Tomas Hirst
Russian swagger: turning off the pipes
News that Russia has suspended oil shipments to Belarus should give the rest of Europe cause for concern. It shows that more than ever before the country is willing to use its commodities leverage to ensure cooperation, even of its allies.
The collapse of commodities prices in July 2008 illustrated the true vulnerability of the Russian economic growth story: in the second half of 2008 the price of crude oil fell from almost $150 a barrel to under $33 a barrel, forcing the government to take a huge chunk out of its currency reserves to stave off a rouble collapse.
While the fall was almost catastrophic, it appears to have done little to dampen Russia’s swagger, which is riding comfortably once more following the sharp snapback of commodities prices. Like the gas dispute between Russia and the Ukraine in January 2009, Belarus is a further example of the negotiating technique employed by the Putin government—a stark warning that the country is once again willing to rile friend and foe alike to achieve its goals.
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Tom Streithorst
Iraqi oil auctions: does economic power trump military force today?
George Galloway and Alan Greenspan agree: the war in Iraq was all about oil. But perhaps they were wrong.
In last weekend’s Iraqi oil field auction, US companies were almost utterly iced-out, despite their government’s 100,000 boots on the ground. Russian, Chinese, Dutch, Angolan, and Malaysian oil companies all won rights to exploit the massive Iraqi oil fields, and none of those countries had to go to the trouble to invade. If America, in conquering Iraq had been able to actually steal its oil reserves and move them to say Michigan’s Rust Belt, the war might have made some sense, but unfortunately for America in the modern world, military force no longer automatically translates into economic advantage.
For most of human history—from Neolithic hunting bands, up until the Franco-Prussian war—the military was a massively profitable enterprise. Genghis Khan’s soldiers were just poverty stricken pastoralists until they got on their ponies and sacked more civilized folk. The Roman invasion of Egypt won the tribute of grain that fed the city for over 300 years. The return on capital for William of Normandy’s crossing the channel, for Hernan Cortez’ conquest of Mexico, must be close to infinite.
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Ben Simon
Life in Uganda is full of uncertainties. But one thing is clear: the country has far more oil than anyone initially expected. Since the British-owned Tullow Oil drilled its first successful well in 2006, the company has found double the amount it expected. The latest estimates suggest total deposits may exceed 1.5 billion barrels. Once production starts, oil revenues could feasibly double Uganda’s current GDP. Perhaps not surprisingly, this anticipated influx of petro-dollars has created a few complications—not least that President Yoweri Museveni, Uganda’s leader of 23 years, may view it as his ticket to a lifelong grip on power.
The problem is that most of the oil lies underneath land that for centuries belonged to the Bunyoro monarchy, one of Uganda’s oldest and most powerful tribal kingdoms. In the 1890s, the kingdom mounted one of the bloodiest rebellions in colonial east Africa. The uprising was ultimately crushed, but the surviving monarch insisted the British share any profits earned from Bunyoro’s mineral rich land. Two agreements were signed with the colonial government, in 1933 and 1955, guaranteeing the kingdom a cut of any mineral or oil related profits. Today, King Solomon Iguru insists that these treaties are still valid—unsurprisingly, the government does not agree and the kingdom is not mentioned in any of the revenue sharing agreements signed with the oil companies. The king’s private secretary, Yolamu Nsamba, has warned that if the government doesn’t give the monarchy a share of the oil revenue it “will be a breach of trust, and that would be very unfortunate.” The huge riots that gripped Kampala in mid September, which led to 14 deaths dead and 600 arrests, might be an indication of what “unfortunate” just might mean. Although this time the clash involved supporters of a different monarchy, it underlines the fact that, for many Ugandans, tribal allegiance continues to outweigh loyalty to the president or the so-called “national interest.”
Indeed, if Uganda’s oil programme does go ahead, the tribes will not be the only ones up in arms. As one might expect, the government’s decision to allow drilling in protected wildlife reserves has not gone down well with environmental groups.
But the question likely to cause most discord is what Uganda should do with the oil that sits waiting beneath its soil. During a speech in July, President Museveni acknowledged that when oil was first discovered he was pressured to construct a pipeline to Mombasa in Kenya with the aim of exporting crude oil to international markets. However Museveni, a self-described pan-Africanist and long-time proponent of east African unity, now says he wants to build a refinery in Uganda itself and sell a refined product to Uganda’s neighbours.
While Tullow publicly supports Museveni’s preference, there is speculation the British and Canadian companies involved have reservations about the plan. Generating steady profits requires at least some stability in a part of the world infamous for persistent conflict. Neighbouring eastern Congo remains one of the world’s most volatile stretches of earth. South Sudan has stabilised somewhat since a 2005 peace agreement ended a brutal civil war with the Khartoum government, but there is no guarantee that the country won’t descend back into conflict following a 2011 referendum where the south may vote to permanently secede from the north. True, 15 years after the genocide Rwanda is conflict free and continues to impress investors with steady economic growth, but over the border Burundi is still emerging from more than a decade of civil war and the country’s last active rebel group only agreed to disarm in April. In short, the regional market is fraught with enormous risk.
The Ugandan government is eyeing a refinery capable of handling 150,000 barrels a day, which would require an initial investment of at least $2bn. To pull it off, Uganda will need outside help—and Museveni has already approached some non-traditional allies. “I recently visited Iran, that bad place, according to the BBC,” he said in his July speech, detailing how Tehran had offered support and guidance for his refinery scheme. And at the end of August he travelled to Russia, where, according to a statement from his office, he met with various investors to discuss how “to reverse the colonial approach of exporting raw materials.”
During the first years of his regime, western donors hailed Museveni as “a new kind of African leader,” one who represented a welcome change from Uganda’s turbulent past. But anti-colonial, anti-west and anti-donor rhetoric has become an increasingly common refrain in his public speeches. His relationship with the west was tested when he decided to run for president again in 2006, which required a scrapping of the constitutional provision on term limits. During those elections, which were widely condemned by local and international observers, Museveni’s only legitimate opponent was arrested on rape charges that even the president’s handpicked judiciary considered ridiculous. Allegations of widespread corruption, too, have become increasingly difficult to ignore in recent years. And Museveni now seems intent on extending his rule another five years by contesting in presidential elections scheduled for 2011. If the vote itself is as bloody as many observers have predicted it will be, it will become increasingly difficult to avoid comparisons with figures like Robert Mugabe.
But with Uganda’s new-found oil, there may be little to disincetivise Museveni from doing what he pleases. Crude revenues could make the country much less reliant on a donor community that currently provides roughly 30 per cent of the national budget, and could give the government the freedom to invest in things the donors are unlikely to fund—like a “super weapons” programme, which the president called for in December, or a space exploration programme, which he voiced support for in May.
Museveni never talks publicly about succession. For him, he says, running Uganda is not a job to retire from, but a project of struggle and sacrifice. Backed by oil money, that struggle could continue indefinitely.
Brian Semple
One of the Chinese naval ships that surrounded as US surveillance boat near Hainan Island
With the war in Afghanistan and the recent Sri Lankin onslaught against the Tamil Tigers, you could be forgiven for missing another potential flashpoint in southeast Asia. In March of this year, a US maritime surveillance ship sailing near Hainan Island, south of mainland China, found itself surrounded by Chinese naval vessels. China accused the US of having violated international law by conducting surveillance activities in waters where China claims jurisdiction, while the US insisted the area is international waters.
Regardless of which country was legally in the right, the stand-off was evidence of the US government’s increasing anxiety about China’s naval expansion in the region. In a web exclusive for Prospect today, Jeffrey Henderson asks: who will step in to prevent potential escalation of this superpower rivalry in the Indian ocean? Henderson, who is professor of International Development at the University of Bristol, argues that perhaps only a strengthened EU can mediate between the two nations before the conflict intensifies. As ever, let us know your thoughts below.
Tom Streithorst
Futures markets in oil create more, not less, volatility
Another piece of news in today’s Financial Times designed to restore our faith in the efficiency of financial markets. It turns out that last Tuesday’s big spike in oil was caused by one man, Steve Perkins, a “rogue trader” purchasing a huge number of Brent Oil futures contracts in the middle of the night. When other traders staring at their screens saw the rising prices, they jumped in, bidding oil up to the highest price of the year. In one hour, Perkins all by himself traded as much oil as Saudi Arabia produces in a day.
When introductory finance textbooks explain the function of futures markets, they use the homely analogy of a farmer, fearing a drop in wheat prices and a bread maker fearing a rise. To lock in their tight margins, the farmer and the bread maker get together, agree on a price for future delivery. That way each can proceed to harvest and bake, without worrying that conditions out of their control will make all their hard work unprofitable. What could be wiser, what could be more efficient, what could be farther from the truth of modern futures markets.
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