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RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 05 MOSCOW 005231 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT 
DOE FOR HARBERT, HEGBERG, EKIMOFF, PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR WARLICK 
 
E.O. 12958: DECL: 11/01/2027 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA'S NORTH-SOUTH ENERGY STRATEGY:  A KNIFE, A 
HAMMER, OR A BAND-AID? 
 
REF: A. MOSCOW 875 
 
     ¶B. ANKARA 2491 
     ¶C. LONDON 3999 
     ¶D. BRUSSELS 3195 
     ¶E. KYIV 2671 
     ¶F. MOSCOW 5069 
     ¶G. KYIV 2611 
     ¶H. MOSCOW 4691 
     ¶I. SOFIA 1073 
     ¶J. MOSCOW 4088 
     ¶K. BAGHDAD 3254 
     ¶L. MOSCOW 5162 
     ¶M. TBILISI 2657 
     ¶N. BAKU 1227 
     ¶O. BUCHAREST 1205 
     ¶P. SOFIA 1240 
 
Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d). 
 
¶1. (C) SUMMARY.  Russian activism in recent years to 
strengthen the "north-south" energy corridor 
suggests an intention to slice through the conceptual 
"east-west" corridor, to reassert Central Asia's 
dependence on Russian energy routes, and to repair 
Russia's own fumbling gas balance.  Russia appears to 
be using several tools to build a stronger north- 
south corridor: money; Russia's existing and new 
pipeline routes; solidarity with Iran on energy 
issues; and aggressive counter-measures against 
"east-west"-oriented transportation routes. 
 
¶2. (C) However, we doubt Russia can succeed in this 
effort.  Success would require an unlikely 
combination of subservience by the Central Asian 
countries, lethargic pursuit of east-west routes 
by the West, Chinese apathy, and a reliable Iranian 
partner.  Everyone in the region understands the 
game so there is little element of surprise left for 
Russia to use.  And, perhaps most importantly, 
Russia has squandered the key element of trust in 
nearly all its energy relationships in Eurasia. 
 
¶3. (C)  In our view, Russia will remain dependent on, 
more than controlling of, Central Asian gas and will 
continue to play an aggressive game of catch-up with 
emerging alternative routes.  On the oil front, 
Russia has more cards to play but, with the Baku- 
Tbilisi-Ceyhan (BTC) line in place and cross-Caspian 
shipments looming, the horse is already out of the 
barn.  Against the backdrop of these Russian 
weaknesses, the West has an opportunity to put the 
burden on Russia -- via proposals to cooperate but 
not dominate -- to declare whether Russia is only 
interested in control, or can sometimes see its 
self-interest in playing by everyone else's rules. 
END SUMMARY. 
 
DOMINATING CENTRAL ASIA IS NOT SO EASY 
-------------------------------------- 
 
¶4. (C) Russia has been reminded recently that when 
it comes to energy, Central Asia and the Caucasus 
are not the roll-overs they once might have been. 
Russia's activism in the last two years to 
strengthen the "north-south" energy corridor has 
been notable, but mostly reactive.  Russia has 
increased prices paid to Kazakhstan and Turkmenistan 
for gas, driven by the emergence of China in the 
region pulling resources eastward, by continued talk 
of a trans-Caspian corridor, and, perhaps most 
importantly, by Russia's primary need for this gas 
(ref A). 
 
¶5. (C) Yet the Central Asian countries remain 
interested in independence and sustainable 
sovereignty and are increasingly astute in their 
 
MOSCOW 00005231  002 OF 005 
 
 
pursuit.  Kazakhstan's Nazarbayev has managed to 
appease Russia on energy while not precluding his 
own options.  Turkmen president Berdymuhamedov's 
relatively bold moves to reach out in all directions 
attest to a similar calculus, as demonstrated most 
emphatically by his gas production and pipeline deal 
with China.  That both countries signed onto the May 
2007 gas pipeline deal with Russia without negating 
alternatives was an acknowledgment of geographical 
reality, but the deal also demonstrated that Kazakhs 
and Turkmen understand the need for alternatives to 
help secure the highest price through the Russian 
route. 
 
EUROPE AWAKENING? TESTS FOR RUSSIA 
---------------------------------- 
 
¶6. (C)  As the Chiefs of Missions conference in 
Istanbul in September (ref B) concluded, reaffirming 
Europe's interest in the sovereignty and 
sustainability of the FSU countries and the New 
Europe countries is a prerequisite to securing EU 
activism on alternative energy corridors originating 
from or through these countries.  Perhaps 
ironically, Russia's own energy mistakes and 
diplomatic bludgeoning over the last two years 
appear to be driving a more active European 
consideration of energy realities in the region. 
 
¶7. (C) Recent evidence (for example, refs C and D) 
suggests Europe will engage more strongly, 
presenting Russia with the challenge of taking on 
more adversaries than bargained for or finding ways 
to cooperate.  South Stream and Blue Stream-2 are 
clearly reactions to Nabucco and other evolving 
southern corridor lines.  But Russia is also 
considering its options should Nabucco go ahead, 
providing the opening for Europe to force Russia to 
reveal its intentions at a time when Europe is 
rigorously reviewing its tolerance of Russia's 
ambitions in the European energy sector. 
 
¶8. (C) Indeed, Russia's initial reactions to the 
draft competition regulations the EU revealed on 
September 19 ranged from stunned to indignant, and 
the GOR is still trying to figure out its approach 
to this new European resolve.  This presents an 
opportunity for the EU to test Russia's willingness 
to play by the rules, perhaps with Nabucco as an 
early case.  Gazprom Chairman (and First Deputy 
Prime Minister) Dmitriy Medvedyev's recent trial 
balloon about eliminating middlemen in the Russia- 
Ukraine gas trade (refs E, F and G) may provide 
another opportunity to foster more rules-based and 
transparent behavior on the foundation of economic 
reality - in this case, the reality that increasing 
gas prices everywhere makes middlemen too expensive. 
 
CROSS-CASPIAN OIL PROBABLY A GIVEN 
---------------------------------- 
 
¶9. (C) With excess capacity in its own oil pipeline 
system, Russia should in principle have great clout 
in dominating Central Asian (primarily Kazakhstani) 
oil flows.  Instead, Russia failed to expand the 
Atyrau-Samara line.  And after pushing Caspian 
Pipeline Consortium (CPC) negotiations to the 
breaking point, Russia appears to have been forced 
partly by Kazakhstani-Azeri progress on cross- 
Caspian shipments to finally come to an (apparently 
workable) agreement on CPC expansion (ref H). 
 
¶10. (C) At the same time, for all its attempts to 
dominate the Burgas-Alexandropolous pipeline bypass 
of the Bosporus, a pipeline Russia views as a CPC 
extension, Russia has punted the burden of filling 
 
MOSCOW 00005231  003 OF 005 
 
 
the pipe onto Bulgaria and Greece (ref I) while 
retaining a majority interest, a business model that 
could drive Kazakhstan to cross-Caspian routes as an 
alternative.  Meanwhile, the success of the BTC oil 
pipeline was largely unexpected in Russia and has 
brought some urgency to preventing expansion of this 
corridor, but Russia has accepted (ref J) that 
cross-Caspian tanker traffic will happen. 
 
CROSS-CASPIAN GAS STILL UP FOR GRABS, BUT 
DIFFICULTIES ON EVERY SHORE 
----------------------------------------- 
 
¶11. (C) Russia may have had some success delaying 
Kazakhstan's consideration of a cross-Caspian gas 
pipeline but at the cost of paying substantially 
higher prices to Kazakhstan, and Russia has not 
been able to kill the idea of a cross-Caspian 
route.  Berdymuhamedov famously reserved the right 
to examine cross-Caspian options immediately after 
signing the May pipeline agreement with Russia and 
Kazakhstan.  Russia's own companies such as Lukoil 
and TNK-BP have joined the parade of energy 
companies courting Turkmenistan to explore for oil 
and gas and have told us, as have western firms, 
that they would examine all transportation routes 
that are commercially sensible. 
 
¶12. (C) Russia may be testing Iran as a partner for 
dominating a north-south flow for Central Asian 
gas, but an examination of prospects for such an 
alliance would suggest that common Russo-Iranian 
energy interests could well be offset by lack of 
follow-through and trust.  The recent summit of 
Caspian states could be interpreted as 
reaffirmation of common interests among the five 
littoral states, but the fact that Putin and 
Ahmadinejad also used the occasion to discuss 
cross-Caspian pipelines suggests some anxiety. 
 
¶13. (C) Russia and Iran clearly have a mutual 
interest in preventing the cross-Caspian flow of 
gas and they both win if either causes a north- 
south flow.  But news reports after the summit that 
a deputy foreign minister of Azerbaijan refuted 
Putin's insistence that all five states must agree 
to a pipeline suggests that plucky self-interest 
remains the watchword among the Caspian states 
rather than solidarity.  Recent rumors that Gazprom 
may participate in a major way in the Iran-India 
gas pipeline also seems unlikely given Gazprom's 
squeezed financial situation. 
 
¶14. (C) Russia and Iran undoubtedly recognize the 
latent power that collusion on gas supplies could 
give them over prices, but there is little record 
of trust.  Most analysts in Moscow believe that 
Russia would never formally join a "gas OPEC," 
even if it would certainly consider ways of 
achieving some of the clout such an organization 
might afford.  Finally, Iran is anything but a 
reliable partner for Russia and it would be 
difficult to imagine a rosy relationship on mutual 
energy interests being completely carved out from 
the myriad troubling geopolitical issues facing 
the bilateral relationship. 
 
THE IRAQ FACTOR 
--------------- 
 
¶15. (C) A final consideration is Iraqi gas. 
Russian companies have examined Iraqi prospects and 
must know that Iraqi gas will be searching for 
European markets sooner or later.  Western industry 
contacts in Moscow who have undertaken negotiations 
with all the Iraqi factions tell us that Iraq could 
 
MOSCOW 00005231  004 OF 005 
 
 
be exporting 10-12 bcm at a minimum into Nabucco 
within 3-4 years of signing, provided the political 
support of the U.S. and Baghdad is forthcoming. 
 
¶16. (C) As ref K details, there is probably more 
where that came from.  Even if Russia senses a 
window of opportunity to control or deny a 
"southern corridor" before Iraqi exports come 
online, it probably concurrently feels too weak to 
do anything about Iraqi gas.  That said, Lukoil 
and others are increasingly frustrated at their 
inability to pin down deals such as West Qurna, 
so that their role as potential champions of 
Iraq's oil and gas development remains 
underexploited. 
 
BEAST TO THE EAST: NEW FACTOR PULLING AGAINST RUSSIA 
--------------------------------------------- ------- 
 
¶17. (C) China's thrust into the region means 
diversion of resources along an eastern branch of 
the east-west corridor at Russia's expense. 
Some analysts here believe Russia was almost as 
surprised by the Kazakhstan-China oil pipeline as 
they were by BTC.  Russia may have thought it had 
locked in Kazakhstani gas by upping the price and 
getting Nazarbayev to cease and desist his pursuit 
of a cross-Caspian gas line, but instead Kazakhstan 
turned to China as a potential gas export route. 
Turkmenistan's deal for a gas pipeline to China 
certainly has some Russian officials wringing 
their hands. 
 
¶18. (C) Some in the Russian elite fear that China 
could conceivably dominate the "great game" in 
Central Asia and in any Pacific energy strategy 
Russia might develop (ref L), yet Russia has done 
almost as much harm to itself on the eastern side 
of Eurasia as it has on the western side over the 
past few years.  Russia has achieved nothing in 18 
months of talking with the Chinese on bilateral 
gas trade since Putin visited Beijing in March 2006 
and struck two agreements on building gas pipelines. 
Gazprom's takeover of the Kovykta project amplified 
Chinese and South Korean reticence to place too 
much trust in Russian energy and drove them to seek 
alternatives including the Caspian countries. 
Russia's clumsy attempts to play China and Japan off 
each other on the East Siberia-Pacific Ocean oil 
pipeline jaded the Asian countries towards Russia, 
as our Japanese colleagues have confided to us. 
 
¶19. (C) Looking forward, China could be considered 
in some respects a pacesetter for, and an ally of, 
those pursuing the east-west corridor.  For where 
once Russia may have thought it could rekindle the 
Soviet-era reality that Central Asian molecules 
went to mother Russia first before transiting 
onwards to markets, Russia now finds itself racing 
against Central Asia for the Chinese market ) and 
against China for influence in Central Asia.  And 
while Gazprom may feel confident in its newfound 
control of the East Siberian gas development and 
export plan, the Kremlin's push to the east was 
largely reactive -- to the Russian private sector's 
preceding efforts to cut such export deals itself 
and to China's activism in Central Asian energy. 
 
CONCLUSION 
---------- 
 
¶20. (C) Russia can be counted on to aggressively 
pursue its interests, which it perceives as 
thwarting the east-west energy corridor, where it 
can.  But its leverage is declining in Central Asia 
and the Caucasus as China enters the scene and as 
 
MOSCOW 00005231  005 OF 005 
 
 
dependency on Russia for supply or transit declines 
in relative terms (e.g., refs M and N).  Russia's 
leverage is perhaps growing in countries such as 
Bulgaria or Romania (refs O and P) that are nexuses 
where the southern energy corridor is colliding 
with Russia's interests.  But Russia's poor track 
record of energy diplomacy and trust-building 
throughout Eurasia has left it with few places to 
attempt genuine strategic alliances, leaving Russia 
to peddle influence the old fashioned way - through 
ad-hoc marriages of convenience and likely through 
graft as well.  In that respect, Russia's north- 
south thrust is less a weapon or a political 
bludgeon than a reaction to injury (band-aid), 
whether self-inflicted or not. 
 
¶21. (C) Against the backdrop of these fundamental 
weaknesses, deft diplomacy could harness Russia's 
ambitions by posing it with a challenge - to signal 
to the world, at a time when most are wary and 
anxious of Russia's energy throw-weight, whether 
Russia is interested only in control or is ready 
to cooperate.  While the Russian elite's often 
groundless (and boundless) sense of aggrievement 
will push the leadership to see neo-containment 
behind every western action on the energy front, 
the leadership has demonstrated, occasionally and 
fitfully, that pragmatic self-interest can 
sometimes win out. 
 
¶22. (C) That means it is worth exploring whether 
Russia can be brought into constructive 
relationships -- which in turn means using our 
leverage carefully and creatively.  The EU is 
doing that with new regulatory proposals, and 
could do the same via a well-timed invitation 
into Nabucco and carrying through on the idea of 
eliminating middlemen in the Ukrainian gas trade. 
Central Asia is doing that by introducing China 
into the equation.  China itself is doing that by 
courting Russian gas while securing alternatives 
in Central Asia and elsewhere to force Russia into 
compromise on price.  We presumably can have 
influence in all these developments as well as by 
accelerating Iraqi gas entering the southern 
corridor.  All of these could rope Russia in to 
being a senior, but not dominant, part of Eurasian 
energy stability, or they will smoke Russia out - 
to Russia's own detriment. 
Burns