Putin appearance at Katyn Memorial: A Future Polish - Russian Rapprochement in t he works

This am`s Western press has seen almost universal approval of Putin`s appearance at the memorial yesterday to commemorate the victims of the Katyn massacre, which has long bedevilled Soviet (later Russian)- Polish relations.
As background, the Soviet NKVD murdered well over twenty thousand officers of the Polish army in several locations (one of which was in Katyn) in 1940 and later blamed the massacre on the Nazis. This became very much "accepted" history in communist run Poland until the late 1980s when the Russians owned up to their own involvement. The then President Yeltsin provided a copy of the notorious execution order signed by Stalin and Molotov to the Poles. Since Putin`s rise to power there has been studied ambivalence about the episode and at times apparent defensiveness by the Russians to make amends for this historic wrong.
But that seems to have fallen by the wayside as Putin made, what was for him, an almost eloquent speech honouring the victims, both Polish and Russian, of the NKVD, killed either in the Mass Repressions of the 30s as well as in the 1940s at Katyn. It didn`t constitute an apology but it did represent a small positive step in the right direction to putting behind both countries some very emotionally raw history.
We can now see some positive mood music in what has been, for quite some time, a very difficult set of relations but why?
I think the answer lies in both countries wish to seek a lessening of tensions between them for their own political, strategic and economic reasons, in turn:
Poland
The Polish government is struggling to put together a "plan B" given previous governments have placed far too much reliance on a US - Polish relationship - as a Brit, given the shortcomings that have appeared in our own so called "Special Relationship", perhaps before too long the UK may need to think about its own "Plan B". It is worth retracing briefly how the US - Polish relationship has now fallen by the wayside. First of all, Poland committed itself to an unpopular involvement in Iraq (much as the UK did)and is also involved in another conflict, albeit with NATO cover, in Afghanistan. Polish governments did not (and continue not to) receive much of a political dividend for this altruistic participation.
In addition, the then Polish government was facing further unpopularity for its support for agreeing to host elements of the antiballistic missile system on its territory - a matter of immense concern to the Russian authorities. The outbreak of the Russian - Georgian war in August 2008 led to a sudden reversal of popular opinion to now being in favour of supporting the system as Poles became nervous just where Russian intentions would go - a consequence that led to the Russians in turn raising the stakes by threatening to target Poland. However, it could not have escaped Russian attention that they may just have overplayed their hand by the heightened tensions along their western borders as well as a cool response by the Chinese to the Georgian adventure - so much there for the Russian - Chinese "partnership" - famously labelled the "Axis of Convenience" by Bobo Lobo, in which Russia had vested such high hopes to counterbalance the US.
Poland may have felt somewhat secure behind its perceived US "shield" were it not for the fact that the US had started to have doubts of going thru with the antimissile system in Poland. The new Obama administration had been decidedly cool on this idea and (in)famously "pulled the rug out from under" its Polish and Czech "allies" by cancelling the idea. In one of those instances where symbolism is everything, the US announced this on 19 September - the anniversary of the Soviet invasion of Poland in 1939, as agreed to in advance under the Molotov - Ribbentrop Pact. Rarely could the US have timed its (tin eared) announcement to much greater effect. Where was Zbigniew Brzezhinski, former National Security advisor to President Carter and now leading adviser to Obama, when this happened?!
While relations appear not to have entered the deep freeze, the Polish government has taken note of its supposed ally in Washington and has decided to reach out to its longtime foe in the East...
Poland`s relations with its major EU allies also require a lessening of tensions. Given the US position on Russia - a form of benign appeasement while seeking to engage Russia on Iran, Poland also is looking to become more Eurocentric - not in terms of joining the Euro currency, but in reducing tensions with the major EU powers of France and Germany who see Russia as a vital trading partner, particularly for oil and gas supplies but also for their own exports - whether Siemens technologies or French helicopter carriers...In particular, Poland`s relations with Germany, despite tensions over postwar expulsions from western Poland and the construction of the NordStream pipeline between Russia and Germany - cutting out Ukraine and Poland in between, have warmed up recently. The German Chancellor has no illusions herself about Russia but exports and German securing its energy sources are important strategic objectives and Poland is not going to stop them happening. Given German economic strength and its role of banker to the EU - whose funds are estimated to have added circa 1 % to Polish GDP in 2009, Poland sees no purpose in being served in riling the Germans with increased tensions over Russia.
Ukraine, Belarus and the Baltics. Poland has strong interests in all these countries. In particular, there is a strong Polish interest in seeing Ukraine acting as a strong buffer against Russia. Several years ago Poland looked to become a major player in Ukraine as it assisted in a peaceful resolution of the Orange Revolution and the appointment of the proWestern President Yuschenko. Since then matters have not exactly gone to plan - Ukraine`s own endemic problems, principally political, as well as Russia`s action in Georgia has stopped any moves by the Ukraine in joining NATO and the start of its accession to the EU dead in their tracks. Both Russia and Poland now need a stable Ukraine on their respective doorsteps.
Similarly for Belarus. This country remains part of the Russian sphere of influence with the country integrated into its defence arrangements and Russians on the borders. That said, Russia does not need signiifcant Polish interference in this country given concerns over the stability of the Lukaschenko regime and Poland`s desire to see this country come within the EU sphere of influence.
PKN Orlen, one of Poland`s largest energy companies, has a stake in a major Lithuanian refinery, which has not operated due to Russia blocking supplies to it. This is causing significant losses. A lessening of tensions with Russia may remove this "blockade" and allow Orlen to generate a return.
Trade
Russia remains a major export market for Poland. It was the sixth largest export market accounting for 5.2 % of its US $ 178 billion of exports in 2008. At the same time, Russia is Poland`s second largest supplier accounting in 2008 for 9.7 % of total imports of US $ 200 biillion. A few years ago Poland managed to bring an end to a mini trade war with Russia on agricultural products - food and live animals account for 8 % of its total exports so this has been important for Poland`s current balance.
And now for Russia:
The War with Georgia
Russia was wholly successful in its military operations against Georgia but the economic and diplomatic fallout has been spectacular. With respect to the diplomatic, China`s response was notoriously cool and Russia received very little backing in the wider world, save for support from Nicaragua and Venezuela. As seen above, tensions markedly increased with the EU, notwithstanding the muted condemnations of the invasion of Georgia. Energy security has jumped up the agenda of the EU. Russia has not failed to note the increased interest by certain EU countries ie Germany and Poland, in developing shale oil, as well as Poland`s plans for a liquified national gas terminal. This has also been exacerbated by the recession and the drop in gas imports in the West. Gazprom has had to accept spot (and therefore lower) prices on a number of its longterm contracts.
Russia is notoriously reliant on oil and gas for its export earnings and its government revenues due to the taxes on oil and gas companies. Russia`s Gazprom has moved towards signing a new longterm supply agreement with PGNiG - see my last blog, to shore up its export earnings from one of its major Western customers.
Interestingly, Poland is Russia`s 7th major export market, accounting for 4.3 % of its total exports of US $ 470 bn in 2008 - just a little shy of China, its "strategic partner", with 4.5 %.
Russia is also keen to reduce tensions with the West - the Georgian war was a leading factor in causing a mass exodus of foreign investors and a crash in the Russian stock market, thereby exposing the Russian economy to the tender mercies of the wider global financial crisis. Russia`s easing of tensions with a longterm foe is part of establishing a narrative of rejoining the international community and to stave off Polish pressure in EU forums for a more "get tough with Russia" approach.
It may also signal, in my view, a serious rethink in Russia`s own relations with the EU and may yet lead to Russia revisting its own longterm political and strategic interests. It has not escaped Russia`s attention either that its "strategic partner" in countering an unipolar world, China, is positioning itself for the joint leading role in the now notorious G2 club alongside the "Main Enemy", the US. Russia will also have taken note of the US` attention switching from its previous EuroAtlantic leanings to the East, where the US sees the leading economies of China, India, Japan and others in the Pacific being the new geostrategic centre of gravity and the threat to its leading position.
Russia may now see that, rather than seeking an accomodation with China and the US, it should now seek the opportunity of anchoring itself to the EU and to remove existing obstacles to that end - one of which is the longterm antagonism with Poland. It may well therefore be that DeGaulle`s vision of a Europe from the "Atlantic to the Urals (as extended to Vladivostok)" may yet have taken a small step via Katyn yesterday and will take a major leap if a major Polish - Russian rapprochement ensues.

Poland`s shale-gas: A future Qatar on the Baltic?

At present, Poland imports around 70 % of gas for its energy needs, principally from Russia. For several years, Poland, amongst others, has watched with increasing concern the deployment of the gas weapon by Gazprom in furthering Russia`s foreign policy aims in the region. Cut offs of energy supplies to Ukraine and Belarus in 2006, 2007 and early 2009 as well as the Russian – German agreement in 2005 to build the “Nord Stream” – notoriously likened then by the current Foreign Minister and possible candidate for the next Presidential elections, Radoslaw Sikorski, to a new “Molotov – Ribbentrop pact”, has served to increase these fears of apparent dangerous overreliance on a longterm foe for keeping Poland`s lights on. Poland has sought to cooperate with its neighbours in the Baltics and its fellow Visegrad pact members (comprising Czech and Slovak Republics as well as Hungary) to enhance and integrate the countries` respective energy systems to mitigate the risks of a further cutoff and improve their energy security. An example of this is the gas interconnect project between Poland and the Czech Republic scheduled to be completed in 2011.

In addition, Poland is moving to exploit its own potential energy resources. Poland extracts about 4 billion cubic meters of gas a year, and has proved reserves of about 165 billion cubic meters. Its existing usage is just under 14 billion cubic meters per annum. In addition, Poland is believed to be located over a promising geological strata that could yield somewhere between 1.5 and 3 trillion cubic meters of gas. If efficiently extracted at an affordable cost, over five to ten years this could transform both Poland`s national security (as well as that of other regional neighbours) and its public finances.

Poland has recently awarded 44 concessions for exploring and exploiting shale-gas, among the lucky winners were some of the world`s leading multinationals such Chevron, ConocoPhilips, Exxon and Marathon. In August 2009, ConocoPhilips signed an agreement with Lane Energy to evaluate several promising shale gas licenses in Poland, which Lane Energy had obtained in October 2007 in respect of around 1 million acres in the Baltic Basin.

Based on existing usage, Poland could, in future, dramatically curb imports – around 11 % of Poland`s imports of circa US $ 210 billion constitute minerals, principally oil and gas, and Russia accounts for just under 10 % of total imports, and also seek to generate significant export earnings from sales to its regional neighbours. This would lead to a reversal of its current trade deficit. Providing there is clear and transparent legislation and a nonpunitive tax regime, Poland might be able to enjoy a nice little earner in the form of future royalties and corporate tax receipts. This could also positively benefit Poland`s public finances.

All to the good, but Poland is still at the early stages although initial signs are promising. To exploit the shale-gas requires a combination of hydraulic fracturing and horizontal digging – a technique that is in common use in the USA where exploration companies have moved quickly to exploit the huge resources there. According to the recent issue of “The Economist”, the US may well have passed Russia in becoming the largest gas producer in the world on the back of the country`s own shale-gas deposits. The cost of extraction is relatively high, there may well be significant costs arising from damage to the environment and of course the rate of development and exploitation could be affected by future gas prices. Of interest here is Gazprom`s decision recently, in the light of increased competition from Norway and spot-market supplies, to amend some of its longterm supply contracts in Europe to allow a portion of sales to be linked to the spot price.

It is expected that the results of well testing in Poland should be released during the course of this year. Given Russia`s own heavy reliance on Gazprom to support its economy, Russia will be paying close attention to what develops in Poland that might affect its own core business. In January of this year, Poland extended an agreement with Gazprom to supply upto 11 billion cubic meters of gas per year, depending on Polish market demand, upto 2037. Perhaps before too long, Poland itself may seek renegotiation of the longterm agreement?

No time to crack open the bottle of champagne yet!

In 2009, Poland, alone of all the EU and most of the industrialised world, managed to register an increase in GDP of 1.7 %. In addition, it is projecting further economic growth this year of 2 % or more. Furthermore at a time when many countries, in particular, Greece, have come under scrutiny for their level of indebtedness, Poland looks on the face of it to be safe - the "P" in the grouping of "PIGS" - those falling under chilly gaze of speculators, hedge funds and "Gnomes of Zurich" (relocating from London to enjoy a more favourable tax regime), is filled by Portugal not Poland - the others being Ireland, Greece and Spain. Poland`s current debt as a share of GDP is just 50.5 %. That is comfortably midrange - Spain is a little lower at 49.7% but that country has a raft of problems such as 19 % unemployment and other sundry problems, while Greece`s is 113.2 %. Just to round off the comparisons - the average of the EU 25 is 72.3% while the UK`s is 63.4%.

So far, so good and I think it would be churlish to deny the government a little pat on the back for not allowing the economy to "boom and bust" as others have. Poland`s Minister of Finance was in fine fettle earlier this week, as demonstrated by his interview for the "FT". He couldn`t, of course, pass up the opportunity of reminding others in the EU "to get their finances in order" and "buck up and cut out the fiscal stimuli and other "voodoo economics". But, as so often seen in life, such hubris can be followed by nemesis, although whether this a quick one-step or a more prolonged drawn out affair, only time will tell. For one statistic not so well known may give all of us some pause for thought.

According to data prepared by Jagadeesh Gokhale of the Cato Institute, the current and future pension obligations of Poland amount to an eyewatering 1,550.4% of GDP! Greece`s own figure is 875.2 % and the EU 25 average is 434.2%. The UK`s is 442.1%. Poland`s nearest rival is Slovakia with 1,149.1%. In other words, Poland is in a class of its own but not one many other countries would wish to imitate. On another level, it also suggests that looking alone at government debt, everyone may be missing the real threat to our future, and to our children and grandchildren`s standard of living - the cost to support us as we all retire.
Poland`s problem has been exacerbated by the relaxed treatment provided to people in the 1980s and 1990s in terms of taking early retirement and a full pension - a disguised form of unemployment not reflected in the then already reasonably high figures. Starting in January of this year, the Government started to reduce the pensions of tens of thousands of functionaries of the former regime by around a half. It has been reported that some were receiving pensions of around EUR 2,000 per month. One might say in passing that the government presented this as a delayed form of justice for those who were part of an illegal regime who declared martial law and cracked down on Solidarity etc etc although one suspects that economic motives were more than likely prominent in the decision.
Poland may yet still need to consider other drastic courses of action - a further increase in the pensionable age, reduced benefits etc if Poland is to escape the fate of "Greece on the Baltic"...