Russia maintains energy superpower status, for now

The Russia-Georgia conflict has caused several analysts to state that Moscow’s main goal was to ensure its energy dominance in the region. Though this may not be entirely correct – other Russian security interests were equally at play – energy issues did have a large role. Ever since Vladimir Putin took over the reins, he had time and again reiterated the importance of energy in Russia’s regional, and indeed its global, policy. It is well known that Moscow will not allow its supremacy to be compromised. Putin’s successor Dmitry Medvedev appears to be continuing with his mentor’s policy. During an interview with a Russian TV channel a day before the European Council’s Brussels summit, he stated that Russia’s foreign policy includes the defence of its commercial interests.

Thanks to its vast oil and particularly gas reserves, Russia has certainly emerged as an energy superpower. In 2007, Russia exported some 6.75 tcf (191 bcm) of natural gas to European, Baltic and CIS states, which included supplies from the Central Asian Republics as well. However, while the sale of energy resources has allowed Russia to refill its coffers and recoup some of its economic clout, it is its vast energy pipeline network that has been used as an effective instrument to ensure its supremacy over the European energy market. After the break-up of the Soviet Union, while Russia privatised almost all its upstream activities in the oil sector, it retained state control over its vast pipeline infrastructure. In the case of gas, however, the state continued to retain the majority stake in Gazprom. Being the richest company in Russia, accounting for 8 per cent of the country’s GDP and contributing about 25 per cent of its earnings to the federal budget, Gazprom earns the majority of its revenues by exporting gas to Europe, for which it charges oil-linked world prices, and which are around five times the prices paid by Russian consumers. Hence, after the break-up of the Soviet Union led to the emergence of several energy-producing Former Soviet Union (FSU) states, Russia was faced with a number of rival suppliers that could eat into its revenue earnings. Russia tried to neutralise the threat by ensuring that it acquired a stake in new projects by offering its vast oil and gas pipeline network, or by offering higher prices for the resources and locking them into the Russian system.

When Western/US-led consortia appeared in the region in the late 1990s offering investments, technology as well as alternative routes to Russian transport networks to the FSU states, Russia was uncomfortable. It was particularly so in the case of Georgia, whose ports on the Black Sea are a main shipping point of Caspian crude from the Baku-Tbilisi-Ceyhan (BTC) and Caspian Pipeline Consortium (CPC) pipelines, thus making it an important factor in current and future energy exports from Azerbaijan and the Central Asian states. While it is an important transit route for the current BTC and Baku-Tbilisi-Erzurum (BTE) pipelines, the stakeholders of the projects are planning expansions to the project which will allow oil and gas volumes from Kazakhstan and Turkmenistan, such as the Kazakh-Caspian Transportation System and the Trans-Caspian and Nabucco gas pipelines.

Hence, many experts believe that part of Russia’s decision to attack Georgia was an indication of the Russian intent to warn other potential neighbours from drawing closer to the West and aiding the US-European agenda of wresting Russia’s position as Europe’s main gas supplier. As far as the Nabucco pipeline is concerned, the Georgian exercise has succeeded in putting the project on hold.

More importantly, the Georgian exercise could be a prelude to further such actions against other FSU states that have shown a proclivity to move closer to the Western camp. For instance, 90 per cent of Russian gas is routed through Ukraine, which, over the past few years, has grown closer to the West, and in fact hopes to become a member of NATO soon. Though it is highly unlikely that Russia would attempt any military action against Ukraine, which is also one of its largest trading partners, it could stir up trouble by using its Russian-speaking majority in the Crimea along the lines of the South Ossetian case, to prevent Kiev from moving closer to the West. It should not be forgotten that in January 2006, Russia cut natural gas supplies to Ukraine’s main natural gas company, Naftohaz Ukrainy or Naftogaz, ostensibly because of a dispute over prices. Gazprom said that it wanted Naftogaz to pay revised prices, which was around four times more than prices paid by Ukraine as well as back payment for gas already delivered, and a portion of the transit fees on the grounds that Ukraine had sold cheaper gas obtained from Central Asia at discounted rates. The dispute had seen gas supplies to European countries like Austria, France, Germany, Hungary, Italy, Poland and Slovakia drop by around 30 per cent. Though a compromise solution was worked out, another dispute arose in February 2008, once again over non-payment of overdues to Gazprom by the Ukrainian company.

The Ukrainian – and later a similar incident with Belarus over oil and gas price hikes — saw Russia’s European clients talking seriously about finding alternative supply options. However, this is easier said than done. Alternative supply sources have their limitations. For instance, while exploration and production development in Azerbaijan have proved to be disappointing, the Central Asian suppliers are not very reliable either. First, problems involving transit routes appear to have had a dampening impact on the expansion plans of the BTC project as well as the planned Nabucco project. Second, as far as Central Asian gas is concerned, Turkmenistan has already dedicated most of its reserves to Gazprom. And a recent agreement between Uzbekistan and Russia on the construction of a new gas pipeline from Turkmenistan and Uzbekistan to Russia is an indication of the continuing strong bonds between these countries. Moreover, the shareholders of the Tengiz and Kashagan projects have shown a marked preference for the CPC line rather than the BTC line to transport Kazakh oil. However, given that the CPC line requires expansion to carry new oil from that country, this is not possible without the concurrence of Transneft, which has demanded new terms such as higher transit tariffs and greater stakes in the project. Finally, even as the European Union was contemplating imposing sanctions on Russia for its Georgian exercise, Moscow has threatened to find alternative markets in the east which appears to have had a sobering impact on European governments.

Though Russia appears to have emerged as the winner in the recent Georgian episode, with its status as the main energy supplier for Europe remaining unscathed, in the long term it cannot afford to be sanguine. For one, given the growing concerns expressed by its European customers and their determination to seek alternative sources of supply, Russia may have to act on its “threat” and actually look eastwards to lessen its dependence on the European market. The other option that Russia should explore is the Iranian one. According to reports, the two countries are already discussing increased economic interaction which could culminate in boosting bilateral trade from the current $2 billion to $200 billion in the next 10 years. Given that they hold the world’s largest gas reserves, this could make for a rewarding partnership. Russian companies are already involved in Iranian energy projects, and plan to set up a joint gas venture to explore deposits in the Persian Gulf and Central Asia.

A more eastward looking Russia, at least in terms of energy issues, would be a welcome factor for India. While Russian-Indian cooperation in the energy sector has grown over the years with ONGC participating in the Sakhalin I oil and gas project and the recent Russian endorsement of OVL’s bid to acquire Imperial Energy, Russian companies have evinced interest in large-scale projects to build oil and gas pipelines in India. In February 2008, GAIL signed a Memorandum of Understanding with ITERA Oil & Gas Company of Russia for cooperation in projects ranging from participation in CNG projects in Russia, gas-based petrochemicals opportunities in Russia, E&P opportunities in Russia and CIS countries, and cooperation in other projects of mutual interest.

As a Russian official who was part of the delegation to India for the India-Russia Trade and Investment forum in February 2008 said, the construction of planned pipelines in India, which will enable it to provide international oil and gas transit, “could be an interesting element of Russian-Indian cooperation”.