Venezuela and Russia have mutual interests in the former’s arms build-up and in energy deals

Venezuela continues to deepen its diplomatic and economic relations with Russia, as evidenced by President Hugo Chávez’s recent visit–his eighth–to Moscow. Agreements were signed in the areas of trade and energy, with an arms deal getting the most attention. The motives behind the relationship are in part political, with Venezuela seeking to strengthen its hand against the US and offset its influence in Latin America, and Russia interested in expanding its presence in the region. But the two countries are also linked as major global energy producers with mutual interests in expanding co-operation in this area.

The latest arms deal involves the purchase of 92 T-72S tanks, Smerch missiles with a range of 90 km and an advanced anti-aircraft defence system including radar and missiles with a range of 400 km, according to announcements by Mr Chávez made on September 13th. The Russian government will provide a credit line of US $2.2bn to finance the acquisition.

This is not the first time the Chávez administration has sourced weaponry from Russia. Over the past four years it has secured Sukhoi fighter jets and 100,000 Kalashnikov rifles, spending an estimated US $4.4bn to date. However, the new deal is worrisome because it comes at a time of heightened tensions with neighbouring Colombia. On July 28th Caracas froze diplomatic relations with Bogotá, and it has also since then imposed trade sanctions on the country.

There has been longstanding hostility between the Venezuelan and Colombian governments, but most recently Mr Chávez was angered by revelations that the administration of conservative President Alvaro Uribe planned to grant the US expanded access to military bases for anti-narcotics operations. There was always concern that Venezuela’s previously procured rifles and jets might be used in a potential conflict with Colombia, or alternatively somehow get into the hands of Colombia’s leftist insurgent groups. The latest arms deal has upped the ante considerably.

Flexing their muscles

The US State Department expressed concern on September 14th that the weapons deal could set off an arms race in Latin America. Although Mr Chávez says the tanks and anti-aircraft equipment are for defensive purposes only (he has repeatedly accused Washington of planning to attack the country), critics fear he is fuelling an arms build-up that could threaten stability in the region.

The missiles being provided by Russia would be able to reach well into Colombia as well as to US military installations in nearby Caribbean countries. Although Mr Chávez is unlikely to risk a direct conflagration with the US, his possession of an advanced air defence system would be a threat to US airpower over the region.

Venezuela’s purchases are aimed at sending a message not only to Colombia but also to Washington, which Mr Chávez continues to criticise even with a new, Democratic president in office. Thus far the administration of Barack Obama has not taken the bait, avoiding direct confrontation with Mr Chávez.

Russia, too, is flexing its muscles, both close to home and abroad. By reaching out to Mr Chávez, Moscow is paying back the US for actively supporting pro-US states in the former Soviet Union, particularly Ukraine and Georgia. (During his visit to Moscow, Mr Chávez became only the third world leader to recognise the independence of South Ossetia and Abkhazia, which recently broke away from Georgia with Russia’s support.) Since 2008 Russia has also been patching up relations with Cuba, and last November it held joint naval exercises with Venezuelan ships in the Caribbean. There has even been talk of Venezuela and Cuba offering Russia the use of air bases.

Energy agenda

While the growing Venezuelan-Russian relationship certainly has a geopolitical dimension, Mr Chávez’s visit was also designed to firm up additional deals in the hydrocarbons sector. These including an agreement to form a venture to develop the Junin 6 heavy-crude oil field in the Orinoco Belt together with five Russian energy companies, among them Rosneft Oil, Lukoil and Gazprom. The total investment will be an estimated US $20bn for upstream production and equipment, with a goal of producing 400,000 to 450,000 barrels per day. According to Venezuela’s energy minister, total shared investments could eventually reach US $30bn, with an output target of 1m barrels per day. Russia has also agreed to help Venezuela develop a nuclear energy programme.

Russian interest in partnering with Venezuelan state oil firm Petróleos de Venezuela (PDVSA) comes at a time when other global oil majors are finding it more difficult to operate in Venezuela, given the Chávez administration’s increasingly onerous contract terms. The government in 2007 forced multinational oil firms to renegotiate contracts to give the state majority control, and seized the assets of those that didn’t comply, including Exxon Mobil and ConocoPhillips.

Venezuelan-Russian collaboration in energy has strategic implications, with the two countries aspiring to directly influence global market developments. Both are heavily dependent on hydrocarbons as a source of income and thus have a strong interest in a high oil price.

Venezuela is a modest gas producer and has no exportable surplus, but it holds the second-largest reserves in the Western hemisphere. According to the latest available data from BP, at 5.15trn cubic metres, Venezuela’s gas reserves are already more than three times as large as those of Canada and more has recently been discovered. This month, PDVSA announced that it is evaluating a major offshore natural gas deposit in the Gulf of Venezuela discovered by Spain’s Repsol and Italy’s Eni. The deposit is thought to contain at least 7-8 trillion cubic feet of gas.

Venezuela has a long-held ambition to become a major exporter of liquefied natural gas (LNG). However a string of disappointing exploration results had cast doubts over plans for an export facility. Far from being a gas exporter, Venezuela has had to import gas from neighbouring states, notably Colombia. However, this latest gas discovery could change everything.

Gazprom and its European partners also hold licences for deposits in the Orinoco basin and are involved in projects to build new pipelines in the region. It is notable that Igor Sechin, Russia’s highly influential deputy prime minister with responsibility for the energy sector, is a frequent visitor to Venezuela.

The rise of commodity gas

For Russia, close relations with Venezuela are important as the global gas market evolves. Presently, the vast majority of gas is traded regionally and delivered by pipeline. The advent of LNG threatens to change this, as it liberates the international gas market from costly fixed pipelines and converts natural gas into more of a tradeable commodity. Although most Russian gas is indexed to oil, and thus price-setting in the OPEC mould is not possible, a gas-producing cartel–which was announced in Moscow in December 2008–could divide up major markets among suppliers, thereby mitigating the risk of too much price-capping competition in North America, Europe and Asia.

Russian LNG produced from Sakhalin will soon be delivered to California, and in the future Russia hopes to supply LNG to the US east coast via offshore fields in the Barents Sea. Thus Russia is interested in ensuring that gas produced by Venezuela and its regional allies is exported south, rather than to the US; to guarantee this, it is interested in ensuring political relations between the Chávez bloc and the US remain tense. (A similar logic informs Russian policy to Iran, which is a potential competitor on the European gas market.)

Thus, in energy Venezuela and Russia are strategic partners, with long-term goals. While in the political-military sphere they collaborate closely and share some common aims, this is not a relationship based merely on mutual resentment of the US’s global power and a desire to bolster the two states’ position as they deal with Mr Obama. Mr Chávez may indeed be interested in needling Washington in the short term, but Russia is positioning itself for well after that.

SOURCE: Business Latin America