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Friday, December 26, 2014
How Diplomatic Backdoor Channel Maneuvering Will Lift Russian Sanctions
The brutal oil price meltdown and anticipated continued low prices
for the upcoming months has forced the mothballing of mega-energy and overall
industry wide retrenchment. Several western firms have pulled out of their
agreements with respect to multibillion dollar mega shale gas exploration
projects in Ukraine including Royal Dutch Shell and Chevron. The reasons,
according to an unnamed source, were due to a combination of plunging oil
prices and disappointed geological results in a war-torn eastern Ukraine. This
pullout means that Ukraine will continue to be totally dependent on Russia as its
sole supplier for its energy needs. Ukraine is Russia’s cash cow with respect
to oil revenues.
Because Ukraine is technically bankrupt it depends on IMF, World
Bank and EU funding to pay their energy bills, a dependency that perpetuates
Russia’s huge political leverage in the region. More unsettling for these
western funding sources is the fact that Ukraine is ranked 135 of 175 with
Transparency International which is hardly reassuring that these funds will be
fully used to secure energy.
The reasons for why the oil giants’ dropped the oil shale projects
are certainly not because of low oil prices or hostilities for several reasons.
firms undertake these mega-projects as a strategic operation and don’t fold
camp due to the historical cyclical whims of the energy market.
firms certainly wouldn’t sign multibillion dollar agreements if there wasn’t
proof of potentially highly profitable findings. Before the CEO puts his John
Hancock “on the line that is dotted”, all forms of due diligence, including
geological surveys, have been performed.
Third, they go
where the oil is and that has historically included mostly war-torn territories
where they’re highly experienced in security protocols for personnel and
installations in hostile geological and political environments.
One possible reason is that this might be part of a grand back-door
political deal with the West so that President Putin has a face-saving way to
have the sanctions eased or lifted. Easing or lifting of sanctions would allow
Russia to access to capital markets to reschedule payments to pay about $365
billion in capital debt to foreign banks due in 2015. Without such harsh
economic encumbrances the ruble can stabilize and then rise gradually
eliminating the need to continually raising interest rates, force state-run
companies to sell foreign currencies, or touch their $400 billion foreign
The oil firms’ participation in Ukraine represented the West’s
perceived economic energy infringement into Russia’s Near Abroad. The oil
firms’ withdrawal is an economic, not military retreat and an economic, rather
than military solution to a political logjam.
With this economic withdrawal by the west, we’ll probably see
reduced overt Russian military activity in eastern Ukraine and possibly even
barely noticeable withdrawals as part of the implicit agreements between the
West and Russia. There will be gradual and progressive official lifting of
sanctions by the end of 1Q2015, with unofficial tacit agreements to quicken the
pace contingent on Russia’s positive political and military “behavioral
modifications”. It does not serve large European or American financial and
energy firms to have a bankrupt or severely weakened Russia.
Any crisis always provides excellent cover for countries to engage
in unusual practices out of convenience or necessity. A current example is
China’s voracious purchase of oil at low prices to bolster their low strategic
oil reserves. Because of clever data reporting, it’s difficult to discern how
much of the total Chinese oil purchases are for commercial and military use.
Applying this cover in Ukraine, this possible conveniently
orchestrated arrangement makes it all but impossible to link the sudden
withdrawal of large Western energy firms that signed multibillion dollar
agreements only last year, to soon-to-be more favorable economic treatment of
This deft mutual maneuver will put Russia in a positive position
as surplus oil inventories are drawn down by an improved world economy. And
because several mega-exploration projects were halted, it will be difficult to
restart immediately to have an impact to meet growing world demand for oil
which will result in an upward price trend.
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