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Oil and Politics in Russia

With huge oil and natural gas resources, Russia is aiming not only to maximise its economic gain from energy exports, but also to regain the countryâ??s earlier powerful position in the world. This article examines how energy has been used as an instrument to enhance Russiaâ??s global political ambitions.

Oil and Politics in Russia

Tightening Grip on Pipelines

With huge oil and natural gas resources, Russia is aiming not only to maximise its economic gain from energy exports, but also to regain the country’s earlier powerful position in the world. This article examines how energy has been used as an instrument to enhance Russia’s global political ambitions.

R G GIDADHUBLI

R
ussia is one of the major exporters of oil and natural gas in the world. With proven reserves of about 49 billion barrels of oil and presently exporting about five million barrels of oil per day, Russia is the second largest exporter of oil. It contains over 1,700 trillion cubic feet (Tcf) in proven reserves of natural gas, and holds one-third of the world’s natural gas reserves, the world’s largest. Possessing such huge reserves of energy resources, Russia’s objective has been to make economic gain when international prices have risen to unprecedented heights. It is of considerable interest to understand the policies and measures adopted by Russia to maximise economic benefits from the energy exports. It is also worth noting that Russia does not seem to be interested merely in maximising economic gain from energy exports, but also under president Vladimir Putin has larger political objectives to regain the country’s power position in the world. Hence, it is important to examine as to how energy is being used as an instrument to enhance Russia’s global political ambitions.

To get maximum benefit from the rising energy prices in the global market during the last few years, Russia has taken some important policy measures. First, it has increased the production and exports of oil and gas. This is evident from the fact that while the production of oil in the largest Russian west Siberian oil fields was stable between 1995 and 2000 at about 200 million tonnes, in 2005 it shot up to 300 million tonnes. As a result Russia’s oil exports significantly increased from 150 million tonnes in 1995 to 275 million tonnes in 2005. The production of natural gas also increased from 180 billion cubic metres in 1995 to over 200 billion cubic metres in 2005. Secondly, Vladimir Putin has tried to bring the energy firms under direct or indirect political control of the state. This is evident in the case of the Yukos oil firm, which was trying to challenge the authority of the state. According to analysts, Russian oil and gas firms such as Rosenergo, Transneft, Rosneft, and Gazprom cannot operate totally independently from the state. In majority of the cases, those who are heading these firms are said to be loyalists of Putin. Even Lukoil, which is a large privateowned oil firm, has close ties with the state. To facilitate effective political control, the share of the Russian state has been increased in the firms, which were privatised under Yeltsin’s policy of economic reform. The Russian government has 51 per cent share in the capital of Gazprom. Thirdly, it is a matter of great significance that Russia has made huge investment in oil and gas sectors of several countries including Kazakhstan, Turkmenistan, Uzbekistan (and even in Iraq before the US military action) with due support of the Russian state not for meeting the domestic energy needs, but for controlling and exporting oil and gas to global markets.

Energy has been used by the policymakers of Russia as an instrument of foreign policy both for increasing economic benefits and for enhancing political objectives of the country. According to a CIA report in 2005, Russia was well positioned to marshall its oil and gas resources to support domestic and foreign policy objectives. There are various ways in which the energy export policy has been used to serve Russia’s political objectives. It has been observed that while exporting oil and natural gas, Russia has adopted the policy of charging different prices for different countries depending upon Russia’s economic and political interests. In January 2006, Gazprom hiked the price of natural gas supplied to Ukraine from $ 50 to $ 230 per thousand cubic metres to punish Ukraine after the Orange Revolution, which reflected pro-western and somewhat anti-Russian leanings of the country. On the other hand, Russia continued to charge less than $ 47 per thousand cubic metres of gas to support the regime of Alexander Lukashenka in Belarus, which had been closely aligned with Russia. There are various economic and political aims involved in the pricing policy of Russia. For instance, Gazprom is keen to acquire energy assets abroad by offering low prices for energy supplies. This may be observed in the case of Armenia, which was another former Soviet republic with which Russia has close ties. According to an Armenian government statement in March 2006, Gazprom was to be granted the ownership of a large, but incomplete gas-fired power plant located in the central town of Hrazdan in exchange for supplying Armenia with almost $189 million worth of gas free of charge.

The pipelines for transporting oil and natural gas from Russia to global markets have assumed geopolitical and geo-economic importance. During the last few years Russian policy-makers have evolved the strategy to gain control over this infrastructure not only within Russia, but also in the neighbouring countries through which Russia’s energy resources are being exported. To export oil and gas to the west European market, Belarus and Ukraine are important transit countries since the existing pipelines pass through them. Hence, Russia has gained control over Yamal-Europe gas pipeline in Belarus and has managed to get a major stake in the Beltranshaz pipeline. Similarly, in the

Economic and Political Weekly August 5, 2006

case of Ukraine, Gazprom acquired 51 per cent share in the Rosukrenergo pipeline, but it has raised some controversy. The acting prime minister of Ukraine, Yurii Yekhanurov contended in February 2006 that there was no Ukrainian owner in this joint venture and hence, the Ukrainian authorities were probing the role of Gazprom and ascertaining who else had stake and ownership in this joint venture.

Russia has been interested in exerting influence on the former Soviet republics of the central Asian states of Kazakhstan and Turkmenistan and Azerbaijan in the Caspian region, which are also important energy producers and exporters. Being connected to the pipelines passing through Russia, these states were dependent upon Russia for exporting their oil and gas. These countries are getting due encouragement from the US and European countries, which are supporting “multiple pipeline” policy to ensure that their own energy needs are met. They have succeeded in making BakuTbilisi-Ceyhan (BTC) pipeline linking Azerbaijan with Turkey operational in 2005 to get Caspian oil bypassing Russia. But Russia has vehemently opposed this “multiple pipeline policy” of the west. Thus there is a conflict of interest between Russia and the western countries on the pipeline issue, each pursuing an aggressive policy in the central Asian and Caspian region. On its part Russia already has controlling interest over the 1,500 km. Caspian Pipeline Consortium (CPC), which connects the western oil fields of Kazakhstan with the Russian port of Novorussisk on the Black Sea. In the first week of April 2006, during the visit of Kazakh president Nazarbaev to Moscow, as a part of his strategy to win him over, Putin agreed to allow Kazakhstan to increase its exports of oil from the present 28 million tonnes to 67 million tonnes per year through the CPC, which seems to have satisfied Nazarbaev.

With the aim of enhancing its political influence at a global level, Russia has entered into a 25-year agreement with Turkmenistan and has also proposed to form an “alliance of gas producers” jointly with Turkmenistan, Kazakhstan and Uzbekistan, which will become an important international organisation to export natural gas to the world markets. In fact, during the last over a decade to serve its own economic and political interests, Russia has often taken policy decisions different from that of the Organisation of Petroleum Exporting Countries (OPEC), with regard to the quantity of production and export of oil. The interest of Russia to increase its global role in the energy sector is evident from the statement of president Vladimir Putin who asserted in November 2005 that “energy sphere takes first place in Russia’s cooperation with the Asia Pacific Economic Cooperation”.

Russia’s Huge Economic Stake in Energy Market of the West

Western Europe is an important market accounting for over 70 per cent of Russia’s total energy exports and getting much needed hard currency for the country. Hence Russia has strong economic interest in this region. To ensure more economic benefit, Gazprom, which provides a quarter of Europe’s demand for natural gas proposes to increase exports of gas to UK from 2 billion cubic metres in 2005 to 10 billion cubic metres by 2010. Similarly, Russia is an important source of energy needs for Germany. Hence the present chancellor of Germany Angela D Markel while reiterating strategic partnership with Russia, wanted that Russia should be a reliable partner with regard to energy. This comment was made in the context of Ukrainian-Russian gas crisis on the newyear eve. But as stated by London’s Financial Times on April 7, 2006, the business community and some political groups in Germany, which are benefited by wideranging economic ties with Russia including in the energy sector, do not consider that dependence on Russian gas was harming Germany’s economic interests. In fact, they do not want to hurt Russia’s sentiments by such allegations since they know that Russia provides Germany with 35 per cent of its oil and 40 per cent of its gas, with bilateral trade in 2005 valued at $ 47 billion and still growing. Apart from strong economic interest, Putin has political interest in bringing Germany closer to Russia. This is evident from the smart diplomatic move in early 2006 when Gazprom, not without Putin’s support and consent, appointed the former chancellor of Germany, Gerhard Schroeder as the CEO of the North European Gas Pipeline (NEGP). This pipeline, running through the North Sea connects Russia with Germany, bypassing Ukraine and Poland for exporting gas to west Europe. The NEGP is expected to be completed by 2008 to carry 55 billion cubic metres of gas per year. Hence Schroeder’s appointment is intended to solicit political support for Russia’s pipeline proposal, which was criticised by some sections in central, western Europe and also in Russia.

The west has been exerting some political pressure on Russia’s energy exports. At the G-8 meeting held in Moscow on March 16, 2006, the European Union wanted Russia not only to ensure the reliability of energy supplies, but also to ratify the Energy Charter. The EU has also urged that Russia should enter into a long-term pact for supply of oil and gas since the pact of 1994 will end in 2006, which indicates the extent of dependence on Russia. At the same time, the EU is critical of Russia’s policy of using energy as a political weapon to serve its objectives. The EU also wants Russia not to discriminate other energy exporting countries such as Kazakhstan and Turkmenistan in using Russia’s pipelines. So far Russia has resisted these proposals since investment and technical assistance by the west European countries in the energy sector of Russia will depend upon complying with this EU charter agreement.

Russian Policy towards China and India

Cooperation and Mutual Interest

Russia has strong economic and political interests in enhancing its role in rapidly growing energy market of China. Hence, during the visit to China in March 2006, Putin has pledged to actively pursue the construction of a pipeline and Transneft oil company of Russia and the China Natural Petroleum Corporation (CNPC) are entrusted with this task. This pipeline is to be completed by 2008 to supply additional 30 million tonnes every year. Moreover, Rosneft and Gazprom have also signed deals with CNPC on joint venture basis to supply oil and gas to China. Russia has agreed to supply annually 80 billion cubic metres of natural gas to China for which a pipeline costing $ 10 billion is to be built and completed by 2011. As a result of these agreements signed in March 2006, Russia-China trade turnover is expected to increase from about $ 30 billion in 2005 to about $ 60 billion by 2010. Thus there is cooperation and mutual interest between Russia and China. Putin wants to display that Russia is a major player in this dynamic region of the world. For China, apart from the import of oil and gas, closer relations with Russia would serve its own political interest of promoting “multi-polarity” to counter the US dominance in world politics.

Economic and Political Weekly August 5, 2006

But notwithstanding these measures, as observed by Sergei Blagov, there are underlying tensions in trade relations between Russia and China. Specifically, Putin has a dilemma in his policy towards China whose growing economic heavyweight could be a challenge to Russia in the decades to come. In fact, there is a strong possibility of competition between Russia and China in the energy sector. Russia’s concerns are not unfounded which is evident from the agreement signed on April 8, 2006 between Turkmenistan and China under which a pipeline of about 4,000 km would be laid from Turkmenistan via Uzbekistan and Kazakhstan. This pipeline will enable Turkmenistan to export annually 30 billion cubic metres of natural gas to Urumci in western part of China by 2010. This pipeline is later to be extended up to Shanghai. The CNPC will work on a production-sharing basis to explore and develop oil deposits in the Caspian offshore areas. This project proposal, when it materialises, might help China and reduce Turkmen dependence on Russia.

Russia has proposed to give greater importance to the development of nuclear energy both for meeting its own domestic needs as well as for acquiring global markets including those of China and India. This seems to be evident from the Russian official report of ‘Vedomosti’ published in February 2006, which wanted to consolidate and modernise the nuclear power industry. In fact, this is a part of Putin’s plan to expand the role of nuclear power and make Russia an international energy superpower. Thus Putin has offered China in March 2006 machinery and equipment for setting up nuclear power plants to meet its growing energy needs. Similarly, during his visit to India on March 17, 2006, the Russian prime minister Mikhail Fradkov offered to support India’s development of nuclear energy. This was a significant diplomatic move by Russia even as the much-hyped Indo-US nuclear deal offered by the US president George Bush was still being debated. Russia decided to supply 60 tonnes of uranium to safeguard Tarapur 1 and 2

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nuclear reactors and additional support for the Kudankulam nuclear plant in Tamil Nadu. Similarly, much to the discomfort of the US policy-makers, Russia has continued to help Iran in its development of nuclear power technology for peaceful purposes.

Thus in lieu of conclusion, it may be stated that the policy measures adopted by Russia such as differential pricing of energy exports, control over pipelines, increasing control over energy resources of other countries through joint ventures, etc, are intended to maximise Russia’s economic benefits and to enhance political influence at a global level. It appears that Russia has tried to support or punish regimes through its energy policy. While trying to bring the central Asian states, west Europe and China politically closer by adopting shrewd energy policy measures, Putin wants Russia to emerge as a super energy power to challenge the US in global geopolitical game.

EPW

Email: rgidadhubli@hotmail.com

Economic and Political Weekly August 5, 2006

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