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. 

First, oil firms undertake these mega-projects as a strategic operation and don’t fold camp due to the historical cyclical whims of the energy market.  

Second, these 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 reserve.

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 Russia. 

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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