take place when the Silk Road and European transportation links to China are completed.56 Therefore Russian and Chinese programs for economic engagement with North Korea are in competition.57 So just as happened under Communism, and despite their broader strategic agremeent Russia and China quite visibly compete in the Korean peninsula for influence, leverage, and access.58

South Korea’s government is eqaully interested in realizing the TKR-TSR project because it is an integral part of its vision of South Korea as a transcontinental hub importing and epxorting its own and other goods to and from Europe.59 Thus in 2006 Seoul offered Pyongyang energy assistance in return for commtting to complete, verifiable, and irreversible disarmament of its nuclear program.60 And since the February 13 agreement it is launching a major initiative to launch groups to develop the DPRK’s mining and light industries and expedite the development of its raw material resources.61 These programs are in addition to earlier ones developed under the Sunshine Policy since 1998 to forge inter-Korean economic cooperation.

Meanwhile China has long since been the main economic partner of and foreign investor in North Korea, a relationship that also causes tension between these two states due to Pyongyang’s obduracy in the face of Chinese pressure to reform and its weakness vis-a vis Beijing.62 Indeed, the mounting intensity of Chinese and South

55 “Russia Launches a More Active Policy in the Korean Peninsula,” EASTWEEK, No 57, October 19, 2006, Centre for Eastern Studies, Warsaw; Blank (2002 pp. 3–24) 56 "Russian Government To Continue Investment in Loss-Making Railway in Far East," "China Could Compete with Russia in Transport Project Involving Koreas, Trans-Siberian Railroad," Interfax, August 29, 2002 57 Sergei Luzyanin, “Russia and China Are Waging a Secret But Very Tough Struggle for Influence in the Korean Peninsula,” Moscow, Nezavisimaya Gazeta, in Russian, October 21, 2002, FBIS SOV, October 21, 2002; Wishnick, Elizabeth (2002) “Russian-North Korean Relations: A New Era,?” Samuel S. Kim and Tai Hwan Lee Eds., North Korea and Northeast Asia, Lanham, MD. : Rowman and Littlefield Publishers, pp. 149–150 58 Ibid 59 FBIS SOV, February 27, 2003; FBIS SOV, April 26, 2006; Heikkila, pp. 139–157; Yoon-Churl Jeon, "Globalization and Its Impact on Korea," pp. 192–197 60 “South Korea Considers Energy Aid to North Korea in Return for Nuclear Dismantling,” Yonhap News, June 11, 2006 61 Lee Jin-Woo, “Seoul to Expedite NK Resources Development,” Seoul, The Korea Times internet Version, in English, March 29, 2007, FBIS SOV March 29, 2007; Lee Joo-hee, “Seoul to Support Light Industry in North Korea,” Seoul, The Korea Herald Internet Version, in English, March 29, 2007, FBIS SOV March 29, 2007 62 Hwang Jacho (2006), “Measuring China’s Influence Over North Korea,” Issues & Studies, 47, No. 2, 205– 232 is only the most recent full exploration of this Sino-DPRK relationship and the question of China’s influence over the DPRK but it reflects a scholarly consensus on the dubiety of expecting that China will push North Korea to the wall see also Twomey, Christopher P. (2006), “China Policy Toward North Korea and its Implications for the United States: Balancing Competing Concerns,” Strategic Insights , 5., No. 7, 2006; Kim (2006), pp. 84–89

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Korean economic interaction with North Korea has led analysts like Samuel Kim to observe that,

Although the nuclear challenge from Pyongyang is grabbing headlines, it is perhaps the changing economic role of China on the Korean peninsula that will have the most lasting impact. Chinese economic relations with North Korea are defined by aid from Beijing designed to keep the Pyongyang regime afloat so China has a strategic buffer and so the number of refugees will be limited; however, Chinese economic relations with South Korea are becoming increasingly important and integrated in a global context. With such proximity, competition and tension often follow, and that seems to be the case regarding China’s position on the Korean peninsula. The ability of the Seoul and Beijing regimes to channel these energies into constructive projects and into defining - together- a regional economic order will determine the long-run impact of China’s new role and power on the southern half of the peninsula.63

If one considers as well these states’ growing investment in the North the same prognosis for their future economic standing there might well be indicated, leaving Russia a poor third at best. Indeed, the relative economic weakness of both North Korea and Russia and their economic asymmetry both obstructs progress towards realizing Russia’s grand design and leaves them potentially dependent upon third parties like China, the U.S. , Japan, or South Korea to pay for bilateral economic interaction. As Kim observes,

Perhaps the most revealing part of the DPRK- Russia Moscow Declaration of August 4, 2001 is embodied in Point Five: “In order to carry out a series of bilateral plans, the Russian side confiemd its intention to use the method of drawing financial resources from outsiders, on the basis of understanding of the Korean side.” In other words, Moscow and Pyongyang are now looking to Seoul, Washington, and Tokyo to foot the bill.64

In fact this process had apparently already been launched in 2000 as Russia suggested a three-way cooperation scheme to both Koreas wherein Russia would promise to provide materials to build the DPRK’s economy while urging South Korea to make payments for those projects by investing in that economy. Thus Moscow was talking then with both Koreas then not only about the TKR-TSR project but also about a trans-Korea gas pipeline.65 Moscow has been pushing that policy line ever since.66 In view of the fact that Russia needs South Korea (or someone else) to help finance its hoped for expansion of trade and investment with North Korea, it is no surprise that Russian analysts believe that Russia alone of the

63 Ibid., p. 89 64 Ibid., 149 see also Wishnick,(2002), p. 145, and Takeda, (2006), p. 202 65 Ivanov, Vladimir I. (2003), “Creating a Cohesive Multilateral Framework Through a New Energy Security Initiative for Northeast Asia,” ERINA Report, 55, pp. 31–32 66 Seo Hyun-jin, “Seoul Plays Moscow Card with North Korea, Asia Times Online, September 24, 2004, www.atimes.com; Georgi Toloraya, (2003) “President Putin’s Korean Policy,” The Journal of East Asian Affairs, 17, NO. 1, , p. 42

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six parties should favor a peaceful unification of the Korean peninsula..67 Neither is it altogether surprising that Russia’s negotiator, Aleksandr’ Losyukov, immediately after the deal was made on February 13, 2007, , somewhat plaintively stated that “Russia as one of the participants in this process should discuss economic asistance to North Korea on equal terms with other negotiators.”68

However, one should not confuse discussions, policy papers, signed agreements on paper, and endless and often incorrect publicity about construction projects for actually constructed pipelines and explorations. Russia today only exports about 3– 5% of its oil and gas to Asia, and one reason is precisely the lack of infrastructure and underdevelopment of Siberia and Russian Asia.

Likewise, economic ties to North Korea have stagnated due to Pyongyang’s failure to reform and Russian inability to develop its own infrastructure to inject resources into the North Korean economy unlike South Korea and China.69 Although everything points to Asia emerging as a primary consumer, this energy infrastructure from Russia to East Asia is only now and gradually, and too slowly being built. Meanwhile, the costs for building and maintaining it will be astronomical. Typically, as in ESPO’s case, Russia tends to underestimate those costs only to find out too late what they really are.70 Thus any project to sell energy to either Korea (especially the North given its stricken condition) and build the necessary infrastructure will require large subsidies from other partners to Russia and may also need substantial transfers of technology and competent management know-how as well.

Consequently consumers and producers must start building that infrastructure now and investing enormous amounts of capital into those projects in order to make these energy sales feasible. For that to happen these investments must be both economically and politically justified since consumers have existing alternative sources of supply, e.g., from the Middle East where the infrastructure already exists and established commercial relations are of relatively long standing even if Asian consumers must pay the so called Asian premium.71 However, North Korea is not one of those consumers and cannot become one for a long time unless someone subsidizes it. And if such subsidization is the solution, Russia obviously cannot play that role.

Undoubtedly this Asian premium adds compelling economic reasons for buying elsewhere to fears about interdiction of supplies to Asia. But because energy issues are now major policy questions for every Asian government, unless the price and political conditions are right that Northeast Asian and Siberian infrastructure will not and cannot be built. Obviously the size of the initial investment outlays is a major issue in deciding whether or not to construct that infrastructure and that still remains

67 Ibid, p. 37; Voronotsov, p. 19 68 Moscow, ITAR-TASS, in English, February 13, 2007, FBIS SOV, February 13, 2007 69 Takeda (2006), pp. 200–204 70 “Transneft Facing Sharp Cost Increase in ESPO Line-Russia”; “Russian Official: Phase 2 of ESPO Could Be online in 2015–2017” 71 Jaffee, Amy Myers and Soligo, Ronald (2004) “The Future of Saudi Price Discrimination: The Effect of Russian Production,” Paper Presented as part of the project The Energy Dimension in Russian Global Strategy, James A. Baker III Institute for Public Policy, Rice University, Houston, Ogawa, Yoshiki, (2004) The Asian Premium and Oil and Gas Supply from Russia, Ibid.

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to be decided as regards providing North Korea with Russian energy. In this context it must be understood that in most cases if not all, the price of the energy to be shipped to China, India, Japan, Korea, etc. from Russia has not yet been decided, nor have the amounts of gas and oil to be shipped over time the full route of many of these pipelines, or the contribution to them by the interested parties been decided. And without resolution of those issues of the price of energy, who bears the investment costs, and the route of pipelines, not much can or will happen.

Moreover, if pipeline construction begins without preceding agreements on price, payment and reasonable estimates of the amount of the energy that is available for sale abroad, then the outcome will be economically, if not politically, sub-optimal from every standpoint, leaving consumers, if not producers, dissatisfied with the results. Therefore for some time to come the Middle East and the Gulf will remain the most critical producers of Asian energy and Asian governments will have to continue paying the Asian premium for it. Beyond that fact it is precisely because of the Middle East’s and Russia’s volatility and their enormous future needs that the integration of East and Central Asia has taken off.72Therefore to understand the possibilities for Russia to sell large amounts of energy to either Korea we must take into account Russia’s policies towards those states and its domestic conditions affecting production and export of energy to North and/or South Korea.

Russian Energy Policy Towards North Korea

Energy has figured in the agenda of Russo-DPRK relations since at least 1999 and has only grown in importance as the six-party talks have progressed since 2003. From 1999–2001 the main economic project under consideration in Russo-DPRK relations was the TKR-TSR. Yet Russian officials were already talking in general terms about infrastructural projects in Northeast Asia that would include the DPRK. These discussions included energy as Moscow and Seoul were already discussing gas exports from Russian Asia to South Korea and building the pipeline through North Korea was the most efficient way to ship this gas.73 Indeed, these sweeping regional infrastructural projects which involved electric as well as hydrocarbon and nuclear energy transmission held special interest for Russia then.74

After Putin began his “Ostpolitik” by traveling to Pyongyang and initiating a series of summits with Kim Jong-Il in 2000 discussions over rebuilding North Korea’s energy industry began to pick up as part of the bilateral agenda. By 2001 Moscow and Russian leaders had told North Korea that if its economy opened up Russia would help rebuild its infrastructure and energy industry.75 However, in

72 Blank, Stephen, (2003) ”Central Asia and the Transformation of Asia’s Strategic Geography,” Journal of East Asian Studies, 17, No. 2, pp. 318–351; Blank, (2007)” pp. 39–63 73 Bazhanov, (2006 p. 221) 74 Karasin,(1999 p. 14) 75 Joseph Ferguson, (2003) “Russia’s Role on the Korean Peninsula and Great Power Relations in Northeast Asia,” NBR Analysis, National Bureau of Research, Asia, 14, No. 1, p. 42; Zhou Liang, “DPRK- Russia Honeymoon In Light of Kim Jong- Il’s visit to Russia,” Beijing, Liaowang, in Chinese, September 2, 2002, FBIS SOV September 2, 2002

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2002, as the rise in energy prices began to manifest itself, and the issue of nuclearization and compensation for nuclear energy advanced to the agenda Russia began to assert its ability to participate in compensatory energy programs with greater frequency. This also stemmed from the Putin regime’s insistence on the primacy of Russian economic interests and the linkage to the reconstruction of Russian Asia, whose depopulation and poverty are now regarded as a security threat had both begun to influence policy.76

Likewise, by 2002–03 discussions about energy pipelines to China, Japan, and South Korea had become major policy issues, so obviously the problems of providing energy to South Korea reinforced thinking about exporting energy to North Korea and then to the South.

By 2004 the energy issue had become even more prominent because 2003–04 were probably the times of maximum danger due to the nuclear crisis and the fears of another American preemptive war against proliferators. North Korea’s halting, limited, and insufficient efforts to move towards a market economy despite Sino- Russian advice to reform also generated alarm. In 2003 observers detected a Russian ambivalence about North Korea where Russian experts and officials regarded it simultaneously as an erratic, unsophisticated, and quite possibly doomed to collapse state and as an “extremely promising partner in the Asia-Pacific region.77 Indeed,

In conversations with JIR (Janes’s Intelligence Review) in 2003, Russian officials were candid about the scope for a “Ceausescu scenario” if conditions worsened in North Korea and Kim Jong-il lost control over some of the security forces.78

By 2004 Russia’s negotiators were publicly warning about the possibility of war over Korea.79 Russian officials also regarded all other Northeast Asian states as much more interesting trading partners and showed their concern about a North Korean collapse by holding maneuvers with Japan and South Korea on a refugee scenario in 2003, and with China under the auspices of the Shanghai Cooperation Organization in 2005 for a scenario that likely was connected to the possibility of either an invasion of the North in response to U.S. threats or the DPRK’s state failure.80

Nonetheless Russian officials still saw promising economic opportunities there including major infrastructural operations to open the Najin cargo port and oil refinery, road and railway links, the provision of electricity and other projects described above.81 America’s Ambassador to Russia, Alexander Vershbow had also indicated in early 2003 that Russia could be called upon to supply North Korea with

76 Ibid; and the reports of the Baikal Economic Forum in September, 2002, Moscow, ITAR-TASS, in English, September 18, 2002, FBIS SOV, September 18, 2002 77 Mark Galeotti, “Moscow Reforms Its Links With Pyongyang,” Jane’s Intelligence Review, February, 2004, http://www.4janes.com/subscribe/jir/doc 78 Ibid 79 See the warnings uttered by Russia’s chief negotiator in early 2004 Deputy Foreign Minister Aleksandr’ Losyukov, Moscow, Interfax, in English, February 29, 2004, FBIS SOV, February 29, 2004; Moscow, ITAR-TASS, in Russian, February 29, 2004, FBIS SOV, February 29, 2004 80 Sergei Blagov, “War Games Or Word Games,?” Asia Times Online, August 26, 2005, www.atimes.com 81 Galeotti, (2004); Brooke, “Russia Wants to Supply Energy to North Korea,”

22 East Asia (2008) 25:7–33

energy as part of a settlement. And in that case a method of financing the purchase of that energy, possibly involving South Korean financing, would be necessary. North Korea’s Ambassador to Russia Pak Ui Chun, also said that Russian firms could participate in such an endeavor.82 By 2004 interest in energy had broadened not only to include the question of providing light water reactors for nuclear energy but also the trans-Korean gas pipeline as part of a “gas for nukes” program, electric energy shipments from Russia to North Korea, and the projects mentioned by Darkin.83

However, during 2004–05 no progress was registered in the six-party talks that alone could unlock the door to cooperation on these projects including the TKR- TSR. Russia started publicly voicing its dissatisfaction with its economic ties to Pyongyang.84 Consequently Russian calls for North Korea to negotiate seriously and return from its periodic walkouts or stalls to the talks became more insistent in 2004–05 along with statements of Russia’s ability and willingness to provide it with energy. Moscow again offered electricity and the willingness to rebuild its nuclear power plants if North Korea would rejoin the Non-Proliferation Treaty. But it also insisted that no energy could be forthcoming without a return to that treaty regime and renouncing “all existing nuclear programs”, including the weapons program.85

Nevertheless and despite the February 13, 2007 agreement and progress (though not a conclusion) on the issue of the DPRK’s debts to Russia, as of March 2007, no solution has yet been announced.86 A solution may be a long time in coming since Rusisa has tied cancellation of the debts – which Moscow wants to do – with fulfillment of the six-party accords.87 Russia remained unhappy about prospects for more bilateral business cooperation with North Korea.88 However, even if the issue of the debts is resolved, it still remains unclear by what mechanism and which provider North Korea will receive the energy it needs once it renounces its nuclear program. Any solution to this issue requires first of all a verifiable end to North Korea’s nuclear program. Then it also requires detailed commitments to provide oil and gas, electricity and nuclear power under appropriate treaty regimes as well as a mechanism for satisfactorily addressing the issue of who will finance purchases, pipeline, and power infrastructure construction costs. In other words, even if a

82 Ivanov, “Creating a Cohesive Multilateral Framework, p. 31; Moscow, Interfax, in English, January 13, 2003, FBIS SOV, January 13, 2003 83 “’Gas for Nukes’ Proposal Gains Momentum,” Korea Times, July 14, 2004, Retrieved from Lexis- Nexis; James Brooke, “Russian Electricity for North Koreans?, International Herald Tribune, June 29, 2004; James Brooke, “Russia Wants to Supply Energy to North Korea,”; Seoul, Yonhap, in English, January 31, 2005, FBIS SOV, January 31, 2005 84 Moscow, Interfax in English, August 10, 2005, FBIS SOV, August 10, 2005 85 Moscow, Interfax in English, July 26, 2005, FBIS SOV, July 26, 2005; Interfax Oil & Gas Report for July 28–August 3, 2005, FBIS SOV, August 4, 2005; Moscow, ITAR-TASS in Russian, September 19, 2005, FBIS SOV, September 19, 2005; Moscow, ITAR-TASS in English, September 22, 2005, FBIS SOV, September 22, 2005; Interfax Russia & CIS Diplomatic Panorama, September 22, 2005, FBIS SOV, September 22, 2005 86 Northeast Asian Pacific Security Network (NAPSNET), November 30, 2006 87 Moscow, RIA Novosti, in Russian, May 14, 2007, FBIS SOV, May 14, 2007 88 Moscow, ITAR-TASS in English, March 15, 2007, FBIS SOV, March 15, 2007

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solution is reached by which Russia provides North Korea with one or more form of energy, some other party or parties must subsidize that program and will also share in the influence accruing to the energy providers for North Korea. Beyond that fact lies the question of whether Russia can actually provide enough energy (in whatever form) to the DPRK given its own problems in assuring reliable energy supplies to Russian,, European, and Asian consumers. As the record of its energy relations with South Korea suggests, this last question is no less problematic than is the quest to find an effective mechanism by which to provide North Korea with energy.

South Korea and Russian Energy

Some of the issues relating to Russian energy sales to South Korea also pertain to North Korea. And they mostly relate to problems inherent in Russian energy. First, for Russia to export energy to South Korea and in most cases to North Korea a territorial intermediary must be found or expensive infrastructure must be built since there is no infrastructure on the Russo-North Korean border and no direct geographical link to South Korea. Thus the ROK can only get Russian energy if it comes by sea or through another country in East Asia since its market alone is not large eneough to justify the huge outlays involved in developing Siberian fields in Russia.

However, even if an equitable arrangement is worked out any serious examination of the Rusisan energy industry and its real capacity soon generates considerable skepticism as to whether Russia can truly satisfy the demands of its own market, the CIS states to which it sells energy, the European market to which it is committed by several contracts, and the dynamic East (and South) Asian market. This problem comes directly out of the politicized nature of the Rusisan energy industry.89 Gazprom invests its profits and revenues mainly in unrelated industries, and suffers from declining production, probably 3–4% in 2006. In contemporary conditions this is amazing but not surprising inasmuch as in 2004, another year of surging global demand, its production only grew 2%. So its higher debt and increased inefficiency are directly traceable to state policies of monopolization and control with their predictable consequences.90 And production continued falling in January–February 2007.91

Not surprisingly, due to their distorted incentive structure Russian oil and gas production are suffering from insufficient prospecting.92 Therefore there may not be enough oil being produced in East Siberia for the ESPO to meet its 2025 target. Recently Japanese experts at the Ministry of Natural Resources concluded that,

According to the information revealed at the experts’ meeting of the Ministry of Natural Resources, confirmation of the oil reserves is drastically falling behind

89 Blank, (2006, pp. 15–30) 90 “Gazprom-2006: The State Support for Expansion,” East Week, 90, www.osw.waw.pl, July 27, 2007; Ahrend, Rudiger and Tompson, William, (2005) “Unnatural Monopoly; The Endless Wait for Gas Sector Reform in Russia,” Europe-Asia Studies, 57 NO. 6, pp. 801–821 91 Moscow, Interfax, in English, March 21, 2007, FBIS SOV, March 21, 2007 92 Moscow, ITAR-TASS, in English, April 12, 2007, FBIS SOV, April 12, 2007

24 East Asia (2008) 25:7–33

schedule. In 2005, only 800,000 tons(0.08%) was confirmed against the estimate of 90 million tons; in 2006, 15 million tons (8.5%) against the estimate of 108 million tons was confirmed. — At the current pace, it will be impossible to reach the amount of resreve that will be needed to start the second stage of construction (of ESPO-author), and to reach Japan. Therefore, there is the strong poossiblity that Russia will only supply oil to China.93

To meet that target for 2025 Siberia should step up annual crude production by 50 milion tons and pay $102 billion for it. In 2006 the region’s funding by oil companies accounted for just 30 % of the scheduled amount. So according to Russian Prime Minister Mikhail Fradkov, the only way out is “to enforce investments on business.” In other words, in typical Rusian fashion the govern- ment’s answer to problems largely due to excessive state inerference is even more coercive state interference. Fradkov conceded that the entire grandiose project is on the verge of disruption, production is falling, and the goal of reaching 80 million tons by 2012 is receding.94 Yet the government is obviously divided on who is going to invest here. Natural Resources Minister Yuri Trutnev, a consistent proponent of an autarchic anti-foreign investment program publicly stated that the rates of oil and gas development are unrelated to insufficient foreign investments and it is the government’s task to develop the national economy and take priority over foreign firms. Thus he also rejected Japan’s offer of foreign investment.95So as of the summer of 2007 the ESPO is delayed because of price overruns and delayed growth or production of reserves; nearly every mineral deposit project in East Siberia is lagging behind schedule; foreign observers in general are extremely skeptical concerning Russia’s ability to meet its future oil and gas export commitments without reform of the internal gas market; Russian electricity production is not keeping up with demand; Russia faces a looming oil shortage due to its high taxation of oil exploration and profits and needs $300 Bilion in investments to maintain its current level of production through 2015; Gazprom cannot any longer satify domestic demand or meet the growing gas deficit due to over consumption of what remains a subisdized proudct by its own means; and Putin has personally expressed his own unhappiness with the implementation of his own policies for comprehensive regional development, including energy in Primorskiy Krai (Russia’s Maritime Province).96 The head of Rosatom, Russia’s Federal Atomic Energy Agency, Sergei

93 Tokyo, Sankei Shimbun Internet Version, in Japanese, April 18, 2007, FBIS SOV, April 18, 2007 94 Moscow, Kommersant.com, in English, March 14, 2007, FBIS SOV, March 14, 2007 95 Moscow, ITAR-TASS, in English, April 10, 2007, FBIS SOV, April 10, 2007; Tokyo, Sankei Shimbun Internet Version, in Japanese, April 18, 2007, FBIS SOV, April 18, 2007 96 “Oil Shortage Looming for Russia,” Analytical Department of RIA RosBuinessConsulting, June 18, 2007 from Johnson’s Russia List, June 18, 2007; Mikhail Sergeyev, “The State Is Not About to Lose Its Appetite for the Fuel and Energy Complex,” Nezavisimaya Gazeta, July 3, 2007 from Johnson’s Russia List, July 3, 2007; Moscow, ITAR-TASS in English, December 8, 2006, FBIS SOV, December 8, 2006; Vasily Buslayev, “Vladivostok Will be Without Defense,” Vladivostok, Vladivostok Novosti, in Russian, January 30, 2007, FBIS SOV, March 21, 2007; Moscow, Interfax, in English, March 16, 2007, FBIS SOV, March 16, 2007; Report from the Flame Gas Conference in Amsterdam, Johnson’s Russia List, March 14, 2007; Moscow, Interfax, in English, April 10, 2007, FBIS SOV, April 10, 2007

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Kiriyenko, told journalists that Russia’s failure to build enough nuclear energy may cause it to lose that industry by 2025 as at least 42 generating sets must be built by 2030 because the existing infrastructure is worn out.97 All this is happening as Russia’s oil fields in Western Siberia are gradually wearing out and suffering from falling production, increasing the importance of Sakhalin and Eastern Siberia. Meanwhile rising gas and electric prices, as the regime tries to bring those prices up to market levels, are slowing down growth, defense acqusitions, and the completion of national projects.98 And these inflationalry pressures indicate that the economy is outrunning the capacity of the domestic energy sector to satisfy demand.99

Moscow’s response to this situation has been to gradually raise domestic gas and electricity prices so that they will be fully freed from state controls in 2011, launch major expansion of its nuclear power sector, and seek to increase its power generating capacity by 50% in a decade.100 Logically, it would appear that major reforms in the economy as a whole must be carried out, but Moscow refuses to grant more private enterpise and is instead expanding the program originally conceived of for oil and gas, that then spread to defense industry and heavy metals, and to expand it to the nuclear power sector, i.e., create joint-stock companies owned by the state which are giant holding companies amalgamating all the firms in a particular sector, e.g., nuclear power.101 Thus Moscow has ordered more than 30 nuclear related companies to amalgamate “into a single state-owned behemoth” which will control every stage of civil atomic engineering form mining to construction, export of power stations, to fuel enrichment, and to decommissioning of old reactors.102

It remains an open question if Russia can get the foreign investment it claims to need to develop its Siberian energy fields. Given Yukos, TNK-BP, Shell, Mitsui, and MItsubisihi’s experiences, Russia’s attracitveness to foreign investors in the energy business must be questioned.103 Gazprom is now, under the pretext of a “routine” scrutiny of Sakhalin-1 moving to force out the foreign owners there and insert itself in their place.104 And worse yet, it now insists that the production of gas from Sakhalin-1 and Kovykta which was owned by TNK-BP but recently taken over by

97 Moscow, ITAR-TASS, in Russian, December 13, 2006, FBIS SOV, December 13, 2006 98 Moscow, ITAR-TASS in English, December 13, 2006, FBIS SOV, December 13, 2006 99 Fred Weir, “Russia Plans Big Nuclear Expansion,” Christian Science Monitor, July 17, 2007 100 Ibid.; “Russia’s Energy and a Power Equation,” The Korea Herald, July 13, 2007, Retrieved from Lexis- Nexis; Moscow, RIA Novosti, in Russian, November 29, 2006, FBIS SOV, November 29, 2006; Moscow, Interfax, in English, November 29, 2006, FBIS SOV, November 29, 2006;”Transcript of President Putin’s Press conference with the Russian and Foreign Media, February 1, 2007, www.kremlin.ru 101 Blank, Stephen (2007)Rosoboroneksport: Arms Sales and the Structure of Russian Defense Industry, Carlisle Barracks, PA, Strategic Studies Institute, US Army War College, 102 Weir (2007) 103 “Russia’s Energy and a Power Equation,”; Blank, (2006, pp. 25–47) 104 Moscow, ITAR-TASS, April 19, 2007, FBIS SOV, April 19, 2007; Gazprom Puts a Cork in Sakhalin-1,” Kommersant, June 20, 2007; “Russia Economy: Gazprom Eyes a Gas-Grabbing hat-Trick,” Economist Intelligence Unit, August 3, 2007, accessed at www.tmcnet.com/usubmit-russia-economy-gazprom-eyes-gas, August 5, 2007; Geoffrey T. Smith, “Flush With Kovykta Victory, Gazprom Eyes Sakhalin-1,”Dow Jones Newswires, June 26, 2007, www.rigzone.com/mews/article.asp?a_id=46920

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Gazprom, and which was the centerpiece of projected gas exports to China and South Korea, must go to the Russian domestic market.105 While such policies leave East Asian consumers in the lurch, presumably Gazprom and Russia’s other energy behemoths will then be able to follow a purely or almost purely autarchic energy policy which they falsely maintain can answer all of Russia’s needs, contracts, and commitments. Transneft, for example, believes it can make up oil shortfalls by increased production and opening up of new fields. Certainly ESPO’s builders have not seen such an increase in production and cannot afford a pipeline surplus, so Transneft’s claims, like many such, are extremely dubious.106

So if we measure Russian claims as advanced by Dementyev, Gazprom, and Transneft against current policies like those in the nuclear sector and those advocated by Trutnev, as well as the realities listed above, one must approach Russian plans to sell oil, gas, electricity, and nuclear power to either Korean state with great caution. This does not mean there will be no such sales, but it is unlikely they can meet consumers’ demand in regard to quantity, and in China’s case, price, or do so in a timely fashion. In fact a vicious circle in Russia’s Asian policy is discernible. That policy of massive energy exploration and exports is the only basis on which Russian Asia and Siberia can be revitalized, yet Russian economic policy’s main thrusts to state control and monopolization make it impossible for Siberia to realize its role as energy source to Asia and generator of investments that will flow back to it and develop its infrastructure. Consequently grandiose programs in the past and like those outlined above by Dementyev are thrown at the problems but are inherently unavailiang while opportunities for developing the region’s energy infrastructure, go unrealized.

Indeed, Russia’s overall energy trajectory is not a result of unique policies but is inherent in the nationalization of its oil and gas complex. Its record resembles that of other NOCs (National Oil [and gas] companies).

The list of NOC’s whose oil production has been falling or stagnant in recent years due to civil unrest, government interference, corruption & ineffiiciency, and the diversion of corporate NOC capital to social welfare is long and includes Indonesia, Iran, Iraq, Mexico, Russia, and Venezuela. To the extent that NOC’s must meet national socio-economic obligations, such as income redistribution, over-employment, fuel price subsidization, and industrial development, (in Russia’s case we might add military development as well- author) NOC’s have fewer incentives or resources for reinvestment, reserve replacement, and sustained exploration & production activity. This raises the question of whether timely development of the vast resources under the control of national oil companies can take place, given the constraints imposed by domestic political influences and geopolitical factors. In sum, future oil supply may simply fail to materialize in the volumes that are needed, leaving major oil consuming national scarce of fuel.107

105 Ibidem, 106 “Oil Shortage Looming for Russia,” 107 Chen , Matthew E.and Jaffee, Amy Myers “Energy Security: Meeting the Growing Challenge of National Oil Companies,” Whitehead Journal of Diplomacy and International Relations, 8, NO. 2, pp. 12–13

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The bureaucratic rivalries among minsiteries over pipeline routes, prices, ownership of energy hodlings, and the lust for monopoly over markets is generating outcomes that are easily foretold by any competent economist or student of Russian history.108

Irrespective of Russian foreign policy towards South Korea and its exisitng enegagement in the ROK’s energy market, these internal factors will exrcise a decisive and negative influence on Russian policy towards the Korean states and all of East Asia unless reforms are instituted soon.

The Kovykta Experience

The Kovykta gas field formerly owned and operated by TNK-BP epitomizes the vicissitudes of Russian energy policy towards South (and potentially North) Korea. Discussions about bringing natural gas from Irkutsk province in Eastern Siberia to China began in 1993. By 2003 South Korea, a large importer of both natural gas and LNG had entered the project to obtain reliable supplies from Russia and to discuss a pipeline route from Siberia to the DPRK and then to Pyongtaek. Previously there had been only two routes under consideration.

The first one, presented by Gazprom would pass through Mongolia to Beijing. It had been planned to link it in Russia to Gazprom’s network of gas pipelines from Yamal and the deposits in Yakutia, and to link it in China to the East-West pipeline of CNPC (China National Petroleum Corporation) that is currently being built. The second route, in which Anglo-American company BP, the joint owner [with TNK- author] of the Kovykta deposit (known as Rusia Petroleum) was interested, partly duplicated the route of the Angara -Daqing oil pipeline planned by Yukos and CNPC. In the future it may be extended via an undersea gas pipeline to South Korea.109 Indeed, Gazprom is now discussing an undersea pipeline to sell Sakhalin gas to South Korea. An export channel from East Siberia to China’s Dalian and the ROK’s Pyongtaek is considered to be the most promising land line, but this line exlcudes North Korea, minimizing Russia’s ability to sell it gas. Gazprom has also hinted that because the many limitations affecting the inter-Korean relaitonship may rule out the more economical land lines, a “submarine” line is likely to be laid to bring Sakhalin gas to the ROK and to Khabarovsk and Vladivostok.

The proposal by Kogas, South Korea’s state gas company, clashed with Gazprom’s and Rosneft’s plans for an LNG distribution center (mainly from LNG on Sakhalin) at Nakhodka. But otherwise it fit perfectly with Gazprom’s and Transneft’s intention to establish a unified and centralized state system for integrating oil and gas extraction and export..110 Sergei Vainshtock, the head of Transneft, claimed that this project was backed by the Ministry of Energy and aimed to integrate all the “uncoordinated” projects for oil and gas in Eastern Siberia and

108 Blank, (2006 pp. 25–52) 109 Dmitry Butrin, “Korea is looking at Russian Gas Very Closely,” Moscow, Kommersant, in Russian, February 27, 2003, FBIS SOV, February 27, 2003 110 Ibid.

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Sakhalin into a single system for exporting Russian energy to the Pacific and even beyond to America.111

The interest in new pipelines for oil and gas to East Asia coincided with oil and gas firms like Yukos’ calls for reform and even dismemberment of state oil and gas companies. On February 14, 2003, Putin quashed all hopes for breaking up the state gas monopoly when he stated that,

As a strategic company, Gazprom had to be maintained and has been maintained as a single organism. That is how we will approach the upgrading of the company’s activity in the future. As Gazprom’s major shareholder, the state will press for a reduction in costs and an enhancement in the effectiveness of the company’s activity but it will not back any plans for its dismemberment or division.112

Putin’s speech duly made it almost certain that Gazprom, secure in its monopoly, would fight with TNK-BP to prevent a private firm from competing with it to own the China-Korea “account”. Since then Gazprom has waged an unrelenting war on TNK-BP either to suppress Kovykta as a source of that energy to the East or take it over and oust its original owners. This happened when TNK-BP , in 2006, signaled its readiness to give up control of Kovykta to Gazprom.113 That takeover was finalized in 2007 and essentially represented a Gazprom expropriation of TNK- BP.114 But the consequences of Putin’s speech went still further. As German Gref, Minister of Economic Development observed,

The Russian economy is already a market economy, but the state remains to a considerable extent Soviet. So, preserving a state-controlled Gazprom in its current form implies preserving its socialist component.115

So even though Gazprom and Kogas agreed on a 4,000 KM project costing about $11 Billion and to be completed in 2010 from Kovykta in May 2003 and were subsequently joined by CNPC, the project was already problematic by then.116

Leonid Drachevsky, Putin’s plenipotentiary in Siberia, publicly worried that implementing the project might trigger gas shortages in Irkutsk, Chita, and Buryatiya provinces and adversely affect Siberia’s coal industry while inhibiting other explorations for gas in Siberia.117 Other problems also soon arose. Gazprom’s negative attitude towards this project which it would not control since TNK-BP owned Kovykta now manifested itself. As a contemporary analysis observed,

111 Ibid. 112 Speech by Russian Federation V.V. Putin at Celebratory Session to Mark the 10th Anniversary of Gazprom, www.president.ru February 14, 2003, FBIS SOV, February 15, 2003 113 “TNK-BP Ready to Give Up Control of Kovykta Gas Field to Gazprom,” Alexander’s Gas & Oil Connection, XI, No. 4, February 27, 2006, www.gasandoil.conm/goc/company/cnr60997.htm

117 Moscow, ITAR-TASS, in English, May 7, 2003, FBIS SOV, May 7, 2003, Moscow, Interfax, in English, May 7, 2003, FBIS SOV, May 7, 2003

116 Moscow, Interfax , in English, May 12, 2003, FBIS SOV, May 12, 2003; “Russia, South Korea To Build Pipeline, Pravda, June 6, 2003

115 “TNK-BP Ready to Give Up Control of Kovykta Gas Field to Gazprom,”

114 “BP Surrenders Siberian Field to Gazprom at Knockdown Price,” Reuters, June 23, 2007

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In the general outline for the exploitation of natural resources that the company (Gazprom-author) is currently drawing up, priority is given to gas from the Chayanda field (Chayandinskoye) in Yakutia which is currently part of the undistributed stock. The reserves at this field are estimated at around 1,2 trillion cubic meters of as [as opposed to Kovykta’s 1.9–2 trillion cm of gas-author] It is envisaged that commercial extraction will begin in 2009 and in 2012 it is planned to reach the design capacity of 23 Billion cubic meters.118

Gazprom’s priorities here are obvious, to say the least. It becomes the operator, attracts additional funds from interested investors, and proclaims its intention to build a gas pipeline via Tynda, Blagoveshchensk, Khabarovsk, Vladivostok and onwards to the Korean peninsula excluding Kovykta. The construction of a gas pipeline geared to the Korean consumer had become increasingly pressing in the emerging political situation of North Korean nuclearization and its attendant crisis. Thus Gazprom’s rivalry with TNK-BP meant it would abandon the idea of building a gas pipeline from Kovykta to China and thence to Korea.119 And sure enough as a result of the new plans announced this year, Kovykta is now slated, as is Sakhalin-1 to go to the exploding Russian domestic market.120 Given the government’s desire to prevent blackouts in Siberia and maintain control over the gas industry while promoting Gazprom’s monopoly; the likely decision as to who would control events there was hardly in doubt.121

Another related question was the projected pipeline route. China insisted on the pipeline bypassing Mongolia so that Mongolia could not turn off its gas, i.e., for strategic and political reasons. But that raised the final costs since the pipeline would have to detour south to reach China and the Yellow Sea before reaching South Korea.122

China’s insistence upon its strategic priority raised the costs to it while excluding North Korea from consideration. This displeased Seoul which wanted to provide Pyongyang with alternatives to nuclearization. China’s insistence on avoiding Mongolia also irked Russia which wanted to get in on the ground floor of any Korean settlement by providing natural gas to North Korea to substitute for nuclear power in generating electricity there.123

These issues were thoroughly discussed throughout 2003. By November, Russia, China, and the ROK were supposed to finalize the results of the feasibility study for Kovykta while reports suggested that the ultimate route would bypass North Korea due to excessive costs and safety reasons. Instead the pipeline would link up to South

118 Blagov, (2007b) 119 Vladimir Potapov, “A Solution Can Be Found,” Moscow, Rossiyskaya Gazeta, in Russian, May 7, 2003, FBIS SOV, May 7, 2003 120 Blagov, “Moscow Considers Enormous Investment in Eastern Russia’s Gas Sector”; “Russia Needs 92 Billion Dollars to Develop Eastern Gas Deposits by 2030,”

123 Ibidem; Sugino, Ayako (2004) Russia’s Energy Policies for Asia, Paper Presented as part of the project The Energy Dimension in Russian Global Strategy, James A. Baker III Institute for Public Policy, Rice University, Houston, p. 13

122 Ibid.: Pacific Russia Information Group, Pacific Russia Oil and Gas Report, Prospects for Energy Cooperation in Northeast Asia: A Role for Sakhalin?, http://pacificrussia.com/Sakhalin-Energy_pg6.html

121 Locatelli, Catherine , The Entry of China to the Gas Market: Constraints and Opportunities, Unpublished paper, 2003, pp. 9–10

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Korea through China and the Yellow Sea and annually provide China 20 BCM and South Korea 10 BCM after it opened in 2008.124 However, even here the signs of domestic Russian discord soon appeared. Gref openly supported opening up the Rusia Petroleum Company, TNK-BP’s company that owned Kovykta, and the project to multiple foreign investors. But the United Financial Group brokerage firm warned that Gazprom could seek to use “administrative resources” to buy Rusia Petroleum at a lower price for itself and quash the project.125 Thus by late 2003 Gazprom effectively had two ways to stop the project. Either it could use its ties to the state to buy Rusia petroleum essentially on its own terms or it could simply stop TNK-BP from moving forward. Since 2004 Gazprom experimented with both options, preventing any progress until TNK-BP capitulated to it in 2006–07126

Thus South Korea and China, to obtain gas from Russia must go to Sakhalin or other suppliers as Kovykta will apparently be oriented to the domestic market. 127

For example, Sakhalin gas is supposed to start flowing to the ROK in 2008 at a rate of 1.5. million tons amounting to 6% of the ROk’s domestic consumption. 128

However, both Sakhalin 1 and 2 are also evidently being reoriented away from East Asia to the domestic Russian market. ESPO and the Russo-Chinese gas pipeline (the Altay pipeline) are now both being delayed as Gazprom, Transneft, and Russian oil firms are clearly finding it difficult to meet their commitments.

However, this solution too causes problems for everyone. While they will undoubtedly have to buy from Sakhalin and Gazprom, they would have bought still more gas from Kovykta if it was available. Therefore they are searching elsewhere, and not without success for alternatives to Sakhalin and Gazprom, e.g., in Indonesia, Australia, Central Asia, and the Gulf, because they now know they cannot rely upon Russia either for honesty, predictability, or efficiency. And in any case, since

There is no regional gas grid in East Asia, so even with pipelines, Russia cannot easily supply Korea and China with gas. This lack of a regional gas grid means that East Asia relies heavily on Liquefied Natural Gas (LNG) from the Persian Gulf for the bulk of its supplies. As a result East Asia is far less dependent on natural gas for its energy mix than Europe and the United States.129

While China, if it gets the 80 BCM of gas beginning in 2011, hopes to fill gaps between its projected supply and demand for natural gas and Russia will receive the

124 “Trans-Siberia Project Taking Shape,” Korea Times, November 17, 2003; “Giant Russian Gas Pipeline to China, South Korea Gets Green Light,” Channel News Asia, November 14, 2003; “Pyongyang Could Be Left Out of Russian Gas Pipeline to Korean Peninsula,’ Agence France Presse, November 12, 2003, all retrieved from Lexis-Nexis. 125 “Foreign Groups Line Up to Bid for Stake in Rusia Petroleum: Report,” Agence France Presse, November 17, 2003, Retrieved form Lexis-Nexis 126 Blank. Stephen, (2006) ”Kovykta: Russian Gas and Asian Markets,” Northeast Asia Energy Focus, Korea Energy Economics Institute, 3 No. 2, pp. 34–42 127 “Russia Needs 92 Billion Dollars to Develop Eastern Gas Deposits by 2030”; Blagov, (2007b); “Russia, South Korea Clinch 20-Year Natural Gas Deal,” People’s Daily Online, July 16, 2005, 128 “Russia Exports Natural Gas Directly to South Korea (Undersea Pipeline, Excludes NK),” Donga Ilbo, July 11, 2007, accessed from www.freerepublic.com/focus/f-news/1864080/posts, August 5, 2007 129 Ian Pryde, “The Other side of Security,’ www.russiaprofile.org, March 22, 2006

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revenue from these sales, it is by no means certain that these new pipelines will escape Kovykta’s sorry fate.130 Sakhalin-1’s example is instructive here. Neither is it clear what Russia really gains except less revenue than it would have gained from a more market-friendly, transparent, and less monopolistic approach to energy.

Conclusions

This episode shows not only Russia’s determination to build a state owned and essentially autarchic anti-foreigner energy industry, it also shows that Russia is equally determined to compel subsidies for pipelines that may or may not be economically justified but which are lucrative to the owners and can be arguably validated on political grounds. Clearly for Russian firms like Gazprom the priority is and was retention and protection of their monopoly against all competition and rent-seeking behavior towards that objective.However, such policies only undermine Russia’s larger geostrategic objectives. Russia has only managed to alienate East Asian customers, forcing them to seek alternatives like LNG or other providers while foregoing immense revenues and failing to develop its own energy industry to satisfy either foreign or domestic customers and obtain foreign investment.131 Thus monopoly in economics has accompanied or paralleled the accelerating trend towards monopoly in politics. However such sharp practices have undoubtedly contributed to the globalization of China’s, India’s, Japan’s, and South Korea’s quest for energy.132

Moreover, such dealings cast doubt on any possibility that Russian energy, whose extent remains unknown, can effectively advance Russia’s Asian interests and/or to meet the rising demands of Asia’s consumers.

As noted above, every project in East Asia faces cost overuns and major delays. Neither is it easily visible how Russia can alone supply North or South Korea with relaible energy, even if someone else pays for it. Undoubtedly East Asian states will buy Russian energy in large quantities, but they will not be as large as could have been the case and there are good grounds for a tough-minded skepticism concerning Russia’s ability to deliver on its big talk of massive energy and infrastrucutral projects. Energy has hitherto helped Russia reclaim a strong place in East Asia. But Russia’s management of its energy holdings is also a trap. Large energy holdings, as in the 1970s, provides a temptation for state control and neglect of reform that Moscow cannot or has chosen not to resist. That trap and Moscow’s failure to escape it, helped trigger the huge decline in Russia’s strategic presence in the Far East in the last decade of Soviet rule. By repeating its mistakes Moscow risks courting the same fate, but in an utterly transformed East Asia where its margin for error is vastly smaller than it was a generation ago.

130 Karl Malakunas, “China, Russia Using Gas Deal for Vastly Different Reasons,” Agence France presse, March 22, 2006 131 Lee Joo-Hee, “Korea Rolls out Energy Diplomacy,” The Korea Herald, March 22, 2006; Yoo Soh- Jung, “Korea Diversifying Oil Supply: Long-Term Policy Emphasizes Future-Oriented Energy Outlook,” Korea Herald, March 22, 2006 132 Ibidem.

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Stephen Blank is Professor of Russian National Security Studies at the Strategic Studies Institute of the U.S. Army War College in Pennsylvania. Dr. Blank has been Professor of National Security Affairs at the Strategic Studies Institute since 1989. In 1998–2001 he was Douglas MacArthur Professor of Research at the War College. He has published over 500 articles and monographs on Soviet/Russian, U.S., Asian, and European military and foreign policies, testified frequently before Congress on Russia, China, and Central Asia, consulted for the CIA, major think tanks and foundations, chaired major international conferences in the USA and abroad In Florence, Prague, and London, and has been a commentator on foreign affairs in the media in the United States and abroad. He has published or edited 15 books focusing on Russian foreign, energy, and military policies and on International Security in Eurasia. His most recent book is Russo-Chinese Energy Relations: Politics in Command, London: Global Markets Briefing, 2006. He has also published Natural Allies?: Regional Security in Asia and Prospects for Indo-American Strategic Cooperation, Carlisle Barracks, PA: Strategic Studies Institute, US Army War College, 2005. Dr. Blank is also the author of a study of the Soviet Commissariat of Nationalities, The Sorcerer as Apprentice: Stalin’s Commissariat of Nationalities, Greenwood Publishing Group, 1994 and the co-editor of The Soviet Military and the Future, Greenwood Publishing Group, 1992. Prior to this appointment Dr. Blank was Associate Professor for Soviet Studies at the Center for Aerospace Doctrine, Research, and Education of Air University at Maxwell AFB. He also held the position of 1980–86: Assistant Professor of Russian History, University of Texas, San Antonio, 1980–86, and Visiting Assistant Professor of Russian history, University of California, Riverside, 1979–80. Dr. Blank’s M.A. and Ph.D. are in Russian History from the University of Chicago. His B.A is in History from the University of Pennsylvania.

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