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Stratfor: the Past, present and future of Russian energy strategy
Material posted: Publication date: 19-02-2013

Russia's ability to remain a global energy supplier in the future, as well as the force that gives the Kremlin the Russian energy sector, today, are becoming increasingly questionable. After ten years of strong energy exports and a larger income Russia reduces the price of delivered gas to Europe, and forecasts the revenues of its energy giant Gazprom since the beginning of this year are declining, " writes the American edition of Stratfor.

Russia has the world's largest proven reserves of natural gas and periodically replaces Saudi Arabia at the head of the list of leading oil-producing countries. This country provides one-third of European demand for oil and gas, and starts to increase exports to the markets of East Asia, the energy-hungry. Energy sector to Moscow, it is something more than just a commercial asset. He was for a century is one of the pillars of the stabilization of Russia and the source of its growing power. The Kremlin has called energy security the main component of Russia's national security, especially due to the fact that recent changes in domestic and global trends cast doubt on the strength of the energy sector.

The Russian energy sector was intensified, then weakened throughout the history of the country. The management of this cycle was put at the forefront of Russian domestic and foreign policy in tsarist times. And now it is a historical burden rests on the shoulders of Vladimir Putin's regime.

Russian imperatives and the energy factor

Russia is at its core a vulnerable country because it is surrounded by other great powers, and its boundaries are not very favorable to the defense. In addition, Russia has a huge, mostly dreary and inhospitable territory, inhabited by various ethnic groups that have long been at odds with the Central government of Moscow. In this regard, she is faced with the pressing need to maintain its integrity as a state and to strengthen its position as a regional power. First, Russia needs to consolidate their society under a single authority. Secondly, it is necessary to extend its authority for the immediate geographic surroundings to create a buffer zone as protection from the other powers. (The formation of the Soviet Union is a clear example of this imperative in action.) And finally, she must skilfully use their natural resources to ensure equilibrium with the great powers beyond its periphery.

To achieve these goals, Russia throughout its history has used a variety of means from export of agricultural products to outright military conquest and intimidation. Since the end of 1800-ies Russia was included in the inventory of the important means to achieve its major strategic objectives of the national energy resources. By the mid-20th century, the Russian energy sector has become one of the main foundations of its economic and political power.

Revenues from exports of oil and gas shows how the energy sector has allowed the Kremlin to hold the country together. Revenues from energy exports began to flow into the Treasury of the Russian Empire in the late 1800-ies. Export revenues from the sale of oil was at that time 7% of the total revenue derived from exports. In the late 1920-ies, that is, at an early stage of existence of the Soviet Union, this figure rose to 14%. And 1950-th years of the state budget is already half replenished by energy revenues. This influx of capital was and remains an important tool in helping Russia build the military and industrial base necessary to maintain the status, if not global, at least regional powers. However, because the Russian government became dependent on energy, these revenues makes it extremely vulnerable.

In addition to providing export revenues the energy sector contributes to the creation and preservation of internally stable and industrialized state. Domestic energy consumption in Russia is huge, due to the very cold weather prevailing most of the year. But despite the inefficiency of the energy sector, large energy losses and high cost of its production, the internal reserves of the country allow Moscow to maintain low energy prices for their citizens and the businesses where they work.

The energy sector also strengthens Russia's ability to extend its influence to the immediate neighbors. Moscow different uses its energy resources as leverage in the buffer States. Here and control over energy production in the regions (which previously existed in the oil fields in Azerbaijan and Kazakhstan), and energy supplies at a discount to neighbouring countries, and control over their energy transport infrastructure. The same strategy Russia used in the construction of relationships outside of the former Soviet Union. For example, this country is one of the two main suppliers of energy to Europe, and besides it is the only European supplier with large reserves of oil and gas, and has long been selling them at competitive prices. Physical conjunction of Russia with Europe and its ability to understate prices, forcing out all their competitors, have become the basis of its relationship with many European countries.

Evolution of Russian energy strategy

The usefulness of energy as a means of achieving three main goals of Russia changed over time because Russia had to adjust its strategy based on changes in the internal and world situation. The advantage of Moscow is its flexibility in the management of the energy sector.

The importance of the Russian energy industry was proven in the late 1800s, when the monarchy saw a huge potential for strengthening of the Russian Empire, which consisted in large-scale development of the energy sector. However, the Empire had neither the technology nor the capital to create a domestic energy industry. The monarchy has found a solution, removing restrictions on foreign investment and inviting European and American companies to develop oil fields in Baku and the Volga region. Began a brief period of warming in relations between the Russian Empire and its Western partners, in particular with Britain, France and the United States. All parties soon realized that the only way to make the Russian oil business is highly profitable, despite the high costs associated with a harsh climate and vast distances, is to increase production. At the turn of the century, the Russian Empire was producing 31% of global exports.

With the increasing importance of the Russian energy sector, it became clear that he is having a huge impact the internal stability of Russia. The Bolsheviks in the early 20th century used the energy sector in their attempts to overthrow the monarchy. The oil-producing regions were the main centers of activity of the Bolsheviks, because the mining industry was one of the few where the workers were well organized. In addition, the Bolsheviks used the network of Railways, which transported the oil to spread promotional materials around the country and abroad. In 1904, when the Empire brutally suppressed the uprising in St. Petersburg, protesters from among the Bolsheviks set fire to the oil fields in Baku. This has led to reduction of Russian oil exports by two-thirds. Moscow and foreign markets realized how much of the oil export from Russia depends on its internal stability.

Modern Russian energy strategy began to emerge after the Second world war. When the Soviet Union became one of two global hegemons, towering over a divided Europe, Moscow felt that now nothing could prevent it to establish its supremacy in the field of global energy. In the period from 1950 to 1960-e years, oil production in the USSR doubled, and the Soviet Union once again became the world's second largest oil-producing state and a major supplier of this fuel in Eastern and Western Europe. The revenues from oil exports again amounted to almost half of total exports from the Soviet Union.

As the Soviet Union was producing oil in large quantities, and the cost of labor under the Soviet system was low, Russia could sell its oil at prices that were nearly 50% lower in the middle East. Selling oil at discount prices to the countries of the Soviet bloc and then to Western Europe, Moscow has weakened Western regimes and to strengthen its position in its own periphery. The CIA called this the strategy of the Soviet economic offensive. The advice was more important not to make money (although the money they earned too), but to form its sphere of influence, weakening the West. This strategy entailed considerable costs, since Moscow received less revenue than they could, and the oil extracted is inefficient, quickly draining their fields.

In 1970-e years the price of oil rose to heaven due to a succession of crises, which occurred mainly in the middle East. At the same time, Russia has already started to feel how difficult it is to keep on his shoulders the huge Soviet Union. The regime of Soviet leader Leonid Brezhnev faced a choice: take advantage of high world prices, to raise them to Eastern Europe and to obtain an economic benefit, or to continue to subsidize Eastern bloc, tying it to Moscow and not allowing him to think about other sources of energy. It was a choice between the two immutable responsibilities: maintaining internal stability in the USSR and the preservation of the buffer zone. As a result, Moscow decided to defend their interests and in 1975 raised the price of oil to their customers. Next she raised them in accordance with rising prices in the world markets. By 1976, oil prices in the Eastern bloc grew almost two times. They remained below the world, but had risen high enough to force some countries of the bloc to take loans.

Tips to the middle of 1980-ies tried to maintain a high level of income from the sale of energy. During this period at the expense of such sales, the Union received almost half of foreign exchange earnings. But in the mid-1980s, the Soviets received a double blow when oil prices dramatically fell and the West imposed an embargo on Soviet oil, which markets have filled their fuel Saudi Arabia. Moreover, the Soviet Union greatly lagged behind the West in technology, especially in energy and agriculture. In response, starting in 1985, the Soviet Union began the transition to a market economy in the field of energy, raised prices for countries of the Eastern bloc, demanded to pay for fuel in hard currency and allowed foreign companies to return to its energy sector.

But changes in Russia's strategy was shallow and belated. With their help, failed to prevent the collapse of the Soviet Union. During the decade that followed the collapse of the Soviet bloc, the energy sector of Russia was in a state of chaos. Initiated under Mikhail Gorbachev in the 1980-ies of the energy liberalization took extreme forms, when in 1990-ies the country was ruled by Yeltsin. As a result, the production fell by half, and the Russian energy sector is divided between a foreign Corporation and in increasing the time the class of Russian oligarchs.

The situation changed in 2000, when he came to power Vladimir Putin. One of the first tasks on the agenda of Putin in the framework of the stabilization of the country was the consolidation of the energy sector under state control. This meant a radical change in the liberal policy, initiated two decades earlier. The government essentially nationalized a large part of the energy sector, giving it control of three state giants: Gazprom, Rosneft and Transneft. The Kremlin began more aggressive negotiations when concluding supply contracts with the former Soviet republics and Europe. He forced them to buy large amounts at extremely high prices, because these buyers had no alternative supply. The Kremlin also began to cut off the supply to some markets, thus attempting to influence other political negotiations. While the blame for the termination of the supply he laid on creating problems of transit States such as Ukraine.

Although the energy strategy of Moscow became quite aggressive, she has helped strengthen and stabilize Russia. Revenues from the sale of energy in Russia began to grow rapidly thanks to the rise in world oil prices and high natural gas prices, which the Kremlin has set for Europe. Russia has extra funds, which she began to invest in the political, social, economic, and military spheres. Energy policy also helped Moscow to increase its influence in the former Soviet Union and Europe was forced to retreat and abandon counteract the resurgence of Russia. Of course, those financial crises that swept Europe and Russia in 2008, Moscow recalled how much she needs her largest buyers of energy, when oil prices are falling, and the demand begins to decline.

The issue of maintaining the Russian energy sector

Most of all Russia is concerned about its dependence on fluctuations of energy prices. Because the Russian budget is half filled due to sale of energy (the share of oil in this quantity accounts for 80%, while the share of natural gas 20%), the state may be seriously affected in case of a fall in energy prices. The Kremlin has lowered its budget projections on oil prices from 119 to 93 dollars per barrel, although even at that price, the government is risking. Stratfor is not engaged in the forecasting of oil prices, but historical patterns show that large international crises and changes in global consumption and production have a significant enough impact on oil prices and on the income of Moscow, contributing to the destabilization of the country.

The revenues from exports of natural gas are currently also under question. Europe, which is the largest Russian consumer of its fuel, it starts to receive gas from other sources, from-for what the Kremlin has in recent months forced to cut prices. This year Gazprom can lower prices to European consumers by a total $ 4.7 billion, representing approximately 10% of the net income of the Corporation.

In its current form, the Russian energy sector is experiencing a heavy load. Consolidation of the industry is controlled by two large state corporations, the Kremlin gave a lot of advantages. But after a decade of consolidation in the industry began to accumulate the disadvantages. Russian gas giant Gazprom, without any competition, lagging behind in technology and is considered unfavourable by the company to invest in its foreign investments. Russian oil giant Rosneft recently began to turn into a large monopoly like Gazprom, and therefore may fall into the same trap. Since the implementation of future energy projects Russia will need more advanced technology (because to implement them have in remote areas and in harsh climatic conditions) and more capital, Gazprom and Rosneft are in need of modernization and foreign investment.

Another important factor is corruption. According to various estimates, Gazprom due to corruption and inefficiencies, loses 20 to 40 percent of their income. Rosneft have similar problems. Such losses would be acceptable if revenues from the sale of energy was still at a high level. But if prices in future will decrease, or if the cost of maintaining and expanding the energy sector will increase, such losses will be unacceptable. The Kremlin is conducting investigations into Gazprom's structure, but because the corruption in Russia was rampant throughout its history, there was little he could do to eliminate crime in his gas Corporation.

Moreover, Europe's dependence on Russian energy is decreasing. The shortage of gas faced by all of Europe during the Russian-Ukrainian crises of 2006 and 2009, served as a grim reminder of the vulnerability of European countries and their dependence on gas exports from Russia. European countries, acting unilaterally and through the European Union, began to develop strategies that allow them to reduce both the vulnerability of Europe from disputes between Moscow and transit countries, and its General dependence on energy supplies from Russia.

One of the areas in the framework of such efforts was the accelerated creation of new and modern enterprises and facilities for import of liquefied natural gas. Due to this, some countries, especially Lithuania and Poland will gain the opportunity to import natural gas from supplier countries around the world, avoiding the impact of traditional Russian influence, which is a physical bunch. This is especially important in light of the increased development of unconventional gas sources in the world, particularly the shale reserves in the United States. Another attempt in this direction is the development of a pipeline project under which non-Russian natural gas will be supplied to the European market. Although this attempt for today at least successful, in the future it will reduce Europe's dependence on Russian natural gas.

In addition, a set of pan-European measures, including the third energy package, provides the member countries of the EU political and legal tools to weaken the dominance of Gazprom in the relevant supply chain of natural gas. This General mechanism allows the European countries more closely together to counteract certain commercial practices which they consider to be monopolistic. The latest example was the investigation of the European Commission on the issue of Gazprom's pricing strategy in Central Europe. Because of these measures, and also due to the EU-funded efforts to build connecting pipelines between the countries of Central Europe Russia becomes more difficult to use the mechanisms of the gas pricing as a foreign policy tool. This is an important change of the last decade. Earlier Moscow as a reward for closer ties with Russia reduced countries the price of gas (for example, Belarus), while increasing them to those States, which provided her disobedience (e.g. the Baltic States).

And finally, Russia is facing yet another simple, but pretty grim prospect: strengthening of financial and political crisis in Europe will lead to lower energy consumption on the continent or, at least, prevent the increase of consumption in the next decade.

The next step of Russia

The Putin administration is well aware of the challenges which are thrown the Russian energy sector. Russia's attempts in the past decade to reduce its dependence on energy exports through accelerated industrial development was not crowned with much success, and the country continues to tie their fate with energy. The Russian strategy of using energy exports as a foreign policy tool and income generator sometimes causes contradictions. To use energy as leverage in foreign policy, Moscow should be able to lower or raise the price and threaten to stop supply. And this is extremely negative impact on the export profits.

Global and regional conditions have changed so much that Moscow has to make a choice between foreign policy and economic aspects of its energy strategy, defining priorities. And she clearly decided that getting income is much more important. The Kremlin has begun to develop a set of measures aimed at adapting the country for the changes that will occur in the next twenty years.

First, Russia is trying to eliminate a very dangerous limbo in her relationship with key transit countries, which have always enabled her to supply energy to Europe. The construction of the oil terminal in Ust-Luga on the Baltic sea will allow Russia to bypass Belarusian pipeline system supplying crude oil and petroleum products to consumers directly. Laying of the Nord stream gas pipeline under the Baltic sea, and South stream through the Black sea will give Russia the opportunity, if necessary, to pump gas bypassing Ukrainian and Belarusian transport systems. These two pipelines will be mainly to provide gas supplies to major European customers in Germany and Italy, with which Russia seeks to maintain long-term strategic partnership.

The bypass system will allow Russia guaranteed to provide gas to their major European buyers, which means that Moscow will continuously receive this vitally important revenues from the supply of energy resources. This flexible strategy of energy exports will increasingly deprive Minsk and Kiev of leverage with Moscow, and Russia will have additional opportunities to transform Ukraine and Belarus in the vassal buffer state. This is one of the few political goals, which Moscow still intends to seek, within the framework of its energy strategy.

In addition, Moscow adapts its energy strategy to the new conditions, when European consumers are increasing measures of diversification and liberalization. Gazprom began to expand its policy of price discounts on gas, which he previously conducted solely with respect to strategic partners, such as Germany and Italy. The Kremlin understands that his only hope for saving gas revenues in the face of possible global revolution in shale gas is long-term contracts with consumers at competitive prices. Moscow will continue to show that it is able to offer European buyers a large guaranteed volumes and delivery at competitive prices that can rarely afford suppliers of liquefied natural gas.

And finally, Russia pays great attention and allocates significant resources to the development of relationships with growing energy markets of East Asia. She diversifitsirovat their exports, hedging in case of problems on the European market will be strengthened. All of the policies that Russia intends to implement in the next decade, have one thing in common: their implementation will require significant funds. Only one oil pipeline ESPO (East Siberia – Pacific ocean) will cost about $ 15 billion. Despite the negative effects of the financial crisis in 2009, Russia still has huge financial reserves that are designed to implement such large-scale projects. But these funds are not infinite.

It seems that the Kremlin is well aware of what problems and challenges Russia will face in the coming twenty years, when I come to the end of the next energy cycle. Unlike Brezhnev and Gorbachev, Putin has proven his ability to develop effective changes in the policy and strategy of the Russian energy industry. The fact that Russia strongly depends on oil prices, remains a concern to Moscow. But Putin has so far proactively respond to external changes in energy consumption and in the structure of production, especially those that affect the European gas market. However, the long-term sustainability and viability of the model, to which Russia is still in doubt.

 

Source: http://www.oilru.com/

 


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