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Russia: Oil and Politics Author(s): R. G. Gidadhubli Reviewed work(s): Source: Economic and Political Weekly, Vol.

38, No. 21 (May 24-30, 2003), pp. 2025-2030 Published by: Economic and Political Weekly Stable URL: . Accessed: 11/04/2012 09:38
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Under VladimirPutin Russia has followed an aggressive energypolicy enhancing the contributionof the oil and gas industryin the domestic economy. But as private companiesgain dominancethroughmergers andforeign collaborations,a conflict of interestmay emerge between the state and oil barons. Russia has become a majorplayer in the world energy sector and has used oil as a weapon to achieve itsforeign policy objectivesthroughenergypipelines.

oil industry beenin the has Russia's news duringthe pastfew months. In the third week of April, two majorRussianoil companies,Yukos and theirmerger create to Sibneft,announced in oil thefourth largest company theworld, worth$35 billion.The new company,to be called YukosSibneft,commandsthe reserves about billionbarrels, of 20 largest whichcan produce2.3 millionbarrelsof oil perday.Economicanalystshave consideredthe mergeras one of the most significantevents since Russia's transition to a marketeconomy.For instance, Post on April23, 2003, The Washington newspapercommentedthat the merger had createda "new giant which will be fourth but one producer number in largest the provenreservesof oil". In fact, this was the second major oil deal in the 10 2003,Britprevious weeks;inFebruary ish Petroleum bought 50 per cent of oil s Russia' third largest company Tyumen Oil, at $6.7 billion the biggest foreign direct investment Russiain thepastfive in years.Since2002, Russiahas emergedas a major energy playerin the international market. Russia now rivalsSaudiArabia in as the biggest oil producer the world. Duringthe past few years, Russia's oil as barons havemadehugeprofits oil prices market. RusThe rosein theinternational is sian treasury gettingfilled with petrodollars.However, some analysts in the west andpoliticalgroupsin Russia,from are theirownperspective, criticalof some of thedevelopments claimswithregard and But to the country'soil industry. the fact that and remains Russia oil areintertwined, something aptly commentedon by an This economic historian. is clearlyevident considering that Russia's president, Vladimir Putin,hasbeenpursuing aggressive policies and measures using its

of gas energyresources oil andnatural as an economic weapon to serve national interestin world politics. Before its break-up, Soviet Union the was one of the majorproducers exand of oil and naturalgas. For postporters Soviet Russia,energyresources continue to be of greatimportance. This is evident from the fact that in 2002, the energy sector accountedfor 25 per cent of the totalindustrial of output Russia,about33 per cent of the federalbudgetand 50 per cent of the country'shardcurrency earnabout350 million ings. Russiaproduced tonnes of oil and over 600 billion cubic metres natural Russia depended of has gas. theexport rawmaterials earning of for upon much-needed hard currency for the economy in transition. Energyresources were the most acceptable material raw in the international market. Hencetherehas been a significantincreasein the importanceof oil andgasintheRussian economy. Russia'sgas company aloneacGazprom countedfor about8 percent of the states revenue.Apartfromeconomicgainfrom energy resources,the Russian state has used oil and gas as a politicalweaponto increaseits influencewithinthe CIS and in particular thecentralAsianstates, with Byelorussiaand Ukraine. State and Private Sector of Someoil andgascompanies theSoviet era, such as Gazpromand Rosneft continueto operate.But in addition these, to several new ones emerged during the of presidency BorisYeltsin.Forinstance, Yukos is the largestverticallyintegrated company, engaged in activities ranging fromgeologicalexploration marketing to of refined products. chiefof Yukos, oil The MikhailKhodorkovsky, one of the oliis garchs(baron)of Russiaand a multimillionaire.Similarly,Lukoil is a leaderof

the Russian fuel energy complex, the first integratedcompany engaged 'fromoil well to filling stations'. The presidentof Lukoil, Vagit Alekperov, is another oil baron. Before the merger, Sibneft was considered to be one of the world' s top 20 private oil companies in terms of the reserves it possessed, concentrated mainly in west Siberia. Boris Berezovsky was one of the chief promoters of this firm and Roman Abramovich is its unofficial head, holding majority share. Tatneft is a joint stock oil company in Tatarstan autonomous state. There are also many medium and small private firms operating in Russia. In the case of state-owned firms, as a result of privatisation, the share of the state has come down significantly. In Gazprom, it has been reduced from 100 per cent to 38 per cent. At the same time, the Russian state holds stakes in some private companies. In Lukoil, it holds 14 per cent share, in Slavneft 50 per cent and so on. Notwithstanding the privatisation process, there are close relations and interactions between the state and private companies. Lukoil president Alekperov was a former government official and a deputy in the Soviet oil industry. Sibneft chief Abramovich is the governor of Chukota, which is an energy-rich region on the Barents Sea. Yukos chief Khodorkovsky was a leader in Komsomol (the youth wing of the Communist Party) and in 1993 he briefly served as deputy minister of power. The former prime minister of Russia, Viktor Chenomyrdin, was the chief of Gazprom. Anatoly Chubais was a deputy prime minister and was closely associated with Boris Yeltsin and his 'family', a group which was closely linked to the Kremlin. For the past five years, he has been the chief of the 'unified energy system' of Russia and his position has been extended up to 2008. Some analysts have, therefore, argued that the Russian state and private companies complement each other in Russia's energy sector. The Russian state wants to increase its political power both at home and abroad while private companies want to increase their profits. Those who have not adjusted to this situation have been eased out, such as Boris Berezovsky, who was at one time an influential figure and closely associated with Yeltsin. He was not only caught in a few alleged frauds, but was also reported to be opposing president Putin and the policies of the Russian government. He has been squeezed out and is in exile after Putin came to power. It needs to be

Economic and Political Weekly

May 24. 2003


mentioned,however, that the heads of Russia'soil gas companies technically are To professionals. makethefirms qualified competitiveinternationally, privatecomoil paniessuchasYukosandTyumen have appointed western managers at senior levels, which has reformedthe management of the companies.All these efforts have causedthe shareprices to shoot up in 2003. The Russian state has been actively the sector thedevelopin supporting private mentof theoil-gasindustry. I Kalyuzny, V the formerministerof fuel and energy, the appreciated role of Russianprivateoil companies in implementing Russia's in He energystrategy the21stcentury. said thatin a shortperiodRussianoil companies, which althoughyoung have taken, a worthy placein the new economicorder and are successfully competing with western energygiants.Infact,theRussian seems to have supported the government oil-gas companies to consolidate their positions,whichhasalsohelpedin attracting foreigncapital.For instance,accordthe ing to MikhailFridman, multibilliondollarjoint venturedeal betweenBritish Petroleum Tyumen wouldnothave and Oil been possible withoutthe supportof the Russiangovernment.Accordingto some whenthisjointventure analysts, company startsproduction, will be a locomotive it for the Russianeconomy. Similarly,the CEOof YukosSibneft, MikhailKhodorkovsky,has assertedthatthe companyis expectedto play a big role in the world oil market.It is importantto note that accordingto some analysts like Daniel the has Kimmage merger takenplacewith the blessingsof the Russiangovernment. In support this contention, Russian of the on newspaper zvestiyaalsoreported April 23, 2003 that Roman Abramovich of Sibnefthad"discussed dealwithPutin this to save the deal from being acquiredby as that a foreigners" therewere rumours foreigncompanymighttakeover Sibneft. MoscowTimesreported April23, that on the mergerwouldstrengthen between ties the CEO of YukosSibneftand a number of influential figuresincludingpoliticians andbusinessmen the country.Presumin ably for this reason,France'sLe Monde wroteon April23, 2003 thatthe merger deal was "the most important since the birthof marketeconomyin Russia".The Economist takena different has view, and has commentedthat the mergerby itself may not be a sufficient condition for YukosSibneft to compete with other

globaloil giantssuch as Exxonor Mobil. Be thatas it may, consideringthese two recent cases, it appearsthat the Russian has government beentryingto balancethe dominant role of foreigncompanieswith thatof Russian in companies thecountry's will energysector.YukosSibneft play an role important in Russia'soil-gasindustry. Moreover, it proposes to boost export new capacity significantly constructing by the pipelines.Considering new developments,the Russiangovernment mightreconsiderits earlierpolicy of maintaining total controlover pipelines,thusopening the door to private-sectorfunding and operationsin the new pipelines. Strategic Partnerships Duringthepastfive-six yearsprivatelyowned Russianoil companieshave also beenworking othercountries in producing oil and gas and participating strategic in Russian companies in the partnerships. energy sector are workingin tandemto meetthecountry' increasing s energyneeds andincreasing andgas exportsearning oil hardcurrency. fact, according some In to these companiesare addressing analysts, someof Russia's basicforeign policytasks. For instance, in 2002 Putin initiated a proposalof greatercooperationbetween RussiaandTurkmenistan thegas sector. in In February chief Alexei 2003, Gazprom MillermetTurkmen Niyazovto president discussfurther in the exploicooperation tation Turkmen anditsexport of gas through Russianpipelines.Gazpromwith 38 per cent ownershipby the Russian government, has initiated proposals for the modernisation production of activities and construction new pipelines,whichwill of the of helpincrease gasexports Russiaand Turkmenistan. havebeen made Proposals and to by Gazprom Turkmeneftgaz jointly build pipelines to export gas to China. RussiaandTurkmenistan concluded have and agreementunderwhich, from 2005, Russiawill buy 10 billioncubicmetresof Turkmengas annuallywhich will go up to 20 billioncubicmetresfrom2008. This will further enhance Russia's export capacity. Russia'sprivate haveplayed companies animportant in increasing producrole the tion of oil and gas duringthe past few years.For instance,from3.5 millionbpd (barrels day) in 1997, the production per of oil shot up to over 7 mn bpd in 2002. This has enabled the country to meet domestic demand and also growing

demandin worldmarkets. ManyRussian oil companieshave investedand particiin patedinjointventures theenergysector in many countries.They receive strong support from the Russian government. Lukoilhasfive big projects developoilto LukoilandKazak gasfieldsin Kazakhstan. state-owned firm KazMunGazLiazzat Kiinahavedecidedto createby November 2003 a joint ventureto explore and develop oil-gas in one block of the Caspian Sea, which has reservesof over 100 mn tonnes. The supportof the Russian state for privatecompaniesis also strong.Lukoil, along with two otherRussianfirms,had investedin a projectvaluedat $3.7 billion for the exploitationof the West Qurna oilfield in Iraq. In December2002, the underSaddamHussein Iraqigovernment terminated contract theground the on that the Russianfirms-had failed to develop oilfields as agreedupon in the contract. But Lukoil contendedthat the firms had not violatedthe contract were barred but from proceedingwith their work on the The projectundertheUN sanctions. issue causedconsiderable debatein Russia.Political analystscontended Lukoilwas that under "strong the of protection theRussian state".A Lukoil spokesmaneven threatenedthatthefirmwouldtakeupthematter court.On the legally at the international December 15, 2002 the Russianforeign its ministryissueda statement expressing on displeasure the issue. Russianpolitical commentators, however,pointedout that Saddam Husseinwas still in powerthanks to Russiaanda few othercountries. Thus, feeling the pressurefrom Moscow, the Iraqi government withdrew the order the Russia astrong has terminating contract. economic stake in Iraq, where it has investedheavilyoverthepasttwodecades. even the on Russia Therefore, after war Iraq, has not agreed to the US suggestionto write off Iraqidebt. Lukoil has insisted that it proposes to operatein Iraq'soil industry. The Russiangovernment whileextending supportto the privatesector,is also tryingto bringit underits own influence. UnderPutin'spresidentship, Russian the government seems to be interestedin the increasing influenceof the stateover oil-gas companies.The policy statement of primeministerKasyanovmadea few months back, to bring oil-gas pipelines under construction under the state control,was a clear indication of this development.But this policy, may be


Economicand PoliticalWeekly May 24, 2003

reviewedas private companies such as YukosSibneft proposeto build pipelines to jointly with the government push exto new markets. Accordingto some ports men Putinhasputhis own trusted reports, fromSt Petersburg important in positions in Gazprom. February In 2003, Aleksandr who was a colleague of Putin Bespalov, at the St Petersburgregional office of the KGB and is now chairmanof the pro-KremlinUnified Russia's General Council, was named as the head of Gazprom's information policy department.The Russian governmenthas also appointeda former intelligence officer fromSt PetersburgSergei Ushakov, as Gazprom's deputy chairman for administration. Valeri Golubev, a former KGBofficer and the LeningradOblast to legislature's representative the federal council has been appointedto a leadership position in Gazprom's subsidiary companyItera. All these developments indicatethe interestof the Kremlinand the Russianstateto activelyincreasetheir holdontheenergysector.Stateandprivate energy companieshave been important tools of the state in promotingRussia's economic and political interests. Politics of Pipelines RussiaunderPutinhas pursueda very aggressive policy on pipelines for the of transportation oil-gas both for the as domesticmarket well as for export.At present,Russia has pipeline capacity to export130-140mn tonnesof oil. During the past couple of years, many projects have been completedand new projects in takenup.Forinstance, August2002 the Consortium (CPC)was CaspianPipeline In inaugurated. this Tengiz-Novorussisk pipelineof 1,700 km Russia,Kazakhstan and some westernfirms includingChevron are the partners. This pipeline links Kazakhstan the CaspianSea with the on BlackSea portin Russia.It has the initial capacityto export 28 mn tonnes of oil, whichwill increaseto 67 mn tonnesover the next 10-15 years.Accordingto some the has analysts, Russian government made efforts to complete this much-awaited pipeline.Russia wants to assert that the pipelineis more economicalnot only to Russia, but also to Kazakhstan and comparedwith the proposed Azerbaijan Baku-Tbilisi-Ceyhan (BTC) pipeline route.During the past few years, some westerncountriesincludingthe US have the beenstrongly supporting BTCpipeline

routeas they are interas an alternative ested in getting oil from Baku on the this CaspianSea through pipeline,which connectsthe Turkish portcity of Ceyhan Sea. on the Mediterranean Hence Russia has been tryingto convey the advantages of CPC over BTC, which,however,may take some more years to materialise. The Russianstateand Russia'soil and gas companies including Gazpromand several andYukoshaveenvisaged projects to promoteits energy exports,including a gas pipeline projectto Europevia the Baltic Sea bed, and an oil pipelinefrom eastern Siberia to China and Japan. to AdAccording the EnergyInformation ministrationreport of November 2002, with consortiums theparticiinternational are pationof Russiancompanies developing projectsin SakhalinIslandwith proposals to build pipelines to China and Japanwhereenergydemandis increasing rapidly.Thus,Russiawantsto strengthen its economic ties to cultivatethe market for oil and gas bothin the east and in the west. In this regard,an important policy hasbeentaken theRussian government, by when prime ministerKasyanovsigned a documenton December11, 2002 calling of for the integration Russia's dominant Druzbapipeline(knownin the Soviet era as 'Friendship'pipeline), which passes and with Poland Slovakia, Belarus, through the Adriapipeline,whichtransits through Hungary and Croatia. This integrated Druzba-Adria pipelinehas come undera single economic entity to supply 15 mn tonnes ( 90 mn barrels)of Russian oil to world markets through the Croatian port of Omisalj. Russia's state-owned Transneft,which initiated the scheme, would operate the project from the Russian side. An equally significant. factorin this projectwill be that Russia will get the advantageof the deepwater portfacilityof Omislaj,which will overcome the disadvantage Russia has been so far. experiencing Russia'saggressive policyto expandits pipelinenetworkis also evidentfromthe fact thatPutininaugurated exportteran minalat Primosrk the Gulf of Finland on inDecember 2002,whichwillallowRussia to controlthe distribution Caspianand of west Siberian to Europe. oil Accordingto a Russianspokesmanthis will help both Russiaand the centralAsian countriesto increaseexports of oil. Primorskis the final link in the Baltic Pipeline System (BTS) and the $500 mn that Russia has investedwill link Siberiawith the portin

the ArcticOceanin the northcircumventthe ing the Baltic states.Considering fact that Russia-Baltic state relations have become sensitive on the alreadyexisting LatRostrans pipelineissue, Putinmadeit a pointto statewhileinaugurating port the that BTS was not intended to sever economic ties with the Baltic states. But he assertedthat Russia has to care more aboutits own securityand independence with regardto the exportof oil and gas to worldmarkets. factthatRussiahas The been using pipelines as a foreign policy weapon is clear from the fact that in 2003 it decidedto bypassLatvia February in exportingoil. This is possiblybecause some of the policies of the Baltic states, includingtheirdecision to be partof the NATO and a discriminatory attitudetowards ethnic Russians seem to affect Russia's interests.In the first quarter of 2003, RussiahasnotusedtheLatRostrans pipeline,whichis jointlyownedby Russia and Latviaas per the agreement, entered into in 1993. Duringthe past decadethis pipelinewas usedby Russiaforexporting oil to Europe from the Latvianport of Ventspils and thus has been a source of incomefortheBalticstate.ButnowLatvia has been unhappy, Russia'sactionhas as Latvia economicallyaffectedits interests. has also contendedthat Russia has violated the 1993 agreement.The Latvian governmenthas gone to the extent of approaching the European Union and seekingthe help of US president George Bushto intervene endingtheblockade for of the pipeline by Russia. The Latvian governmenthas also statedthat most of theworkers theVentspils at portareethnic Russiansand thatthey are being affected by thisblockade.Butthe Russiangovernment has insisted that there was no violationof the agreement. has also argued It that the Latvia-Russia on agreement the joint use of oil pipeline did not regulate supplies. Similarly,in July 2000, Gazpromdecidedtobypass in Ukraine exporting natural gas to westernEuropeandtake the route BelarusandPoland,andthe same through was done with the exportof oil. This was partlydue to the fact thatin recentyears, oil hasbeenstolenby mafiaelementsfrom the pipelinesin Ukraine.But Russiahad to bearthe revenueloss. Moreover, there have been disputesbetween Russia and Ukraineon the amountof debt that the latterhas to pay Russiaas also delays in the repaymentof debt. These could be some of the reasonswhy Russiatriedto

Economicand PoliticalWeekly May 24, 2003


use strong-arm tactic by not using the pipeline passing through Ukraine. However, in 2002 there some understanding has been reached at the highest level between RussiaandUkraine.Subsequently, in January 2003, Gazprom and Neftohaz of Ukraine formed a consortium with a capital of $ 1 million, which is expected to upgradeUkraine's pipeline gas system. In April 2003, Germany's Ruhrgas decided to join the consortium. For Ukraine this is a positive development and a sign that Russia would not abandon it in exporting energy resources to western Europe. Ukraine has 35,200 km of pipelines and in the past about 90 per cent of Soviet export passed through Ukraine. It appears that even as Russia has decided to export part of its oil through pipelines in Ukraine, it does not want to depend upon thatcountry, and additional pipelines are being worked out skirting Ukraine. An important policy decision has been taken recently, under which the Russian government proposes to increase state control over the pipelines. In January2003, Russian prime minister Kasyanov said that pipelines under construction in Russia would remain state property. He was

speaking with reference to the west Siberian-Murmansk pipeline, which will oil be jointly constructed by four Russian oil companies, Yukos, Tyumen oil, Lukoil and Sibneft. It appearsthatthe government is trying to restrict the role of Russian firms, which are partly or wholly owning the pipelines. By increasing control over pipelines, the Russian state wants to automatically influence the oil-gas sector in general since pipelines become an effective political and economic weapon in the hands of the state. But Russia's privatised and new oil companies are resisting this policy proposal. Several privatised oil and gas companies have flourished by expanding their activities, such as exploiting oil resources and transporting to domestic and foreign markets. They are also able to attractforeign capital in their activities. Increase in state control may affect their development.

Russia and the West

In recent years, there has been growing interest among some western countries in Russia's oil-gas sector as an additional source of supply to thatof the Middle East.

This is because 18-20 per cent of the total oil consumption of the European Union is met by imports from Russia. For Russia, the European Union is a major oil destination, accounting for 50-60 per cent of its total exports. Political stability and economic growth in Russia under Putin and the reform measures undertaken to build a marketeconomy, including privatisation, seem to have encouraged several western countries to look for investment opportunities in Russia's oil-gas industry. For instance, at the Energy Summit held in October 2000, the European Union agreed to develop Russia's oil-gas resources in return for long-term energy supply commitment and export to the EuropeanUnion. Thus the Central European Equity Fund (CEE) has invested in several Russian oil firms. By March 2003, its assets exceeded 13 per cent in four companies, with Lukoil 4.1 per cent; Yukos 4.9 per cent, Surgutneftgas 3.5 per cent and Gazprom 0.2 per cent. The growing interest of the CEE in Russian oil is evident from the views of H Ackermann, who is portfolio manager of the CEE. He has opined that Russia has enormous catch-up potential with regard to oil and gas in the years to come. Equally

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Economicand PoliticalWeekly May 24, 2003

its important is his contention that Russia's also hopesto increase rolein thenorth- oil were going up, Russian oil companies sector is massively undervalued east Asian energy markets. increased their exports. Thus in March energy relative to energy companies in the west. Russiancompanies'keennessto export 2002, exports reached a peak of 5.5 mn These views seem to be the basis for oil and gas to westernmarkets mainly bpd against 4mn bpd in January 2002. is increasing investment by western compa- dictatedby the motivationto maximise There are two reasons for this. Firstly, nies in Russia's energy sector. That Russia profits. Under prevailing conditions in private Russian companies are able to get has thus become important for western Russia, exportprices of oil are reported more profits on their exports since world countries is also evident from the fact that to be doublethoseof domesticpricesand market prices are almost double those of for the first time the InternationalEnergy hence overall earningsof oil companies domestic prices. It is estimated that every Agency (IEA) invited Russia in April 2003 will be improvedby increasingexports. $1 perbarrelincreasein thepriceof Russia's to attend its meeting. The main agenda of Notwithstanding several measurestaken Urals Blend benchmark brings in almost the IEA meeting was to discuss policies with regard liberaslising economy, $1 bn in extra earnings. Hence profit to the for stable energy supplies from the view- thereis a stronglobby in the countryto motivation is strong among Russian oil point of oil-producing nations and also to protectdomestic consumers.Hence do- companies. Therefore, indirectly the Rusdiscuss measures to avoid disruptions in mesticpricesof oil andgas aredeliberately sian state is also benefited by oil exports. oil supplies after the Iraq war. kept low. Apartfrom price differences, Secondly, the payment on exports is guarRussia andwest Europeancountrieshave Russiancompaniessupplying andgas anteed for Russian companies unlike when oil market oftendo notreceive they sell oil in the domestic market. Hence wide-ranging relations such as trade and to thedomestic investment in the energy sector. Some paymenton time as most of the regional under pressure, the Russian government face abandoned its export cuts by July 2002. Europeancountries have entered into joint andlocalgovernmental organisations venturesin Russia's oil industryduring the budgetary constraints. Therewerereports Russia's push for new oil marketsin recent had past decade. The latest joint venture, in thatin the pastGazprom notreceived years has been a cause of concern for which British Petroleum has made a huge paymenteven from the federal govern- OPEC. investment in the Tyumen Oil Company, mental In Russian firms Russia does not want to be a part of agencies. contrast, is a case in point. According to oil baron receive immediatepaymentin hardcur- the 12-member OPEC cartel, possibly Mikhail Fridman of the Alfa Group, this rencyforexports foreign to markets. Hence because it may not be an influential joint venture deal is a major vote of the keennessof Russianfirmsto increase member and will still have to abide by confidence in Putin's economic reforms exports is quite understandable. This is cartel discipline. However, Russia has and that it would attract more FDI in particularlyevident from the fact that taken the initiative to form a gas cartel Russia's oil industry. But on this issue Russianoil producers occasionallytry to jointly with three central Asian republics, Moscow newspaper Pravda made critical bypass the restrictionof 30 per cent of namely, Kazakhstan, Turkmenistan and observations on April 24, 2003 stating domestic for fixedunder Uzbekistan. The proposal for the formaproduction exports that "the Russian government believed a long-standingquota arrangement and tion of this gas cartel was made in January in selling oil companies to foreigners as increasetheir exports. 2003, when Putin met the Turkemen a simple way to fill up the treasury" and president Niyazov. The justification for that both the government and the the formation of this cartel seems to be Russia and OPEC to secure a balance between supply of oligarchs were interested in selling the motherland. Russiahassomewhat uncertain relations and demand for gas in world markets, to Russia has also come closer to the US with OPEC and is not a memberof the protect the interests of Russia and the in the energy sector. The 'energy dialogue' Therearevaryingviews on central Asian states and to evolve a single organisation. initiated by Putin and the US president Russia-OPEC relations thecountry. in The export channel policy. In March 2002, the Bush in 2002 has been intended to open advisorto the Russianpresident, Andrei four countries signed an agreement to upRussia's oil industryfor US companies. Illarionov, has contended that OPEC cooperate in this regard. The Russian In July 2002, Russia supplied 2 mn tonnes members not benefitedsince the GDP president has considered this as a serious are of oil to the US which was organised by of the member-countries fallen over step to come closer on the energy sector. has MikhailKhodorkovsky,the CEO of Yukos, the past two decades.At the WorldEco- However, Putin emphasised that this Russia's second largest oil company. In nomicConference heldin Davosin Janu- agreement was in no way internationally February2003 he said that Russia hoped ary 2003, he said that Russia would not or legally binding. Hence it is to be seen to become a leading exporter of oil to the join the OPEC.The Russiangovernment, how this cartel proposal will take shape US by supplying 1-2 mn bpd 15 per cent however,has often agreedto abideby the in the near future. of US imports. There were reports that OPECdecision to cut oil exportsto preIn proposing this gas cartel, Russia Yukos andUS firm Exxon might enter into vent declinein prices.Forinstance, the has a decided advantage. In 2002, Russia in a multi-million dollar deal. Similarly, firstquarter 2002, the Russiangovern- and the central Asian countries produced of Russia has been making efforts to enter mentagreedto cut oil exportsto 1,50,000 620 bn cubic metres of gas, of which the oil and energy markets of China, Japan bpd. Notwithstanding this decision, ac- Russia's share was 570 bn cubic metres and South Korea. These countries account cordingto some Russianoil companies, followed by Turkmenistan. Russia's for about 20 per cent of global energy Russiawas not interested assuming in the domestic consumption was 280 bn cubic to consumption and theirdemand is expected obligations observethecarteldiscipline metres hence it was exporting about to increase considerably in the next couple andlimittheexport oil. Thusthegovern- 300 bn cubic metres of gas. As noted of of decades. In 2003, China imported 70 ment decision was not implementedin earlier, Russia also has the largest share mntonnes oil fromRussia. of HenceRussia reality.In fact, as international prices of of reserves of natural gas, accounting for Economicand PoliticalWeekly May 24, 2003


aboutone-fourthof total worldreserves, andtogetherwith the threecentralAsian states they will accountfor nearly onethirdof worldreserves.Hencein the next 1-2 decades they will emerge as crucial sourcesof supply.Russiawith this dominant position can play a crucial role. Moreover, at present most of the gas pipelinespass throughRussia, which is interested retainingits controland inin fluencein ensuring gas from the central Asian statesflows throughits pipelines. This will help Russiato hold the central Asianstatestogether exporting world in to Russiawillalsobenefiteconomimarkets. cally by chargingthe centralAsian states for the use of its pipelines. Challenges Ahead Expertsdiffer on the extent to which Russiacan play in worldenergy market. Accordingto energy experts Fiona Hill andFlorence (2002),Russia's Fee resources are much smaller than that of the key players,namelySaudi Arabia,Iraq,Kuwait, UAE and Iran. It is pointed out thatRussiahas only 5 per cent of proven oil resources and it occupies seventh that placein theworld.It is argued Russia has anotherdisadvantagewhich is that about50 per cent of its oil resourcesare located in regionsnot easily accessible. These factors,it is pointedout, increase the cost of oil production in Russia. Moreover, the relatively low level of technologyand low labourproductivity further affectRussia'scapability make to an impact on the world energy market. Thesearesomeof thechallenges Russia that faces in being a competitive playerin the international energymarket. Onsomeof theseissues,Russian economists have differentviews. For instance, while it is a fact thatin provenresources Russia lags behind the key players, accordingto RussianeconomistsKuzovkin (2000)andTerekhov (2002), Russia'spotentialestimated reservesof oil areabout 13percent,whichputsitin secondposition afterSaudiArabia.Moreover,Russiahas takenseveralmeasures overcomesome to of the disadvantages. Firstly, recent exin plorationsundertaken variouspartsof Russiasuch as SakhalinIslandand eastern Siberianregionscloser to Chinaand Japan have given encouragingresults. These findings will enable Russian companies to increase production to meetgrowingdemand fromthe domestic and export market. Secondly, Russian

companies have invested in oil-gas dropin the nearfuturewith Iraqioil entering projects in several countries such as the market in large quantities, Russia's oil Kazakhstan,Turkmenistan, Azerbaijan, industry will be hit badly. Thus it may be stated that Russia under Iran, Saudi Arabia, and Iraq. As noted earlier,Russiahas been able to get com- Putin has followed an aggressive policy to fromTurkmenistan, mitments Azerbaijan enhance the role of the oil andgas industry, to andKazakhstan exportpartof theiroil which has enormously enriched the doand gas through Russian pipelines. mestic economy. Russia has re-emerged as Russiahasbeenplayinganactive a major player in the world energy sector, Thirdly, role in bilateraland multilateral negotia- the position USSR had occupied in the tions in findingsolutionsto the problems past. Russia's entry into new oil markets of sharing of energy resources in the has caused concern for OPEC members. Caspian region. These measures may Even as the Russian state and private oilenhanceRussia'sroleandinfluencein the gas companies are often working in tanworld energy market.Fourthly,Russian dem to promote the country's national oil companiesproposeto use the location interest, the government has tried to exert of energyresources SiberiaandtheFar greatercontrol over private companies. At in East to cater to marketsin China and the same time, as private companies gain havealready Thesecountries shown dominance in size and capability through Japan. interestin investingin the Russianoil-gas merger and foreign collaborations, the sector and in projectsto build pipelines conflict of interest between the state and to meet new andgrowingdemands. Thus oil barons for economic gains in future Russiais tryingto overcome locational may not be ruled out. The Russian state the contended someanalysts. has used oil as a weapon to achieve its disadvantage by Moreover,in the case of naturalgas foreign policy objectives through energy Russiahasthe largestreservesaccounting pipelines. But Russia's ability to sustain for 25 per cent of estimatedworld re- its impact on the world oil marketin future sources.In comparison, Iranhas 15 per may be relatively restricted due to the cent, Qatar7 per cent, and SaudiArabia limitations of its oil reserves compared 4 percent.Hence,in respect gas,Russia with other key oil producers such as Saudi of has a greatadvantage. role of natural Arabia and Iraq. But with the largest natuThe gas as a sourceof energyhasbeenincreas- ral gas reserves in the world, Russia can ing in recent years. In the case of the shift its focus from oil to gas and thus may Union, gas accountsfor nearly still have a chance to be able to play a European of a quarter energyconsumption. Russia crucial role in the global energy marketin is a major of supplier gasto theEUmarket, the coming decades. t133 whichaccounted 62 percentof its total for environmental con- References exports.Considering cerns, consumptionof gas in the deveas lopedcountries a cleansourceof energy Kuzovkin,A (2000): 'Potentialof EnergySupply', is expectedto increase.Hence,as opined Ekonomist, Monthly Journal (Russian) Moscow 5/2000. by some experts such as Adams (2002) with the growing importance of gas Terekhov,V (2002): 'Strategyof NaturalResource Utilisation', Ekonomist Monthly Journal Russiahasthepossibility shiftthethrust to (Russian) Moscow 3/2002. from oil to natural in the nearfuture. Adams, Jan S (2002): Russia's Gas gas Diplomacy, In that case, Russia's role may increase Problems of Post-Communism,May/June. in the world energy marketin the next Hill, Fiona andFlorenceFee (2002): 'Fuellingthe Future: The Prospects for Russian Oil and decade. Gas', Democratizatsiya,the Journalof PostWhileenergy have resources beenagreat Soviet Democratisation, Washington, Fall assetforthecountry petro-dollars and have 2002, Vol 10, No 4. Putin'sRussiain attainimmensely helped rates ingreasonably economicgrowth high the during lastfew years,over-dependence on oil and gas may not be desirablefor Books at Unbelievable Prices the countryin the long run. At present, History, Sociology, Politics, many branchesof the Russianeconomy Economics, CulturalStudies, consumer durables, including engineering, Gender, Post-Modernism etc. chemical and food processingindustries For Discounts Upto 90% Visit are not doing well. Hence, there is an imbalance in the development of the if economy.Moreover, oil andgas prices


Economic and Political Weekly

May 24, 2003