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Russia is using oil to undermine the U.S. around the world

by Greg Walters
Nov 2 2017, 1:55pm

Iraq sent tanks rolling into combat against its own renegade province of Kurdistan in mid-October, raising the specter of a new Iraqi civil war that U.S. diplomats had spent the summer scrambling to avoid.

America’s attempts to prevent Kurdistan’s independence referendum in September failed — both because of the Kurds’ long-held determination to establish their own country, and thanks to the big vote of confidence Kurdistan received from Russia’s top state-controlled oil company, Rosneft.

Analysts say Russia’s power play in Kurdistan was just the latest example of a trend that has accelerated this year: In places like Iraq, Venezuela, Cuba, and North Korea, Russian oil is emerging as a powerful counterweight to U.S. political and economic statecraft, with the effect of undercutting U.S. objectives in a way that’s alarming U.S. policymakers and members of Congress.

“There’s no doubt in my mind that Russia has brazenly used the geopolitics of oil, directly propping up of regimes that are antithetical to the United States,” Rep. Trent Franks, an Arizona Republcan, told VICE News. “They have literally used oil as a strategic weapon.”

Read more: How a Russian oil giant bankrolled the Kurdish split from Iraq

These investments, analysts say, put a new twist on Moscow’s decades-old strategy of using energy to bind itself closer to client states around the globe. But this time, Moscow’s agents are also seeking profits.

“The Soviet Union used its energy resources to gain political advantage,” said Chris Weafer, a longtime business consultant in Moscow. “Modern Russia is combining what they see as good politics with good economics.”

Rosneft, the Kremlin’s favored oil company, has a starring role in this trend.

Rosneft’s global gambit

Russian President Vladimir Putin (L, front) listens to Rosneft Chief Executive Igor Sechin as he visits the Zvezda shipyard in the far eastern town of Bolshoy Kamen, Russia September 8, 2017. REUTERS/Serqei Karpukhin

Led by Igor Sechin, one of Russian President Vladimir Putin’s closest aides and a man once described in a classified U.S. diplomatic cable as the “grey cardinal of the Kremlin,” Rosneft is Russia’s biggest domestic oil producer.

In recent years, the oil giant has turned its attention outward, running an aggressive global expansion strategy featuring a variety of geopolitically risky deals.

“Rosneft is investing in a lot of risky assets other companies aren’t biting on,” said Ellen Wald, an American consultant in energy and geopolitics. “And it definitely sees these distressed, controversial, risky assets as opportunities.”

Operating under the Kremlin’s banner, Rosneft seems willing to subvert U.S. interests in the course of aggressively expanding its business internationally, said Wald. But as the company pursues empire-building overseas, observers have been left to wonder where Rosneft’s profit motive ends and the Kremlin’s political ambitions begin.

“Russian foreign policy these days is defined in large measure by ‘How can I make life more difficult for the United States?’” Rep. Tom Cole, an Oklahoma Republican, told VICE News. “It’s a policy built on resentment.”

Though providing funds to Kurdistan or Venezuela might appear to officials in Washington like an attempt to undermine U.S. policies, “the view from Moscow is the opposite,” Weafer said. “They’re finding opportunities where the U.S. has totally screwed up, and then they’re moving in.”

Because of U.S. sanctions, Rosneft has limited opportunities to chase new business by expanding in traditional downstream markets closer to European or American consumers, Weafer said. That’s forcing the company into frontier markets, including places where geopolitical risks make other oil giants nervous, analysts said.

“Rosneft has ambitions to be really competitive, but there are few regions they’re welcome now because of sanctions,” Valery Nesterov, oil and gas analyst at Moscow’s Sberbank CIB, told VICE News.

Venezuela

A demonstrator returns a canister of tear gas towards security forces during anti-government protests in Caracas, Venezuela, Wednesday, April 19, 2017. (AP Photo/Fernando Llano)

Venezuela, where the U.S. has sought to isolate President Nicolas Maduro with sanctions, is one of the places where Rosneft has doubled down, pouring billions into the beleaguered country.

Last October, Rosneft commissioned a 20-foot Russian-made granite statue of former Venezuelan president, Hugo Chavez, to be installed in Sabaneta, Chavez’s hometown. Rosneft head Igor Sechin turned up for the unveiling, addressing the crowd in Spanish: “Russia and Venezuela, together forever!”

Since then, Russia has stood by Venezuela as the rest of the world backed away and Chavez’s successor Maduro clung to power during bloody anti-government protests and an economic collapse.

Maduro’s deadly crackdown on demonstrators prompted a range of sanctions from the U.S. geared at weakening the dictator’s grip on power.

“To show Russia’s presence in the U.S. backyard is very important.”

As Venezuela imploded, Rosneft threw the country an economic lifeline. Like it did in Kurdistan, Rosneft effectively lent the cash-starved government vast sums of money by agreeing to pay for shipments of oil in advance, helping the country import food and stave off default — and, as in Kurdistan, Rosneft used that leverage to barter for control of the country’s oil wealth.

Rosneft said in August that it had already given Venezuela $6 billion in the form of pre-payments for oil. Reuters reported the same month that Rosneft has been secretly negotiating over vast swaths of Venezuela’s energy assets in exchange for cash and loans needed to keep Venezuela struggling economy afloat, including interests in up to nine of Venezuela’s most productive petroleum projects.

At a time of rising instability and isolation, Rosneft emerged as Venezuela’s most important foreign investor, according to Vladimir Rouvinksi, a political scientist at Colombia’s Icesi University in Colombia.

Rouvinski said Rosneft’s moves in Venezuela are likely driven more by politics than good business, and aimed at supporting a country seen as a Russian ally on American turf.

“For Russians, Latin America remains the U.S. backyard,” Rouvinski said. “To show Russia’s presence in the U.S. backyard is very important.”

Rosneft’s commitment to Venezuela looks profoundly risky for the company from a business perspective, Rouvinski said, as Venezuela teeters on the brink of economic collapse.

“There have been a lot of accusations that what Rosneft’s doing is crazy,” Rouvinski said. “Sechin is spending a lot of money, and the profits are not so clear. But if we consider Rosneft a political tool of Russia, then it’s been quite successful in cementing bonds with Venezuela.”

And from a political standpoint, the payoff is big: In return for Rosneft’s loans, Venezuela has handed over half of its U.S. distribution network, Citgo, as collateral.

That’s prompted members of Congress to call on the U.S. Treasury Department to investigate whether effective control by the Russian state of a massive network of American oil refineries and pipelines could endanger U.S. energy security in the case of a Venezuelan default on its debts.

“Given Venezuela’s increasingly dire economic and humanitarian situation, we are seriously concerned with the possible acquisition by Rosneft” of Citgo, Senators Marco Rubio and Robert Menendez wrote in a letter to Treasury Secretary Steven Mnuchin on Sept. 18.

Sechin said in late October that Rosneft would consider swapping the Citgo stake for another Venezuelan asset “if they offer something more interesting.”

Cuba

People line up for potable water from a government-run water tanker next to Cuban flags hanging to dry after Hurricane Irma caused flooding and a blackout, in Havana, Cuba September 11, 2017. Picture taken September 11, 2017. REUTERS/Alexandre Meneghini

Venezuela’s troubles have forced Caracas to reduce oil shipments to Cuba, which Venezuela had been supporting as a fellow socialist Latin American country. In May, Rosneft picked up the slack, shipping large quantities of oil to Cuba for the first time in over a decade. Rosneft announced it would supply about 250,000 tons of crude and diesel fuel to a Cuban state-run firm called Cubametals.

Responding to the Cuba-Russia oil deal, U.S. Senator Patrick Leahy said the Trump White House’s bid to tighten sanctions on Cuba was leaving “a gaping vacuum” for “our adversaries to fill.”

“The Kremlin has again become the island’s savior amid a Cuban energy crisis caused by the chaos in Venezuela,” Leahy wrote in an OpEd in June. “This alone should set off alarm bells in the White House.”

North Korea

North Korean leader Kim Jong Un claps with military officers at the Command of the Strategic Force of the Korean People's Army (KPA) in an unknown location in North Korea in this undated photo released by North Korea's Korean Central News Agency (KCNA) on August 15, 2017. KCNA/via REUTERS

America’s efforts to isolate North Korea, too, appear to have run afoul of Russian energy — though the details remain murky.

Russia and China joined together to force the U.S to abandon its attempt to place a total ban on North Korea’s oil imports earlier in September, although the final resolution did reduce 30 percent of oil provided to North Korea, and limited imports of crude to only volumes arriving in North Korea by the Dandong-Sinuiju pipeline from China.

This summer, however, reports emerged that Russia may be secretly supplying North Korea with crude.

At least eight ships that left Russia carrying fuel ended up traveling to North Korea instead of their declared destinations, Reuters reported Sept 20, citing its own shipping tracking data. The Washington Post cited unnamed U.S. officials in September saying Russian smugglers are keeping North Korea supplied with oil.

On June 1, the U.S. Treasury Department slapped sanctions on a small Russian oil trader called the Independent Petroleum Company which had “signed a contract to provide oil to North Korea” and already delivered at least $1 million worth of petroleum products.

It remains unclear what the Kremlin’s position is with regard to supplying North Korea with fuel — and whether the smuggling is encouraged, quietly tolerated, or simply slipping through the cracks of lax enforcement. But one recent account indicates the volumes from Russia are significant.

In June, a senior North Korean defector named Ri Jong Ho told Japan’s Kyodo News agency that the Hermit Kingdom secretly buys up to 300,000 tons of oil products from Russia every year, procured by brokers based in Singapore.

If the defector’s claims are accurate, then Russia could be the source of around a quarter of North Korea’s liquid fossil fuels, said David Von Hippel of the Nautilus Institute for Security and Sustainability, which tracks North Korea’s energy economy.

“I’m pretty sure some Russian oil is getting in there, but it’s awfully hard to say how much it is,” Von Hippel told VICE News. “If [Ri Jong Ho’s claims are] true, that’s pretty significant.”

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