Monopolies do not stop at 49 percent - Rosneft Deal Jeopardizes Georgia’s Strategic Energy Transit Corridor
05 February, 2015
Monopolies do not stop at 49 percent - Rosneft Deal Jeopardizes Georgia’s Strategic Energy Transit Corridor
When it comes to some topics in Georgian politics, things are eerily silent. Recently 49 percent of Georgia’s Petrocas oil terminal in Poti – one of the few in the entire country – was sold directly to Russia’s largest oil company. And yet the Georgian government has hardly reacted to the Rosneft deal. Even as David Iakobashvili, who made a ton of cash off the deal, gloated at the World Economic Forum in Davos, no one complained. Strangest of all,
is that even the most boisterous anti-Russian UNM members have been almost silent about the deal. Sure, Petrocas has a murky past and may have been owned by members of that same party, but even they weren’t selling it to Russia.

The irony is that those sanctions Georgia is now helping Russia circumvent were intended to protect countries like Ukraine and Georgia from Russian occupation and aggression.

If the reason for the Georgian leadership’s silence is some capitulated assumption that they cannot stop such deals from happening in the future, then the entire Georgian government is misinformed. As Dietrich Muller, a co-founder of Georgian Investment Group+, told Georgian Journal’s financial analyst Nino Patsuria several weeks ago: “This private deal reveals weakness in the Georgian government. The state must [and can] have a law that obliges private companies to comply with the government when they plan to divest their stakes in entities of national strategic importance. All developed states do this, but Georgia does not. It is a disgrace when the strategic partners of Georgia impose economic sanctions on the state that is an enemy of Georgia, and then the Georgian government allows a Russian state-owned company into Georgia [to evade those very sanctions].”
If the strategic relevance of the South Caucasian transit corridor is being put at stake, and make no mistake, it is, then why isn’t Parliament acting? Why are Parliamentarians more concerned about a few Chinese and Indian farmers buying small plots of farmland than the foundations of Georgia’s strategic energy corridor being sold to a company owned and run by the same country which continues to occupy it?
Why isn’t the Parliament rushing to push through some bipartisan law on protective legislation for national strategic assets? Or are we missing something? Is something else going on?
Whatever the case, here’s how this looks from Washington: the Georgian government – not just Georgian Dream, but all parties, – in exchange for a small amount of Russian investment, are allowing Russia to avoid Western sanctions by bringing fuel directly through Georgia in a move that will permanently result in Georgia’s national strategic detriment. Meanwhile, the Georgian government is talking about land plots for NATO training centers and making copious political claims about Western integration.
The problem here is that actions speak louder than words. The irony is that those sanctions Georgia is now helping Russia circumvent were intended to protect countries like Ukraine and Georgia from Russian occupation and aggression. What’s even more unfortunate is that those “strategic partners” of Georgia, like Germany and the Baltic states for instance, are paying a very heavy financial and political price to push those sanctions through.

The Military Element

The oil behemoth has its eye on the entire trans-Caucasus region, not just Georgia.

Perhaps even more alarming is the possibility for Russia to use the presence of its state-owned oil company as a reason to invade Georgia or to carry out military exercises off the coast of Poti – justified by the Kremlin’s oft-used “protection of national assets” argument. As history shows, simply having such Russian State assets in Georgia may give the Kremlin cause to attempt to act as a “moderator” in any possible future conflict – to “ensure peace and stability in the region.”
Furthermore in a long-term way, this move could harm Georgia’s relations with Azerbaijan, Turkey and other partners integral to Georgia remaining a strategic corridor.

So how did this happen?

The lack of liquidity makes this an extremely strange time for an acquisition, and it signals this move is more politically driven than economically.

geotv.geAt the end of December, Rosneft bought a 49 percent stake in Petrocas Energy International, a Georgian chain of filling stations. Petrocas trades oil in the Caspian and Black Seas and operates the largest retail petroleum station chain in Georgia with 140 Gulf branded stations.
Thing is, the decision does not make immediate business sense for Rosneft. The Russian state-owned company does not stand to gain much by expanding its petroleum distribution in Georgia, and it is using up valuable cash reserves to make the purchase. With oil down 48 percent and the ruble down 46 percent, Rosneft is struggling to pay its debts and is running low on cash. It has $60 billion in debt, $20 billion of which will be due in 2015. Without access to cheap Western funding, Rosneft will have a hard time paying its dues. Furthermore, the company has shelved and scrapped several offshore investment projects. The lack of liquidity makes this an extremely strange time for an acquisition, and it signals this move is more politically driven than economically. And that’s the catch.
Rosneft issued a statement on December 29, claiming, “Through the joint venture, Rosneft will considerably expand its presence in the region, amplify its geographic reach, and further diversify its supply routes options.” The oil behemoth has its eye on the entire trans-Caucasus region, not just Georgia. Armenia, specifically, depends heavily on imports through Georgia’s Poti terminal, which is owned by Petrocas. Georgia is uniquely positioned to be a significant and influential energy corridor, not just a consumer.

Georgian Gain

With only 49 percent, Rosneft does not have a controlling interest. Georgian businessman David Iakobashvili owns the controlling share of Petrocas. At the World Economic Forum in Davos this week, Iakobashvili said, “That joint venture will be managed by Georgian management is an unprecedented fact in the recent business history of Georgia.” He asserts that Rosneft will have no control, though only one percent stands between it and a controlling interest.
Iakobashvili continued his defense, stating, that “approximately a $200 million investment is planned to be made into the economy of Georgia, which will provide up to 1,000 new jobs.” Apparently, Rosneft will help rebuild the port providing foreign investment and creating Georgian jobs. It all seems too good to be true. If only we could forget about history.

Complicated by Crisis

To put it lightly (and mildly sarcastically), the deal is untimely. Georgia’s allies have imposed direct economic sanctions on Rosneft, cutting off access to funding and western trade. The sanctions were imposed in response to Russia’s invasion of Ukraine. Georgia can sympathize with Ukraine and its territorial integrity, and should support the sanctions. How the Georgian government reacts (or non-reacts) will shape the seriousness of Georgia’s stance on Russian encroachment in any country. It may also affect the willingness of Western allies to offer aid. Sanctions come at a cost, a sacrifice for the sake of moral principle. War is also a cost, one that Georgia knows all too well. War is more costly.

geotv.geTake Your Time

Economists estimate if oil remains below $60 per barrel, Russia has a year before it burns through all of its foreign currency reserves. The Georgian government should take its time reflecting on history before appeasing Russian businessmen in their acquisition of strategic ports.

Russia’s oil production hit a post-Soviet record high last year. This is the only way an oil-dependent economy can make more money – sell more oil. The stubborn strategy may work for the short term, but important Siberian fields are depleting quickly. As revenues have declined with the price of crude oil Rosneft is desperately trying to make up for lost revenues by selling more barrels.
Russian state-owned monopolies are good at one thing – expanding their monopolies. They infiltrate, expand, and dominate markets with subversive subsidies, pernicious pipelines, and potential beachhead ports. Monopolies overwhelm the market, force out competition, and create long-term gaps between supply and demand that consumers ultimately pay for.
Russia is too late in the game to start diversifying, and its other business ventures like the South Stream Pipeline are beginning to fall through. Economists estimate if oil remains below $60 per barrel, Russia has a year before it burns through all of its foreign currency reserves. The Georgian government should take its time reflecting on history before appeasing Russian businessmen in their acquisition of strategic ports. Monopolies do not stop at 49 percent.

Author: Thomas Kapp
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