After a decade of eroding political and economic power, Russia is back on the international stage. Lately, especially Russia's energy policy has become the subject of increasing controversy. As conventional wisdom reckons, the Western world is faced with a 'corporate Russia' which is economically fueled by oil and gas and equipped with a foreign policy arm called Gazprom.
This conventional wisdom is however wrong on several accounts:
- The Kremlin has only limited ability to use Russian oil and gas as a 'weapon.'
As for oil, Russian companies - state or non-state controlled - trade their oil on a global market. Hence, if Russia decided to individually cut oil supply to a consuming country, the targeted country can purchase the short fall on the spot market and circumvent the "blockade". Gas does not suit extremely well as a foreign policy instrument either. Given its characteristics, gas is almost exclusively transported via pipelines, necessitating long-term contracts between producer and consumer of 20 years or more. Hence, if either side wanted to break an established contract and start dealing with an alternative partner, it has to make a high additional investment, i.e. build a new pipeline. This fact considerably limits Russia's marge de manoeuvre. In case it turned off gas supplies to Western Europe, it could not sell its gas to, say, China, since the existing infrastructure is simply insufficient. As a consequence, any attempt to use gas as a ‘weapon' would immediately translate into a significant loss in the Kremlin's budgetary revenues - not an attractive move for a country whose largest share of federal budgetary income stems from hydrocarbon sales.
- Gazprom is not necessarily instrumental for the Kremlin's foreign policy agenda.
Both entities are intertwined, but their interests do not necessarily coincide. To date, more than two thirds of Russia's annually produced gas is used domestically. At the same time, the Russian gas market is highly regulated, keeping domestic gas prices at a level which is a fraction of prices charged on foreign markets. Hence, to generate revenues, Gazprom has to tap into foreign markets. In fact, the gas giant earns virtually all its profits from exports to Western Europe, although this market only accounts for 25 percent of the total production. In turn, if accessible foreign markets are not attractive yet, Gazprom tries to render them more profitable, and raises prices, if it can. This is what Russia's "Near Abroad" had to painfully found out recently. After heavily subsidizing its former Soviet allies throughout the past 15 years, Gazprom has pushed gas prices in CIS countries close to those it charges its West European clients. This policy has resulted in several ‘gas disputes' with Russia's neighbors such as Ukraine and Georgia. It has even hit Belarus, a traditionally strong Russian ally - a fact that caused the Kremlin considerable problems when it was forced to provide an explanation for suddenly raising gas prices it charged the last remaining pro-Russian government in Central Europe. In that respect, and ironically, Russian foreign policy appears increasingly driven by Gazprom's business interests rather than vice versa.
- Finally, Russia's recent economic growth story is not truly due to high energy prices, but has rather been driven by a boom in domestic consumption and investment.
True, hydrocarbons are a major factor in the Russian economy, its exports and in state finance. "At the same time, however, by amounting to 'only' about 20 percent of GDP, oil and gas add up to less in the overall Russian economy and its economic growth than commonly assumed. In fact, by growing below average rates, the gas sector performs especially poorly." By contrast, the initial kick-start of Russian economic recovery does not lie in oil prices but in the 1998 financial crisis: as a consequence of the Russian government's default, the Russian ruble was strongly devalued, which led to greater competitiveness of Russian products abroad, favored domestic over foreign goods and thus spurred consumption of domestic Russian products. In addition, the rise of oil and gas prices supported economic recovery, as did general improvements in management and technology of private companies and the introduction of a new tax system in 2000. Double-digit annual increases in capital and labor productivity have further contributed to securing a stable Russian growth path.
Summing up, instead of adopting a reflex-like geopolitical perspective on Russian energy, Western policymakers should regard it as a commodity that, even if politicized, should be dealt with in terms of regulations on global or regional markets, through the means of dispute settlement mechanisms, and within the frame of investment regimes and trade agreements.
Dr. Andreas Goldthau is a Transatlantic Fellow at the RAND Corporation, and a fellow at SWP and SAIS (JHU).
A longer version of this article was published in the February/March edition of Policy Review and can be found here under the title "Resurgent Russia? Rethinking Energy Inc."
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