Southern Pulse Intel Brief, 13 August 2009

I have posted below the Southern Pulse Intel Brief, with permission from the Southern Pulse editors. This intel brief is normally published only for Southern Pulse members, and no longer available on Networked Intelligence, the organization's blog. I hope you find it interesting and informative.

INTEL

Russia and Cuba signed agreements in August 2009 to explore oil in the Gulf of Mexico. As part of this latest effort to deepen ties between the two old friends, Russia has also extended Cuba a US$150 million credit line for construction materials and farm machinery.

Out of India, sugar refining group Shree Renuka Sugars has made public its interest in acquiring a stake in Brazilian sugar and ethanol producer Grupo Moema. Shree Reunka has up to US$100 million available for the acquisition. Moema is also reportedly interested in other sugar refining groups, including Cosan, São Martinho Guarani, Cargill and Bunge.

Finally, we have learned that in Mexico, Army personnel detained Roberto Gaspar Caballero, a 21 year-old resident of Reynosa, Tamaulipas on 5 August 2009 as he attempted to smuggle 20 grenades into the U.S. in his Chevy Suburban via the Reynosa-Pharr port of entry.

ANALYSIS

Russia’s new relationship with Cuba began to take shape in June 2008 when Russian Deputy Prime Minister Igor Sechin made a state visit for formal talks. Sechin returned with a delegation of businessmen and diplomats on 18 September 2008. News of the development of a Russian-Cuban space center later surfaced, and in mid-March 2009, we learned that five Russian companies could begin oil exploration in several Gulf of Mexico blocks owned by Cuba. With this agreement in place, Russia has solidified its position in Cuba as an energy partner for many years to come.

Indian sugar producers have had a tough year. This explains, in part, why the international price of sugar hovers at record highs, and why Brazilian sugar producers have begun to shoulder global demand, raising their international profile. Brazilian sugar production is closely tied to ethanol as both are made from sugar cane. Grupo Moema is but one of many companies that can produce ethanol or sugar, but only a few have attracted international attention. Cosan, which has been negotiation with Shell oil over a minority stake, is another. In the short-term, Brazil’s sugar/ethanol producers will struggle to meet domestic and international demand. The price of sugar, however, will help offset losses over the depressed price of ethanol and limited export markets.

The news of a Reynosa man caught smuggling grenades into the United States reminded us of when an unidentified man threw a grenade into a bar in Pharr, Texas. From 2008 to 2009, there has been a considerable jump in the amount of seized grenades in Mexico, indicating that the use of explosives in armed confrontations will continue to be a normal occurrence. We are watching for improvised explosive devices, however, which would be a serious escalation. On 16 March 2009, Mexican soldiers seized 34 Tovex sausage explosives, 47 meters of explosive fuse, and around ten pounds of granulated explosive from a safe house just south of Sunland Park, New Mexico. Additionally, on 19 and 24 February 2009, 30 kilos and 121 kilos of explosives, were stolen in Mexico. These explosives have yet to turn up.

Brazil, Russia, and Turkey - energy backgrounder

On 10 June, ISN published a piece I prepared on Brazil and Turkey. Entitled, "Petrobras Empowers Turkey", this commentary focused on Lula's recent trip to this promising country and the energy deals sealed between Petrobras and its Turkish counterpart, TPAO.

In the piece, I discussed briefly how Turkey and Russia compete for dominance in the EU energy markets - Russia by providing natural gas through its own pipelines, and Turkey by developing its own energy supply for sale and, more importantly, by allowing others to lay pipe across Turkey to access EU markets.

But this topic deserves more attention and explanation.

My research assistant, Kelsey Price, has prepared a Russian energy backgrounder that expands upon Russia's role as an energy supplier for the EU as well as Turkey's budding presence in regional energy markets.

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Russia’s immense supply of natural gas gives Moscow a significant hold over its foreign consumers, especially the European Union, which received over a quarter of its gas supplies from Russian gas company Gazprom in 2004. Disputes over pricing with third party countries have, in the past, cut off large portions of Europe’s energy supply, and despite the EU’s pleas with the Russian state Duma to open its gas line monopoly, the Duma has reinforced Gazprom’s power by giving it “exclusive right to export of gas” in 2006.

Recently, Russia expanded its influence, promising large-scale projects in southeastern Europe: the ambitious South Stream pipeline, for one, would help Europe diversify its energy supplies at least among the various Gazprom lines. Russia has also promised to build a power plant in Bulgaria, create a Central European gas hub, and finance various storage facilities, all to court skeptical countries into supporting the South Stream.

However, Russia’s strategy lies solely in its willingness to make generous concessions to European partners that outweigh the disadvantages of foregoing energy diversification. This strategy may have seemed feasible at one time, considering Russia’s success during formerly high gas prices. Now that gas prices have dropped and the global recession has taken its toll (Russia saw a 9.5% contraction in its economy during 1Q09) funding for these projects may disappear. Moscow’s European partners are happy with promises for now, but Gazprom’s controversial Russia-to Germany project Nord Stream has already needed to request an increase in its credit guarantee by about 1 billion euros. Once the gas giant has to begin cutting back on its projects, Russia may have to delay or retract some of its hefty promises.

Financial problems may also affect Russia’s energy supply; the Energy Ministry reported on June 18 that most new oil projects in Russia would not be profitable even with gas at $150 a barrel. Without government incentives for new fields, such as lower export tariffs and a laxer taxation system, Russian oil companies will produce 40 million tons less oil in 2013 than they did this past year, the ministry said. While the ministry is attempting to make oil companies more profitable, this drop in confidence in Russia’s energy supply may also drive European countries and other gas importers to work harder to diversify their suppliers.

Russia has also been known to restrict its gas supply as leverage in payment skirmishes. In January 2006, Russia decreased the amount of gas sent to the Ukrainian pipeline because of a drawn-out pricing dispute; this pipeline brought gas not only to Ukraine, but to Western Europe as well, and countries like Germany, Italy and the Czech Republic saw drastic reductions in their energy supply. Russia and Ukraine signed a treaty four days later, but the dispute demonstrated Russia’s strong influence in energy and its powerful “negotiating” tactics.

In October 2007, Russia threatened to cut off power to Ukraine once again because of unpaid debt. While Gazprom assured Europe that its consumers would not experience any decrease in energy supply, the European Commission still called for a swift resolution in the dispute, still wary of Russia’s hold over the region. While Ukraine’s deputy prime minister repaid the debt, Gazprom claimed that the overall issue was not over. “Gazprom is a reliable supplier of energy resources, but we cannot and should not deliver gas without payment,” said Gazprom spokesman Sergei Kupriyanov after the March 2008 repayment.

At the end of 2008, Ukraine owed Gazprom over $1 billion, and on January 7 Russian Prime Minister Putin ordered a halt on all gas sent through Ukrainian pipelines on accusations that Kiev had been siphoning off energy and disrupting the flow to Europe. At least eighteen countries reported significantly less pressure in pipelines, especially Bulgaria, Moldova and Slovakia. After Europe suffered gas shortages during a subzero winter, on January 18 Russia restored gas supplies and began demanding that Ukraine pay European prices, not its previously discounted post-Soviet prices.

The gas crisis caused even more concern than before for European consumers, who lost confidence in Russia and Ukraine as reliable gas suppliers and business partners.

Russia’s influence over Europe as a major supplier also faces some challenges from an empowered Turkey. Various companies other than Gazprom have offered Turkey the opportunity to become a European energy hub, mostly through the U.S.-backed Nabucco line. The 3,300-km pipeline from Azerbaijan would help European countries diversify their energy options, and some say it is more cost-efficient than Gazprom’s proposed South Stream project. The Nabucco project would violate Turkey’s prior support of the central Iraqi government’s exclusive right to export oil from the country, as Turkey has been a key ally in Iraqi centralization. However, Turkey would become the energy hub for Europe if Nabucco succeeds over South Stream, giving it some needed influence in the continent—Turkey is still bidding for a spot in the EU, despite opposition from France’s Sarkozy and Germany’s Merkel.

Russia has blocked Turkey’s influence in the past, however, striking deals with Kazakhstan and Turkmenistan in 2007 that drew exports away from the Nabucco line. Also, Russia and Gazprom have remained confident in gas sales to Europe despite decreased exports to the region and a group of oil fields deemed unprofitable. Gazprom’s market share in Europe and Turkey dropped from 30 percent last summer to just 16 percent in the first quarter, in part because Russian contracts held prices that were set at the record-high levels of six to nine months ago. Medvedev reassured reporters at a news conference, “this can be seen as a shift in demand from an earlier period. That’s why we, at Gazprom, don’t see any reason for panic and pessimism.”

Sources/Notes:

Bogle, Sally. “EU Countries Glimpse Consequences of Future Dependence on Russian Gas-as Pricing Dispute with Ukraine Cuts Import Flows.” Global Insight, 3 January, 2006.

Buck, Tobias and Buckley, Neil. “Duma votes for Russian gas export monopoly.” Financial Times, 16 June 2006.

For environmental and security reasons: http://tinyurl.com/mmoptk

Koutsarov, Ivan. “Economic crisis threatens Russian projects in Southeastern Europe.” Global Insight, 27 May 2009.

Malkova, Irina. “Most oil projects may not be profitable.” The Moscow Times, 18 June 2009.

“Russia cuts off gas supply to Ukraine.” The New York Times, 1 January 2006.

“Gazprom cuts Ukrainian gas supply.” BBC News, 3 March 2008.

“Factbox- 18 countries affected by Russia-Ukraine gas row.” Reuters, 7 January 2009.

Solovyov, Dmitry and Ferris-Rotman, Amie. “Russia and Ukraine aim to sign gas deal on Monday.” Reuters, 18 January 2009.

Ciszuk, Samuel. “OMV, MOL, Crescent Attempt to Bring Iraqi Kurdistan Gas Through Nabucco to Europe.” Global Insight, 18 May 2009.

Ü.S. throws weight behind EU’s Nabucco pipeline.” Reuters, 22 February 2008.

Schleifer, Yigal. “Questions cloud Turkish-EU energy cooperation.” EurasiaNet, through ISN. 13 June 2007.

Medetsky, Anatoly. “Gazprom sees no reason for ‘panic.’” The Moscow Times, 25 June 2009.

The Monroe Doctrine: Circling the Drain

Many of the legacies left by George W. Bush will focus on the War on Terror and Iraq. In Latin America, however, his legacy will be one that always remembers how Latin America was lost on his watch. As President Bush closes out his final months in office, many in Washington lament that the Monroe Doctrine, the foundation of Washington’s soft power in Latin America, is circling the drain and nearly dead.

Iran, China and Russia are certainly helping it along, but they would be in no position to do so if the present White House had simply lived up to what President Bush promised in his first presidential campaign: closer ties with Latin America. If anything, however, President Bush has distanced himself farther from Latin America than any president in recent history, creating a vacuum that has been steadily filled by patron nations not motivated by Washington’s best interests.

On 22 September Russian Naval cruiser, Peter the Great, set sail with two other ships for Venezuela where they will take part in naval exercises in the Caribbean. Russian bombers recently left Venezuela after a number of training missions off the Venezuelan coast, and a long time Russian spy, now Deputy Prime Minister, Igor Sechin recently made his rounds through Cuba, Venezuela, and Nicaragua at the head of a large delegation of diplomats and business leaders.

The Russians are courting Bolivia, offering helicopters to help combat organized crime and drug traffickers. Meanwhile, Bolivia has announced it will move its Middle Eastern embassy from Egypt to Iran, a county now hard wired to Venezuela with at least one weekly flight.

A runway built by the US military in Manta, Ecuador, may soon be used to receive regular flights from China, and there are talks to open an international deep water port in Manta, making Ecuador a primary link between South America and growing business interests out of China.

Hutchinson-Wampoa, the company that controls ports on both sides of the Panama Canal has shown considerable interest in building in operating the Manta port, as well as a deep water port in northern Mexico.

The Chinese Development Bank, a financial institution that conducts some US$400 billion in annual loans, grants, and other programs, will invest US$100 million in Chile, where the national mining company, Codelco, will soon open another copper mine just to meet Chinese demand.

Over the past four years, we have watched the president of Iran receive a warm welcome in Nicaragua, Bolivia, Venezuela, and Ecuador, when the US president was all but forced off stage at the Summit of the Americas in Argentina and embarrassed by a negative public reception in Guatemala at the tail end of his obligatory Latin American tour in 2007.

The US State Department declared in January 2008 that this would be the year of engagement. So far, there has been little more than a cursory glance at Latin America, with most of the attention coming recently when Bolivia, then Venezuela, sent the US ambassador packing.

The International Monetary Fund has been lambasted as a bunch of Washington cronies. The State Department's Human Rights report and yearly review of cooperation in the so-called War on Drugs is significantly watered down in an environment where the region’s new patron states don’t place a high value on protecting human rights or preventing drugs from entering the United States.

Any influence the United States may still retain over the region has all but eroded. And since Thomas Shannon, the State Department’s top diplomat in Latin America, visited China in 2004, it has been all but formally acknowledged that China has a “seat at the table” when any Latin America enters serious discussions over trade, military support, or foreign direct investment.

Looking ahead, President Bush will hand his successor two ongoing conflicts in Afghanistan and Iraq as well as the so-called wars on terrorism and drugs. By many accounts, the new president will inherit four “wars”. Three of the four wars are over an ocean and half a world away. And the war that potentially has the most impact on Americans' daily lives has received the least amount of attention and funding.

What may affect Americans the most in the coming presidential term and beyond is likely not the threat of nuclear war or a terrorist attack but losing the support and respect of a region that since 1823, when the Monroe Doctrine was first signed, has been for better and for worse, the sole purview of the United States.

In the last eight years, Washington’s backyard has become littered with a number of interests that range from hostile to indifferent towards the United States. For many Latin American nations, the upshot is choice, an option to trade with other countries aside from the US and the EU. They are new patrons who don’t care about human rights standards. They do not force Latin governments to give their soldiers immunity from prosecution at the International Criminal Court

Moving forward, many countries in Latin America, specifically Brazil, Ecuador, Chile, Argentina, and Mexico, may see winning combinations and synergies emerge from budding relationships with at least China and Russia. Iran is a distant, yet significant regional player.

The big loser will be the United States. US diplomatic pressure and geopolitical voice will increasingly fall on deaf ears. A region that was once very close has perhaps forever stepped away. It is unlikely future leaders in the White House will repair broken relations or revive one of the region’s oldest unspoken laws.

One Brazilian diplomat recently told Southern Pulse, “In the past, the door for talks with the United States on any issue had to remain open. We had no choice. Now we can close it if we want. And in the future, it may rarely, if ever, open again if China and Russia have their way.”