Russia’s tryst with energy

– Varshita Agarwal

Energy has always taken centre stage in global geopolitics and economic power play. Energy has played an instrumental role in the rise of great powers, the formation of alliances, and the outbreak of wars and conflicts in several cases.

Almost every international order in modern history has been based on an energy resource. Nations use their energy assets for economic gains and as a vital tool of foreign policy leverage. In this game of energy power play, Russia has been at the forefront for quite some time now.

This week’s Macroscan will discuss the economic and geopolitical implications of Russia’s diversifying energy basket.

Russia has made a dramatic economic turnaround, using its energy wealth to protect and promote its economic interests and to make its geopolitical influence felt further afield, including in Europe.

Russia has been building an altogether new kind of energy state, one with global influence surpassing OPEC in the international energy market. The fundamental reason behind this is Russian prominence in multiple energy domains, especially oil, gas, coal and nuclear power. This multi-pronged energy strategy has geopolitical and economic implications that stretch from its neighbours in Europe to developing countries worldwide.

The Energy Saga

Gas and Oil are the bread and butter of the Russian economy. Energy constitutes almost half of Russia’s export earnings. In 1999-2000, the oil and gas exports contributed as much as 90% to Russia’s GDP. The oil prices were soaring during this period and at end of 2001, the Russian economy witnessed the best 3 years after 1966 -1999.

However, it hasn’t always been all hunky-dory. Between 1990 and 1995, the oil industry crashed and the oil demand contracted by 40%. This led to an excess supply of oil in the domestic market, leading to a crash of oil prices. The yearly exported 11 million barrels came down to 6 million annual barrels only during 1988- 1998 and the Russian oil was tagged as a money-loser.

Nevertheless, after the Russian ruble devaluation in 1998, the oil demand once again picked up and it became profitable again, leading to industry revival. In 2001, oil companies expanded their international reach by boosting oil production.

Alongside this, Russia increased its prominence in the gas sector as well. The gas sector of Russia is widely considered the energy future of Russia. Today, Russia has the largest proved natural gas reserves in the world. Nearly 32% of the world’s proven natural gas reserves are located in Russia, followed by Iran (15%) and Qatar (7%).

Did you know? 90% of the Russian oil and gas exports are controlled by a giant company ‘Gazprom’ and contributes up to 25% of the Russian government’s total revenue receipts. Gazprom is involved in the construction of major infrastructure projects such as Nord Stream and Nord Stream 2.

Despite oil belonging to the dominant global fuel category, the importance of natural gas has been slowly and steadily rising for the takeover. Currently, 23% of global energy demand is met through natural gas, soon to take over coal which stands at 24%. The reason is liquified natural gas and advancements to pipeline technology due to which gas is no longer a local commodity but an international business in itself.

Russia and Europe: The Energy Dynamics

When it comes to energy trade, Russia clearly has the upper hand. Even the Nature Journal 2019 revealed that Russia has a strategic advantage in the trade relations between Russia and Europe. Russian state-owned gas giant Gazprom supplies nearly 40% of Europe’s gas via pipelines running through Eastern Europe and the Baltic Sea (Nord Stream).

This over-reliance is not a healthy one, especially for Europe.

In fact, the national security experts have been advising Europe to reduce its oil and energy-based dependency on Russia. The advice seems like a wise one given Russia’s history of threatening and exercising supply cuts to Europe in response to disputes, often with Ukraine (an instance is discussed in the later section) which carries around 80% of the Russian gas sold in Europe.

Putin, Ukraine and the US, EU Sanctions

Russian President Vladimir Putin took several measures to revive the failing oil and gas sector of Russia in the 2000s. He renationalised ‘Gazprom’, which had become a private enterprise after the fall of the USSR.

The result? By the end of the first term in 2004, Putin’s government had significant control over Russia’s oil and gas production. The increased revenues from this sector helped the Russian government to propel its domestic agendas and military might.

The increased expenditure on military and foreign policy agenda benefited Russia in form of enhanced leverage in the neighbourhood.

An example of this extraordinary leverage is an instance from 2006-2009 when the Ukrainian government adopted pro-western policies which were not very well- received by the Kremlin. As a result, Russia ceased the gas supply to Ukraine. This further had a domino effect on supply to central and western Europe and Germany.

Russia has used its gas supplies to punish and reward, affecting both transit states and end-consumers. In 2014, it was because of military actions in Ukraine that the US and the EU had imposed sanctions against Russia. Though, Ukraine charges $3 million on the Nord Stream pipeline (leading to Europe through Ukraine) as the annual transit fee. However, Nord Stream 2 will take away this transit fee as it offers a more direct alternate transit route that does not pass through Ukraine. According to the Ukrainian president, Volodymyr Zelinsky, without the transit fee, there will be nothing left to pay for the army which will leave them defenceless against Russian aggression – A clear instance of how Russia is leveraging its energy positions in the geopolitical arena.

Furthermore, the EU is building an Energy Union based around the Third Energy Package, a more integrated European market and diversified supplies. The EU is preparing to withstand such energy coercion by investing in new supplies, such as LNG, and completing a liberalised energy market.

What lies ahead?

Despite rising tension in the west, Russia has consistently maintained its dominance in the international oil and gas market. Russia is not just expanding its presence in Asia and Europe but also the North pole where it currently has several ongoing projects.

Fossil fuels are declining with each passing day and clean energy requirements are likely to skyrocket in the coming years. As the market for natural gas booms, Russia seems ready to seize the opportunity. History has proven that one who holds the energy controls has an unrelenting influence on the global front and Russia seems to be on the right track.

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