Russian arctic oil fields

The future of Russia’s ability to remain a global energy supplier and the strength the Russian energy sector gives the Kremlin are increasingly in question. After a decade of robust energy exports and revenues, Russia is cutting natural gas prices to Europe while revenue projections for its energy behemoth, Gazprom, are declining starting this year.

Russia holds the world’s largest proven reserves of natural gas and continually alternates with Saudi Arabia as the top oil producer. The country supplies a third of Europe’s oil and natural gas and is starting to export more to the energy-hungry East Asian markets. The energy sector is far more than a commercial asset for Moscow; it has been one of the pillars of Russia’s stabilization and increasing strength for more than a century. The Kremlin has designated energy security as the primary issue for Russia’s national security, especially since recent changes in global and domestic trends have cast doubts on the energy sector’s continuing strength.

Throughout Russian history, the country’s energy sector periodically has strengthened and weakened. Managing this cycle has been a centerpiece of Russia’s domestic and foreign policy since czarist times. This historical burden now rests on Vladimir Putin’s regime.

Russia’s Imperatives and the Energy Factor

Russia is an inherently vulnerable country, surrounded by other great powers and possessing no easily defensible borders. In addition, Russia is a massive, mostly inhospitable territory populated by diverse ethnic groups that historically have been at odds with Moscow’s centralized authority. This leaves Russia with a clear set of imperatives to hold together as a country and establish itself as a regional power. First, Russia must consolidate its society under one authority. Second, it must expand its power across its immediate neighborhood to create buffers against other powers. (The creation of the Soviet Union is the clearest example of this imperative in action.) Finally, it must leverage its natural resources to achieve a balance with the great powers beyond its periphery.

Russia has used a variety of tools throughout history to achieve these imperatives, ranging from agricultural exports to pure military conquest and intimidation. Starting in the late 1800s, Russia added energy to the list of vital commodities it could use to achieve its central strategic goals. By the 1950s, Russia’s energy sector had become one of the major pillars of its economic and political strength.

The revenues from oil and natural gas exports show how the energy sector empowered the Kremlin to consolidate the country. Energy export revenues for the Russian Empire began flowing into government coffers in the late 1800s, with oil export revenues making up 7 percent of the export earnings. These revenues rose to 14 percent in the late 1920s during the early stages of the Soviet Union, and by the 1950s accounted for half of Soviet export earnings. Currently, energy revenues make up half of the government’s budget. This capital influx was and continues to be instrumental in helping Russia build the military and industrial basis needed to maintain its status as a regional — if not global — power. However, as the Russian governments became dependent on energy, the revenues also became a large vulnerability.

Beyond export revenues, the energy sector has contributed to the creation of a domestically stable and industrialized state. Russia’s domestic energy consumption is very high due to extremely cold weather for most of the year, but despite inefficiencies within the energy sector and the cost of producing energy, the country’s domestic reserves have enabled Moscow to provide its citizens and the industries that employ them with low energy prices.

The energy sector also contributes to Russia’s ability to expand its influence to its immediate neighbors. Moscow’s use of energy as leverage in the buffer states differs from country to country and ranges from controlling regional energy production (as it previously did in the Azerbaijani and Kazakh oil fields) to subsidizing cheap energy supplies to the countries and controlling the energy transport infrastructure. Russia has used similar strategies to shape relationships beyond the former Soviet states. For instance, Russia is one of Europe’s two main energy suppliers and is the only European supplier with large reserves of oil and natural gas and historically cheap prices. Russia’s physical connectivity with Europe and ability to undercut any competitor have served as the basis of many of Moscow’s relationships in Europe.

Evolution of Russian Energy Strategies

Energy’s usefulness as a means of achieving Russia’s three main imperatives has altered over time because Russia has had to change its strategies depending on shifts in domestic or international circumstances. Moscow’s strength lies in its flexibility in managing its energy sector.

The importance of Russian energy was established in the late 1800s, when the monarchy saw great potential for the Russian Empire if it could develop this sector on a large scale. However, the empire had neither the technology nor the capital to start up an indigenous energy industry. As a solution, the monarchy eased its foreign investment restrictions, inviting European and U.S. firms to develop the Baku and Volga oil fields. This brought about a brief period of warmer relations between the Russian Empire and many Western partners, particularly the United Kingdom, France and the United States. All parties soon realized that the only way to make the Russian oil business profitable despite the high costs associated with the country’s harsh and vast geography was to transform Russia into a massive producer. By the turn of the century, the Russian Empire was producing 31 percent of global oil exports.

As the importance of the Russian Empire’s energy sector grew, it became clear that Russia’s internal stability greatly affected the sector. The Bolsheviks used the energy sector in their attempts to overthrow the monarchy in the early 1900s. The oil-producing regions were one of the primary hubs in which the Bolsheviks operated because energy was one of the few sectors with organized workers. In addition, the Bolsheviks used the oil rail networks to distribute propaganda across the country and abroad. In 1904, when the Russian Empire cracked down on an uprising in St. Petersburg, mostly Bolshevik protesters set the Baku oil fields on fire. This cut Russia’s oil exports by two-thirds, forcing Moscow and the foreign markets to realize oil exports’ great vulnerability to Russian domestic stability.

Russia’s modern energy strategies began forming after World War II. With the Soviet Union left standing as one of two global hegemons towering over a divided Europe, Moscow saw no barriers to achieving dominance in the global energy field. Between the 1950s and 1960s, Soviet oil output had doubled, making the Soviet Union once again the second-largest oil producer in the world and primary supplier to both Eastern and Western Europe. Revenues from oil exports started to make up nearly half of Soviet export income.

Because the Soviet Union was producing oil en masse and the Soviet system kept labor costs low, Russia was able to sell its oil at prices almost 50 percent lower than oil from the Middle East. The subsidization of oil to the Soviet bloc and then to Western European countries helped Moscow undercut Western regimes and strengthen its position in its own periphery — a strategy that the CIA dubbed the Soviet Economic Offensive. For the Soviets, this was not about making money (although they were making money) as much as it was

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