Russia is a huge producer of oil and gas. It is the second largest producer and exporter of oil, and the largest producer and exporter of natural gas (Winfrey, 2010). Its economy largely depends on its oil and gas reserves. The funds acquired from its oil and gas reserves have greatly contributed to the survival of its political system. Boix (2004) argues that there are no examples of a successful transition to democracy in a country in which the contribution of the oil in the country’s export income is more than one third, and it seems to be alarming situation for democracy in Russia. Being an authoritarian state Russia has majority of its oil and gas companies under the umbrella of state.
This paper will prove that oil and gas have played the vital role of positioning Russia as a super power in the economic world. The wealth from oil and gas is the backbone of its political society and no doubt of its very powerful geopolitical position. I will go on to discuss how oil and gas have played a role in developing Russia and how current events such as the Russia-Ukraine are threatening to destabilize the manner in which oil and gas affects the political system of Russia.
Many have feared that an economy that solely depends on natural resources such as oil and gas is doomed for failure. This is because, this is wealth that can run dry and leave a country poor and in debt. However, in the case of Russia, running out was not an option. Many studies has concluded this as one study state that “radically different Russian and Ukrainian scientific approach to the discovery of oil allowed the USSR to develop huge gas and oil discoveries in regions previously judged unsuitable, according to Western geological exploration theories, for presence of oil. The new petroleum theory was used in the early 1990’s, well after the dissolution of the USSR, to drill for oil and gas in a region believed for more than forty-five years, to be geologically barren—the Dnieper-Donets Basin in the region between Russia and Ukraine.” (Engdahl, 2007)
This analysis by Engdahl is the backbone of the success that Russia has had with oil over the past decades. The country dedicated research and personnel into finding the location of oil and gas deposits and how efficiently they could be extracted. It was a good plan that worked for the development of Russia in the long term.
According to Engdahl (2007), the total number of wells drilled was sixty one and out of these sixty one wells about thirty seven were producing oil commercially, this was almost sixty present of highly impressive exploration success rate, as compared to the size of discovered fields in North Slope of Alaska. This was the beginning of the buildup of wealth through oil.
It should be noted that political leadership in Russia is made up of leaders who are well versed within the natural resource sector, starting with the big man himself, Vladimir Putin, who in January 1999, published a mining dissertation he had written earlier on (Putin, 1999). With such a basis, when Russian leadership deals with its resources, it is because they have studied the characteristics of the industry.
Pirog (2007) states that the Russian government having moved to take control of the country’s energy supplies broke up the previously large energy company Yukos and acquired its main oil production subsidiary. Olcott (2004) states that this move scared foreign investors a lot.According to David (2003), Yukos was planning a merger with ExxonMobil, from the United States of America. Due to a Yukos takeover, Russia was able to immediately pay of 2 billion dollars of its government tax debt (RPI, 2003).Instead, Gazprom was voted by the Duma to be given the executive rights to export the natural gas and thus creating the state-controlled monopoly in natural gas sector. This resulted in the limited participation of foreign companies in the oil and gas production of Russia and thus the major control of the Sakhalin energy project came to Gazprom. In 2007, Russia also agreed with Germany to supply Germany and, eventually, the UK by building a natural gas pipeline under the Baltic Sea, bypassing Ukraine and Poland.This shows the efforts made by Russia to transparently show the link between its oil and gas with its politics. The Russians understand that for natural resources to benefit the state they should be state-owned.
On the other hand, Russia has also been known to be an exporter and manufacturer of other valuable goods such as ships, weapons and nuclear energy. These have played a role in financing some political activities in the country.
Impact of Russia-Ukraine crisis on oil and gas production and export
Source: (BBC News, 2014)
Russia shares a border with Ukraine as seen on the map above. It is also a strong trade partner to the smaller nation. The Russia and Ukraine crisis worsened in early 2014. This crisis has its roots in the fact that Crimean’s intended to join Russia and abandon the Ukrainian flag. This was not what the rest of Ukraine wanted. Russia’s military presence in Crimea deepened the crisis. Russia also tempered with its supply of gas to Ukraine forcing it to look to the EU for more supplies. Though the UN deems the annexation of Crimea as illegal, Russia is already settling into the former Ukrainian territory. This has had a negative impact on its oil and gas markets. The Russian economy largely depends on high market prices of oil. Owing to this crisis, the Russian-American stained diplomatic relations, are influencing the Russian markets badly. The impact of western sanctions on the Russia seems to be uncertain, but potential harm to Russian economy is the lower oil prices. Over the last 13 to 14 years the success of the Russian economy during the Putin’s rule has been imputed to high oil prices, thus Russia will face heavy loss if oil prices falls. (Burgess, 2014).
Russia's illicit aggression on Ukraine is the greatest challenge to Europe's security in a generation (Aljazeera, 2014). Shevtsova, in 2003 stated that Putin did not like the Russia that he inherited so it is no surprise that he would take extreme measures to make Russia greater even by invasions. The Russia-Ukraine crisis cannot eliminate the fact that there are large reserves of gas and oil in Russia. This situation might play with the markets abit and temper with trade but the resources are still there. Due to the role that politics plays in this situation, Russia’s neighbors will be more affected by the results of this crisis than Russia itself because, if the supply of resources is controlled, some states will be left vulnerable.
Source: (Conway, 2014)
Ukraine is the largest transport corridor of Russian gas to Europe. It is visible in the table below, that the Ukraine is the gateway to the Russian gas in Europe and Ukraine facilitate half of the estimated total of 167 billion cubic meter of gas that is imported from Russia to Europe(IEA/OECD, 2014).
Europe’s economy expanded alongside the world economy after 2003, potentially prompting Russia to judge that European consumers would require more of its gas and thus pay a higher price over the course of the decade(ECE, 2004).
There are different routes of Russian gas that is coming to Europe:
- Pipeline flows through Ukraine, supplying gas to Slovakia, Czech Republic, Hungary, Western Europe, South Eastern Europe and Turkey.
- Direct to Finland.
- Direct to Germany through Nord Stream.
- Direct to Turkey via the Blue Stream pipeline.
Below is a table of Gas flow to Europe between 2010 and 2013. The units are in billion cubic meters
Source: IEA/OECD, 2014
In the start of April 2014, the telegraph reported that Russia would stop gas supply to Ukraine. This, if carried through, will affect the region. The EU buys a third of its gas needs from Russia and half of this gas comes to EU in pipeline coming through Ukraine. (Telegraph, 2014)
Strouse (2009) stats that, both the prices of natural gas and the cooperation of Russia with its customers on foreign policy issues is of great importance. It further affirms that you cannot separate politics from the markets.
In the past, Russia has played around with cutting of gas supply to its neighbors as a political tool to ensure its supremacy in the region. During the years 2003 and 2007, Russia used gas supply as a tool to influence international issues especially the separatist movements on Georgia and the international efforts to abandoning Iran’s nuclear program. These aggressive Russian foreign policies created an alarming situation throughout the European Union, majorly those European countries who consume Russian natural gas (Goldman, 2008). Bor, (2014) reports that Ukraine aims to take Russia to court over hiked gas supplies.
According to reports Ukraine, being a transit country plays a vital role in Russain trade to Europe especially to its crude exports. Northern Ukraine provide route to the main Russian pipeline (Druzhba pipeline) to Europe, although this pipeline have a total capacity of 400 kb/d but throughout last several years it has only used three-quarter of its total capacity. Druzhba pipeline is main source of Russian crude oil to Slovakia, Czech Republic and Hungary. Until 2013 the Black sea ports Feodosiya and Odessa have been main outlet for Russian crude oil. (IEA/OECD, 2014)
In 2013, the southern spur of Druzhba that runs through the Northern Ukraine supplied approximately 310 kb/d which is in line with the crude volume supplied in 2009 till 2012 (IEA/OECD, 2014). This pipeline provides backbone to the crude imports of Bosnia, Hungary, Slovakia and Czech Republic.
CNN, on the 3rd of March in 2014 reported that Oil prices spiked nearly $2 per barrel on increasing tensions between Russia and Ukraine, but according to experts the World's need for oil and natural gas from Russia and Russian economy need for the revenue generated should ensure the taps stay open throughout the crisis (CNN, 2014). This has proved to be true, with trade not being halted by the crisis yet.
Russia and other organizations
This year, due to recent political developments, the G8 could work without Russia according to a Platts.com report (2004). Also, international bodies such as the Organization of Petroleum Exporting Countries(OPEC) exist to monitor the supply of oil, to make sure the supply and returns are efficient and sustainable. However, Russia makes maximum profits through its sale of oil because it is not a member of OPEC and therefore not bound to any price scaling. However, Russia faces stiff competition from The United States of America. The USA poses a serious market threat to Russia as illustrated in the table below:
Source: EIA, 2014
Over the last 5 years, as shown on the graph. The United States of America is producing a little bit more that the Russian Federation.
Nichol, (2014) states that Russia's economy began to recover from the Soviet collapse in 1999, led mainly by oil and gas exports, but in 2008 when the oil and gas prices started to decline and down turn to global economy began it resulted in the 8% drop in the GDP in 2009. The economy was increased with the increase of oil prices on global level, but still it was a slow economic growth due to reduced energy exports, consumer demand and faltering investment. There were some other factors which also influenced economy and these factors include high rates of crimes, unemployment, corruption, healthcare and educational issues. This goes to show that despite a disturbing oil market, Russia seems to be benefiting positively from sales.
The organization of the Russian political system plays a large role in sustaining the markets. In a 2003 Interview, Putin claimed that he uses managed democracy to rule the country. This, he feels is a successful foundation
Role of Geo-politics
Source: (EIA, 2005)
Geopolitics is the study of how geography and economics have an influence on politics and on the relations between nations (Merriam-Webster Dictionary, 2014).
Russia is the largest country in the world. It is surrounded by smaller nations. It not only has land borders but also maritime boarders which automatically makes the country flexible enough to flourish within its region. Normally, a country this big would have enough manpower to conquer smaller states and acquire more land. That has been the norm in the history of Russia where territorial conflict is common. Due to its size, resources and geographical location, Russia is a threat to major powers in the world like the United States of America. Its oil, timber and gas reserves have filled the countries coffers for a very long time. It funds the state enough to limit foreign investment in the federation.
The location of Russia and the fact that the federation is large enough to share a boarder with multiple countries means that there are more commercial prospects for its oil and gas. It provides it neighbors with not only oil and gas but timber and coal too. When a country knows that others depend on it for energy for its people, at times it tends to affect the local politics of those countries. A relevant and popular example is Russia’s taking over Crimea from Ukraine and threatening to stop gas flow to the country. This put Ukraine in a vulnerable position that needed other stronger powers such as the United States and the European Union to intervene.
It cannot be doubted that Russia has strong military strength hence its geopolitics are considerably stronger. Any form of military action against this federation would most likely result in a war.
Russia being the biggest country of the world has a unique historical and political culture, being a huge economy it is not fair to measure it with same economic criteria used for other societies. For instance, Russian economist seems to be reluctant to compare Russian economy with that of China, although China is also using its geopolitics for its own benefits. In 90s the “Kuwaitization” of Russia was an issue and being complained by both Communists and Nationalist wings. (Delyagin, 2005)
Delyagin (2005) further believes that these Communist and Nationalist of Russia wanted it to stick to its exporter position in the advanced technology industries such as aircrafts, ships, weapons and nuclear power. They were not ready to accept that Russia’s capacity to sell weapons and war technologies has been closely bounded with its military superpower role and its allies and also to those states who bought these technologies on subsidized rate.
Russia is confident that its role in world energy markets is secure. It provided 48% of the increase in world oil supply 1998-2004 and has 72 billion barrels of proven reserves, 6.1% of the world’s 45 major reserves. Investment in the Russian oil industry was $12 billion in 2004, 70% up on 1998, which is roughly comparable to the $65 billion invested globally by the Big Five oil majors in 2004. Investment in extraction accounted for 30% of total investment in the Russian economy in 2006 and refining another 27 % (World Bank, 2006). With the way the takeover of Crimea has gone, Russia is still confident that its markets will survive despite completion from other producers.
The World Economic Forum (2013) believes that, “in the coming decades, Russia will face at least three challenges emanating from a changing global energy landscape. The first will be increased supplies of oil from sources ranging from the United States to Iraq. The second challenge for Russia will be turning the threat of unconventional gas resources into an opportunity, given the potential of shale to undermine Russia’s hold on its traditional and prospective gas importers. The third shift Russia will need to master is in response to a changing demand landscape where, according to all major projections, non-OECD economies will account for the largest share of future fossil fuel demand. Finally, it remains to be seen whether Russia can lead a changing global market structure or whether it merely trails along. While the country could be at the helm of an OPEC-style organization to regulate gas supplies and prices, for example, it could also lose out to strong competition in the liquefied natural gas (LNG) sector and elsewhere”. I am in total agreement with this as Russia is facing stiff opposition currently due to the Crimea invasion. The politics of the federation have to be good in order to benefit the economy.
After going through different studies I have reached to the conclusion that Oil and Gas are very important for the Russian economy and Russia itself cannot do any such act that would result in the blockage for the betterment of the economy. Another factor that we should keep in mind that although Russian government is threatening the European world and trying to pressurize them in their favor but it’s a fact that even in worst conditions the Western European countries like Germany and France would not face any shortage of Oil or Gas in near future as they had made alternative routes. Still Eastern European countries like Slovakia, Bosnia and Czech Republic may find them self in Oil and Gas crises.
Russia itself knows that if they would stop Oil and Gas supply to world it would be an economic suicide, therefore these threats does not mean anything on actual grounds. I my opinion Russia is using this threat as a political tool to get support from effecting countries in the Ukraine Russian issue.
On the base of my study and conclusion, I would recommend that Russian government should consider other areas for the economic boom too. Although they are unable to get their former position in the area of weapon and technology industry but they should strive for it. It will help their economy to flourish and their dependency on Oil and Gas will decrease.
I would also recommend to the Eastern European states that they should take some proactive measures as Germany and France did after the earlier crisis of Ukraine. They should consider some alternative routes and alternative supply channel for fulfilling their needs of Oil and Gas. Another thing they should consider is that they can also invest in alternative energy sources and should work on Bio Energy, Wind Energy and Solar Energy to decrease their needs of Oil and Gas.
Russia has received EU and US sanctions from its annexation of Crimea; this will further hurt its economy. It is further recommended that the Kremlin government, through the leadership of President Vladimir Putin should enter roundtable discussion with leaders of US and the EU to fashion ways out to quickly settle the tensed atmosphere on its threat on Ukraine. The financial climate in Russia will remain threatened until there is a amicably resolution.
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