Siberian Nights: The East Siberia-Pacific Ocean Oil Pipeline

This is a guest post by Matt Stone. Matt is a student of international studies and economics at the University of Arizona, where he is finishing up his honors thesis on the geopolitical ramifications of the East Siberia - Pacific Ocean (VSTO) oil pipeline. Last year, he lived in Irkutsk and Vladivostok, Russia - roughly the two endpoints of VSTO. A 2007 Marshall Scholar, Stone will study next fall for a MSc in energy economics at the University of Dundee. He co-founded and writes for The Global Buzz.

As the 2008 Russian presidential election approaches, no one is more concerned about Russia's future policy direction than those that stand to benefit from Russia's energy largesse.  In particular, China and Japan are very anxious about the final routing of the East Siberia - Pacific Ocean oil pipeline (VSTO - its Russian acronym), which is expected to be the world's longest oil pipeline (2,500 miles), originating in East Siberia at Taishet and extending to a Pacific port at Kozmino Bay.  VSTO is Russia's first pipeline to East Asia, ultimately unlocking the supposedly vast oil reserves in East Siberia, an area that has been likened to the final frontier of hydrocarbons exploration.  Whomever is elected (ie, appointed) president in 2008 will be the one who determines which country will benefit most from VSTO.

What makes VSTO so critical to the Chinese and Japanese is the changing energy and geopolitical landscape.  In 2003, China surpassed Japan to become the world's second-largest consumer of oil.  Chinese state oil companies (CNPC, Sinopec, and CNOOC) are pursuing a "going-out" strategy, where promises of Chinese investment in other sectors of a nation's economy secure guaranteed supplies of hydrocarbons, such as China's good-will investment in the Tehran subway system.  The Chinese are rightfully worried about their dependence on Middle Eastern oil sources and the routes by which that oil is transported.  China receives 51% of its oil from the Middle East.  The vast majority of that oil is shipped through the Strait of Malacca, and therefore, is threatened by U.S. naval dominance.  Thus, the Chinese are seeking to diversify their energy supply base, not only by increasing production of coal and hydropower, but by developing oil and gas pipelines with neighboring Kazakhstan and Russia.

More than any other region of the world, energy is seen in East Asia as something of a zero-sum game: Japan increasingly views China's positive gains in securing energy supplies as its own loss.  Even though the Chinese still don't have a ministry-level agency to coordinate energy policy, Japan feels that it is a step behind.  Eighty seven percent of Japanese oil is imported from the Middle East - an extraordinary amount that also must pass through the Strait of Malacca.

Hence VSTO begins to take on hues of geopolitical significance.  While technically the routing of VSTO is not important from a market perspective (any oil purchased at world prices from VSTO by either Japan or China will simply free up oil supplies elsewhere), in light of the strategic chokepoints through which oil traverses - chokepoints that are critical to both the Chinese and Japanese economies (and subsequently, social stability in China) - Russia's ultimate decision is of paramount importance to both nations.

After years of Sino-Russian and Japanese-Russian memoranda of understanding, joint communiques, and declarations of intent, each ostensibly negating the one before, in 2005 the "final" route chosen by Moscow was the best (or worst) of both worlds.  VSTO was planned to extend from Taishet to Perevoznaya Bay, just south of Vladivostok, with a branch line running from the Russian border town of Skovorodino to Daqing (Kozmino Bay would later be selected over Perevoznaya as the terminus).  The road to that decision was more than circuitous.


VSTO was originally vetted as an idea in the mid-1990s by the Yeltsin administration as a way to expand Sino-Russian economic ties.  However, things didn't really get off the ground until the Putin presidency.

In May 2003, Chinese President Hu Jintao (in Moscow) signed a joint communiquŽ with Russian President Vladimir Putin endorsing a pipeline route from East Siberia to the Chinese oil-refining city of Daqing in Manchuria.  At the same time, Yukos CEO Mikhail Khodorkovsky signed a 20-year agreement with a "Chinese state-owned oil company" (which later was reported to be CNPC) to supply China via some form of eastern oil pipeline.  At the time, Yukos was viewed as the main proponent of a China-only route for any East Siberia oil pipeline.  Japan was conspicuously absent from any plans.

However, during the second half of 2003, a pipeline feasibility study had still not been approved by the appropriate Russian agencies.  Nezavisimaya Gazeta reported that the lack of a coherent framework for action by the Russian government was leading Russian oil companies - including Yukos - to act independently.  Increasingly, it appeared that there was a behind-the-scenes struggle occurring between Yukos and Transneft, the state-owned pipeline monopoly, over the final route.  Transneft, with everything to gain by constructing the longest route possible, was pushing for a pipeline to the Pacific, not China.

By October of that year, Mikhail Khodorkovsky had been arrested on charges of tax evasion and other unsanitary habits.  The Chinese were miffed; their main man in Moscow was now behind bars and it appeared that the final route for VSTO was far from settled.

Furthermore, during the run-up to Khodorkovsky's arrest, the governor of Primorye, Sergei Darkin, lobbied heavily for a Pacific route - one that would clearly terminate in his home region.  Darkin went to Tokyo to meet with the Japanese foreign minister, and he accused Yukos of deliberately underestimating East Siberia's resources to promote the Daqing route.  In July 2003, during a meeting between Putin and Darkin, the governor urged the president to help integrate Primorye into the East Asian economy.  Darkin implied that VSTO - and specifically the Pacific route - would be the perfect candidate for immediate economic integration with the region.

The momentum seemed to be turning in Japan's favor.  In February 2004, Russian Deputy Foreign Minister Aleksandr Losyukov told reporters that the government was considering multiple options - presumably not mutually exclusive - and would "give priority to its own interests when selecting which option to follow."  On December 31, 2004 - not two weeks after Yuganskneftegaz was sold in a rigged auction to Baikal Finans Group and later state-controlled Rosneft - Russian Prime Minister Mikhail Fradkov approved the Transneft-endorsed route from Taishet in Siberia to Nakhodka on the Pacific coast.

A branch to China was not included in the approved plan.

But, in typical Russian teeter-totter fashion, by April 2005, the Kurile Island dispute between Russia and Japan had impeded forward progress on the pipeline plan.  This hang-up was indicative of the fact that Russia was using VSTO as a bargaining chip in the Kurile Island dispute.  It is important to note that a Pacific terminus would allow any country to import East Siberian crude - both China and Japan, and possibly America.  Pipeline length notwithstanding, it would seem to be in Russia's interest to build to the Pacific in order to export to any number of markets rather than just one under the China plan.  However, Russia wanted to use that potential route as leverage over the Japanese in its territorial claims.

That same month, the Russian government announced that the two original plans - (1) Taishet-Daqing and (2) Taishet-Nakhodka - would be integrated, thereby giving Russia leverage over both nations during the construction process.  The first stage of VSTO would originate at Taishet and end at Skovorodino, a town that borders China; a branch line to Daqing would be built.  The second stage would continue on from Skovorodino to Perevoznaya Bay, just south of Vladivostok.  The Japanese immediately threatened to terminate funding for VSTO because the pipeline would start pumping oil to China before terminating on the Pacific.

Oil would flow to Skovorodino by 2008 and Perevoznaya by 2012.  VSTO was announced to have a capacity of 1.6 million b/d, although a debate rages as to whether East Siberia has enough accessible oil reserves to fill VSTO to capacity.  In July 2006, Transneft declared that Kozmino Bay, closer to Nakhodka, would be the ultimate terminus for VSTO.


While VSTO has been the subject of much environmental controversy, especially with regards to the World Heritage Site of Lake Baikal, it is its geopolitical significance that motivates the most pressing questions.  Even more important, however, is what VSTO says about Russia's future policy direction in the spheres of energy and foreign relations.

Immediately clear is the fact that Russia (rightly) considers its energy resources as a strategic asset rather than a purely economic one - and consequently leverages those resources for strategic gain.  But Russia also worries quite a bit about competition.  When Kazakhstan's Atasu-Alashankou oil pipeline to China began pumping oil in May 2006, the Russian government hit the accelerator on VSTO construction.  With Atasu-Alashankou pumping, Russian oil firm Lukoil announced its intention to ship oil via that pipeline in lieu of any Russian alternative.

A Russian alternative was clearly a strategic imperative for the Kremlin.  State-controlled Rosneft plans to double its investment in the East Siberian Vankor oil field to $1.5 billion in 2007.  The company is also making noises about building an oil refinery in Nakhodka, near VSTO's terminus (a project Lukoil wants to get in on).  One of Yukos's last units, Tomskneft, is slated to be sold off in a couple months' time.  (Interestingly enough, Chevron is trying to reverse its bad luck in Russia by partnering with Gazpromneft, the oil-producing subsidiary of state-controlled Gazprom, to purchase Tomskneft ... Stupid or genius?  I give it 80/20.)  Tomskneft is actually not in East Siberia, but rather the far eastern part of West Siberia.

Here is where it gets interesting.  While Tomskneft doesn't seem to be immediately important to the success of VSTO, many analysts are predicting that East Siberia will not have enough oil to fill the pipeline, and therefore, Russia will instead "borrow" from West Siberia - adding roughly 1,250 miles to the distance of transport.  According to Leon Aron of the American Enterprise Institute:

Even with all of the currently known major oilfields in eastern Siberia coming fully 'on stream' by 2015, production will be no more than 287 million barrels per year - or less than half of the planned amount.

Thus, what would cost between $6.40 and $9.80 per barrel in transportation costs from East Siberia, the oil being shipped from West Siberia would cost well over $12 per barrel just for transport.

It becomes immediately clear that the Russian government doesn't view VSTO from a purely economic perspective, but rather from a political and strategic one.

What does that mean for Japan?  By most indications, it increasingly appears that VSTO will not extend to the Pacific, but rather dive south via Skovorodino into China.  It would not be surprising if sometime in 2008 or soon thereafter the Russian government announces that production in East Siberia does not merit an extension of VSTO to the Pacific.

Yet, at the same time, the Russian government fears being tied into a single-buyer relationship with China a la Blue Stream in Turkey.  Granted, the natural gas market is fundamentally different from the oil market, but after getting burned by the Turks in 2003, the Russians are afraid of China using its monopsonistic market power to force prices down for East Siberian crude.

Can Russia sustain its energy largesse in the Far East?  It would be easy to claim that Russia is on a collision course with reality - that oil prices will fall from their historic peaks in due time, that state intervention in the Russian oil, natural gas, and pipeline sectors will eventually decimate oil production increases, thereby decimating rents, thereby causing the Russian government to wake up to the fact that less state control, not more, is what is needed to infuse new vitality into the industry.  But such claims are standard Western boilerplate and avoid the fundamental shifts occurring in the global oil market.

As the Chinese economy continues to grow at breakneck speeds, its people will continue to consume more and more oil.  Despite all the talk of biofuels and alternative energy sources, the United States is not going to transition into a post-petroleum economy in the near or medium term.  And as long as the Russian government enjoys the support of its populace as well as positive media coverage - both a near certainty - the Russian government can continue to funnel money into giant, state-sponsored industrial projects.

Moreover, we face a world where the oil majors are desperately in need of access to acreage.  Less and less oil is available to the ExxonMobils of the world to develop.  Thus, investors are increasingly pleased to invest in state-owned (yet inefficient) energy ventures like Gazprom and Rosneft.  Capital is not hard to come by.  Because of this, Russian state-controlled energy companies have little incentive to bring Western oil majors on board any major projects, thus decreasing the likelihood that these projects will be done well with the maximization of return to investment for shareholders.  With the full backing of the Russian state on specific pipeline projects like VSTO, Transneft does not need to worry about the economics of any project.  The subsidization of the industry - and associated diversion of resources from other, more efficient sectors - does not stir any outrage in the Russian media.  There is little reason to expect a change in the fundamental conditions that foster the corporate-energy state that Russia has become.  This is a road paved with $60+ oil and VSTO is just one of many manifestations of Russia's state-sponsored largesse.



Who wins?

The Russian state for one.  It gets a new export market in China - and potentially other markets in East Asia.  No longer will Russian oil revenues be based solely on European demand.  Europe is certainly worried that Russian exports to China will either reduce Russian exports to Europe or allow Russia to threaten a cutoff like the one that occurred with Belarus this January.  The first worry is a red herring: the nature of the global, fungible oil market implies that less oil exports from Russia simply means more oil imports from other regions.  Furthermore, it is prohibitively expensive, even for the Russian government, to ship oil being produced west of the Urals to China.

The second concern is more reasonable.  A cutoff in Russian oil exports to Europe or a threatened cutoff would cause global oil prices to spike in the same way a shutdown of the Strait of Hormuz would.  Western governments must mitigate any diplomatic rows with Russia to avoid this contingency.

China wins in some sense.  Because VSTO is viewed in China as a strategic asset as well, its completion will allow Beijing to breathe a bit easier.  The Chinese fear of an energy cutoff actuated by the U.S. navy in the Strait of Malacca cannot be overstated.  Diversifying their oil supplies is a significant boon.  Furthermore, the Chinese can hope that in any potential conflict with the United States over Taiwan, the U.S. will avoid bombing VSTO for fear that such an action would draw Russia into the conflict (on China's side).

However, the Chinese will never achieve full energy independence or even diversify energy supplies to the extent that an energy cutoff will be entirely impossible.  Thus, the onus is upon China, the United States, Russia, and other energy consumers and producers to forge a consensus enshrining the preeminence of the market as the key purveyor of energy security.

Everyone wins.  This is less talked about but possibly the most important element of VSTO.  This is not a strategic threat to the United States or Japan or the European Union.  VSTO is but one way of further liberalizing the energy trade by opening new corridors of exchange.  East Siberian crude would not be exported without a pipeline - even an expensive and ill-planned one like VSTO (Deutsche UFG recently estimated a total price tag of $20 billion).  Thus, the introduction of new sources of supply on world markets will only help in a time of demand outstripping supply.  Indeed, even if VSTO dumps its oil into China, that will theoretically free up oil supplies elsewhere to be consumed by other nations, thereby dampening world prices.


Given the strategic and economic nature to VSTO, Russia's vast undertaking represents the best and worst possible worlds.  Like Churchill's famous utterance, it is a "puzzle wrapped inside of an enigma," jointly meeting the sovereign needs of multiple nations, but doing it in a way that is overly costly and overly politicized.  Even though construction has already commenced, the conclusive route of VSTO is never a certainly - not until the pipeline is buried and oil is flowing.  The Japanese and Chinese will be eagerly watching what the Russians ultimately decide to do.

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Your link to the Ferguson Testimony is broken - try this:



Appreciate the heads up. We'll get that fixed.

At some point post peak the open oil market will I think give way to a strategic one. The fact that Russia is already focused on strategic oil sells is alarming.

Next the problem with strategic oil is that the stick part of the carrot and stick is to cut off oil supplies.

This leads to heightened tensions and probably war. I can't see strategic games by oil suppliers being successful for long before they incite a crisis and war. Strategic manipulation of resources has always lead to war in the past. Sooner or later Russia will have to follow through and actually cut supplies to punish a consumer.

All I see is a ticking time bomb.

The threat of cutting off supplies is sufficient to enforce compliance, much like the threat of MAD keeps the world secure from nuclear armegeddon.

Proxy wars between the US and Russia are quite likely, however. You could say that it already happened last Summer in Lebanon.

Except that with oil you have the simple problem that the routes of supply can be attacked thus if you threaten to cut off oil to me I'll blow up your pipeline and nobody gets oil.

I don't think that strategic oil games are the same is MAD although a resurgence of MAD to prevent all out war is obvious since most of the players have nuclear weapons.

MAD would actually encourage regional war in my opinion over oil.

I just cannot see everyone being Russia's whipping boy over oil. Also Russian exports are declining now so they are dealing with a smaller carrot every year.

Back to pipelines. They are such a easy target for attack disruption and this can readily be hidden as either a real insurgent attack or fake one that I think this will be used to punish Russia if the go to far. Thus covert disruption is trivial.

I don't agree with equating MAD with oil supplies.
It simply to easy as you mentioned to use proxies and covert operations to disrupt supplies for everyone on the threat of
cut offs for one.

Why would Europeans or Asians want to risk destroying their relationship with the world's most stable major energy supplier? While the Saudis, the Iranians and the Iraqis are all vulnerable to being invaded or thrown into chaos by insurgents, Russia is a first-world nation with a secure government.

Instead of seeking confrontation, the Europeans are trying to limit their economy's reliance on energy by persuing policies directed towards efficiency.

The BTC pipeline and others like it are designed to keep Russia from gaining too much influence in Europe.

If both the American-aligned pipes and the Russian-aligned pipes are being sabotaged, nobody gets any energy. I think that it's likely that producer and transit nations will develop insurgencies that will put pressure on the pipelines - but it would be counter-productive for the Euros to do it.

First off at some point the gloves will come off so to speak.
Once it becomes a matter of survival I cannot see either Japan or Europe not moving to a more militant footing. Democracies can swing quickly if their "way of life" is threatened. Yes both are less stupid than America if that makes sense but don't underestimate how quickly things can change.

In a previous post I related a chain of events that could result in martial law being declared in America. It was Mexico going unstable plus economic depression plus peak oil. Not since the last great depression has even the possibility of martial law been worth considering.

If anything resource wars will cause previously pacifist nations to change quickly. Japan has already moved to a more militant stance to counter China.

The only way I could see this not deteriorating into increasingly violent resource wars is for regions to undertake and aggressive policy to move away from oil.

I still cannot see how Russia playing oil as a strategic resource will not result in war.

Understand that the threat for oil as a strategic resource is denial.

For Russia its denial of oil to one of the consumer nations.
For anyone of the consumer nations its destruction of the oil delivery method and in essence denial for all.
Either Russia follows fair market practices and sells for the most part to the highest bidder or their will be war.

This of course means that it may become pretty important for the creation of treaties to handle power down.

Given the fact that peak oil is not even recognized right now the chances of a enlightened approach is low.

I see war according to Sun Tzu's Art of War

Very informative, thanks Matt.

Re: Indeed, even if VSTO dumps its oil into China, that will theoretically free up oil supplies elsewhere to be consumed by other nations, thereby dampening world prices

Some of us view a dampening of world oil prices as not necessarily a good thing, at this juncture —  

Several things

- Blue Stream was about winning the race to the Turkish market - and Gazprom duly won. Everybody knew that there would be too much gas in the short term. It's irrelevant in the long run, as Gazpeom controls most of the routes into Turkey now, having killed off the Caspian threat then. The new Baku-Ezrurum line is much less ambitious than projects were back then.

- "causing the Russian government to wake up to the fact that less state control, not more, is what is needed to infuse new vitality into the industry. But such claims are standard Western boilerplate and avoid the fundamental shifts occurring in the global oil market." That standard boiler plate is not "Western", it's "non-importing Anglo" perspective. State control works in the energy sector, as France demonstrates, and even as Gazprom demonstrates. Gazprom is by far the most effective way to get the whole Russian population heated and powered at the lowest cost possible. It is a natural monopoly, and it is well run on the engineering side. The fact that the economic rents are stolen after that is another story. Private ownership/management targettign profit maximisation would do little for the Russian population.

- I'll believe that VSTO when it's actually operational. I expect it to be delayed a few more years.

An interesting side note is that Yukos has manage to export almost 1mb/d of oil to China by railcars in 2003. All the tanker wagons that had been used in the 90s by Chevron to export Tengiz oil were switched to the China route...

The worst bit of truth in this report:
"Despite all the talk of biofuels and alternative energy sources, the United States is not going to transition into a post-petroleum economy in the near or medium term."

Nope, our government, regardless of who sits in the White House, will continue to proffer apologetics wrapped in subsidies to a token biofuels racket garnered by farm lobbyists, particularly the corny variety, while they pump media soundbites into the public's ear. Thus we will crow about how "we are at the forefront of green energy" but the fuel filling our tanks will continue to come from "black" in one form or another.

We'll keep partying like it's 1999 till the last chair is thrown in the fireplace, and when the fire goes out, why we'll find another boogeyman and start another war, of course.

America has transitioned from a nation of innovators to a nation of obfuscators and procrastinators.
Oh, eventually we'll get to the point where we have to transition to some partially biofueled future, but by that time we will have made the larger transition to a feudal society of dystopian peasantry on mopeds and three wheeled jitneys while we keep rusting SUV's in the driveway the way that deaf grandmothers keep dusty grand pianos in their parlors, a reminder of the good old days, when ignorance and muscle, fueled by state credit, were king.

And it will all be someone ELSE'S fault, of course.

There is a lot of talk about increasing risk of war between oil suppliers and oil providers as supplies lessen. I'd question that. The oil trade is mutually beneficial. The purchasers need to buy it just as much as the sellers need to sell it. We have examples over the past 50 years of wars in the middle east, where oil production and shipment continued amid the bombs.

You have several main categories of wars - wars of ideology, wars of trade and wars of conquest, or empire

You can wars about oil, but you can't have wars without oil
the oil has to flow

I can see Russia playing politics, and playing sides, and playing dog in the manger, but I can't see them NOT selling, or withholding, for very long.

How's this for the current pulse of the US small business owners:

"Thirty-nine percent of respondents said that changes in gasoline prices affect profitability, while 48 percent said the effects are minor and 13 percent said they were of no consequence."

I wonder if the business owners really understand this issue.

Yes, the question was directly about gasoline prices, but they are indeed dependent on crude oil prices. So the question could have been how they are affected by rising oil prices.

Unless your business idea is to sell ideas from a public speakers corner, you're affected.

In the block where I live there's a small shop specialicing in cheese, they've got it all there. Cheese doesn't (hopefully) contain gasoline so they might be one of the 13-percenters above. An acute oil shortage or price rise though would propably put some of the cheese manufacturers out of business, and rising the remainings prices. Add to that increased transport costs to get the cheese from the manufacturers to the shop. Throw in increased rents and electricity bills to keep the cheese cool. At this point I wouldn't be surprised if the prices doubled, at the same time they would be offering less of a variety than before. And people in general would have a tighter economy basically due to the same reasons as above, thus bying less cheese...

No they don't pay no gasoline bills but energy prices DO affect them.

Hello Matt,

Thxs for the keypost--well done. So how do you see the proposed stationing of anti-ballistic missiles in Poland affecting Putin's decision making going forward? Is this an intentional effort by the US and NATO to escalate the FF-trade economic war into an ideological war, or a conquest war?

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

Bob, while I'm no arms control expert, anti-ballistic missile bases in Poland and the Czech Republic will (obviously) not go over well in Moscow. Most of the current Russian leadership is ensconced in a Cold War mentality (post-9/11 offers by Putin to overlook U.S. bases in Central Asia was perhaps the last opening we had with the Russians to alter that mentality).

Indeed, Russia's stability as a state is based upon a particular Cold War legacy: a state-centric system of resource rent distribution. In the 1990s, the distribution of resource rents was based upon private oil companies like Yukos and Sibneft, both of which have now been subsumed by the state (expropriation in the first case, a gentlemen's agreement and buyout in the second). The Putin administration has handily reasserted the state's role over resource rents and where they are diverted - thus precluding the rise of another center of power beyond the Kremlin.

The United States and Europe (belatedly) have criticized this project because it threatens our "energy security." I'm no Russian apologist, but there's a short-term historical legacy here that we tend to forget: the Russian "oligarchs" of the mid-1990s swindled the country and all but a handful of Russians (probably could count them on one hand) feel no remorse for the Khodorkovskys and Gusinskys. The newly assertive Russian state is a good thing in their eyes.

Which leads me to the final point: if Russia still operates in a Cold War mentality and its populace supports the project by which such a mentality is supported (state-centric resource rent distribution), then there are no domestic "push" factors that could potentially change Putin's thinking. ABM bases in Eastern Europe is just another in a long line of abrogations and insults (which, frankly, the Bush administration has been a little bit more than inept in managing and mitigating). Russia's cutoff of gas supplies to Ukraine last year, its cutoff to Georgia, its threats of cutoff to Azerbaijan and Belarus - in Russia's mind, these were calculated demands for market prices. The West, in our perceived zeal for the market, looked like hypocrites complaining about the way the demands were met.

It just adds fuel to the fire. Moscow doesn't trust the West - and yet they need European energy demand to fill the state coffers. Putin will continue to think in realist (yet vindictive) terms to account for past perceived injustices done to the Russian state during the 1990s.

As for war, I don't think so. I don't think the United States really wants to risk confrontation with Russia right now and I don't think its in anyone's interests to do so.

Thxs for the thoughtful reply Matt. By the way, my nephew knows you very well--I told him about your TOD posting tonight. Cheers!

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

Bob, I'm wracking my brain for someone by the last name of Shaw, but maybe your nephew has a different last name? Do you mind dropping me an email at mstone520 (at) gmail [dot] com? Would appreciate it!

When the Soviet Union collapsed, there was a tacit understanding that NATO should not take advantage of the situation and expand eastwards. Take a look at the map and see how NATO has filled the vacuum.

Currently, NATO is engaged in Afghanistan of all places. The Soviets could not conquer it, but NATO knows best.


It is Gazprom's control over the distribution of energy resources in Eurasia that is Russia's true power base. Russia has demonstrated to both suppliers and customers it's willingness to use it's control of distribution to enhance it's power and enforce it's wishes. Despite the denials, much of Europe is under the influence of this energy relationship and political decisions are not made independent of it. If something is going on globally that Russia wants others to stay out of, few nations will risk the loss of their source of energy to go against their wishes.

Thanks Matt, a very interesting post. Does that 2008 timeframe for delivery to China still holds? Or do you think it’ll get further delayed?

Luis, most indications suggest that 2008 still holds -- and Russia is pumping a lot of money into building this thing fast in light of other alternatives (Atasu-Alashankou) -- but I wouldn't be surprised if it falls behind schedule. During the spring of 2006, Putin rerouted the pipeline some 350-400 kilometers away from Lake Baikal (as opposed to skirting the lake before) due to environmental activism within Russia and abroad. Despite the significant reroute, Transneft claimed that they would still have the first section to Skovorodino completed by 2008, which could be typical over-promising to please the leader. However, I just don't know. Most likely, we won't know until this thing is laid and oil is pumping.

If I had to make an educated guess, I would say it gets delayed by at least a year for two reasons: (1) significant cost overruns have been announced the past month on just the first section ($11 billion instead of $6.6 billion initially, announced in Transneft's recent Eurobond prospectus), and (2) development of East Siberian oil reserves is moving along at a snail's pace - thus, Transneft may not finish the pipeline immediately for want of oil but many companies aren't developing East Siberia for want of knowing exactly where VSTO will terminate - China or the Pacific?).