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In 2005, as the Kremlin began to prepare for the first ever Russia hosted G8 summit in St Petersburg, it identified energy security as the dominant theme. But less than six months before the summit, scheduled for mid-2006, the gas price conflict between Gazprom and Kyiv resulted in a four-day disruption of supplies to Ukraine. Many Europeans and Americans subsequently accused Moscow of using energy as a weapon. Energy security became synonymous with security against Russia. Speaking on the eve of the NATO summit in Riga in November 2006, US Senator Richard Lugar proposed the creation of an ‘energy NATO’.
In the minds of many, the geopolitics of energy relationships has replaced or absorbed the traditional geopolitics of military balances.
In Russia, oil and gas, rather than the army and the navy, are being touted by ascendant conservatives as the country’s most important assets. In Europe, concerns about the Fulda Gap have been succeeded by concerns over the Nord Stream pipeline. And Gazprom acquisitions are regarded with almost the same anxiety as local Communist party gains were in various western countries during the Cold War. Indeed, the arrival of some new version of the Cold War, fought in part with energy weapons, is repeatedly prophesied.
Should one worry about Russia as an energy superpower? The short answer is No, because Russia’s energy policy is much more about seeking profits than about establishing political domination. To give a long answer, one needs to analyse the ambitions, interests and objectives of the parties involved, as well as their resources.
Russia will remain an energy power
Russia wants to be a great power, which means, under 21st century conditions, an independent global player. In recent years, Vladimir Putin has decided to call off Russia’s previous strategy of integrating with the West. This decision was based on the leadership’s general reading of Russo-Western relations from the 1990s to the early 2000s, but it was prompted by two important developments. One was Mikhail Khodorkovsky’s move to sell his Yukos oil company to American buyers; the other was the advent of ‘colour revolutions’ in Georgia and Ukraine, two important transit countries for Russian energy. Russia’s decoupling from the West occurred, of course, against the backdrop of the US war in Iraq, a country with the world’s third-largest oil deposits. By the mid-2000s, energy was playing a key role in Russia’s re-orientation from pro-Western to independent great power.
In order to achieve the stated goal of strategic independence and international prominence – epitomised, for example, by the goal of becoming the world’s fifth largest economy by 2020 – Russia is determined to use its few but important comparative advantages, above all its oil and gas. Russia is home to just over 6 per cent of proven oil reserves and it accounted for 12 per cent of global oil production in 2006. It also has about a quarter of the world’s natural gas deposits and is responsible for a fifth of total gas production.
Windfall profits from energy exports have allowed Russia to gain financial power, and the trickling down effect has benefited many other sectors of the economy. But the government is also keenly aware of the need to modernise the oil and gas sector and to make progress with the development of other parts of the energy sector, such as clean coal and internationally competitive nuclear energy.
Russia’s energy specialisation is here to stay, certainly for the medium and possibly long term.
The Russian leadership assumes that international energy prices will stay high for some time, periodic fluctuations notwithstanding.
Alternative sources of energy, save for nuclear power, will not make a major impact on the market in the foreseeable future. Moreover, on nuclear, as well as coal, and electricity generation more broadly, Russia is in a strong position. While the notion of Russia as an energy superpower is an exaggeration, Russia as an energy power is credible, especially if it manages to become a more advanced producer and more efficient consumer. When a number of Russian companies decided, with prodding from the state, to create an international award capable of competing with the Nobel Prize, they opted for “Global Energy”.
The expansion of Russia, Inc.
Russia’s interest in energy is overwhelmingly business-related. At the beginning of the 21st century, Russia’s business is business.
‘Russia, Inc.’, as the country’s politico-economic system is sometimes called, is seeking above all to increase the capitalisation of its largely state-owned giants, such as Gazprom, Rosneft and the now-reformed electricity company UES, to the benefit of shareholders and stakeholders in the Kremlin and outside. In their view, what is good for Gazprom (or the others) is good for Russia.
The growing number of IPOs in the past five years reflects this endeavour. But they are only the tip of the companies’ and their beneficiaries’ ambitions.
Gazprom has been aggressively seeking to acquire infrastructure abroad, such as transit pipelines and gas distribution centres and networks, ranging from Beltransgaz, the Belarusian gas transit and distribution company, to proposed gas hubs in Central and Western Europe. What may look like a clever and sinister strategy to expand Russia’s political influence within the expanded borders of the European Union is in fact a business-driven effort to win lucrative markets. In a similar vein, private Russian oil companies such as Lukoil have been buying up refineries and gas stations across Europe, and a metals firm, Severstal, made an unsuccessful bid for Arcelor. Indeed, Russia’s idea of integration with Europe could be summarised as cross-investment and reciprocal stock acquisition.
In a sweeping proposal to the German Chancellor Angela Merkel, in 2007, Putin offered a major assets swap, under which Gazprom would acquire assets in Germany’s gas distribution networks in exchange for German acquisitions of Russian upstream assets.
Though Germany spurned this initial offer, the idea of a grand energy bargain is not off the table. Meanwhile, Gazprom has been busy strengthening its bilateral ties with Europe’s top energy companies. Germany’s E.ON and BASF, Italy’s ENI and Enel, Gaz de France and the Dutch Gasunie have all concluded long-term deals with Gazprom.
The most dramatic changes by far, however, have happened in the former Soviet space. From 2005 onwards, Gazprom has been abolishing its system of de facto imperial preferences which had allowed various CIS states to buy Russian gas at hugely discounted prices. This came as part of Moscow’s general policy to shift its relations with the CIS on a more commercial basis. What many outsiders saw as a cold-blooded Kremlin attempt to strangle an independent-minded and democratically oriented Ukraine was largely a desperate and fairly heavy-handed effort to make Ukraine pay a more adequate price for the resources it consumed. True, it was the 2004 Orange Revolution that jolted the Kremlin out of its former complacent mood. But the new approach applied across the board, from revolutionary Ukraine and Georgia, to Moscow’s allies in Minsk and Yerevan.
The timing of price hikes was staggered (Belarus was given a grace period, so as not to undermine President Alexander Lukashenko ahead of a poll), and the actual prices charged differed somewhat (Russia-friendly Armenia got a better deal than a more hostile Georgia), but no one was spared. The ‘former’ Soviet Union ceased to exist: from Gazprom’s (or Moscow’s) perspective, everyone was now abroad. Russia no longer considered itself a former and future empire; instead, it started to act as a great power vis-à-vis its smaller neighbours.
Clearly, that game was about politics, and energy did play a role in the Kremlin’s calculations. But then, subsidised gas prices are as much a policy tool as prices raised to ‘European’ levels. In the 1990s, Moscow hoped to buy the loyalty of Kyiv and others by charging them only a fraction of the price it demanded of the Balts, the Poles or the Germans. When it finally saw that that was not working, it changed tack. Another, and more insidious, way of buying influence was engaging in opaque schemes in the gas trade.
The Russo-Ukrainian relationship in the 1990s and the early 2000s is a prime example of this. After the Orange Revolution, both techniques have been on the way out. Russia has lost its illusions, but is marginally richer as a result. Ukraine is free at last, even if it has to pay for it.
This display of harshness toward the former borderlands, however, was never meant to beat Europe into submission. Gazprom had no reason to do so. First, because EU member-states were paying top prices for Russian gas; and second, because any attempt to blackmail the Europeans (and make them turn away from Russia) would have been foolish, given how dependent the Russian budget is on the proceeds from gas and oil exports, 60 per cent of which go to the EU. All the Russians might have hoped for, foolishly, was to win Europe as a partner in bringing Kyiv back to its senses. In fact, the Ukrainians, shut off from Russian supplies, creamed off gas exports destined for the EU and got away with it. The Russians were then squarely blamed for temporary shortfalls in EU countries. That was a bitter lesson, but the Russians needed it.
Even before the Ukrainian gas crisis, Gazprom had had a similar problem with Belarus. Politically, authoritarian Minsk is a far cry from pluralist Kyiv. Belarus had become even more addicted than Ukraine to cheap oil and gas supplies from Russia, some of which it resold at a substantial profit. When Gazprom in 2004 briefly interrupted gas shipments to Belarus, citing Minsk’s non-payment, few people in Europe noticed except for the Poles. When Russia halted the oil flow to Belarus in early 2007, Europe was soon up in arms. The Kremlin was appalled. It had believed for years that the West had wanted Russia to put pressure on Europe’s “last dictator”. Russia, of course, did not mean to punish Lukashenko: it wanted him to pay up and fulfil his old promise to sell Beltransgaz to Gazprom.
A direct route to Europe
Together, Ukraine and Belarus, as transit countries, have controlled the lion’s share of Russia’s oil and gas exports to Europe. Since the Kremlin came to view both as unreliable, it decided to substantially reduce Russia’s dependence on them. In 2006 Gazprom, with Ukraine’s co-operation, replaced barter payment for transit across Ukraine with money transactions. This simplified the payment procedure, reduced haggling, and increased Russian revenue. More important, however, was Moscow’s decision to shift gas export pipelines from land to sea, and thus to decrease the need for transit, if not eliminate it altogether.
This trend started in the early 2000s, when Russia stopped the flow of oil through pipelines to ports in the Baltic states, using instead its own Baltic Sea terminals, Primorsk and Ust-Luga. The Estonians and Latvians saw this move as punishment for what the Russians claimed were unduly harsh naturalisation and integration policies that left hundreds of thousands of local Russian residents stateless.
More to the point, Russia wanted to develop its own port infrastructure and keep the money in the country. Already in the 1990s, Gazprom had built the Blue Stream pipeline across the Black Sea to Turkey, thus avoiding the politically hazardous land route along the Caucasus coast.
But it was the 2005 Nord Stream deal between President Putin and Chancellor Gerhard Schröder that attracted most attention. This pipeline – initially scheduled to be ready by 2011 – will transport gas across the Baltic Sea from Russia to Germany, and on to the Netherlands and possibly other EU countries. Nord Stream’s obvious objective is to go around Poland, Belarus and the Baltic states, all deemed a potential (or real, in the case of Belarus) nuisance.
A similar move followed in 2008, when Russia and Italy agreed to construct a South Stream pipeline along the bottom of the Black Sea and across several Balkans countries – but not Ukraine. Some fear that South Stream, if realised, could make the EU-favoured Nabucco pipeline superfluous. Nabucco would bring Central Asian and theoretically also Iranian gas to Europe, thereby reducing the EU’s reliance on Russian gas and pipelines.
Prior to announcing South Stream, Russia had secured agreements with Kazakhstan, Turkmenistan and Uzbekistan on the continued transport of their gas across the Russian territory, in return for a substantial increase in the prices Russia pays for this. Instead of a proposed pipeline across the Caspian which would pump gas into the Nabucco system, the Central Asians have announced that they will upgrade the littoral pipeline going north to Russia. The pipeline competition is far from over, with Central Asian states clearly enjoying practising what they call multi-vector foreign policies.
Moscow, for its part, is not only seeking to undermine Nabucco; it has already destroyed Ukraine’s hopes of receiving cheap Turkmen gas. Seen from Kyiv, Gazprom’s activities in Central Asia look like efforts to build a ‘gas caliphate’. Yet, there are likely to be several ‘caliphs’ in this game.
A gas OPEC?
Vladimir Putin once called the idea of a gas OPEC “interesting”.
Moscow, however, is not particularly keen to become the organiser of a new gas community. It values its sovereignty of decision-making and prefers to keep its hands free, pragmatically siding with various partners as its interests demand. Central Asia is being managed on a largely bilateral basis. Russia is actively expanding co-operation with gas-rich Gulf countries such as Qatar, Iran, and Saudi Arabia, as well as Algeria. Moscow blusters and bluffs, evoking frightening memories and playing with a particularly dark brand of geoeconomics, but its real objective, true to the general pattern, is to gain commercial advantage.
Thus, the discussion of a gas OPEC could be part of a war of nerves between Russia and the EU. Occasional remarks by Gazprom executives and Russian government officials about diversion of gas exports from Europe to Asia fall precisely into that category. Russia is exasperated with the EU’s stated goal of reducing its dependency on Russia. So it wants to send a message that it has other potential customers a continent away. In reality, the most serious emerging competitor to Europe as Gazprom’s customer is Russia itself. Despite price increases, domestic demand for gas is growing, while Gazprom’s production stagnates and Central Asia is less capable or willing to fill the gap.
Geopolitics revisited
Austria has been buying natural gas from the then Soviet Union since 1968, as has Germany since 1973. Since then, the energy interdependence between Russia and Europe has continued to grow, and will continue to do so in the medium and long term. The higher the degree of mutual dependence, the less likely it will lead to politically-motivated threats. Even the Soviets, during the Cold War, never threatened to cut off gas, delivering supplies even as the USSR was disintegrating. There is much less reason today to suspect the Russians of harbouring evil intentions.
Several western oil majors have had to significantly scale back their ambitions. But the restrictions that the Kremlin imposed on the likes of BP and Shell are in line with Moscow’s general policy of regaining control over the energy sector, and have not specifically resulted from political machinations.
The cases of Russia’s alleged recent use of energy as a weapon require closer scrutiny. With respect to Ukraine, Belarus and other CIS countries, one can argue that discounted gas prices represent a more credible instrument of political influence than world-level prices, which require no payment in kind. In any event, an energy weapon can only be used once, in a suicidal strike which creates a temporary disruption for the consumer, but permanently cripples the producer. The Russians are not jihadis.
Russia’s refusal to pump oil to Latvia’s Ventspils Nafta from 2003 or Lithuania’s Mazeikiu Nafta from 2006, which obviously have more than technical reasons behind them, represent the blatant use of strong-arm tactics in economic disputes.5 Basically, Russia believes that the Baltic states are not (or at least not yet) in the same category as its established large customers in Western Europe, and so it feels free to respond more brutally when it sees its interests infringed. This does indeed constitute a case of using energy as a weapon, but in the form of a border skirmish rather than full-scale war.
Diversification of imports and exports is a good thing in principle, with the European Union eyeing Central Asia and Iran as well as LNG, and Russia looking at East Asia and also LNG. For the foreseeable future, however, the energy bond will represent the economic hard core of the relationship between Russia and the EU.
Gazprom is Russia, and Russia is in a competitive and nationalistic mood, neither of which promises an easy relationship in the future.
Yet, the more assets Gazprom acquires in Europe, and the more assets Europeans acquire in Russia, the higher each party’s stakes in the other’s economic health and prosperity, and the more vulnerable each one is to the threats the other party may face. Like Russia, Gazprom wants to make money, be strong, rich and respected. There is no ‘geopolitics of energy’ per se. Gazprom’s moves are often misconstrued as a tool of some political strategy.
The reality is different: energy is a political business, but it is business first and last.
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5 Russia stopped shipping oil to the Mazeikiu refinery in July 2006, after Lithuania sold it to a Polish company, not a Russian one. The Russian side has blamed technical difficulties on the Druzhba pipeline but has not responded to Lithuanian offers to help resolve these
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Dmitri Trenin is a senior associate of the Carnegie Endowment for International Peace and Deputy Director of the Carnegie Moscow
Center.
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