June 9, 2009 | Commentary on Russia, Energy and Environment

Russia's Commodities Strategy: While the West talks, Medvedev and Putin Lock up Resources for the Future

The economic glitterati have descended on Russia's "second capital." President Dmitry Medvedev, vice premiers and ministers, CEOs of Intel, Nissan, Coca-Cola and other Forbes 500 companies, and oligarchs are rubbing shoulders with superstar pundits such as Thomas L. Friedman and Nuriel Rubini. All have flocked to the St. Petersburg International Economic Forum.

Russians are all smiles after the purchase of 2 percent of Facebook, and state-owned Sberbank's participation in acquisition of the General Motors Corp.'s German subsidiary Opel. The public discourse is all about diversification, innovation and coping with the global crisis. Mr. Medvedev says he wants innovation-based growth. But privately, many sotto voce discussions turn to the question: What is Russia's global strategy?

Over the last few months, Moscow has pushed hard to consolidate its positions in commodities and energy resources in both European and Asian markets. Using carrots and sticks, Russia is redrawing the natural resources map around its borders.

At the forum, Mr. Medvedev, and Presidents Ilham Aliyev of Azerbaijan, and Serzh Sarkisian of Armenia met to discuss a peaceful resolution of the lengthy conflict between the two countries over Nagorno-Karabakh.

In April, Moscow invited Mr. Aliyev to sign a memorandum of understanding on gas exports. According to the proposed agreement, Azerbaijan will sell all its gas to Russia. Moreover, it will use the Russian pipeline system, controlled by the state-owned monopoly Gazprom, to export gas to Europe.

The agreement, if implemented, will mark a massive shift in Azerbaijan's export policy. That nation has long favored exporting via the proposed Nabucco pipeline, which would run through Turkey to Europe. Azerbaijani diplomatic sources say that, in exchange for the gas exports, Russia promised to help Azerbaijan resolve its conflict with Armenia over Nagorno-Karabakh.

The White House hopes to short-circuit the proposed gas exports agreement. Veteran "energy diplomat" Richard L. Morningstar has been dispatched to Baku, Azerbaijan, bearing a personal letter from President Obama to Mr. Aliyev. It remains to be seen whether this visit will be enough to keep this key Caspian player from reorienting its energy exports.

Azerbaijanis not the only object of interest for Russia. Gazprom recently decided to play rough with a major gas supplier, Turkmenistan. Last April, the sole pipeline carrying Turkmen gas to Europe suffered an unexplained explosion. It paralyzed exports. Once the Russian pipeline was repaired, Gazprom demanded that Turkmenistan either decrease its gas exports or cut the price. That's hard-nosed negotiating.

These days Russian Prime Minister Vladimir Putin seems content to let Mr. Medvedev do the talking about high-tech development. Meanwhile, he focuses on the "core business" of Russia Inc.: multi-billion dollar projects in commodities and energy control.

The true Russian agenda is most transparent in faraway Mongolia. Strategically squeezed between China and Russia, it has been dominated by both nations in the past. Today, the pro-American, democratic republic finds itself deluged by visits from senior Russian officials, including Mr. Putin himself.

Mr. Putin jetted into Mongolia on May 13. He spent six hours pressing officials for a number of deals in uranium, copper, gold and coal. All these commodities are expected to be in high demand in the neighboring Asian markets.

The government-owned Rosatom hopes to grab Mongolia's massive uranium reserves. The key is the railroads, controlled by Moscow since the times of Soviet hegemony there.

Russian Railroads (RZhD), a state-owned mega-company, dominates Mongolian rail through a joint venture. It is offering Mongolia a railway modernization project. Part of the project includes building a new line that would ensure access to natural resources in the Gobi desert and the uranium-rich northeast, boosting Russia's grip on nuclear fuel supplies.

The railroad deal would also give Russia development licenses for two of Mongolia's largest mineral fields: the Tavan Tolgoi coal deposit and the Oyu Tolgoi gold and copper field. The latter is problematic, however. The Mongolian government has already signed a contract promising Oyu Tolgoi to Canadian company Ivanhoe and Rio Tinto, the London-based natural resources giant.

And there's another fly in the ointment. The Mongolian railways are eligible to receive $300 million for capital improvements from the U.S. government's Millenium Challenge Corp. (MCC). The Russians have ordered the Mongolians to reject MCC funds - lest it comes with strings that might tie up their own plans. The Obama administration faces a difficult choice: to allow the Mongols to redirect the MCC funds to other projects, or cede strategic initiative to Russia.

Russian government-connected companies are preparing other major projects in Mongolia as well. A slew of Russian firms - Alexei Mordashov's Severstal, Oleg Deripaska's Basic Element, Victor Vexelberg's Renova, Alisher Usmanov's Metalloinvest, and state-owned Russian Technologies - a weapons exporter - have their eyes on Oyu Tolgoi and other deposits.

As the rain falls on St. Petersburg's glitzy economic forum and the Obama administration plans its summit meeting with Mr. Putin and Mr. Medvedev in July to negotiate Moscow's accession to the World Trade Organization, Russia is consolidating its geostrategic advantage from the Gobi desert to the Black Sea. The U.S. and Europe had better take notice. While the talk of high-tech diversification appeals to Western businessmen, the real show is happening thousands of miles away from the capital Peter the Great built on these grim Baltic shores.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Allison Center of the Katherine and Shelby Cullom Davis Institute at The Heritage Foundation.

About the Author

Ariel Cohen, Ph.D. Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
Douglas and Sarah Allison Center for Foreign and National Security Policy

First Appeared in The Washington Times