Tuesday, May 16, 2006

The Great Game

The global struggle for geopolitical domination never really stops, but it certainly has its periods of storm and calm. Historically, the storm never seems to develop quite where people are focused. Right now all eyes are turned towards a potential US confrontation with Iran—and as a result, virtually no one is watching the recent moves made by the Shanghai Cooperation Organization (SCO).

Founded (out of the Shanghai Five Mechanism) in 2001 between China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, the organization’s stated goal was to facilitate “cooperation in political affairs, economy and trade, scientific-technical, cultural, and educational spheres as well as in energy, transportation, tourism, and environment protection fields.” Recently, however, the SCO is beginning to look more like a modern-day Warsaw Pact, an energy-financial bloc in central Asia consciously constructed to serve as an anti-pole to US hegemony.

While no such intention is explicitly stated by the group, recent actions speak for themselves. So far in 2006, the SCO has extended de-facto offers of membership to India, Mongolia, Pakistan, and most importantly to Iran (who will officially be invited to become a full member at the SCO June 15th meeting). Beyond their expansion, the SCO member states are also taking steps to separate themselves from US-petrodollar imperialism: Russia has announced that it will open a Ruble-denominated oil and gas bourse in late 2006; China recently announced the intention to move its reserves away from the dollar and that it will use $40 billion in US dollars to purchase gold reserves; Russia’s state-owned, Vladimir Putin-controlled natural gas transport monopoly Transneft has further consolidated its pipeline control to become the sole exporter of Russian natural gas (by far the largest reserves in the world). With Iran, the SCO will control the vast majority of the world's natural gas reserves, as well as a significant portion of its oil reserves, not to mention potential control of the Strait of Hormuz.

These moves are significant because they amount to an act of energy encirclement. Central Asia, the greatest remaining promised land for oil and gas development, is completely enveloped within the SCO, limiting hydrocarbon access to non-SCO nations. China ensures the supply of energy that it will need to continue its amazing economic growth. Alternative supply sources of oil and gas to Europe now run exclusively through SCO-controlled export pipelines, allowing for a new OPEC-style cartel to bleed Europe at the optimal rate. And the ability to force the West to purchase energy in something other than dollars (to a greater extent than is currently the case) will help balance China’s export-driven surplus of foreign currency—at least until the rise of a consuming middle-class in India and China can become a self-sustaining market for their own economic production.

To the extent that this maneuvering is a move to encircle the energy supplies of central Asia, and to form an effective energy-cartel, the combined pincer maneuver is decidedly pointed at the trans-Caucus region: Georgia and Azerbaijan. With the addition of Pakistan and Iran to the SCO’s geostrategic alliance, the only remaining point of access to the riches of Central Asia are through those two nations—and the West’s “great white hope,” the Baku-Tbilisi-Ceyhan pipeline, runs precisely that route. So rather than looking towards conflict in Iran (which seems increasingly likely to be a unilateral exercise with Russia and China’s veto power firmly behind Iran at this point), perhaps we should be more carefully watching events in Georgia and Azerbaijan, as these nations represent the critical battleground between the SCO and the “West.” Russia has long been involved with fomenting problems among the Ossettians (South Ossettia in Georgia, North Ossettia in Russia), but Georgia is a traditionally Western-looking nation. More attractive to the SCO is the prize of Azerbaijan--an Asian nation with its own hydrocarbon reserves and a complete connection of the encirclement between Iran and Russia. Expect to see interesting developments regarding Azerbaijan after Iran is solidified as an SCO member on June 15th.


Jeff Vail said...


In this article from Asia Times, the Iranian Deputy Foreign Minister, Mohammadi, explicitly talks about building a Iran-Russia "gas-and-oil arc."

Anonymous said...

"And the ability to force the West to purchase energy in something other than dollars (to a greater extent than is currently the case) will help balance China’s export-driven surplus of foreign currency—at least until the rise of a consuming middle-class in India and China can become a self-sustaining market for their own economic production."

I think this quote is indicative of two errors in your thought--neither of which invalidate the immediate implications I might I add.

With declining energy resources, anything the SCO takes from the West will mean decreased ability to purchase things from the East.

Furthermore, the idea that the SCO or any other nation can create a market for itself and sustain economic growth is crazy. Peak oil is only the first of many ecological limits our society is about to hit. To think that the Chinese could even continue at the "present rate of consumption" (not your quote, just a common one) for much longer is unrealisitic.

While the SCO and others may jockey for energy resources, with success or failure, there will be no lasting stability. Even if the SCO encircles some of the last remaining hydrocarbons on the planet it will not matter much in the long run (not to mention NOCs and communists are notorious for poorly producing resources--which is probably a good thing for global warming)>

Jeff Vail said...

I agree with you that China and India will not be able to produce a self-sustaining internal market--but the salient point here, in my opinion, is what the Chinese and Indians think they will be able to do. This will drive their near-term strategic maneuvers. I don't know how peak-oil aware they are (they have more reason than most to be in denial) but there are at least some signs that they really think they will be able to keep growing their economies at the present rate until they have developed a self-sustaining middle class--and if so they likely think that securing energy resources is one cornerstone to that process. The confucian tradition certainly has its strengths, but the ability to rapidly shift paradigms (here, in light of evidence of peak oil) is probably not one of them--at least not historically.

From a peak oil perspective, this matters because it will decrease the fungibility of the remaining resources, which will in turn exacerbate the troubles as production begins to decline, and increase the likelihood that it ends up in some form of military contest, rather than being governed by market-mechanisms...

Sethkj said...

Great analysis. Have also been following SCO wrt energy security and its potential impact on California's energy market. Links:

Keep up the good work!

John Rawlins said...

Jeff, do you know whether the SCO includes a nuclear umbrella for the non-nuclear members?

Jeff Vail said...

I haven't seen anything to that end, but there is mention of security cooperation on the official SCO website. I would *guess* that the group hasn't evolved that far yet--because ultimately the extension of a nuclear umbrella only makes sense if the nation that the umbrella extends over is vital to the strategy of the nuclear power. More likely--at least in the short term--I think would be an increase in sales of high-tech armaments. Iran, in particular, would certainly be interested in purchasing the Russian-built SA-20 surface-to-air missile system (Russian name is S400 I think), as well as the Igla 2-B (Nato name SA-24) Man Portable Surface to Air Missle System (MANPADS).

Anonymous said...

Not sure of the mechanism whereby China will address their surplus foreign currency problem through oil exports from others in the SCO, but nevertheless a very thought-provoking article. The potential of this emerging bloc will give many US allies in Asia/Pacific much to be concerned about.

Jay Denari said...

Hi, Jeff,

This is something that deserves significantly wider acknowledgement than its getting (almost none in the MSM that I've seen). Thanks.

The Moscow Declaration on the SCO's website states, "The SCO aims to jointly promote relations of partnership on the great expanses uniting our countries on a broad agenda that would include cooperation in the political, trade, economic and humanitarian spheres and in countering present-day threats and challenges."

Note the last phrase ... Anybody with sense in those countries has to consider the US one of those threats, given our behavior in recent years.

I've been expecting this. If Iran joins and we attack Iran, the SCO might not have a nuclear umbrella, but will almost certainly offer military support of some significant type that will turn a bad regional conflict into a global one.

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