Putin, Petroleum, Power and Patronage
By:
Thursday, December 7, 2006
10:00 AM – 12:00 PM
Presenter:
Professor Marshall Goldman
Associate Director, Davis Center for Russian and Eurasian Studies
Harvard University
Discussant:
Lana Ekimoff
Director of Russian and Eurasian Affairs
U.S. Department of Energy
Summary:
Professor Goldman explored at great length the current situation in Russia with regard to energy production, including Europe’s increasing dependence on Russian energy exports. He also examined how Russian energy production has been the single most important factor with regards to Russia’s improving economy as well as its vastly increased economic and political influence on the world’s stage. Professor Goldman made several important observations:
– Putin has publicly stated (in 2005) that he intends to use the production and supply of Russian energy as an instrument of foreign policy.
– The Russian economy has almost become a monoculture of oil and gas production, with a dramatically close relationship between the increase in oil production and the increase in GDP rarely found in economies.
– The recent increase in Russian oil production accounts for approximately 40% of the world’s increase in oil production. The result is that Gazprom is now the third largest company in the world in terms of capitalized income, behind only ExxonMobil and General Electric.
– Energy production in Russia has been largely re-nationalized with the result that the "siloviki," or Putin’s close allies, who replaced the oligarchs of the 1990’s, have essentially created an "oilgopoly" in Russia.
– Russia intends to dominate both the supply and distribution of energy to Europe, which is already increasingly dependent on Russian energy.
– Russia is currently as strong as it ever was in czarist or even Soviet times.
– Europe does not even have "Mutually Assured Deterrence," let alone "Mutually Assured Destruction" to use as a lever against Russia’s monopoly over Europe’s energy supplies, thus leaving Europe in a vulnerable situation.
– Alternatives are few and far in between: as Europe threatens to take its business elsewhere, Russia is busy opening up its energy market in China, which could also fall into this energy dependence trap.
– The only real weakness in this system is that it might not survive should someone who is not a Putin acolyte succeed him in 2008.
Ms. Lana Ekimoff’s comments during the event were off-the-record.
Brief:
Professor Goldman began the discussion by noting that Russia’s decision to cut off energy supplies to Ukraine in January 2006 should not have come as a shock. President Putin had openly talked about changing Russia’s energy subsidies towards Ukraine should Ukraine adopt an openly pro-Western policy. Professor Goldman commented that although Russia was surprised by the world’s reaction to this, it nonetheless gave President Viktor Yushchenko’s government a black eye, and prompted Ukraine to change direction, which is what Russia wanted in the first place. Goldman then commented that since the collapse of the Russian economy in August 1998, gas and oil production in Russia has increased from 303 million tons in 1998 to 469.6 million tons in 2005. This has almost single-handedly been responsible for the constant growth of the Russian economy since that time and has also amassed a huge trade surplus for Russia.
President Putin has been busily re-nationalizing many large industries, ranging from energy producers to aircraft manufacturers. In turn, Putin has minimalized, largely through economic and political intimidation, the role of the oligarchs who largely ran the Russian economy in the 1990’s. Many of the companies in these newly-privatized industries are now run by a coterie of Putin’s supporters known as the "siloviki." These include:
– Dmitri Medvedev, the current First Deputy Prime Minister, and a leading contender for president in 2008, is also the chairman of Gazprom.
– Yevgeny Shkolov, a presidential aide, is also on the Board of Directors of Transneft.
– Sergei Sobyanin, Putin’s Chief of Staff, is also the chairman of Tvel, which is a major producer of nuclear fuel.
In short, this fits in with Putin’s world view that Russia needs "national champions," or people who essentially help build a nation both economically and politically. However, Goldman pointed out that Putin is making Russia vulnerable to a return of the kleptocracy that haunted Russia in the 1990’s. Indeed, many children of people who are in the higher echelons of Russian government are finding it easier to become ingratiated as very important people in Russian business; Goldman calls these children the "princes" of Russian society.
Goldman informed the audience that the dependence of Europe on Russian energy exports may be higher than previously thought. Furthermore, East European countries are even more dependent on this supply than their West European neighbors. While France, Germany and Italy have 30 percent, 32 percent and 40 percent of their energy imports originating from Russia, respectively, Poland, the Czech Republic and Slovakia have 63 percent, 72 percent and 91 percent of their total energy imports coming from Russia. The Baltic States and Finland are completely dependent on Russia. In some respects this can be traced back to the encouragement of some European leaders, like former German Chancellor Gerhard Schröder, who sought to diversify the source of Europe’s energy away from the Middle East and then recommended that Germany stop producing its own nuclear energy. The difference in the level of dependence on Russia between West Europe and East Europe is becoming a source of tension in the EU as the western members have been generally taking a more quiescent approach to dealing with Russia on this issue, while East Europe has been arguing for a more strident approach.
In the end, Goldman argued that Russia is seeking to become something of a one-country monopoly for gas and oil supply and distribution in Europe. Since many of the North Sea gas fields are becoming depleted, Russia is increasingly the sole supplier to gas to Europe. As such, Russia is as powerful as it ever was, and Europe does not even have the threat of a "Mutually Assured Restraint." After all, whenever Europe threatens to take its market away from Russia, Russia turns around and intimates that it will supply its energy resources to China. Goldman warned that in the future, even China could fall into this trap of energy dependence with Russia as its energy needs grow in the next few years. Goldman saw a few potential scenarios which would alleviate this energy monopoly:
– The construction of a pipeline through the Caspian Sea; although Putin is putting pressure on Central Asian governments to delay this project.
– Someone who is not one of Putin’s "siloviki" could become his successor in 2008, hence helping to dismantle the system Putin has established.
– The shrinking population of Russia means that there are fewer people available for service in Russia’s military, which means that Russia might not be able to enforce its economic power with military force.
Directions:
The Jamestown Foundation
7th Floor Board Room
1111 16th St. NW
Washington, DC 20036
