When the Berlin wall fell in 1989, it was only two short years until the Soviet Union collapsed under pressure from the West. Its economy suffered extreme hardships, falling into a depression that exceeded the U.S.'s own in the 1930s.

In fact, the first five years of transition to a free market economy saw a nearly 50% drop in GDP!

Since 2003, Russian President Vladimir Putin has engaged in an aggressive program to renationalize Russian oil and gas companies in order gain tighter control over the motherland's natural resources.

When he was elected in 1999, the Russian economy had only just started to show minor growth for the first time since the Communist collapse eight years before.

Putin's push toward state ownership of companies in Russia's energy sector has been swift. In just the last two years the government has purchased over 22 major companies . . . and of those acquisitions, 11 were in the oil and gas industries.

Those that disagreed with the strategy were handled with an iron fist that would make Stalin smile in his grave.

Take Yukos, Russia's second largest oil company, for example, whose executives rot in jail while their company is dismantled before their eyes. Other companies were threatened with the loss of their licenses.

Russia's governmental takeover of its oil and gas sectors has had a profound impact. We have always known Russian dominance in the natural gas industry, which outpaces the second leading producer (U.S.) by over 66 billion cubic meters per year.

But Russian growth in the oil market is a different story.

It is currently the third largest oil exporter, shipping out more than five million bbl/day and producing nine million bbl/day, despite having only one tenth of the reserves that the Middle East holds.

A Perfect Match?

But despite Russia's tightening grip and subsequent economic surge, their Chinese neighbor to the south has outdistanced its expected growth. Chinese GDP growth is predicted to remain steady at 8.5% until 2010.

Last year it grew 10.2%.

And for the first half of 2006, net crude imports were up 17.6% from 2005.

Current data suggest that at China's rate of growth it will be consuming 21 million barrels of oil per day in under 20 years. This makes it imperative to secure future oil sources.

It seems only natural that for the past few years these two countries have been planning the development of an oil pipeline linking Siberia with the Far East. It would have the capacity to pump more than 80 million tons of oil per year. This oil flow could potentially make up as much as 15% of China's future imports.

The last thing the Chinese want is to find themselves in the position of South Korea, which must purchase all of its oil on the open market. This would not only be extremely costly but also inefficient. Without a direct pipeline, China must receive oil imports from Russia via trucks.

This joint venture between the Eastern powers has another effect. It also raises an alarm in Western countries, including the United States, threatening to reduce some of their influence.

I Will Break You

These words uttered by Ivan Drago to Rocky could well stand for the attitude that Russia and China take towards the Western powers.

As Russia and China's relationship continues to grow, several effects may be felt by Europe and the U.S.

A potential threat could arise should Russia and certain OPEC members decide to expand by acquiring major Western oil companies like ExxonMobil. With the backing of the Russian government or rich OPEC countries, such action could be financially viable.

And certainly the U.S. economy remains vulnerable to its own growing energy demand.

But would Russia actually take advantage and act in such a bold, even rash manner?

Well, just one glance at their track record will show you they have no fear of exploiting their position.

Russia just had a showdown with its neighbor Belarus. As it attempted to impose an increased export duty, Belarus tried to fight back. Russia quickly countered with the threat to completely cut ties with Belarus, in a maneuver recalling the time when it hiked gas prices to Georgia by exorbitant and unreasonable amounts in order to bring the Georgians to heel.

Just today, though, Belarus struck back by announcing it would impose a $45/mt tax for the transportation of Russian oil through the country. As I write, Russia has not yet given a response, but we will soon know time if it decides to play hardball.

One's Loss May Be Another's Gain

The emergence of a Siberian-Chinese pipeline will have important ramifications for the oil industry, and the current renationalization of Russian energy companies will cause a power shift among global energy players. Just imagine the numberless scenarios that could play over the course of the next few years, when the world's ever-growing energy demand tightens its grip.

So what's in store for us?

Two things will be revealed by the next moves from Russia and China: Will they exploit certain potential advantages should things go their way? And where can we turn should things go sour?

Only time can . . . rather, will tell.

Until next time,

Keith Kohl