Russian Energy Policy and its Domestic and Foreign Implications

Abstract

ENERGY IN RUSSIA: WESTERN PERCEPTION AND THE DOMESTIC VIEWWere residents of one of the OECD countries to be asked why Russia is an important country in the world, their answers would likely mention two aspects. First, Russia is an important international player with veto power at the UN security council and a presence in the G8 group. It holds nuclear weapons and other paraphernalia associated with this status. Second, this country is a globally significant supplier of resources.Energy is a major component of the Russian economy but its relative importance differs when viewed from the western and domestic perspectives. Two major stories have formed westerners' perception of the Russian sector. First, there are constant messages of how insecure private property rights are in this country, particularly in the oil and gas industries. Second, the western media touches frequently on growing state influence, namely the Kremlin's use of the energy weapon-its decision of how much to charge Russia's neighbours for natural gas.Both stories seem to be well substantiated. The growing role of the state in economic affairs has become visible after the so-called Yukos affair, in which the then-new Kremlin leadership that claimed to represent state interests clashed with a group of wealthy oil magnates that had dominated the sector since its privatization in 1990s. The two sides had a bitter row in 2003 when Mikhail Khodorkovsky, then the top Yukos shareholder and the wealthiest person in Russia, challenged the Kremlin's demand to align his private interests with government plans. In the end, he and his group lost control over their assets and, since then, two state-governed monopolies-Gazprom and Rosneft-have assumed the leading role in the oil sector. However, the battle was not over, as Khodorkovsky's followers succeeded in attracting western attention to the Kremlin's dubious legal methods. While the latter responded with its own list of grievances (including tax evasion and fraud), few in the west believed the official stories, even though independent western experts conceded that the case against Yukos had legal merits.The second story began in 2005, when Russia hiked the price of natural gas sold to Ukraine, following a botched attempt to influence the Ukrainian election. After the same practice was extended to other post-Soviet countries, many started to maintain that the decision to raise prices was a stick that the Kremlin uses in bullying Russian neighbours.Insiders to Russian affairs see things differently, and also for good reasons. They would argue that the change in ownership in the oil industry did not mean that the tycoons of the 1990s lost their fortunes. On the contrary, apart from Khodorkovsky, who lost his wealth and freedom, the same people have continued to occupy the top-10 list of richest Russians from 2003 on. Moreover, during this period their wealth increased in absolute terms. Without going into the causality debate, the conflict in the Russian sector can be associated with the slower accumulation of wealth by top oil magnates such as Roman Abramovich and Viktor Vekselberg-implying that the Kremlin's assertiveness was costly for the sector-but even here the record is unclear as another top oilman, Vagit Alekperov, did better than the average of his nonoil-related peers. Thus, inside observers conclude, the claim that the Kremlin has been engaged in a wide-scale redistributive process since 2003, as its opponents allege, is not supported with hard evidence.Insiders also conclude that it is incorrect to state that the Kremlin overcharges Russian neighbours for natural gas. Even after the price hikes, Ukraine and Georgia-the two countries claiming to be victims of Russian blackmail-continued to pay less per 1000 cubic meters of gas in 2006 ($140 and $153 respectively) than, say, the Czech Republic and Poland ($393 each). The previous price of gas sold to neighbouring countries had been significantly below market levels-the prices that EU consumers paid-and therefore it should be considered a subsidy revoked mostly for economic and not political reasons. …