Pearlstein: The Oil Angle in Russia's Georgian Incursion

Steven Pearlstein
Washington Post Columnist
Wednesday, August 13, 2008; 11:00 AM

Washington Post columnist Steven Pearlstein was online Wednesday, August 13 at 11:00 a.m. ET to discuss how oil and gas play a role in Russia's incursion into Georgia and how Russia has further strengthened its stranglehold on energy coming out of the region that might be sold to Europe.

A transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

Pearlstein was honored with the Pulitzer Prize for commentary for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.

Read Pearlstein's latest columns.


Washington, D.C.: Do you think that the Russian incursion into Georgia has had a positive impact on oil prices, since the chances of a U.S. or Israeli attack on Iran before the presidential elections have become almost nil? However, if John McCain wins the election, I predict to see the U.S. getting more enmeshed in conflicts around the world, and oil prices sky rocketing to new heights. I predict the opposite to happen for an Obama presidency. I'm neither a Democrat nor a Republican. It's just my observation as an independent voter.

Steven Pearlstein: That's really quite speculative, I have to say. It is surprising, however, that the Georgia incursion hasn't had more of an upward affect on oil prices, which tells you that there's still air coming out of the speculative bubble in oil futures.


Washington, D.C.: Wow -- powerful statement on Putin. But wouldn't making a statement on Russia force Europeans and Americans to sacrifice short-term economic gain for long-term political and economic goals? And, sadly, isn't that pretty unrealistic?

Steven Pearlstein: Well, this is the problem. Putin is willing to sacrifice short-term pain for long-term gain. And if the west isn't, then he wins. It's really that simple. He has now sent a powerful message to former satellite states and Soviet Republics that there will be a cost for continuing to talk about joining NATO or the EU, that there will be a cost for trying to break the hold of the Russian energy monopoly, and he has surely scared away foreign investment in "competing" energy projects. He'll deal with the short term costs, in terms of world opinion and relations, in time. It is the Europeans, however, who are the big long-term losers since they are the ones who pay the premium for the Russian energy chokehold, particularly in natural gas (gas isn't shipped across the ocean, at least not yet). But the Europeans, rather than uniting and standing up to Putin on energy, allow themselves to get easily picked off, one by one, with this and that promise or deal. And if you think the United States is reluctant to use military force to stand up to the Russians in Ukraine or Georgia, our reluctance is nothing compared to the Europeans. Spineless is probably not too strong a word.


Washington, D.C.: Why isn't Mr. Sakaashvili's thuggish human rights record coming under more scrutiny by the press? The November 7 protests and crackdown should perhaps have disillusioned the U.S. somewhat about Georgia's status as a burgeoning democracy.

Steven Pearlstein: Can't say I know much about it, but what has been reported suggests that Georgian troops did some serious damage in the breakaway area. Whether it is genocide, as the Russians claim, is really still to be determined. But you have to understand one thing: Georgians have a reputation of being pretty tough customers.


Washington D.C. : Eastern Europe has now seen first hand that the U.S. is not about to step in to protect them when military action is needed, although I'm not sure that would have been a prudent move in this situation. Do you believe we could/should have stepped in militarily? What would be the first steps in taking a hard economic line against Russia?

Steven Pearlstein: I doubt this was a great opportunity for military intervention, particularly considering that Putin probably doesn't want to occupy a hostile Georgia, anyway, and have tens of thousands of troops tied down there getting hit by terrorists every day. They learned at least that from Afghanistan.

As to the economic sanctions, I generally prefer to take a page from Putin's book and don't announce anything but just keep driving them nuts. Prevent purchases of U.S. assets by Russian companies. Tighten visas. Take legal action to seize Russian assets in retaliation for expropriations in Russia. Talk up a boycott of Sochi Olympics. Delist Russian companies on London stock exchanges. The idea is to do this randomly and selectively, without announcing a general policy -- in fact denying that there is such a policy, just as Putin would do. but make it clear to the Russian oligarchs that there are political risks of doing business here.


Washington, D.C.: Thanks for taking questions. How much freedom do European countries actually have to cease imports of Russian oil and gas should they want to sanction the Russian government? What kind of effect would turning to alternative sources of gas and oil have on European economies?

Steven Pearlstein: It would be tough on Europe to stand up to Russia on energy, no doubt about it. Significant short-term cost. But as long as Putin knows he can push them around and play the divide and conquer game by picking them off one at a time, they are facing the prospect of getting held up over the long term. Might as well face the problem now and deal with it.


Lyme, Conn.: About how much of oil produced in Russia stays within Russia, and how much do they sell to other countries? I presume they are troubled that they have less control over oil supplies since several oil regions broke away from them.

Steven Pearlstein: Well, they broke away but they still rely on Russian pipelines to get their stuff to market. As the owner of the monopoly pipeline, Russia takes much of the profit. So that is why these alternative pipeline projects are so crucial.


New Orleans, La.: Several OPEC nations have talked about reducing oil production to support prices. Russia has not talked, but done something about it.

PKK made it's first attack on the 1 million b/day trans-Georgia pipeline to Turkey just before the Russian invasion (coincidence?) and Russia severely bombed the 500,000 b/day oil port of Poti (75 to 90,000 b/day by pipeline, rest by rail). Apparently 1.3 million b/day of oil exports, over 3% of all world oil exports (44.x million b/day), are now off-line and the wells supplying Poti and the Turkish pipeline are being shut in.

All good for higher oil prices, although the market has not quite realized this yet.

If this is Russian strategy, to reduce world oil exports to support prices, then we should expect prolonged delays in re-opening the pipeline to Turkey and rail shipments of oil to the Russian Black Sea oil port Novorossiysk should encounter all sorts of delays.

Are there any signs yet that Russia will try to prolong this major oil shut-down? The PKK attack and the unnecessary bombing of the oil export terminal both point towards this strategy but have there been any other "facts on the ground" that suggest that reduced oil exports was a war aim of Russia?

Steven Pearlstein: Not sure that their aim is to raise prices, short-term. It's more this long-term stuff. Russia is a free-rider on OPEC -- its not a member, but enjoys all the benefits of a cartel that colludes to keep prices higher than they would be in a truly competitive market.


Brussels, Belgium : If oil and gas play a role for Russia, they equally play a role for the U.S. Do you think only Americans have the right to protect their special interests?

Steven Pearlstein: No, not at all. I think Russia has a legitimate gripe about its immediate neighbors joining NATO and putting missiles on the ground there and stationing NATO troops. If the Russians did such a deal with Mexico, we'd go nuts. So I think the U.S. and its allies have helped to provoke this response in Russia. It was foreseeable. And its really unnecessary. I don't really get this big push for NATO enlargement, anyway. What's the purpose? To eventually have every country in the world join NATO?


Central Virginia: Be aware, also, that Russia is reaching into the field of refining. They just bought 50% of an Italian refinery and are actively looking to buy into others.

What effect is THIS going to have on the refineries' production? If Russia locks horns with Europe and they're partial owners of a number of refineries, it will definitely add something to the mix, don't you think?

Steven Pearlstein: This is precisely what the west has to be careful of: Russia moving downstream in an effort to extend its monopoly power and pricing to other aspects of the business. The right response to that is simply to say no -- don't allow it, based on the fact that these Russian energy companies are nothing more than government-sanctioned, government-controlled monopolies, and in capitalist countries, we don't do business that way. That's the Russian way, they are free to do whatever they want in their own country, but it just doesn't jibe with free trade and free-flow of investment across borders.


Mt. Lebanon, Penn.: Re: Condi Rice, Dick Cheney, and John McCain saber rattling about the Russian invasion of Georgia. Who's going to tell them they broke their sabers in Iraq? Henry Kissinger?

Coming soon to a NeoCon theatre near you: "Actions Have Real Consequences. Deal with it!" You won't want to miss it.

Aram Khachaturian (Saber Dance), anyone?

Thanks much. HLB

Steven Pearlstein: Got a point there.


Freising, Germany: What are your thoughts on protecting the Baku-Tbilisi-Ceyhan pipeline and generating support and financing for the Nabucco project?

Steven Pearlstein: Well, Nabucco is sort of dead in the water. No corporate/oil company sponsor. No sure source of supply. And no commitment from the customer countries.

Turkmenistan, for example, having been bought off by the Russians with a good market price for their gas, have now struck a deal with the Chinese for a pipeline taking gas eastward, in a pipeline to be subsidized by the Chinese. How can we compete against that? And with gas already committed to the Russians and the Chinese, when will there be supply available for a new pipeline to the west that is bypassing Russia?


Washington, D.C.: It seems the Russians won an enormous victory on this one, they eviscerated a local adversary and proved a Bush/Cheney doctrine to be a fallacy. I've read they did this for 79 lives lost in their own troops and some equipment. Might this mark an era of brilliantly effective, if brutal, Russian policy? i.e. have the oftentimes "backward" Russians finally turned around?

Steven Pearlstein: Well, they certainly won this round, no doubt about that.


RE: Your Response to Washington, D.C.: But as a practical matter, hasn't Russia's blitz into Georgia exposed starkly the limits of U.S. military power and geopolitical influence in the world due to the U.S.'s Iraq invasion? While Georgia contributed 2,000 troops supporting the U.S. effort in Iraq, and Saakashvili supports Bush administration efforts to spread "freedom and democracy," (given there were no WMDs in Iraq), maybe Saakashvili thought lame-duck Bush would come to his aid if he got in trouble. However with US forces bogged down in Iraq and the U.S.'s need to work with Russia on various geopolitical issues such as curbing Iran's nuclear program, what more can Bush and his soulmate McCain do but talk tough (another euphemism for spineless)?

Steven Pearlstein: Even if we didn't have troops tied down in Iraq, I doubt the U.S. would have intervened militarily in Georgia. We can't be the world's policeman. With the Russian veto, the UN wouldn't do anything. And our dear friends in Europe have no appetite for military action, even when it is warranted. Besides, as I said before, there is no indication the Russians want a long-term occupation.


Woodbridge, Va.: Aren't the options for U.S. or European military responses rather limited? I doubt Turkey would grant permission for a carrier group to enter the Black sea and without one, there is not much we can do but watch, whimper and complain.

Steven Pearlstein: Look, just because we're not willing to send the Sixth Fleet and the 101st airborne any time a country does what we don't like, doesn't mean we are a toothless tiger. We don't control the world, nor do we really aspire to. I think that's a false standard that some people are using.

Our failure comes in two areas. First, we helped to provoke Putin with all this NATO expansion, with promises of even more. And we're not ready to punch him in the nose in other areas such as I outlined before. Sometimes you have to bend the rule of law to fight someone who tramples on the rule of law, just as sometimes you have to be willing to kill people in order to achieve peace. Putin and his cronies and the Russian people need to understand there will be a price to pay for violating international norms of behavior.


Anonymous: Seems to me you are way off base here, Steve. Even is you are sadly squarely in the ranks of our mainstream media on this current crisis. You should be bemoaning how the neocon lunatics in the Bush Administration were seeking to add Georgia to NATO and egging them on to disaster.

Your column ignores the devastating surprise rocket attack ordered by Saakashvili on the capital of South Ossetia, resulting in over 1500 deaths according to reports from the South Ossetian side. This gives your column an Orwellian character.

Why so much spleen against Putin? I personally suspect that much of this current wave of animus to Putin owes its origins to the fact that he is gradually reclaiming the Russian economy from the hands of the murderous oligarchs that raped Russia with our help in the 1990s.

Steven Pearlstein: Excuse me, but did you read what I've been saying, including in the this morning's column? I agree with you on the unnecessary provocation and silly NATO expansion. And I've written columns from Russia describing how much the economy has been improved in the big cities and that this seems to be a tradeoff the Russian people are willing to make even if they don't have complete political freedoms. But the guy can be a thug, whether it is killing people in London, or critics in the Russian media, or expropriating assets of people and companies that don't play ball with him. And it seems to me the way you "negotiate" with a bully is punch him in the nose first and then talk. He won't understand anything else.


Chicago, Ill.: Hey Steve, you had a great column today. Given the military, economic and diplomatic support we give Georgia, would Georgia launch the invasion of south Ossetia without getting some sort of green light from Bush/Cheney? Has any reporting shed any light on why the Georgians felt so emboldened as to attack south Ossetia?

Steven Pearlstein: Apparently they didn't get a green light -- quite the opposite. They were told not to do it, and did it anyway. I suppose that's their right. But then don't whine that we didn't come to their aid when the Russian tanks rolled in.


Anchorage, Alaska: And the reason the oil pipeline was built through Georgia instead of more-straight-line Armenia was...?

Actions have consequences, yes?

Thanks. Registered Engineer

Steven Pearlstein: Good question. I think we have a related comment on that.


Washington, D.C.: The BTC pipeline is a tangible result of following regional politics and no notion for the future. A more direct route for the pipeline would have been through Armenia, but given Armenia's relations w/Azerbaijan and Turkey, the pipeline effectively bypassed Armenia and instead treaded through Georgian territory. Armenia is by all accounts a U.S. ally, a democracy, and at the crossroads of Asia, Europe, and Persia - not to mention quite distanced from Russian political sensibilities.

I think the U.S. missed an opportunity to reconcile at least a small part of the regional tension by using a carrot-stick incentive program for the Turks and the Azeris to welcome Armenian participation. The rush to get oil to Western markets preceded the need for cooperation w/in the Caucasus.

Steven Pearlstein: This is a tricky part of the world and I don't pretend to have any expertise in it. Lots of rivalries and hatreds, etc. But part of the problem is that we won't have anything to do with the biggest and most powerful country in the region that has more oil than any of them, and that is Iran.


Fort Lauderdale, Fla.: Isn't the common denominator for the U.S. and EU their overall dependence on foreign energy sources which, especially in this case, stymies any effective economic or political action against Putin's Russia? Isn't now the perfect time for the West to push forward joint efforts to break this vicious cycle?

Steven Pearlstein: Yup.


Princeton, N.J.: Thanks for the explanation. The media coverage has been terrible. Do you think you could write a similar article about the U.S. geopolitical policy in regard to energy?

A specific question: I heard that the pipeline through Georgia is just a small spur off of the main pipeline which does not go through Georgia. Is this correct?

Steven Pearlstein: The BTC pipeline goes through Turkey and Azerjaiban, with a small detour through Georgia to avoid going through Armenia, as the previous correspondent noted. That's the oil pipeline. The gas follows a similar route until Georgia, and then continues on through Georgia to the Black Sea rather than going through Turkey and coming out at the Mediterranean.


U.S. response: Good luck getting the 6th fleet into the Black Sea. It might not get through the Bosphorus due to physical limitations and the reluctance of Turkey to get into a shooting war with Russia. It's been in war with Russia before. Not a happy predicament.

And what task force commander wants to bottle up his fleet inside of a large lake? Not one with a working brain or one wanting future career advancement.

Thanks much. Former U.S. Navy sailor (Vietnam era)

Steven Pearlstein: Thanks, Admiral.


Ottawa, Canada: Do you think that military action by NATO is warranted in Georgia? Why get involved in this dispute between Russia and its neighbor and risk enlarging the war even if it were militarily possible?

Steven Pearlstein: That's right. Canadians are famous for inventing the term "soft power." And this situation is a perfect one for perfecting our soft power talents.


Madison, Wis.: Thanks very much for this article. I note with irony that some "neoconservatives" consider American reluctance to engage the Russians in Georgia to be "appeasement." Yet the Bush administration's policy has been a more dangerous appeasement of Russia's economic hegemony. Can the U.S. legally constrain Russia from investing in U.S. securities, land, or businesses?

Steven Pearlstein: Can we constrain investment? Yes. Would it be legal. In some instances, yes, in some no. But let them take the government to court, wait the 10 years for the endless appeals and see how they like that. That's what I mean by saying we sometimes have to bend the rule of law to protect the rule of law. They have to understand that they are not the only ones who are willing to use arbitrary power.


Steven Pearlstein: Thanks folks. "See" you next week.


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