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Caspian, Caucasus, Central Asia, Energy Diplomacy, Europe, International Relations, Pipeline, Russia

Importance of Energy in the Economy of Russian Federation


Economic Profile of Russian Federation in the Energy Context

“Modern Russian economic system has a long historical background. The first coherent state ideology (autocracy, orthodoxy, and nationalism) of Russian government was developed by Czar Nikolai I. Russia needs strong leader (like Ivan Grozny, Peter the Great, Catherine II, Lenin, Stalin and Putin) in order to remain stronger both politically and economically. As the political leader is weak, the state also is getting weaker. Vladimir Putin enhanced the role of government in the economy as soon as elected the President of Russian Federation.” [1]

“Economic and financial crisis hit Russian economy as well in 2008-2009. The sharp fails in oil prices hog-tied Russian economy. However, the most considerable problem in the country is the dependence of state from oil and gas revenues and the huge share of energy revenues in GDP (Gross Domestic Product). Therefore, future of country depends upon how Government will manage its energy giant – Gazprom. Because, there is a belief that Russia is seeking to use its energy resources in order to be superpower in the world. It is obvious in his relationship with its neighbors (Ukraine, Belarus). In this regard, European countries have gone to seek alternative sources. However, this behavior of Russia might cause with losing its clients. Notwithstanding, Russia is a regional power, he does not have enough potential (enough resources for a long-run and its dependence on foreign energy markets) in order to be global superpower.” [2]

“One can frequently see in the media the headlines such as “Putin – New Czar”. Because, it’s considered that, Russia will replace Saudi Arabia and OPEC in oil market. In fact, Russia does not even have enough energy resources like Middle East countries have. There is no need to discuss it while comparing energy potential of Saudi Arabia, Iraq, Kuwait, United Arab Emirates and Iran. However, the burning process in the Middle East, increasing instability, global pollution and climate changes drew the attentions to the clean and cheap natural gas reserves of Russia. Energy is the most prominent wealth that USSR left for Russia behind after its collapse. Those reserves give a voice to Russia in the region and the world.

After the establishment of the Russian state-owned oil company Rosneft, petrol sector privatized. Respectively, LUKoil, YUKOS and Surgutneftgas were established. In general, 11 petrol companies were established on regional basis (Tatneft in Tataristan, Sibneft in Siberia). Russian petrol oligarchs (Michael Khodorkovsky, Boris Berezovsky and Roman Abramovich) mentioned their names in Russian economy during first decade. Nevertheless they didn’t have any experience in Soviet oil industry, they managed to stay on the stage till Putin’s administration because of their financial supports to the political parties of Government.” [3]

“Russia is beholden its economic development to private companies, but nationalization policy changed everything after 2005. Yukos, Sibneft, Russneft, Vankor, United Heavy Machinery, VSMPO-Avisma, and Sakhalin Energy companies are nationalized.

“Future of Russian energy sector is very important for Russia in order to remain as a nation-state and for Russian economy. After the collapse of socialist economy, Soviet energy industry turned out to state companies – coal ministry became Rosugol, electricity ministry became United Energy System, and gas ministry became Gazprom. Some portion of oil industry concentrated in the hands of independent companies.” [4]

Yukos case in 2003 became the political transformation for Russian foreign policy. On 25 October 2003, Michael Khodorkovsky, former CEO of Yukos, was sentenced to eight years in prison because of tax evasion crime. Confinement of M.Khodorkosvky for tax evasion meant the emergence of “tax terror” in Russia.

“One of the main reasons of the Yukos case and imprisonment of Khodorkovsky was desire of Yukos to construct its own pipelines and this meant the end of state monopoly in the energy sector. Because, oil and gas pipeline monopoly is under the control of Russian state-owned company Transneft.” [1]

All those cases resulted with development of Gazprom as a “National Champion” due to Putin’s plan. Production of Gazprom was at the lowest level for a long time. After Gazprom owned independent gas companies and forced them to restrict their production, its production increased. Moreover, U.S investors lost 12 billion USD as the result of Yukos case and did not get any compensation. Therewithal, BP was forced to give its Kovykta natural gas field in Siberia to Gazprom. Gazprom also owner of half of the RosUkrEnergo. RosUkrEnergo is the company that enabled to transport Turkmen natural gas through Ukraine to Europe.  The one of the main aims of Russia is to gain the pipeline system of its clients.” [5]

 Energy Sector of Russian Federation

“Development of oil and gas industry in Russia begun with the financial investments of Rothschild family and Nobel Brothers. In this times, natural gas was used for only lightening means. Till World War II Russia does not have long-range pipelines. U.S. was more developed country than Russia during these periods. Therefore, Nikyta Khrushov prepared new strategy for 25 years in order economically to reach U.S. Development of oil and gas industry was the core of this strategy.” [6] “And the first gas field in Russia was discovered in the Elshanka village of Saratov district of Russia in 1941 and was utilized in 1942.” [7]

While analyzing the distribution of oil and gas over the world, one can see that majority of proven (producible) oil reserves were concentrated in Middle East, but natural gas in Russian Federation. Russia is one of the richest countries of the world in terms of natural resources. Russia owns 30-35% of natural gas reserves and 10% of oil reserves and he is the first world country with its 47 trillion cm natural gas reserves. “Other sources claims that, proven natural gas reserves of Russia are 43 trillion cm (48 tcm), second country with its coal reserves (220 billion tone), and eighth country with its oil reserves (12 billon tone).” [8]

“According to the statistical data of Statistical Review of World Energy 2005 issued by BP, Russia owns 72.3 bln. barrel crude oil and 48 trillion cm natural gas reserves (2004’s data). The natural gas sector of Russian is under the de-facto monopoly of Gazprom.” [9]

“Nevertheless Gazprom exports natural gas to different directions, all of that natural gas is not provided by Russian fields. Gazprom buys the remaining gas (totally 60 bcm.) from Turkmenistan, Uzbekistan and Kazakhstan. The EU countries are the main consumers of Russian gas. Their dependence dramatically increases, as they increase their gas consumption. Gazprom is also co-manager of the dozens of companies and pipeline systems in and out of Russia.” [10] “Gazprom also penetrates to the activities of Itera and Novatek companies in order to enlarge its scope.” [6]

“In fact, Russian economy still remains dependent on energy sector since 1990s and he needs a great investment package in order to develop its vast energy fields. The oil and gas sector of Russia is the main creditor of state economy and this sector provides credits for private companies and National Bank.” [11] “Actually, Russian economy (budget) is extremely dependent on oil and gas market and the revenues comes from energy sector owns a great share (20%) in GDP and increase of energy revenues causes with surplus of state budget. According to some analysts, over-dependence can draw Russia to Dutch Syndrome.” [12]

“Russian modern oil sector emerged as a result of unification of oil producers and oil manufacturing plants in Rossneftgaz association created by the Ministry of Oil Industry in 1992. Association later turned to Joint-Stock Company, 51% shares of Company determined as a federal property, and remaining shares distributed among the personnel of company and sold in auction. Re-emergence of Russian oil industry launched with the unification of developed oil companies of Russia such as LUKoil, Yukos, Surgutneftgas, TNK, Tatneft, Sibneft, Slavneft, Rosneft, Bashneft and Sidanco. In 1995, was established Tumen Neftyanaya Kompaniya (TNK) and Alfa Group & Access Renova Group got the control over TNK during 1997-1999 years and TNK joined with BP in 2003. This was the biggest foreign capital in Russia which even supported by Putin. However, increases in the gas operations of the company begun de-facto to hamper the activity of Gazprom. According to the calculation of the Russian officials TNK-BP hijacked the taxes more than one billion. Another company was the Sibneft which created with order of former president Boris Yeltsin. Notwithstanding, Sibneft and Yukos was planning to be united, their plans was not implemented.” [13]

“Another important energy actor in Russia is state-owned company – Gazprom which has a great significance even for foreign countries. Since the Gazprom was the private project of Vladimir Putin, he paid great attention to the activities of Company and placed his best friends (Aleksei Miller, Igor Sechin, Dmitry Medvedev and etc.) in the senior positions. “Gazprom is a unique phenomenon in the political life of Russia. The revenues of Gazprom are 2.5 times more than the military expenses of Russia. Therefore, Gazprom considered as a core of Russian economy. Company plays a key role in the global energy markets. The oil and natural gas production of Gazprom constitutes the 5% of the global energy production, %8.3 of the global oil and natural gas production, and 20% of the world natural gas production. The 50% of the EU gas consumption was supplied by Gazrom.

However, Russia decreased natural gas going through Ukraine to Europe from 390 bcm to 350 bcm because of lack of natural gas and connected it with extreme cold weathers in Russia. But, nevertheless, Russia has the vast of natural gas reserves that enough for 80 years. However, these reserves’ fields have been located in the remote areas of Russia which still is not developed and settled.” [14]

“In order to emerge as energy superpower Gazprom enlarged its scope during the first presidency term of Putin. Gazprom bought the 75% assets of Sibneft from Millhouse Capital (which considered that owned by Roman Abramovich) in 2005. It was doubtless that this operation was realized by Putin.

“Sogaz” was one of the biggest insurance companies under the ownership of Gazprom. After the Bank Rossiya gained the control of Sogaz, company rapidly grew. Thus, Gazprom lost the control of its biggest insurance company. In 2006, Sogaz bought the pension fund “Lider” which managed by Gazprom as well.

Another asset lost by Gazprom was the “Gazprom-media”. Gazprom-media includes itself HTV, THT and other famous channels. Assets of holdings transferred to the balance of GazpromBank, i.e given to the business empire of Russian Central Bank. Later Gazprom bought back assets of Gazprom-media on 166 billion USD, when Bank Rossiya owned PEH-TV and the most read newspaper “Komsomolskaya Pravda” by then (in the framework of Gazprom-media).” [14]

Moreover, State owned 100 % of Rosneft, 50% of Slavneft, 37% of East Oil Company, and 14% of LUKoil. However, Zarubejneft is out of state control (considered under the control of Russian MFA). Furthermore, State owns almost half of Gazprom (51%), but another 49% of share is unknown (to researchers and media) that to whom it belongs. Gazprom and Rosneft also jointly established Sevmorneftgaz for exploration of the Shtokman and Prirazlomniy fields in North Sea and the fields of Western Siberia.” [3]

To sum up, all these activities, performances, and strategic games shows how energy resources and companies can be used as strategic (or political) tools in order to gain power and remain energy-superpower in and around region.

Bibliography

  1. Ozren Pilipovic, Nenad Rancic, Meta Ahtik, “Russia’s Potential for Economic Integration: Three Possible Strategies”, http://oliver.efri.hr/~euconf/2009/docs/Session4/3%20Pilipovic%20Rancic%20Ahtik.pdf
  2. Anders Aslund, Sergey Guriyev and Andrew C.Kuchins, “Russia after the Global Economic Crisis”, Peterson Institute for International Economics, June, 2010, http://www.iie.com/publications/briefs/aslund4976.pdf
  3. Fiona Hill ve Florence Fee, “Fueling the Future: The Prospect for Russian Oil and Gas”, Demokratizatsiya, Volume.10, Number 4, 2002, http://homes.ieu.edu.tr/~ibagdadi/INT435/Readings/Russia/Hill%20-%20Fueling%20the%20Future.pdf
  4. Peter Rutland, “Lost Opportunities: Energy and Politics in Russia”, National Bureau of Asian Research, Volume 8, Number 5.
  5. Anders Aslund, “The Russian Economy: More Than Just Energy?”, Peterson Institute for International Economics, April, 2009, http://www.petersoninstitute.org/publications/papers/aslund0409.pdf
  6. Nadejda Makarova, “Gazprom: Gaz Giant Under Strain”, Program on Energy and Sustainable Development, Stanford University, January, 2008
  7.  “60-letie pervogo magistralnogo gazoprovoda v strane”, 31.08.2006, http://www.gazprom.ru/about/history/events/60years/
  8. The World Bank, “Russian Federation Energy and Environment Review”, June, 2000.
  9. T.R.  Foreign Trade Undersecretariat, General Secretariat of Istanbul Exporters’ Association, “Russia Country Report”, Istanbul, 2006.
  10. Agata Łoskot-Strachota, Katarzyna Pełczyńska-Nałęcz, “Gazprom’s expansion in the EU –co operation or domination?”, Centre for Eastern Studies, Warsaw, April, 2008.
  11. Yalin Alpay, Mehmet Yavuz Ertürk, “Russia Country Analysis”, Turkey Exporters Assembly, January, 2005.
  12. Elnur Soltanov, “A Political Economy of Russian Foreign Policy: The Effects of Natural Resource-Financial Sectors on the Formation of Russian Foreign Policy in the Context of the International Market”, (Master Thesis) The Middle East Technical University, January, 2004.
  13. Robet L. Lasson, “Russia`s Energy Policy: Security Dimension and Russia`s Reliability as an Energy Supplier”, Swedish Defence Research Agency, (Scientific Report), March 2006.
  14. Boris Nemçov ve Vladimir Milov, “Putin i Gazprom”, (Nezavisimiy Ekspertniy Doklad), Moscow, 2008.

You can find the original article at the web-site of Strategic Outlook  http://www.strategicoutlook.org/asia—pasific/news-importance-of-energy-in-the-economy-of-russian-federation.html

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