Feature

R.I.P, WTO

Why 2010 could mark the death of the global trade system as we know it.

Someday historians may look back on 2010 as the year the global trade system died -- or contracted a terminal illness. A pledge by world leaders to complete the Doha round of global trade negotiations this year looks increasingly likely to end in yet another flop, and that would deal a crushing blow to the trade system as we know it.

Of course, commerce will continue across national borders, and one-off deals between countries will still happen. But the slow-but-steady, across-the-board opening of markets that has fueled growth for decades is grinding to a halt. After eight painful years of standstill and failure, with each meeting just a shoveling of intractable problems forward to the next, the Doha talks might collapse once and for all in 2010, possibly taking the World Trade Organization (WTO) down in the process.

Yes, negotiators could once again defer the day of reckoning by setting a new deadline and resolving to try again later -- just as they've already done in Cancún, Geneva (three times), Hong Kong, and Potsdam. But they're running out of chances. No less an authority than Stuart Harbinson, the former WTO General Council chairman who played a key role in the round's launch in 2001, wrote recently: "This time ... the crisis is real. Too many deadlines have come and gone and the WTO simply cannot afford a repeat. The fundamental credibility of the institution is now at stake ... 2010 is a real deadline."

That's dangerous, because for all its failings, the WTO is a rare international organization that works as intended. The Geneva-based trade group is the current embodiment of the system established after World War II to prevent a reversion to 1930s-style protectionism and trade wars. Its rules keep a lid on its member countries' import barriers, and members take their trade disputes to WTO tribunals rather than imposing tit-for-tat sanctions on each other's goods. In addition, the WTO is the guardian of the most-favored-nation principle, which requires members to treat each other's products in a nondiscriminatory fashion -- a valuable bulwark against the sorts of trade blocs that can lead to friction or even military conflict.

If Doha falls apart, the WTO's ability to continue performing its vital functions would be imperiled. If it can't forge new agreements, how long before it loses its authority to arbitrate disputes? The trade body won't disintegrate overnight, but the danger is that its tribunals will be weakened to the point where member countries start ignoring WTO rulings and flouting their commitments.

Without negotiated settlements of contentious issues, litigation will almost surely spread like wildfire -- a potentially explosive situation. On climate change, for example, some in the United States and Europe want to impose "green tariffs" on goods from countries that aren't reducing their carbon emissions fast enough (read: China and India). In the absence of clear rules, China and India would have plenty of leeway to challenge such tariffs, putting WTO tribunals in the terribly awkward position of having to decide: Are such tariffs illegal, meaning that free trade trumps saving the planet? Or, if the tariffs are legal, should the Chinese and Indians have the right to slap duties on goods from Western countries, which they blame for creating the global warming problem in the first place?

Sadly, even in a best-case scenario for 2010, with Doha ending in a deal, the global trading regime might still be doomed. The round's initial goals -- making globalization work for the billions left behind by eliminating the farm subsidies and tariffs that adversely affect the world's poor -- have become so laughably implausible that completing what's left of an agreement will prompt a painful reckoning. The deal on the table has been so watered down by negotiations that it cannot be credibly said to work wonders for the poor, or even effect much change in how global trade takes place. The gap between the result and the initial aspirations will prompt legitimate questions about why so much time was required and whether the WTO has any future as a negotiating forum.

What an irony that would be for President Barack Obama. Despite making multilateralism a keystone of his foreign policy, he may preside over the marginalization of the most successful multilateral institution of all.

FABRICE COFFRINI/AFP/Getty Images

Feature

Paper Tiger

Russia's corporate giant Gazprom inspires anxiety among those who suspect it of doing the Kremlin's geopolitical dirty work. But changes in the global economy are threatening to rob the company of its mojo.

Back in July 2008, the government of the Czech Republic signed an agreement with Washington allowing the construction of a U.S. radar station on Czech territory, part of then-President George W. Bush's missile-defense plans. The very next day, the Russian energy giant Gazprom cut off natural gas supplies to the Czechs, who depend on Russia for 84 percent of their gas. The Kremlin had already stated its opposition to U.S. anti-missile installations in Central and Eastern Europe in no uncertain terms, but Gazprom's move put economic bite behind the bark.

It's stories like this one that have made many in the West wary of Gazprom, the so-called "national champion" of Russia's natural gas sector. Ever since the collapse of the Soviet Union, the Kremlin has increasingly relied on energy as a card in its foreign-policy hand. You can hardly blame it -- especially when it comes to gas. Russia owns 25.2 percent of the world's proven reserves, and virtually all of those resources are concentrated under the aegis of Gazprom, making it the world's largest producer of natural gas. Although private shareholders own big chunks of the company, the Russian state holds a controlling stake of just over half the shares, and no one has ever doubted that Gazprom's managers are happy to follow government orders. No less than Prime Minister Vladimir Putin argued in his dissertation that state control of natural-resource companies (if not necessarily outright ownership) could be used to "restore [Russia's] former might." When Gazprom execs declare, as they've been known to do, that "what's good for Gazprom is good for Russia," they aren't just blowing smoke. Gazprom is the country's biggest taxpayer, accounting for a quarter of Russia's national budget.

Western worries about Gazprom's political power have been, ahem, fueled by the fact that the corporation not only supplies the lion's share of Europe's natural gas, but also controls the all-important pipelines that bring the strategic commodity to consumers. When Gazprom turns off the spigot, entire countries go dark. That happened to hapless Bulgaria, for example, during one of Gazprom's recent pricing disputes with Ukraine. (Bulgaria is 99 percent dependent on Russia for natural gas, and inordinately dependent on natural gas for home heating. When the conflict between Kiev and Moscow shut down the east-west pipeline to punish Ukraine, Bulgarians ended up freezing.)

And that was only logical, says Harvard University professor and long-time Russia-watcher Marshall Goldman: "Gas is not as fungible as oil. With gas you're limited to the pipeline. And the owner of the pipeline has a monopoly along the route." In Central and Eastern Europe, more often than not, the owner is Gazprom. The company boasts a network of 95,000 miles of pipelines -- enough to circle the globe four times -- that it runs from a huge control room in its headquarters in southwest Moscow.

Small wonder that, during the years of high energy prices, Gazprom became a world-beater. In 2008, its market capitalization ballooned to $300 billion, making it the third-largest company on the planet, bigger than Shell, Microsoft, or General Electric. Gazprom used its economic muscle and its control of Eastern European pipeline networks to embark on a shopping spree, snapping up chunks of energy companies around Europe. Former German Chancellor Gerhard Schroeder signed up to run a Gazprom-affiliated company soon after leaving office. And Gazprom execs touted grandiose plans to push into far-away markets in the Americas and Southeast Asia.

What a difference a year makes. The global economic downturn has hit Gazprom shockingly hard. Not only did the worldwide demand for energy crater, but doubts about market turbulence in Russia also spooked investors. The two trends have put the gazmeny in a bind. Whereas more diversified energy corporations have managed to weather the storm, Gazprom's market valuation dropped to just $90 billion, and its global rank in terms of size dropped from third to somewhere in the low 30s. Some analysts compare its slide to the popping of the dot-com bubble at the turn of the century.

Now, Gazprom has had to scale back some of its more ambitious plans -- even as the company acknowledges that it urgently needs to upgrade aging infrastructure and develop new sources of production. "At least until 2013 things are going to be tough," says Jonathan Stern, a leading Gazprom expert at the Oxford Institute for Energy Studies. European demand has collapsed to such an extent that some customers aren't even taking the amounts stipulated in their contracts with the Russians -- raising the prospect that Gazprom might need to try to fine them for not filling their orders. It has served as a salutary reminder that Gazprom is just as dependent on those pipelines as its customers are. In the past, the company has depended on sales in Western Europe for some 60 percent of its revenues. Without them it suddenly doesn't look quite so strong.

One might reasonably object that Gazprom's fortunes will revive once a global economic recovery spurs renewed demand for energy. Yet some experts argue that something fundamental has changed. "[T]he global gas market has steadily moved from a seller's to a buyer's market," writes analyst Roderick Kefferpütz in a recent report for the Centre for European Studies. The pre-crisis era of high energy prices spurred a worldwide investment boom in expensive liquefied natural gas infrastructure, and in 2009, some experts say, those investments helped create something that didn't really exist before: a truly global market for natural gas, independent of pipelines.

"Ten years ago no one could suggest that Australia could sell gas to Europe or the United States," says one analyst at a Western investment bank whose company didn't authorize him to speak on the record. "Back in 2000, gas was not a globally traded commodity. This is the year that changed." The trend has also been driven, he says, by an enormous boom in the extraction of natural gas from shale in the United States and Canada. "Gazprom executives call shale gas production a 'myth,'" the analyst says. "I don't think they realize how dramatically the gas market has been transformed."

The result, as the International Energy Agency's latest World Energy Outlook report puts it, is a "looming gas glut" that "could have far-reaching consequences for the structure of gas markets and for the way gas is priced in Europe and Asia-Pacific." Europe, meanwhile, has been pushing ahead with the liberalization of its energy markets, quietly providing for greater competition in the once-stolid sector. The Europeans have started building pipelines to "energy island" countries, like Bulgaria and Hungary, which were previously dependent solely on Gazprom. The Europeans are also pushing ahead with long-term plans for the Nabucco pipeline, which aims to widen European market access to suppliers in the Caspian Sea region (who currently pay to use Gazprom's pipelines) and the Middle East. That wouldn't obviate the need for Russian gas, but would certainly help reduce the dependency.

None of this, of course, means that Gazprom is sliding into insignificance. The sheer immensity of its existing reserves will see to that. "If you want to be a player in the gas business, you'd better make sure you have some sort of relationship with Gazprom," says Stern, who remains decidedly bullish about the company's medium- to long-term prospects. What it does mean, though, is that Russia's national champion will find itself facing an increasingly unpredictable energy environment. Natalia Milchakova, senior oil and gas analyst at the Otkritie Financial Corporation, sees the biggest risk for Gazprom in coming years in its own domestic market, where government regulations have long kept prices artificially low for Russian consumers. Gazprom has been pushing for years to have domestic prices raised to market levels. But the Kremlin, clearly fearing the likely effects on social stability, has kept postponing the sort of major liberalization that would really boost the company's bottom line.

In any case, the apparent trend toward a more global market for natural gas should be good for Gazprom. Over the long run, anything that gets Gazprom behaving more like a normal, commercially oriented energy company, and less like the Kremlin's favorite political proxy, is probably good news for Gazprom shareholders. And maybe, just maybe, that wouldn't be so bad for Russia, either.

ALEXANDER NEMENOV/AFP/Getty Images