2

3
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ABSTRACT

Russia is one of very developed countries in the world. Russia is the largest
producer of crude oil including lease condensate oil and the second largest producer
of dry natural gas. Russia produced crude oil including lease condensate oil and other
liquid with average around 11.0 million barrels per day. Due to that, Russia became
the worlds largest producer of crude oil in 2015. The social value of Russias gas
exports to the EU lies in Russias role as a provider of energy security to the EU
which increases Russias status in its relations with the EU and contributes to
Russias position as a strategic partner for the EU. Hence Morozovs suggestion
that Russias role as a leading energy supplier to Europe is not just about money, but
also about recognition and identity and Zagashvillis proposal that There is not only
monetary profit, but also influence and status in Russias gas exports to the EU. .
Russia has racked up successive years of economic growth and low inflation. Since
1999 its economy has been growing strongly and consistently. In the 1990s the
Russian government regularly ran massive budget deficits. A decade ago Russia was
deep in debt to foreign lenders, including the International Monetary Fund (IMF),
and nearly devoid of foreign currency of its own. Today, the country has no IMF debt
and its trade balance and foreign exchange reserves are among the largest in the
world. Thanks in large part to this economic performance; Russia now has a sense of
regained sovereignty. 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. Energy became more central to Russian foreign policy due to the rapid
 5

rise in the world market price of oil in the beginning 21st century. High prices
resulted from the exports of fossil fuels became the most important income for state.
Rapid economic recovery and centralization of power revised character of Russian
foreign policy.
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INTRODUCTION

Russia is one of very developed countries in the world. Russia is the largest
producer of crude oil including lease condensate oil and the second largest producer
of dry natural gas. Russias economy is mostly dependent on the hydrocarbon, oil
and natural gas production. Its revenues account for more than 40% of the federal
budget revenue which is very high. Russia also as a major producer and exporter of
oil and natural gas. Their economic growth is driven by energy export, given its high
oil and natural gas production. In 2015, around 43% Russias federal budget
revenues came from oil and natural gas (Henderson, 2015).

Russia produced crude oil including lease condensate oil and other liquid
with average around 11.0 million barrels per day. Due to that, Russia became the
worlds largest producer of crude oil in 2015. At that moment, they also became
second-largest producer of dry natural gas after United State, with average
production of 22.4 trillion cubic feet.
 7

Russia and Europe are interdependent in terms of energy. In 2015, more than
30% of natural gas imports and almost 30% of crude oil imports coming from
Russia. Europe is dependent on Russia as their source of supply for both oil and
natural gas, while Russia is dependent on Europe as their market for its oil and
natural gas revenues those export generate. Almost 60% of Russias crude oil exports
and 75% of Russias natural gas exports went to Europe in 2015 (Chong et all, 2015).

In 2013, Russia consumed 30.52 quadrillion British thermal unit (Btu) of

energy. Majority of energy that consumed was in the form of natural gas (53%), 22%
for petroleum and 14% for coal.

Figure 1. Russia's primary energy consumption (2013)

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Russia produced an estimated 11.03 million barrels per day of petroleum and
other liquids and it consumed around 3.5 million barrels per day in 2015. Russia
exported more than 7 million b/d in 2015, including roughly 5 million b/d of crude
oil and the remainder in products and other liquids (EIA, 2016).

Figure 2. Russia's petroleum and other liquids supply and consumption (2016)
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DISCUSSION

Environment

At nearly twice the size of the United States, and encompassing 11 time
zones, Russia is by far the world's largest country. Russia also contains some of the
world's most abundant natural resources. In addition to huge deposits of fossil fuels,
Russia's other natural resources include boreal forests that comprise over 20% of the
world's forest cover; a vast Arctic tundra; seemingly endless steppe lands (the 'taiga');
and Lake Baikal, the world's largest inland lake, which alone accounts for 20% of the
world's freshwater. The Arctic, the Siberian forests, and Russia's Far East regions -
home to geothermal resources, indigenous peoples and endangered wildlife - make
up ecosystems that are important parts of the world's biological balance (EIA, 2004).

Nevertheless, Russia still ranks among the highest CO2-emitting countries in

the world. Furthermore, since bottoming out in thepost-Soviet era in 1997, Russia's
carbon dioxide emissions havebeen on the increase, buoyed by the rebound of oil
extraction andindustrial production. In 2001, Russia's energy-related CO2emissions
totaled 440.3 million metric tons, an 11.6% increasefrom 1997. In comparison, the
United States emitted 1,565 millionmetric tons of carbon dioxide in 2001, while and
 10

China emitted832 million metric tons of CO2. The world's next highest
carbondioxide emitters - Japan (316 million metric tons), India (251 million metric
tons), and Germany (223 millionmetric tons) - trailed far behind. Russia's per capita
CO2 emissions in 2001, at 3.05 metric tons per person, werehigher than Germany
(2.71 metric tons per person), Japan (2.48), China (0.65), and India (0.25), but still
far lowerthan that of the United States (5.51) (EIA, 2004).

Russia signed the Kyoto Protocol, which mandates specific commitments by

countriesto reduce their emissions of greenhouse gases (GHG) by an average of 5.2%
below 1990 levels by 2008 to 2012 period, on March 11, 1999. Under the terms of
the climate change agreement, Russia is not required to cut its emissions; since it was
classified as a country in transition, Russia merely must maintain its CO2 andGHG
emissions in the 2008-2012 timetable at the same level as 1990. Owing to the
significant reduction in carbon dioxide emissions in the immediate post-Soviet era,
Russia should have little problem in fulfillingits commitments under the Kyoto
Protocol. Moreover, the country would stand to benefit from an emission trading
scheme under the Protocol, as Russia appears to have excess emissions credits - so-
called 'hot air' - to sellto other countries (EIA, 2004).

As of May 2004, Russia had not yet ratified the Kyoto Protocol, which has in
large part kept the Protocol from coming into force. Although Kyoto has
securedenough ratifying parties tobring it into effect, the treaty also required
countries accounting for 55% of emissions tosign on. The Russian government has
been discussing possible ratification of the KyotoProtocol, which would allow the
country tobenefit from technology transfers and bring the international agreement
into effect (EIA, 2004).
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Figure 3 Carbon dioxide emission in Russia (1990-2001)

Figure 4 Global CO2 emissions per region from fossil-fuel

Figure 5 Global CO2 emissions per region from fossil-fuel in top 5 emitting countries
and EU
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2.1 SOCIAL

For Russia, natural gas is not only an economic resource. Energy security is
perceived to be a political and social concept. The social value of Russias gas
exports to the EU lies in Russias role as a provider of energy security to the EU
which increases Russias status in its relations with the EU and contributes to
Russias position as a strategic partner for the EU. Hence Morozovs suggestion
that Russias role as a leading energy supplier to Europe is not just about money, but
also about recognition and identity and Zagashvillis proposal that There is not only
monetary profit, but also influence and status in Russias gas exports to the EU. In
Russian society, subsidized domestic heating is important to the quality of life of
much of the population. The ability of Russias largest gas company and monopoly
gas exporter, Gazprom, to sell gas to the domestic Russian market at state-regulated
subsidized prices depends heavily on profits generated by gas sales to the EU, where
prices are four times higher. To illustrate, in 2010, gas sales to the EU accounted for
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26% of Gazproms total sales by volume but 44% by revenue. Conversely, domestic
gas sales accounted for 56% of sales by volume but just 29% by revenue. Gazprom
reports its consolidated financial results under International Financial Reporting
Standards for the year ended 31 December 2010.

Therefore, anything that poses a threat to those exports is likely to be

securitized by Russian actors, including an EU environmental policy that potentially
curbs Russias gas exports to the EU. Due to the multifaceted Russian conceptions of
gas as a strategic resource, the securitization of gas exports is not only a matter of
economic, political, or societal security, but also an issue of energy security that has
economic, political, and societal components.

In the past, European countries that rely heavily on Russia, like Poland,
Slovakia, Lithuania, Latvia and Estonia, all had very low gas reserves. Energy
systems are also still poorly connected to each other, partially due to the legacy of the
Soviet Union, and partially due to decades old nationalism that that kept European
countries as rivals more than as partners. Countries were left to their own devices.
And Russia was really the cheapest game in town, if not always the most reliable.

For a social term, Europe's dependence on Russia for gas keeps the two sides
friendly. However, If Europe did not have an energy relationship with Russia, it
might be easier to ostracize it in geopolitical affairs such as the Syria crisis and the
ongoing civil unrest in eastern Ukraine. In a worst case scenario, Russia could punish
Europe buy tightening fuel supplies. Russia's main natural gas exporter, Gazprom,
has indeed done just that with Ukraine and Poland. They have not done it with their
 14

biggest clients in Western Europe, namely Germany. Russia accounts for around 30%
of Germany's natural gas.

In the meantime, Russia's Gazprom will still be a reliable source. But it

continues to play in a major market that is hostile to its future. Gazprom might have
to go on a charm offensive in the near future, and change its image as a Russian
government bully that has run roughshod over weaker partners in the past.

2.2 POLITIC AND ECONOMY

In the past seven years, Russia has experienced a remarkable change of

fortune. Following economic and political crises in the 1990s which culminating in a
state of virtual bankruptcy in August 1998. Russia has racked up successive years of
economic growth and low inflation. Since 1999 its economy has been growing
strongly and consistently. In the 1990s the Russian government regularly ran massive
budget deficits (Prahl and Weingartner, 2016).

Today, it is accumulating even larger surpluses. Similarly, its balance with the
outside world has reversed. A decade ago Russia was deep in debt to foreign lenders,
including the International Monetary Fund (IMF), and nearly devoid of foreign
currency of its own. Today, the country has no IMF debt and its trade balance and
foreign exchange reserves are among the largest in the world. Thanks in large part to
this economic performance; Russia now has a sense of regained sovereignty. It is
 15

reasserting itself as one of the major global players and reversing the international
humiliations and indignities of the 1990s.

It is no longer content to play second fiddle to the United States or the West.
Instead Russia is charting an independent foreign policy course, underscoring its
economic and political dominance of the former Soviet republics of Eurasia which it
calls its near abroad and demanding acknowledgement of its rightful place in the
world as an equal to major players like the United States and China(Prahl and
Weingartner, 2016). Energy is at the heart of Russias economic performance and
renewed confidence on the global scene. As the worlds largest producer of both oil
and natural gas, Russia has benefited as few other countries from the soaring prices
of those commodities on the world market (Biresselioglu et al., 2017).

While energy reserves are the source of the countrys economic revival, they
are also a potential weakness. Behind the scenes, Russias entire economic and
political system is highly susceptible to the vagaries of the global oil and energy
markets. Russias economic success is not so much the result of modernization and
economic breakthroughs, or sound policymaking and judicious management, as it is
the dynamics of the global economy, over which the Russian government has no
control (Biresselioglu et al., 2017).

Its current foreign policy posture is equally vulnerable. Russia describes itself
as an energy superpower, a notion predicated on an effort to leverage its perceived
advantages in oil and gas production and exports to seemingly vulnerable consumer
countries (both large and small) (Sharmina, 2017). Yet the proposition that energy
gives Russia great power is questionable. Russia does not have market power in oil.
It cannot dictate prices or quantities to consumers. The situation is admittedly
different for gas on both counts (Sharmina, 2017).
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But for both commodities, Russias ability to continue supplying at current

rates is in question. In the end, Russias strength is garnered not from energy
production, but rather from the wealth generated by windfall profits from high
energy prices. While these profits are huge, they are also tenuous (Stivachtis, 2015).
They depend on continued high, and even rising, prices. And they depend on
Russias ability to sustain its production of oil and gas. Both the price of energy and
the quantity of production are in question.

1 Russia Economy Pillars

Oil and gas are the twin pillars of the Russian economy. Russia currently
rivals Saudi Arabia as the worlds largest producer and exporter of oil. It is the
indisputable leader in gas production and exports. Russias fortunes and fate have
long been tied to oil and gas. Its history as an oil exporter began in the late nineteenth
century, when early oil operations began in Baku and the western Caspian, then part
of the Russian Empire (Stivachtis, 2015). Oil began to play an especially important
role in Russias development in the 1960s, when major fields were discovered in
western Siberia, and both production and exports shot up. Increased oil production
became yet another measure of national accomplishment and a source of pride and
prestige. In the 1970s Soviet oil output surpassed that of the United States
bolstering the impression that the Soviet Union was a rising power and the United
States a nation in decline (Stulberg, 2017).

By the mid-1970s both oil and gas had become vital to the Soviet Unions
domestic and foreign policies. Oil, which had always been a key raw material for
military purposes, began to be used increasingly as an instrument of so-called soft
 17

power, especially in Eastern Europe (Stulberg, 2017). The Soviet Union deliberately
created dependency on its oil by forcing its Eastern European satellites to transform
their heavy industries to run on oil instead of, for example, abundant coal in the case
of Poland), then supplying Soviet oil almost free of cost. The value of that subsidy
skyrocketed as world oil prices rose sharply in the mid-1970s (Austvik, 2016).

Once the dependency had been created, any reduction in supply threatened
the stability of the Regimes (Austvik, 2016). Hence the Soviets had no choice but to
keep producing more and more oil to supply them. In effect, both the satellites and
the Soviet Union itself were addicted to oil. The addiction was bequeathed to post-
Soviet Russia. Today, Russia is dependent on the value represented by its abundant
oil and gas resources. The distribution of that value throughout the Russian economy
is key to understanding its entire political economy (Colgan et all, 2017).

Figure 6 U.S and Soviet Oil Output

2.2.2 An Energy Based Economy

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In examination of Russias exports of oil and gas gives a first look at the
importance of these energy resources for the economy. Oil and gas alone accounted
for 63 percent of total exports in 2005 and represented 37 percent of state budget
revenues (Clunan, 2014). Thanks to the increased prices for these commodities on
world markets, hundreds of billions of extra dollars have flowed through the Russian
economy since 1999, available to be collected directly into the treasury or deployed
in other ways. The simple correlation between Russias annual gross domestic
product (GDP) growth and the growth of its crude oil export revenues suggests how
important oil has been in the past decade as shown Figure 4. This relationship shows
up even when both data series are broken down by quarters as shown in Figure 5
(Colgan, 2017).

Figure 7 Russias GDP and Crude Oil Export Revenue Dynamics

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Figure 8 Quarterly Changes in Crude Oil Export Revenues and GDP

The difference oil has made for Vladimir Putin compared to Boris Yeltsin is
illustrated by the following figures. In the four quarters immediately prior to Putins
assumption of the office of prime minister in late summer 1999, Russias earnings
from oil exports were less than $14 billion. In the most recent four quarters (July
2005June 2006), that figure rose to nearly $140 billion (Clunan, 2014, Chernykh,
2011).This has allowed Putins governmentin stark contrast to that of Boris Yeltsin
to fill its coffers, pay down state debt, and build up foreign exchange reserves. The
shift that has occurred during Putins tenure has been monumental. On October 1,
1999, Russias foreign exchange reserves had fallen to their nadir at $6.6 billion,
while the country owed the IMF alone a total of $16.8 billion. Today, Russia has
foreign exchange reserves in excess of $250 billion and holds an additional $80
billion in its oil stabilization fund. Russia has no debt to the IMF. The IMF, by
comparison, has only $223 billion in lendable funds (Clunan, 2014).

2.2.3 Russia Geopolitics

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Russia is considered to be one of the great powers, because of her large

territorial extent. She has reached her current shape following prolonged
geographical expansion. One factor behind motivating conquest of new regions was
natural resources e.g. minerals which exist in Russian soil. The Russian states
historically recurrent drive to mobilize human and natural resources for economic
development and war was conducted under control of authoritarian political system.
A strong sovereign has been a dominant feature in Russias politics. This together
with the centralized economy system and geographical expansion has led Russia to
several confrontations with the rest of the world. Russias foreign policy has been
shaped by the struggle to stabilize empires bordersthrough the centuries. That has
led to permanent military mobilization and frequent war, and has delayed countrys
economic modernization (Chernykh, 2011).

Because of this, Russias economy has developed slower than the economies
of the great powers in the West. Russias great power politics is often explained in
the light of the three geopolitical theories. The first one is based on Sir Halford
Mackinders idea of the World Island, in which the governing of the Eurasian
landmass is the key element for being world power. Mackinders Heartland theory
highlighted geostrategic factors e.g. rich natural resources of the Eurasian landmass
(Chernykh, 2011).

The second one is based on Nicholas Spykmans thinking. This theory

emphasizes the Rimlands and sea areas that surround the Heartland. This
description underlines the meaning of the Central Asia as crucial for Russias
security. The third explanation stresses the meaning of the strategic sea areas and sea
routes for Russias economic might and great power status. This interpretation is
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based on Alfred Thayer Mahans Sea Power theory. The definition made by admiral
Gorskov is on based on technology models in classical geopolitics (Goldthau and
Boersma, 2014).

To outline Russian naval politics, it is essential to notice one geographical

fact; Russia has only two harbours which are free from ice and have an open access
to the worlds oceans around the year. Rest of the Russias oceanic harbours are
struggling with the severe ice conditions, or they are located in inlet straits, which
can be easily sealed. Because of vulnerable sea routes, Russia is often considered to
be an inland power in compliance with the Heartland theory (Goldthau and
Boersma, 2014). However, in recent years Russia has also showed up as a credible
sea power. This is in line with Russias Maritime Doctrine from 2001, in which it is
stressed the aim to reassert her position among other leading sea powers (Maritime
Doctrine of Russian Federation 2020 2001). This has appeared as an increased
military patrolling in the oceans around the world. The opening of the new sea
routes, which is the consequence of retreat of the sea ice, has led to the situation in
which Russia has started to patrol regularly in the Arctic Ocean. The year 2008 was
the first time when she did that since the dissolution of the Soviet Union (Yakovlev,
2016).

All of these theories describe the regions that are important for energy
production and transportation. In order to discover the energy geopolitical reality it is
necessary to look at the location of resources and the lines of communication linking
them. This brings in the concept of security, due to the importance of energy to
modern industrialized societies. The configuration of these two variables assigns the
strategic value to locations, privileging some over others. The dynamics of Russian
energy policy becomes apparent in different geopolitical aspects to the strategic
Rimlands. The Rimlands that surrounds the Russian Heartland create the
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geostrategic buffer zones between the East and the West. These buffer zones are
defined militarily, economically and politically (Yakovlev, 2016).

The early 21st century cuts in Russian oil and gas exports for neighbouring
countries raised questions about relationship between energy and foreign policy.
Western critics of Russia and President Vladimir Putin tend to assume that
everything the Kremlin does is geopolitically motivated. Russia was blamed for
using energy weapon as tool in its foreign policy. However, this energy weapon
interpretation neglects two important factors. First, it underestimates the importance
of commercial considerations in Russian decision making. The Russian government
and major energy companies such as Gazprom, Rosneft, and Lukoil are keenly
interested in profits for its own sake (Malle, 2016).

The price hike for Belarus in December 2006 highlighted the growing
importance of commercial considerations. Secondly, energy trade between Russia
and EU has almost 50 years long history without cuts in supplies (Malle, 2016). The
gas and oil infrastructures, which were constructed during the Cold War between EU
member states and Soviet Union, were an expression of common economic
interdependence; the Soviet Union needed western currency and the EU desired
energy to secure economic development. The energy cooperation during the Cold
War was a starting point for broader (Malle, 2016).
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2.2.4 Energy security in terms of energy as a part of Russia Politics

Russia acts simultaneously as an energy producer, exporter, importer,

consumer, and a transit state. Russias foreign energy policy is influenced by the
factors of global politics and economy, as well as by the developments at regional
and bilateral levels, and the dynamics of the energy market. This diverse role in
energy sector becomes clearly evident in the progress of the neighbouring countries.
The CIS2 countries, former Soviet states are, despite their independence, often still
regarded to be included in Russias sphere of influence, where Russia has legitimate
interests. The reasoning for Russias interests in her near neighbours is explained by
existing geopolitical status quo, in what the shifts would mean global geopolitical
instability. Despite political changes in the relations CIS vis--vis Russia, there are
still elements from the Soviet system in the economic relations (Malle, 2016).

The economic networks, e.g. oil and gas infrastructures are difficult, if not
impossible to dissolve. The CIS countries are dependent on Russian energy imports
which give Russia the option to use these imports as an instrument of political power.
Nevertheless, Russias opportunities to use energy exports to the CIS countries as a
political weapon are quite limited. The Russian Federation is vulnerable to the
disruptions to its deliveries to the EU by Ukraine (Malle, 2016).

The latter is able to divert natural gas, transported for the EU, for its internal
purposes. The transit pipelines, which bind Russia and Ukraine, were built while the
two countries were part of the Soviet Union as a transit and supply pipelines. Any
disruptions of internal supplies may cause problems for external transits, as the
pressure in the pipeline will change. The land between Belarus and China comprises
 24

a hot spot for which states in the world community are positioning. This very region
has been a target for power struggle between great powers from the 19th century
(Malle, 2016).

In the 21st century the Great Game is going on in the region between the
United States, China and Russia. Central-Asia, the Caucasus and the South-East
corner of the Europe constitute a chain which control is essential for energy exports
from Russia to EU. In this regard, natural resources and their transport infrastructures
play a key role in the geo-strategic power game of Central Asia and Caucasus region.
With its vast pipeline network, Russia acts as an important gatekeeper for Central
Asian energy exports. Gatekeeper position is not only improving Russian foreign
policy position vis--vis the Central Asian countries, which are dependent on
hydrocarbon exports, but also strengthens Russias powers of negotiation towards
Ukraine (Gayoso, 2009).

Over the last couple of years, Russia has been faced with competition,
especially from Chinas side, for Central Asian oil and gas. The purchaseagreement
of China for Turkmenistan gas has helped the Central-Asian states to demand higher
prices for their gas from Russia. Moscow has been aiming to restore its presence in
the Asia-Pacific region through increases in oil and natural gas exports. Energy
Strategy for Russia the Period up to 2030 envisioned that Russia would increase its
exports of oil so that the use of Russian oil would increase in the Asia-Pacific region
would increase from 8 percent to of oil used in 2008 to 22 25 percent in 2030.
Natural gas exports were predicted to increase from 0 percent up to about 20 percent
in the same period (Gayoso, 2009).
 25

The strategic goals for Russia in its so called eastern vector are, on the other
hand, to increase energy exports toward the Asia-Pacific for creation of an Asia
card vis--vis the nations of the Europe Union, and on the other hand, to attract
domestic and foreign investments to modernize economic backwardness of eastern
Siberia and the Far East, which Moscow considers a Russian weakness geopolitical
rival, China. In the Sino-Russian energy relationship energy and geopolitics are
intertwined. At first sight the relationship appears to be based almost ideal
complementarily: on one side the worlds biggest exporter of oil and gas; on the
other, one of the largest consumers of energy in the world (Gayoso, 2009).

Also, China and Russia have a common border which makes possible to
transport energy via pipelines without third parties. For China, energy is not an
instrument of geopolitical ambition, but the principal for more assertive foreign
policy, on the contrary for Russia; possession of vast oil and gas resources is the
power-equivalent of nuclear weapons in the Soviet era (Mohsin Hashim, 2010).
Energy is not just an instrument of influence in itself, but impacts on other
dimensions of power: military, political, economic, technological, even cultural and
normative. The most fundamental is that Russia and China have very different
understandings of energy security. China is most concerned of security of supply.
The biggest threat to its energy security is an interruption to or a reduction in the
physical flow of energy, and a rise in the price of energy (Mohsin Hashim, 2010).

To reduce these risks China has diversified its energy imports to around the
world. For Russia energy security means security of demand. Oil and gas account for
over two thirds of Russias exports and a quarter of the countrys GDP. The
dependence of the Russian economy on the energy sector means that Russias interest
is to have long term contracts for its energy exports to protect commercial interests
both in the Far East and in the Europe. Another strategic compass point in Russias
foreign energy policy is north. Global climate change has catapulted the Arctic in the
 26

centre of the global geopolitics, as melting ice reveals options for new oil and gas
deposits. According to Russian sources, most of these Arctics oil and gas resources
are located in Russian territory. The Arctic region is considered to be primary
resource base and potentially important corridor for future ship traffic between the
Atlantic and Pacific Oceans (Security Council of the Russian Federation 2008;
Ministry of Energy of the Russian Federation 2009) (Bilgin, 2011).

However, it was not until 2008 that the Russian Federation managed to
formulate a comprehensive state policy in its Arctic region. The development of the
Northern Sea Route (NSR) alongside with the extraction of hydrocarbon resources is
one of the fundamental goals of Russias Arctic policy. This shipping channel is
perceived as the sole means of transportation for Russian petroleum products from
coastal and insular Arctic regions. Potential opening of the trans-arctic sea routes and
options for energy resources has got also the non-arctic states to look for the benefits
of them. For example China, whose economy is dependent on imported energy and
foreign trade, follows the development of the Arctic region carefully. In the future the
meaning of the Arctic oil and gas resources for global energy security may increase.
Events like, Arab Springs, an earthquake in Fukushima, Japan and Germanys
decision to close its nuclear power plants by end of 2022 have promoted the Arctics
energy reserves as a choice for global energy security (Bilgin, 2011).

2.2.5 Comparison of Russias policy between geo-strategic regions

 27

The changes in Russias energy policy from year 2000 to 2011 have appeared,
mainly, as dynamics between internationalization and nationalization of energy
sector. This dynamics has influenced to the meaning of analyzed regions in Russias
foreign policy. First common thing between the Eurasian Rimlands is their
meaning in the protection of Heartland, and that is why the strategies and policies
of the Russian Federation which consider these regions include along with the other
goals a security aspect (Bilgin, 2011).

The security aspect is emphasized by concept of energy security which

legitimates the states participation in energy production and transportation. In this
regard, Russia to shows up as an actor who has a messianic task to take care stable
distribution and supply of energy in the Eurasia and Asia Pacific regions. By using a
comprehensive understanding of energy security, Russia justifies states control over
the energy policy. Matters, like environmental protection and human aspects, are well
noticed in the concept of comprehensive energy security, and these kinds of soft
security means are making the comprehensive energy security a received and eligible
state of affairs. To succeed in this, Russia needs to control over its energy
infrastructure and that is why pipelines are in strategic position(Valds Lucas et al.,
2016).

A second common phenomenon is a geopolitical rivalry for the control over

the strategic Rimlands which is levelled mainly at the United States. This is
interpreted to mean that Russias uses its energy assets as an instrument of power for
protection of its national interests. However, in the light Russias Energy strategy, in
which countrys foreign energy policy objectives are defined the maximum efficient
use of the Russian energy potential for full-scale integration into the world energy
market, enhancement of positions thereon and gaining the highest possible profit for
the national economy the stick and carrot policy seems to be false
interpretation(Valds Lucas et al., 2016, Kisel et al., 2016).
 28

Use of energy as a foreign policy mean is like a double edged sword, because
any threat of cutting or reducing energy supplies will have a negative effect to
Russias reputation as a liable trade partner. In this regard the geopolitical
competition is not contested by means of the Cold War rhetorics, and that is why it
does not necessarily mean the return to arms race. In fact, this struggle is fought
according the rules of international law and international regional institutions.3
Russia is chasing to pursue extensive and multicentre cooperation, in which foreign
policys goal is to get the maximum profit from the eastern and western markets
(Kisel et al., 2016).

A third common feature underlines the state sovereignty. In Russias energy

policy, state sovereignty is manifested in the discussion of infrastructure and
transport routes. By keeping the pipelines and oil and gas tanker fleet under state
ownership, Russia shows that, even though the country is ready to open its strategic
energy sector to foreign investments, she not willing to give up the control of energy
transport infrastructure. The desire to avoid transit states countries by building up
new supply routes e.g. Nord Stream and South Stream, support Russian foreign
energy policy goals (Kisel et al., 2016).

Transport infrastructure is crucial part of states capacity to control energy

policy. One of the biggest differences between analyzed regions is also related to
energy transports. In the southern Rimlands of Eurasia energy is transported via
pipelines, where as in the Arctic main transport mean is planned to be oil and gas
tankers. The existing pipeline network has its advantages and disadvantages
(Kinnunen and Korppoo, 2007).

On the other hand, the pipeline network which Russia controls binds and
makes former Soviet states dependent on Russia, but then again it prevents Russia
from diversifying its energy exports geographically and from achieving maximum
 29

commercial profits. In this sense the use of tankers in energy transports seems to be
logical, since it provides global markets for Russian energy (Kinnunen and Korppoo,
2007, Baev, 2012). In Central Asia and the Caucasus region Russia acts mainly as a
transit state, while region Russias role in the Arctic and the Asian Pacific is energy
producer and exporter.

These different roles influence Russias foreign energy policy in analyzed

regions. The gatekeeper position in Central Asia allows the control of energy
transports between China and the EU. The Central Asian states are trying to reduce
their dependence on Russia by concluding bilateral relationships for energy exports
and by planning alternative pipelines e.g. Nabucco project which are bypass Russian
territory (Baev, 2012).

On the other hand, in the Arctic region Russia is dependent on both

technological and economical foreign investments. In order to encourage investments
Russia has had to change the energy sector and to make it more open (Mare and
Lary, 2012).

2.3 Energy Change in Russia

 30

Natural Gas

Russias gas sector has undergone major transformations in the upstream,

midstream and downstream segments over the past five years that have enhanced the
longterm reliability of gas supplies in Russia and to European countries and beyond.
Gazprom is successfully managing the transition from operating the legacy gas fields
to one based on new green field primarily Bovanenkovo. Independent companies
have rapidly increased their share of domestic gas production, in particular Novatek.
Gas production is moving to the Yamal area, as well as to the Yakutsk and Irkutsk
centers in the longer term, and liquidsrich gas and deeper gas layers are increasingly
produced.

Russian companies have the capacity to produce much more gas than
domestic and foreign markets can absorb. The domestic gas pipeline network has
been partially modernized and expanded, and the export pipeline infrastructure, with
Nord Stream, has been developed to foster the security of Russian gas exports to key
European markets. Russia also started exporting liquefied natural gas (LNG) from
the Sakhalin plant in the Far East, which could become another major production
center in future, supplying Asian markets. A number of new LNG projects, more or
less advanced, will increase the share of Russia in global

LNG Trade In The Medium To Long Term.

 31

Russia holds the worlds largest gas reserves and is the worlds second gas
producer after the United States. In 2012, domestic production was 654.4 billion
cubic meter (bcm) and reached almost 670 bcm in 2013. The share of associated
petroleum gas in 2012 is 8.4% of the total and in constant increase, from 42.6 bcm in
2005 to 54.7 bcm in 2012. Peak daily gas production was reached at the end of 2011,
with 2.1 bcm per day. Gazprom, a statecontrolled company, is Russias largest
producer with 487 bcm of gas in 2012 (down by 5% from 2011), 487.4 bcm of gas in
2013 extracted from 127 fields and 7 226 existing gas production wells.2 Gazproms
production in 2012 reached its second lowest level in the past ten years at a time
when Gazprom launched its supergiant.

Bovanenkovo field and increased plateau production from the Zapolyarnoye

field. Indeed at the same time, Gazprom reduced imports of Central Asian gas,
purchases of gas from independent companies and its legacy fields continued to post
a progressive decline in output. Production was flat in 2013 at 487.4 bcm. In autumn
winter 2012/13, the companys maximum daily gas production was 1 658 bcm (+50
million cubic metres [mcm] yearonyear). Gazproms production capacity in 2014 is
600 billion cubic metres per year (bcm/yr). Reasons for Gazprom producing below
its potential in more detail in the subsequent sections and include: no increase in
overall export volumes, no increase in domestic gas consumption, steady imports
from Central Asia and the Caspian since 2010, and growing competition from
independents on the domestic market.

Whereas Gazprom remains by far Russias leading producer, its share in total
production has been steadily decreasing over recent years. Three companies
represent the bulk of Russias production: Gazprom (73.1%), followed by Novatek
(12.6%) and Rosneft (5%). Indeed, the share of nonGazprom production from so
called independent producers this is how these companies are referred to in the
Russian official regulations has been constantly increasing, mainly driven by
Novatek. As a consequence, the share of Gazprom in total production has declined
from about 83.3% in 2007 to 73% in 2013. Reasons include lower domestic demand
and lower exports to Ukraine, its commercial strategy, and higher production from
 32

independents benefiting from a more favorabletax and regulatory environment, such

as the right to sell gas at nonregulated prices.

Figure 9 Gas production in Russia (2014)

Production outlook

Overall, Gazprom plans for only small production growth in the short to
medium term, and in the short term, its production is likely to even be flat. This
downward revision of initial production growth numbers cannot be seen in isolation,
from the stagnation of demand on the Russian and foreign markets and from
increasing competition on the Russian market. Gazprom plans to produce about 530
bcm by 2020, while independents also have ambitions of production growth in a
market where demand is unlikely to pick up sharply.
 33

Over the period 201420, independent producers are likely to increase

production by about 40 bcm of already contracted gas, which could require Gazprom
to be the swing supplier and possibly keep output flat or even reduce it unless there is
a substantial growth in exports to Europe and in domestic consumption.

Figure 10 Prediction of Gas production in Russia in the future

Demand

Russia is the worlds secondlargest gas consumer after the United States,
with 459.4 bcmin 2012. Historical data show that over the 2000s, gas consumption
steadily and rapidly increased at a pace of 2.3% per year for the period 200007,
before slowing down to 0.3% per year in the period 200712. The rapid expansion of
demand in the first half of the 2000s was related to the growth in power generation,
as well as the growth in industrial consumption following stronger industrial output.
 34

Over past years, demand for electricity from gasfired power generation has
also increased in a few regions, driven by major infrastructure projects. This is
notably the case in the Leningrad region where the Primorsk port was built as well as
in the Sakhalin region where a major LNG plant was constructed, but also in the
Yamal region where upstream gas projects were developed; similar development
occurred in the Tyumen region and the Moscow oblast. This has thus contributed to a
sharp increase in gas consumption, but only temporarily and in a geographically
limited scope. Calculations from Troyka Dialogue show that when these four regions
are not accounted for, average annual growth in Russia was only 0.5% in the period
200411.

Figure 11 Russia's Domestic Gas Consumption 2005-2013

Crude oil

Russias oil sector plays an essential role in Russias economic development,

and its energy security as well as global energy security: In 2012 Russia was the
 35

worlds secondlargest oil exporter, and the largest exporter among nonmember
economies of the Organization of the Petroleum Exporting Countries (OPEC), but
also the worlds fifthlargest consumer. Russias liquids production is currently at
historically high levels and largely relies on brown fields. A small number of green
fields have fueled the production growth but in the medium term, condensate is
poised to be the key driver of growth in liquids production. However, the key
challenge for Russia is now to minimize the expected declines in mature Western
Siberian fields, which have remarkably slowed and even stabilized in past years,
while bringing on enough green fields to make up for the decline. Key ways include
enhanced oil recovery (EOR) in Western Siberia; unconventional oils; gas
condensate production; new green fields, especially in Eastern Siberia; continental
shelf exploration (Arctic, Black Sea, Caspian Sea, Sea of Okhotsk); and production
of natural gas liquids (NGLs).

In order to maintain oil exports at current levels, Russia will also need to limit
the increase in consumption of oil products with higher efficiency standards and
accelerate the replacement of gasoline with natural gas and liquefied petroleum gas
(LPG) for public transport, trucks, trains and cars. The need to develop the next
generation of oil resources and replace legacy brown fields places Russias oil sector
at a fundamental turning point in terms of skills, technologies and costs. Russias oil
industry will require unprecedented levels of investments and technology upgrades,
alongside foreign expertise and investments.

Supply

Russias crude oil and condensate production in 2012 reached on average

10.73 million barrels per day (mb/d) or 517 million tonnes (Mt) (+1.2% yearonyear
 36

[yoy]), and total liquids production in 2013 amounted to 10.87 mb/d, with crude
alone amounting to 10.09 mb/d. Past years historically high production figures
happened against the backdrop of an average Urals price of USD 108.8 per barrel
(USD/bbl) in 2013 (USD 110.3/bbl in 2012) and improvements to tax conditions that
have supported drilling activity. Russia in 2012 and 2013 was the worlds second
largest total liquids producer, behind Saudi Arabia and ahead of the United States,
representing about 12% of the worlds total output.

Such levels even exceeded the high production scenario from the Energy
Strategy to 2030. However, in 2014 Russia is likely to be overtaken by the United
States as the worlds largest supplier due to the large increases in tight oil production
there. In Russia, according to the Ministry of Energy, RosneftsVankor oil field in
Eastern Siberia contributed to about a half of the net production increase, by 3.1 Mt
(about 62 000 barrels per day [bbl/d] or 62 thousand barrels per day [kb/d]).1 The
production increase also came from other fields: SurgutneftegazsTalakanskoye
Central block (production of 145 000 bbl/d in 2013) and fields developed as part of
RosneftsUvat project in the Tyumen region.

In Western Siberia, production continued to decline slightly (0.2% yoy),

but the decline was slower than from 2010 to 2011 (1.5%)Russian output hit a
monthly record of 10.12 mb/d for crude and 10.89 mb/d for total liquids in
September 2013. It did it again in October 2013, when crude output is estimated to
have reached 10.19 mb/d and total liquids output was 10.96 mb/d. Western Siberia,
with more mature fields, has experienced only a slight drop (some 30 kb/d) since
January 2012 and accounts for about over 300 Mt production4 (about 6.2 mb/d).
Eastern Siberian fields more than made up for this deterioration, with an increase in
output of about 170 kb/d between January 2012 and September 2013. Overall, since
2008, the decline in production from Western Siberian brownfields seen in the mid
2000s has been stabilized.
 37

Figure 12 Russia total liquid production, 2002-2013

Demand

Against the backdrop of robust economic growth during the 2000s, Russias
oil product demand increased quite sharply in the 2000s. Petromarket data show that
consumption of gasoline increased by 4% yoy in 2012 to 34.5 Mt. Jet fuel
consumption was 9.0 Mt (+3.5%). Large commercial airports consume 70% of jet
fuel, and Moscows airports,such as Domodedovo, Sheremetyevo and Vnukovo,
account for over half of the Russian market. The consumption of fuel oil increased
by 3.5% yoy and amounted to 23.7 Mt (about 419 kb/d). On the downside, the
consumption of diesel fuel in 2012 amounted to 28.2 Mt (576 kb/d), marking a 2%
decrease versus 2011, and heavy fuel oil demand is also in decline.

Relatively robust demand growth is forecast in the coming years, albeit at a

gentler pace than the 2000s as some modest efficiency gains are assumed. For
example, the average efficiency of the Russian car fleet is forecast to increase by
around 1% per year over the period 201015, accelerating to 1.3% over the period
201520. Growth in Russian demand is expected to average just over 3% per year in
the period 201218, with momentum gradually easing through the post2014
 38

forecast. Overall oil consumption in Russia increased by 4.1% according to

preliminary data, and a 2.9% increase was foreseen for 2014, to roughly 3.5 mb/d.

Figure 13 Oil demand by sector, 1990-2012

 39

Energy Consumption

The change in energy consumption structure of the Europe evidences an

increase in the share of natural gas. Russian natural gas reserves therefore increase
the importance of Russia as the key energy exporter to the European market. In terms
of gas consumption, Russias share has hovered between 25 and 30 percent over
2013. Europe has in fact increased its LNG import capacity over the last decade,
although this is heavily concentrated in Western Europe (P. Kiernan., 2015)

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 (L. Goodrich., M. Lanthemann., 2013).
 40

1.0 Climate Change Issue

Despite Russias crucial role in the entry into force of the Kyoto Protocol, the
climate change issue has not gained a high profile on the national political agenda.
However, the impact of climate change in Russia can influence the dynamics of
Russian society in four ways as follows (J. Chiavari & M. Pallemaerts., 2008):

a) Climate change will impact the country, with consequences on the

environment, the economy and on peoples lives
b) How Russias oil and gas itself lends to climate change internally and
externally
c) Legacy of inefficient energy production, transportation and
consumption infrastructure, leading to higher emissions than
necessary given the many potential improvements
d) Potential role of the country in supplying the global carbon market
with emission reduction certificates

1.1 Climate Change Challenges towards Energy Security in Russia

 41

The situation in Russias regions will become more severe with a growing use
of coal in residential homes. The energy balance of the country would then expect a
growing portion of the most polluting coal with pollution rising by as much as two
times in southwestern Siberia, where pollution is already a problem. Rising gas cost
could also trigger more pollution as households switch to coal (V. Kopeikina., 2008).

Another climate threat to Russia is melting permafrost, which could wreak

havoc with the infrastructure of northerly regions of Russia. The areas at most risk,
according to the report, is Chukotka, in Northeastern Siberia, the upper basins of the
Indigirka and Kolma River, the southeastern portion of the Yakutsk region, the
Western Siberian plains, the shores of the Kara Sea, Arctic Island of Novaya Zemlya,
as well as other island frost north of Russias European territory. These areas host
Russias oil and gas complex and associated pipelines, the Bilibin Nuclear Power
Station and the electrical infrastructure surrounding it. Melting permafrost in
northern Russia could lead to radioactive leaks from storage facilities (V. Kopeikina.,
2008).
 42

1.2 Russias Initiative to overcome Climate Change Issue

Russia signed and ratified the United Nations Framework Convention on

Climate Change (UNFCCC) in the early 1990s, and ratified the Kyoto Protocol in
2004, having signed the agreement in 1999 (J.D. Sharples., 2013 ). According to the
terms of the Kyoto Protocol, Russia agreed that by the commitment period of 2008
2012, Russias GHG emissions would be equal to the base year of 1990 (J. Chiavari
& M. Pallemaerts., 2008). Kyoto Protocol suggested, at least to some, that the era of
fossil fuel consumption may be cut short, together with Russias energy supremacy.
At the same time, the Protocol offered an opportunity for Russia to demonstrate it
was willing to become a key driving force in the abatement of climate change,
thereby securing a dominant position in the international climate negotiations (M.
Sharmina. et. al. 2013). Russia was far below its 2012 target when Russian
representatives arrived in Durban for the COP17 climate-change conference in
December 2011. Yet during the conference, Russian representatives reiterated
Russias decision not to participate in the second Kyoto Protocol commitment period
of 20122020 (J.D. Sharples., 2013).

Energy Projection

For Russia, energy security and climate change are not as interlinked as they
are for the increasingly import-dependent EU. However, the period to 2030
represents a potential transition phase, during which current and potential importers
 43

of Russian gas could see their gas imports increasingly influenced by global climate
change action. However, Russia is expected to face another energy cycle draws to an
end in the next two decades (L. Goodrich., M. Lanthemann., 2013). Unlike
Brezhnev and Gorbachev, Putin has proven capable of enacting effective policy and
strategy changes in the Russian energy sphere. While Russia's dependence on high
oil prices continues to worry Moscow, Putin has so far managed to respond
proactively to the other external shifts in energy consumption and production
patterns particularly those affecting the European natural gas market (L.
Goodrich., M. Lanthemann., 2013). If Russia plans to expand the foreign market for
its energy exports we should already be seeing new contracts with Asian countries
such as China and the beginning of construction projects building new liquefied
natural gas (LNG) terminals and or pipelines to carry Russian oil and gas to Asia.
Until Russia takes substantive steps to secure its energy export market with non-EU
customers, political leaders are signaling that they still expect to profit from future
trade with the EU (R. G. Patterson., 2013). Even so, the long-term sustainability of
the model Russia is moving toward remains doubtful.
 44

CONCLUSION

Energy became more central to Russian foreign policy due to the rapid rise in
the world market price of oil in the beginning 21st century. High prices resulted from
the exports of fossil fuels became the most important income for state. Rapid
economic recovery and centralization of power revised character of Russian foreign
policy. The strengthening of Russia did not mean return to expansive foreign policy,
thus Russias foreign policy is guided by the objective maximize its economic
growth. After Vladimir Putins accession to power, both domestic and foreign policy
was economy-oriented. The economic system was capitalist even though states role
was bolstered up (Mare and Lary, 2012).

This affected also the energy sector in which state control increased as
compared to privatization policy during 1990s. Strong state policy, led by president
Putin, promoted better execution in reaching Russias national interests. Putins
foreign policy did not mean Russias isolation from the world markets because
Russia still tried to integrate strongly into the global economy.
 45

However, the integration would only happen according to Russias national

interests. Russias foreign, security and energy policy documents and strategies do
not differ from their targets as compared to Western documents, even though Russia
and Western countries have different approach to the post-Cold War world. Despite
this, interpretations of the Russian strategies often highlight the security aspects of
strategies and policies. This has politicized oil and gas, when Russia has had
conflicts with other countries. However, the use of energy weapon is bad policy
from Russian point of view, because it reduces the incentive to do business with
Russia in other sectors (Mare and Lary, 2012).

After oil prices peaked in 2008 Russia tried to modernize its economy by
reducing the countrys economic dependence on natural resources. The
modernization policy has softened Russias foreign policy. This has increased the
prestige in doing business with Russia and has strengthened Russias credibility. A
politically and economically strong and steady Russia is crucial for world
geopolitical stability and peace.
 46

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33