Russia Stalls Expansion of Oil and Gas Production in Dagestan

Dagestan’s gross regional product is a little more than $2,000 per capita. By many economic indicators, Russian economists say, Dagestan is not only far behind many other Russian regions, but is at the level of some of the world’s poorest nations. Economic underdevelopment has been endemic in Dagestan for years. At the same time, surprisingly, the republic apparently has large oil reserves “The proven oil reserves of Dagestan are close to one billion tons,” Russian economist Andrei Bliznets told newspaper Argumenty Nedeli. “Extracting 4–5 million tons every year, the republic could earn the equivalent of $2–3 billion, which is more than it receives now from Moscow.” Bliznets’s explanation for the lack of investment in Dagestan’s lucrative oil sector was that the “rules of game” were too complicated and the risks high. “Even the local oil refinery in Makhachkala operates only at 10 percent of its capacity,” the economist said (argumenti.ru, September 4).

The Russian economist’s explanation appears to be quite superficial and conceals simpler, more sinister reasons for why the oil reserves in Dagestan remain untapped, while the republic remains mired in poverty. Indeed, oil is extracted in many places around the globe that are no less violent and probably no less corrupt than Dagestan. In all likelihood, the reasons for the authorities’ unwillingness to jumpstart the oil industry in Dagestan are political, rather than economic. If oil was extracted in Dagestan, the republic would become economically self-sufficient and separatist tendencies would receive a significant boost. While the Russian authorities have constantly complained that North Caucasians, and Dagestanis in particular, only consume “Russian resources” and produce nothing themselves, oil extraction in Dagestan would easily break that myth and undercut Russia’s control of Dagestan. Currently, the entire budget of Dagestan is slightly larger than $2 billion, 70 percent of which comes as handouts from Moscow (docs.cntd.ru, November 2, 2013).

Oil extraction in Dagestan dates back at least to the mid-19^th century, and information about the republic’s energy reserves is also not newly discovered: indeed, plans for expanding oil and gas extraction there were in place at least five years ago (see EDM, April 3, 2009). However, the Russian government’s strategy is driven by secessionist fears about Dagestan and seems to be ready to pay an extraordinary price to prevent Dagestan from achieving any notion of prosperity that may lead to secession from Russia. First, Moscow has chosen to fight the insurgency in the republic, which it believes is caused by endemic poverty and income inequality. Instead of allowing the republic to use its natural resources to improve the lives of the locals and possibly stop the insurgency within a short period, the Russian government has preferred the low-grade, but unending cycle of civil violence in an effort to keep Dagestan locked in a perpetual and ongoing period of internal instability. Second, Azerbaijan borders Dagestan and is actively extracting oil from the Caspian basin. Over time, some of the Dagestani oil fields might become less productive because of the neighboring country’s oil extraction. So, the Russian government is willing to allow the loss of some portion of its natural resources in order to make sure Dagestan does not become overly prosperous.

This discrimination is unlikely to go unnoticed forever. In February, Dagestani Governor Ramazan Abdulatipov urged the Russian government to hand management of resources over to the regions. In particular, Abdulatipov complained that the republic was buying 85 percent of its natural gas, while the republic’s gas reserves total 800 billion cubic meters. “We do not manage the resources,” he said. “I tell the federal center [Moscow]—either manage them effectively yourself or give them to the regions.” Abdulatipov said that instead of handouts from Moscow, he would prefer to be able to use the resources that the republic already has (Kommersant, February 6). The unfortunate truth for Abdulatipov and Dagestan may be far worse than Moscow’s “ineffectiveness” in managing the resources of the republic. Moscow’s aim appears to be to make sure that those resources are untapped, and that Dagestan has no resources for development and possible secession.

Other republics in the North Caucasus might also have substantial untapped mineral reserves. For example, the Rosgeologia Company recently announced that North Ossetia may have profitable gold deposits (rosgeo.com, accessed October 1).

As the example of Dagestan indicates, the Russian government is willing to go to great lengths to stall the development of its peripheral regions in a quite literal sense, in order to retain political control over them. However, this policy may backfire as the regional elites and general population become increasingly aware of the potential benefits they are missing. Regions will then make the connection between their economic backwardness and Moscow’s policies, which will sour the relations between the regions and the Russian central state. This conversation between Moscow and Russia’s regions is increasingly likely to happen, given that the Russian government is projected to run out of its large budget surpluses as the economy slows down due to western sanctions.