Security Studies Program Seminar

Russia's Energy Policies: Business or Politics or Both

Carol Saivetz
Visiting Scholar, Center for International Studies, Massachusetts Institute of Technology

February 28, 2007


Russian Foreign Policy Goals and Putin's Policies: Will Russia become an energy superpower?

Most Russians lament the loss of Russia's superpower status, with the collapse of the Soviet Union. This is not only an elite phenomenon, but also the view of the average Russian citizen. Reflecting this sense of loss, Putin came to power determined to restore Russia's great power status. That energy was a component of Putin's strategy became clear when, within one month of becoming president, the Russian president discussed the role of energy companies in Caspian oil and natural gas politics.

As a way of framing the argument, Saivetz noted that some political scientists argue that states act in order to overcome what is termed “status inconsistency.” That is, that states act to redress the imbalance between the status they believe they are entitled to and the actual status accorded to them by others. Putin initially tried to restore Russia 's status by balancing against the US. In many respects, he followed policies originally formulated by Yevgeny Primakov (foreign minister in the late 1990s) by promoting multipolarity as an organizing principle to counter the unipolarity of the post-Cold War world. Russia also mooted the construction of an alliance with India and China that would be a countervailing force to the US. However, September 11 provided Russia with an opportunity to change course. Putin apparently thought by bandwagoning with the US Russia would have the opportunity to sit at the superpower table. A story, perhaps apocryphal, circulated in Moscow that on September 12, 2001, Putin met with his top advisors to discuss how to respond to the 9/11 attacks on the US. A small number of those present recommended siding with the Taliban against the US; others argued siding with the US; and the majority argued that Russia should remain neutral. Putin chose the second option; but, he was repaid by the Bush Administration's abrogation of the ABM treaty and its support for the second round of NATO expansion. Saivetz added that the successive “colored” revolutions in Georgia, Ukraine, Kyrgyzstan were viewed in Moscow in the context of “balancing” against US encroachment.

Energy as a way of achieving any number of domestic and foreign goals: Can Russia do this successfully?

President Putin ostensibly wrote a dissertation dealing with the role of energy in rebuilding Russia's domestic and international power. He argued in the dissertation that energy should not be a wholly independent sphere, but tied to the state. He advocated vertically integrated industrial groups (in contrast to independent companies). And then, in 1999, he published an article in the journal of the St. Petersburg Mining Institute which argued that Russia needs to leverage its mineral resources to promote growth and Moscow 's international status.

Major industry actors:

Gazprom – natural gas monopoly
Rosneft – state-owned oil company
Yukos – broken up last year
TNK-BP – currently under pressure from the state
Transneft – state-owned oil pipeline company

Russia has privatized the oil industry, but Gazprom remains the major, and state-owned, operator in the gas sector. In the 1990s Gazprom was 38% state-controlled; under Putin state control has increased to over 50%. It is essentially seen as state-owned, or doing the bidding of the state.

Russia has 60 billion barrels of proven oil reserves, most of which are in western Siberia . Russia is now the second largest producer of oil because of an increase in production levels over the last several years. Of this oil, 71% is exported via Transneft pipelines. The rest is transported either by rail or by the few existing private pipelines. Russia also owns the world's largest—by far—reserves of natural gas totaling some 180 trillion cubic feet. It is also the world's largest gas exporter.

Ukraine, Belarus, Azerbaijan

The January 2006 shutoff of gas to Ukraine, and the consequent reduction in supply to western Europe, highlighted the issue of energy security. Russian leverage throughout the former Soviet space is derived from the dependence of the new post-Soviet states on Russian energy supplies. Almost all of the CIS states are dependent on some combination of Russian and Central Asian energy supply.

Belarus and Ukraine have in effect tried to limit Moscow's ability to export. Not only have they siphoned resources to meet their own domestic needs, but Belarus, for example, tried to charge Russia a very large transit fee for using the old Soviet-era pipeline infrastructure that traverses the country. Both state are hampered in their efforts against Moscow by their degree of dependency vis-à-vis Moscow.


Ukraine is very central to Russia's ability to export natural gas. It is also the largest net importer of gas in the former Soviet Union. Historically Ukraine received gas at a concessionary fee in return for Russia's use of the pipelines that cross Ukraine to export gas to Europe. The crisis occurred against the backdrop of the so-called Orange Revolution (2004), in which Russia backed the losing presidential candidate in a highly contested and disputed election. As a result, Moscow is terrified of so-called color revolutions in nations such as Georgia, Ukraine, and Kyrgyzstan. Russian officials fear that people power could take root in Russia, as well. Moreover, they claim that these upheavals were fomented and paid for by western NGOs. This accusation is not totally untrue given the funding and other help offered to anti-government demonstrators by international NGOs. As a result, Moscow has passed a new law limiting the presence and permitted activities of NGOs in Russia.

Less than a year after the election, Gazprom demanded that Ukraine pay the world price for natural gas. Ukraine did not refuse, but asked that the price adjustment be phased in over time; Russia would not accept these terms. With the Ukrainian refusal to pay and threats to siphon gas from the pipelines to meet its domestic needs, Gazprom stopped the flow of gas. In turn, pressure in the pipeline was reduced for Gazprom's European customers. Within days and amidst harsh criticism from the Europeans, Ukraine and Russia negotiated a deal in which RosUkrEnergo, a shadowy entity, would become the major importer of gas for Ukraine. The agreement stipulated that RosUkrEnergo would purchase gas from Gazprom at world prices, $230/billion cubic meters, and blend this with cheaper Turkmen gas, resulting in a supply prices at $95/bcm. Almost simultaneously there were gas disruptions to Georgia and Moldova.

Although one could argue that Gazprom is fully within its rights to charge world market rates for gas, the timing of the event was arguably purposeful. The shutoff occurred just two months before the Ukrainian parliamentary election. And the ploy may have had the desired results: The party of the Kremlin-backed candidate won the election.

Many have argued that Gazprom's goal in its actions was to obtain ownership for Ukraine 's pipeline infrastructure. Yet, within the last week (late February, 2007), the Ukrainian Parliament has passed legislation dictating that Ukraine retain the ownership of the pipeline infrastructure.


The recent Russian dispute with Belarus involved both oil and natural gas. Even though Gazprom had been raising prices for other CIS states, Belarus until this winter enjoyed highly subsidized prices for oil and gas. The dispute began when Gazprom demanded a major increase in the price of natural gas. The resolution of the pricing dispute resulted in a significant increase in the amount Belarus would have to pay and with Russia gaining a 50% stake in the Belarusian pipeline. In addition, it's important to note that until this past January, Russian oil traveled through Belarus without Moscow charging an export fee. At the same time, Belarus had been making huge profits selling refined oil products to western Europe. In January, Russia announced that it would charge Belarus the full export fee and in return, Belarus began charging Russia transit duties. This tit-for-tat exchange culminated in Minsk reducing the volumes of Russian oil piped through Belarus to Poland ; in retaliation, all oil shipments were stopped. By January 11 oil shipments resumed: Russia was forced to compromise on the export duties (from a demand of $180/ton to $53/ton). However, Minsk will have to give Russia an increasing percentage of the profits from the export of refined petroleum products.

Saivetz argued that each of these cases is somewhat different. Of course, Gazprom has the right to demand world market rates for its gas, but the timing of the demand in the Ukrainian case demonstrates that Russia understands the political leverage its has over Kyiv. The Belarussian case is interesting because Russia has been subsidizing the Lukashenka government, which Saivetz argued has diminished Russia's standing in Europe. Nonetheless, Gazprom now controls 50 percent of the Belarussian infrastructure and Russia will garner 85 percent of the revenues hitherto going into the Minsk treasury.


Azerbaijan gas reserves stand at 30 trillion feet and it is estimated that Azerbaijan has between 7-3 billion barrels of oil. Both come primarily from off-shore field. Azerbaijan has successfully attracted foreign investment in its energy infrastructure—most importantly to date in the Baku-Tbilisi-Ceyhan project which opened last summer.

The problem for Azerbaijan has been that it lacked the infrastructure to use its own resources. Most specifically, it had neither terminals nor pipelines in place to use its gas, but had already converted all its generation plants to gas. When in January, Gazprom demanded an increase to the world market rate of $230/bcm, Baku summarily ended all imports of gas and stopped all exports of oil via the pipeline to Novorossiisk. Moreover, Azerbaijan is now selling natural gas to Georgia , which itself is involved in a contest of political wills with Russia.

Opposing Views on Russian Strategy in CIS States

•  Gazprom has every right to charge prices at the full market rate. This is good business sense—especially since the domestic market is highly subsidized.

•  It seems clear that Russian officials understand their leverage over CIS customers. Reports dating from before the Ukraine crisis quote the Russian foreign minister as saying that energy should be used to punish recalcitrant states. It seems Russia is willing to risk its image in the west in order to control Belarus and have a much larger say in the transit of natural gas etc.

Energy Security: Security of Supply and Demand

With the 2006 Ukrainian energy dispute and its attendant impact on Gazprom's European customers, energy security issues jumped to the top of the international agenda. For consumers this seems to mean security of supply; however, for the producers and exporters it seems to mean security of the market. Russia, then the Soviet Union, began supplying oil and gas to Europe at the height of the Cold War. Europe's dependence on Russian energy has increased: Estimates are that Europe will import 75% of its natural gas needs by 2020. Currently 43% of its energy portfolio consists of oil with gas at 24%. Europe is phasing out coal and replacing it with gas so gas will account for a larger share of Europe's energy needs in the future.

For the Europeans, the energy security question rests not only on supply, but whether Gazprom will open up its gas pipelines to European companies that are currently investing in Russia. In fact, the major stumbling block to ratification of the European Union Energy Charter is the demand that Russia open pipelines to non-Russian companies. Additionally, Gazprom has been trying to buy downstream assets in Europe. Alexei Miller, Gazprom head, threatened Europe by saying that the company could shift the direction of exports to China. Question pertains both to gas and to oil. What is Russia 's export capacity? Could it divert resources to feed Asian markets? Does it have enough infrastructure to do both simultaneously?

OIL: Russia exports approximately 70 percent of its crude, but many of its fields are past peak production. Its export capacity has not kept up with production. In fact, Transneft can only export about 2/3 of its current production. Most of this is via the pipeline that was central to the Belarus-Russian dispute.

There have recently been competing proposals to run pipelines east to China. A YUKOS proposed pipeline, which YUKOS would have owned, was supposed to go directly to China. The current government proposed pipeline would first go to Nahodka then to China. The Chinese want to know why Russia would export first to Japan, and not just straight to China.

There is another obstacle to exports in general. Not only does the infrastructure not exist, but Turkey has objected to increased exports through the Bosphorus. This is why the Baku-Tbilisi-Ceyhan pipeline is so important. Turkey is trying to set itself up as a re-exporter and energy hub.

GAS: Gazprom also has made little investment in its fields and production in the two largest mature fields has declined 20 percent. Last winter, a very severe winter, Gazprom had to reduce exports in order to meet domestic demand. Furthermore, a government report predicted domestic shortages between 2007-2009.

Another issue is that of pricing. Even as the CIS states are pushed to world prices, the domestic rate is far below market prices. This means that Gazprom is focused much more on export. It has historically used cheaper Central Asian gas to supply its domestic market. Putin recently talked about increasing domestic prices, but this raises the specter of possible domestic dislocation during the next electoral cycle and beyond. Saivetz argued that by focusing on exports Gazprom and Russia are mortgaging the economic health of country for short- to medium-term benefit.

Estimates of Russian gas production stand at 656 bcm of natural gas. According to many observers, Russia would need 479 bcm to meet domestic demand, while European purchases are calculated at 161 bcm. An additional 80bcm is sold to the CIS states and Asian purchases are estimated at 24 bcm. This means Russia will need to import 84 bcm from Central Asia to meet its contract commitments. And Russia has been aggressive in tying up long term contracts with Central Asian producers.

Europe remains Gazprom's largest export market. So it would seem that there is a codependency between Europe and Gazprom. Gazprom needs the revenues derived from sales to Europe to invest in new fields and infrastructure. The Asian markets are clearly attractive, especially China's, but it would take billions to create the necessary infrastructure. China is also leery of becoming too dependent on Russian supply. China has invested heavily in Turkmenistan and Kazakhstan, which makes them competitors of Gazprom. This situation renders Alexei Miller's threat to supply Asia in lieu of Europe empty at least for now. The double threat is the more loudly Europe complains, the more it may spur Gazprom to invest in pipelines to Asia instead of fields for Europe, thereby leaving its supply vulnerable.

An OPEC-like Cartel

Several years ago Russia proposed an OPEC-like gas cartel to Central Asian countries. Recently, when Iran brought up the subject several months ago, Russia at first said it was not interested. However, then Putin, at a press conference, expressed some interest in the idea. He recently visited the Gulf states, including Qatar, to talk about arms sales and about gas. Additionally, Gazprom has just cut a huge deal with Algeria, which the Europeans have seen as an alternative source of natural gas. This means that Algeria may now be coordinating policies with Russia and perhaps providing liquefying technologies to Russia. Together the two countries currently provide 46% of EU natural gas needs.

Closing Observations

•  Putin's Russia is an energy superpower with clay feet. Its export capacity is limited and infrastructure is in need of serious investment.

•  The business-politics balance is tipping towards business rather than politics: Saivetz listed the current wave of nationalizations, the YUKOS affair, the Sakhalin stakeholder change, and the recent Kremlin pressure on TNK-BP. Events must be viewed in the framework of the 2008 Elections. No one is thinking long-term. Of the potential contenders for president, each man controls different aspects of the economy - Gazprom, Rosneft, and the railroads. Additionally, there are rumors that Putin might become head of Gazprom if—and that's a big if—he leaves the presidency in 2008. Thus, there will be more politicization of the gas and oil industries as Russia moves toward 2008.


Rapporteur: Nina Fahy

back to Wednesday Seminar Series, Spring 2007