How A Eurasian Union Could Control The World's Energy
Vultures have already begun circling the eurozone, waiting to feast on countries no longer interested in sticking to the single currency adventure (or debacle) that is the euro. While all eurozone countries have probably considered a world in which they once again manage their own currencies, most have probably not considered jumping into bed with a new union agreement. This has not stopped Russian authorities from floating the idea of a "Eurasian Union" between Russia and some of its former satellites, a prospect that brings back memories of the Cold War.

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Vladimir Putin, the once president and future president-in-waiting of Russia, floated the idea of a "Eurasian Union" in October. The union would ostensibly have an economic focus similar to the eurozone, though one would have to imagine Russia taking the lead politically and economically, similar to its role during the Cold War. Putin's initial interest is in Kyrgyzstan, Tajikistan, Belarus, Kazakhstan, and Russia, but his views on the USSR and it's separation encourages the idea that the purposed Eurasian Union could be made up of all former Soviet Union Stats of including Armenia, Azerbaijan, Estonia, Georgia, Latvia, Lithuania, Moldova, Russia, Turkmenistan, Ukraine, and Uzbekistan. If this Eurasian Union were to exist there would not be a struggle for dominance like the EU has seen between France and Germany. Russia has already formed a customs union back in 2010 with Belarus, Kazakhstan, integrating their economies and reducing restrictions on the movement of goods across their borders. Kyrgyzstan has indicated that it intended on joining the customs union as well. The combined GDP of Kyrgyzstan, Belarus, Kazakhstan and Russia was $1,680 billion in 2010, with Russia making up the lion's share ($1,480 billion). For comparison, the current 17 members of the eurozone's GDP totaled close to $12,200 billion in 2010. (For related reading on the euro, see 5 Economic Reports That Affect The Euro.)

Is It Possible?
Could the Eurasian Union be created without the dissolution of the European Union? Unlikely. According to the Maastricht Treaty, the 27 members of the EU are required to adopt the euro, save for the United Kingdom and Denmark. Two countries, Latvia and Lithuania, are former members of the Soviet Union, and thus would have to break the Treaty in order to join a Eurasian Union.

According to the IMF, here's how the Eurasian Union proposed 15 members would look in 2011, including Lithuania and Latvia:




  • GDP: About $2,56 billion ($663 billion without Russia)
  • Population: 288 million (146 million without Russia)


And here's how the European Union would look today, excluding Lithuania, Latvia, Denmark and the United Kingdom.




  • GDP: Approximately $15,000 billion
  • Population: 426 million


Making It Matter
In order for a Eurasian Union to really matter, it will need to expand its membership to include countries with more economic clout, but this won't necessarily require bringing the old gang back together. Russia most likely won't face membership competition from the EU along its southern borders, meaning that the battleground states will be in Eastern Europe and the Black Sea region. The EU has already recognized this, creating the Eastern Partnership in 2009 in an effort to reach out to Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine – all former members of the Soviet Union.

One of the main goals of an EU expansion eastward or Russia's Eurasian Union effort will be the pursuit of oil. Both groups will complain about the sphere of influence infringement, but at the end of the day the geographic prominence of the former Soviet countries will be the prize. Azerbaijan sits on the Caspian Sea and produces 651,700 bbl/day, but has to go through either Georgia or Turkey (another EU hopeful) in order to reach the Black Sea and world markets. Several European countries, including powerful Germany, are already under the thumb of Russia in terms of access to energy, especially of natural gas. A completed Eurasian Union could control up to 33% of the world's proven natural gas reserves (Russia currently has 25%).

The biggest winner of a Eurasian Union may be Gazprom (OTCBB:OGZPY), the world's largest natural gas company and one primarily controlled by the Russian state. The company has been actively seeking new opportunities, but most of the current targets are in northern Russia or the Barents Sea. A Eurasian Union could allow it to use Russia's regional clout to help it expand its interests into Kazakhstan, possibly by further entrenching itself with KazMunayGas, Kazakhstan's state-owned energy company. This likely will make Western companies such as BG Group(OTCBB:BRGYY) and Chevron (NYSE:CVX) nervous, seeing as a confident Russia has not shied away from squeezing foreign oil companies over oil fields near Sakhalin Island in recent years. The more pressure Russia can exert on its former allies the greater it can threaten consortiums such as the Azerbaijan International Operating Company, which includes BP (NYSE:BP), Chevron, and ExxonMobil (NYSE:XOM). (For more on Russia, see Investing In Russia: A Risky Game?)

Russia In Power
Contrary to the dreams of Russia, most of its former brethren are not overly excited about ceding political or economic power to Putin & Co. In 2005, Ukraine, Georgia, Moldova, Estonia, Latvia and Lithuania, Slovenia, Romania and Macedonia formed the Community of Democratic Choice in order to counteract Russia's ambitions. This is a signal that any integration will not be easy. Russia will have to play on the fears of exclusion of Eastern European countries, as well as possibly reducing the type of stringent requirements that the EU requires of its members. In order to make this strategy a success it must move quickly, as the expected euro adoption dates before 2020.

The brightest diamond for Russia would be Ukraine, a country of 45 million with a GDP of about $137 billion in 2010. Ukraine has been trying to enter the European Union for years; it already entered into an Association Agreement designed to pave the way for membership, but is facing scrutiny over a string of political debacles since the 2004 Orange Revolution. This includes the recent sentencing of Yulia Tymoshenko, a troubling sign that may point to a rise in the sort of authoritarianism the EU prefers not having to deal with. This may require EU leadership to downplay its foreign policy aspirations for its economic realism.

Russia's desire to become a member of the World Trade Organization (WTO) may temper any overly-aggressive actions in a Eurasian Union. It has long sought membership, and for being one of the world's largest economies faces a certain level of personal anguish over not being part of the club. That its regional rival, China, which has been a member of the WTO for almost 10 years only adds fuel to the fire. The allure (and economic benefit) of membership has even prompted Russia to make amends with Georgia, a country it attacked in August 2008.

The Bottom Line
The timing could have been a lot worse for the European Union, but not much worse. If the European Union wants to head off Russia's influence and prevent the creation of a broad Eurasian Union, it first must fix the euro mess. After all, the dissolution of the euro may very well torpedo the entire unification experiment, meaning that any further work at membership expansion will be moot. Thrown into the economic quagmire is the possible return of Vladimir Putin to Russia's presidency, an event that some consider a forgone conclusion. If Putin makes the Eurasian Union the focus of his next term and showers affection on former Soviet states while Europe dithers, he may very well succeed in the creation of a European counterweight. (For related reading, see Fueling Futures In The Energy Market.)





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