Russia is Harnessing its Energy Potential to Regain its Former Glory

Russia’s energy potential is undeniably playing a significant role in its geopolitical and economic revival. Viewing energy as the major source for its growth, Russia is modernizing and diversifying its energy sector. It has been playing a significant role in supplying energy to many countries of the world. It has performed its role consistently and reliably during the past many years and is expected to do so in the foreseeable future as well. Today, it is playing a positive role in addressing a broad range of issues related to energy security and is emerging as a global energy supplier.

Being the world’s largest natural gas producing nation (with 1,700 trillion cubic feet of the fuel or 27 per cent of the world’s total), Russia is the primary natural gas supplier to Europe and the former Soviet States. Recently, Gazprom, Russia’s state-run natural gas monopoly which holds more than one-fourth of the world’s natural gas reserves and operates the country’s natural gas pipeline network, and its European partners have ventured into new transportation projects, like the North European gas pipeline project, to substantially increase Russian gas deliveries to Europe. This large pipeline, which is to come into effect from 2010, will run under the Baltic Sea and connect Russian pipelines directly with the northern part of Germany. This new development will make it possible for Russia to act as a key and reliable supplier not only to Europe but also to other parts of the world.

To meet domestic and international demands in the near future, Russia plans to explore its untouched deposits in its far north and eastern Siberia. There are several giant gas fields offshore in the Barents and Kara Seas as well as onshore on Yamel peninsula. However, these areas have a challenging working environment. The development of these reserves would require significant risk and major capital investments. There will also be a requirement of immense human and technological resources for production and marketing purposes. Russia is now therefore looking for compatible international partners to overcome these challenges and achieve maximum benefit both commercially and technically.

Energy is playing a significant role in propelling Russia’s economic growth. Oil and gas accounted for approximately 70 per cent of the growth of industrial production during 2001-05. The oil sector alone accounted for a little less than 45 per cent of the country’s economic growth. This implies that energy resources directly contributed to more than one-third of Russia’s GDP growth over the period 2001-05. The consumption boom in Russia has been due to the surplus generated by rapidly increasing volumes of oil and gas exports. Russia now sees its energy potential as the viable means to propel its economy.

The dispute over the price hike for Russian gas deliveries to Ukraine and Georgia during January 2006 generated international attention on Russia’s surging capability and power derived from growth in the energy sector. Russia cutting-off gas supplies and increasing the prices on supplies to Georgia and Ukraine displayed an assertive policy with an intention to curb their pro-western foreign policy orientation. The effects of this action was not merely limited to Georgia and Ukraine, for it provided a clear indication with respect to the consequences that could befall Europe should it similarly display any anti-Russian manifestations. The supply crisis thus demonstrated not only Ukraine and Georgia’s, but also Europe’s vulnerability. The Russian action reflected the possibility of using energy supplies as a tool to control and retain its influence.

Over a period of time, Russia has brought to an end the old barter system in the energy sector and this has made foreign investments in its energy sector more attractive because foreign investors were averse to the barter system. This development has further boosted Russia’s overall market share in the energy sector. Beyond fossil fuel energy sources, Russia is also showing keen interest in the nuclear energy market.

Russia has also expanded its production ties in the energy sector with the Central Asian Republics. Turkmenistan and Kazakhstan have signed long-term contracts to supply their output to Russia and broaden the energy transport infrastructure within the former Soviet Union. Russia and Kazakhstan recently agreed to double the output capacity of the Caspian pipeline Consortium (CPC). The output capacity of CPC, which is a 935-mile pipeline linking oil fields in western Kazakhstan with Russia’s Black Sea coast, would be increased from the current 28 million to 67 million metric tons. Russia and Kazakhstan have also signed an agreement to jointly develop three large deposits – in Kurmangazy, Khyalynsk and Tsentralnoye in the Central Asian region. It appears that within seven to eight years the increase in oil production in the Central Asian region would be backed by the transportation possibilities from Russia.

Apart from Russia’s near abroad and European states, China and Japan have also begun to compete with each other to attract and support Russian pipelines that might be able to fulfil their energy requirements. At the same time, Russia is also working on new pipeline projects that would reach Asian markets, including China, Korea and Japan. Recently, Russia signed three major oil and gas deals with China, between China’s National Petroleum Cooperation (CNPC) on the one hand and Rosneft, Gazprom and Transneft on the other. Russia is also planning to extend its supply to markets beyond the conventional pipeline systems through the use of liquefied natural gas (LNG). It is now trying to use LNG to leverage the delivery of large quantities of oil and gas to diverse markets and further develop commercial opportunities and globalise its economy.

Increased oil revenues have made Russia emerge as the world’s largest exporter of oil after Saudi Arabia. This led to the creation of a ‘Stabilisation Fund’ in 2004 designed to fund social welfare projects and act as a reserve to tide over future economic crises. Today, Russia is in a position to pay off the entire Soviet-era debt of about £12.5 b to the Paris Club. The ‘Stabilization Fund’ is seen as a tool to ensure macroeconomic stability, to create conditions for the initiation of structural reforms, reduce economic dependency on foreign markets and diversify Russia’s economy.

By harnessing its energy potential, Russia wishes to win over others. It is now using petrodollars for economic diversification and growth. Energy appears to be an asset to re-emerge as a great power, balance the budget, fund national defence and provide strategic leverage over others countries. Revenues from energy exports are fuelling strong growth in sectors like services, consumer goods, retail and real estate. Russia’s ambition thus seems to be not just limited to becoming a prime supplier of energy to the world market but to eventually re-emerge as a great power.