The Nabucco Pipeline

The negotiations on the EU’s Nabucco pipeline project have been completed. A deal is expected to be signed on 13 July in Ankara. The Financial Times has a useful analysis of the pipeline and its potential difficulties today.

The pipeline will go from the gas fields of Azerbaijan and Iran (in itself providing an interesting foreign policy complication), potentially back into Central Asia, through Turkey and thence into Italy via Greece/Albania and into Central Europe through Bulgaria, Romania, Hungary and Austria.

The Heads of Agreement

In one eventual swoop, Nabucco is supposed to siphon off a chunk of Central Asian gas from monopoly control by Russia and ensure that South-Eastern Europe loses its current near-total dependency on Russian gas.

The importance of Iran is clear in terms of its natural proven gas reserves but Turkmenistan is probably of equal importance in practical terms. The full pipeline will comprise 3,300km of new route.

Turkey has been demanding 15% of the gas as its price for transit and a compromise has been necessary to ensure that the intergovernmental agreement could be signed. The next problem is for the governments on the consumption side to ensure that their utilities back the project.

This may raise some very interesting questions about free market choice – this is a geo-strategic security-driven investment with not a great deal of short term commercial sense behind it on paper.

In addition to the engineering, there will have to be an environmental impact assessment which will certainly add to costs, given the somewhat precious approach of European electorates to green issues.

Two key customers of the pipeline (Austria and Germany) have just removed export credit guarantees from the Ilusu Dam Project in South-Eastern Turkey under severe environmentalist and human rights pressure. Central Europeans will push hard for the highest standards of environmental protection.

Supply Contracts & Funding

Deals with supplying countries will have to be agreed. Iran might be ignored for a while yet (though it is hard to see the point of doing so) and Azerbaijan and Iraq are moderately clean nowadays on the human rights front, but the pipeline does not work without more supply from further to the East.

This will raise some fascinating human rights policy issues in regard to Turkmenistan if Iran is still not acceptable or even talking to the Europeans. And then the thing has to be paid for …

The European Commission is handing over Euro200m or so to get it started but that is a fraction of the estimated requirement of Euro8bn, placing it very much in the super-league of strategic security projects alongside mid-sized state nuclear weapons programmes.

The European Investment Bank will finance up to 25% of the project but this leaves nearly three quarters to come from somewhere else with the probability, as in every project, of cost over-runs.

The general view is that once the supply contracts are fixed, commercial funding will be secured because gas transit fees are fairly reliable.

The negotiating boots are thus very much on the feet of the four smaller gas players (Turkmenistan, Iraq, Kazakhstan and Azerbaijan), especially as long as the Iranians are inclined to follow the Russian lead in placing their own pressure on Europeans telling them how to run their affairs.

Interesting Geo-Politics

This is where it gets interesting in geo-political terms. Suppliers are generally (most of all Turkmenistan) going to be concerned to do commercial deals without political strings attached, yet Europeans electorates may turn their attention to the style of governments with which they do business.

There is a classic internal contradiction here between popular sentiment and harsh industrial reality, between soft power and hard power. To pre-empt this, European diplomats will be spending yet further funds trying to get these suppliers into line as essential strategic partners.

European resistance to Russian domination will drive EU policy while the Russians will be encouraging these same suppliers to work with them in cartelising gas in order to increase their revenues (thereby increasing Russian dominance in many ways, not just in control of gas supply).

This sucks Europe into the northern Middle East and raises questions about its treatment of Turkey, Turkey owes the Europeans no favours at this time and presents the same transit scenario as Ukraine to the north.

European industrial survival (a German interest) now seems to depend on two unstable but modernising states, with volatile populations and an ambiguous relationship with the West, acting as intermediaries with supply nations who have little to do with Western values other than the one about making money.

In the short term, things should go smoothly. If the gas can be secured by the end of the year or early next year, then the Europeans can commit to the pipeline in early 2010 and start construction. In the long term, it could be an expensive way of reducing the Russian stranglehold on Europe.

The pipeline is likely to pay its way but it also pulls the European ‘empire’ further to the East along paths last anticipated in the 1940s and well into territories contested by the US, China and Russia.

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The G20 Summit: Obama Speaks

The G20 Summit takes place on Thursday. The agenda has moved away from joint global economic stimulus towards banking regulation and the re-financing of major international institutions.

The Financial Times had a pre-Summit and positive interview earlier this week with President Obama in which he attempted to turn the pessimistic tide about what the summit could achieve with a call for ‘G20 unity’. But the question remains – unity over what precisely?

The Interview

The interview was held symbolically in the Roosevelt Room at the White House amidst pre-spin in London that Roosevelt had decided not to attend a similar Conference in 1933 but that Obama was committed to doing so.

The 1933 Summit had been a failure and the spin attributed the rise of fascism to the failure of the ‘international community’ to cohere and produce a recovery plan. In fact, Hitler and other extremists were well on their way to power by then but this is a narrative that suits the British Government.

Obama’s trip to London for the G20 Summit is only part of a much bigger tour encompassing a NATO Summit in Strasbourg and Baden-Baden, an EU Summit in Prague and a two-day visit to Turkey as part of his reaching out to the Muslim World.

This somewhat reduced the Summit’s importance in relative terms. The truth is that Gordon Brown’s attempt to show global leadership and set the pace for the special relationship, as the new President was celebrating his victory, now looks distinctly threadbare.

Apart from the domestic constraints on international economic leadership – similar in many ways to those faced by Roosevelt in the early 1930s – Obama has a bigger political agenda on the world stage.

American hegemony is beginning to look a bit tattered at the edges and he needs to shore up allies in pivotal states.

If he has an economic priority in that context, it is to get funds into the IMF and other international institutions where they can be used to sustain governments that might face something worse than insurgency – revolution!

In fact, the interview with Obama was exhortatory but rather bland. His main message was to talk down the alleged Anglo-Saxon/European split over policy. A split within the West had displaced earlier talk about integrating China into a Western-led recovery programme.

This split was resolved simply by taking spending stimulus off the agenda – collapse of British stout party! This US concession, too easily made, did not bode well for the Summit as the basis for global recovery rather than as the defensive protector of the status quo.

The Meaning of the Summit Shifts

From a British point of view, the killer punch was that the US itself (no more than the UK) could offer no further economic stimulus measures in the near future because the political system would not take the strain.

In other words, a ‘progressive’ strategy constructed last year would now have to depend on people other than the Anglo-Saxons and Saudi Arabia.

Unfortunately, if other countries would not or could not follow Atlantic ‘leadership’, then the promoters of the policy could not put more money forward themselves to show leadership in operation.

The US position is to concentrate on increasing the capacity of the IMF and other global lenders to deal with impending sovereign debt problems. The US wants the EU, Saudi Arabia and China to transfer funds into the pot that will hold together the international system.

The former will be preoccupied with its immediate neighbourhood while the latter two will want major changes in their say over the management of a financial system hitherto almost exclusively run from Washington. Such a change is not going to happen overnight.

We get the impression that the Summit now exists largely to set the economic ground rules for a strategic discussion that will be pursued over subsequent days.

The aims here are to unify NATO and then get it working on holding together a crumbling Pakistan, get Russia, Iran and China engaged passively but co-operatively with the West Asian situation and encourage moves towards a Turkish-West Asian strategic alliance against insurgency.

Obama is attempting a major re-orientation of US policy to get West Asia sorted as a priority. This is where the Summit comes in. Pakistan is expected to be granted the second tranche of its $7.6bn IMF loan this week but may need more - other basket cases will be demanding funds before too long.

Nearly all the potential political cases for the IMF (Pakistan, Ukraine, The Baltics) and those that may come under pressure later (Turkey, Egypt, Indonesia, South Africa) are pivotal states representing the furthest outreach of Western values.

All these states have been either sustained by the West or have been promised Western support in the context of continued globalisation. They need help badly either now or in the very near future.

Some Big Questions

The problem for Obama is that the potential financial requirements of the US ‘imperium’, regardless of the sheer cost of any full-on military engagement, is far beyond the political and economic capability of Washington to sustain at this time.

Wall Street has required vast amounts of capital. The auto industry expects support. Whichever way you cut it, the resources of the American taxpayer are going to have to be directed at American welfare and jobs.

The implicit demand of Obama is that the rest of the world, for at least a period, takes responsibility for holding the global system together – not expanding it, mind you, (’rogue states’ may relax for a short while) but just holding the line until the system as a whole recovers.

But the major non-US components of the global system are not going to find it easy to help. The questions that arise are the obvious ones :

• Is the EU in a position to take up more of the slack as more equal partner with the West?

Probably not for some considerable time because it is going to be stretched to the limit in dealing with internal social and economic discontent, the crumbling of the economies of some of the smaller states and watching with concern the possible (we still think probable) implosion of the Ukraine.

• Can Saudi Arabia buttress the system without costs to that system’s liberal values?

Despite significant compromises in Riyadh towards liberal reform, probably not. The succession issue seems to have been resolved by the appointment of Prince Naif, the conservative Interior Minister, as next in line after the very ill Prince Sultan.

This suggests that internal security and affairs are going to be of greater importance to Riyadh than pleasing Western liberals.

• Above all, is it in China’s interest to sustain a system which has been its strategic opponent for many decades?

Again, probably not without major compromises on both sides that effectively create a progressive liberal-communist co-dominium over the world.

To some extent this is under way – note Hillary Clinton’s sudden loss of interest in Tibet and Taiwan – but Chinese demands for near-equal status within the so-called Washington consensus are not going to be met willingly in Congress.

Where Next?

In short, the classic ‘West’ is, albeit only temporarily, exhausted. The Atlantic side of the equation has no domestic political capital left to fund in full an international system which it has dominated since 1945.

The Europeans, while committed to Western ideals, are fighting for the survival of their own federal unification programme. They cannot afford to alienate electorates, certainly not in the run-up to the June European Elections.

Meanwhile, the developing countries are resentful of the collapse in a system that they had fully bought into.

The two powers with resources to intervene, Saudi Arabia and, much more so, China have expectations that could have highly ambiguous long term effects on the historic global dominance of Western economic and political values – and certainly will on its full spectrum strategic dominance.

In the long run, the US will recover. We have greater doubts about the ability of the European Project to sustain itself without major change but it is scarcely likely to consider itself as anything other than ‘of the West’.

Obama’s speech was thus a paradox. It showed that the US remains the natural leader of the international community but also that it is struggling to cope with its own temporary weakness.

The next six months will be decisive. If the President is on top of things, challengers will be cautious. If he slips, they will move.

www.tppr.co.uk

www.pendrywhite.com

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