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Honors College

Spring 5-2017

An Analysis of Russian Energy Exports and Their Effects on the An Analysis of Russian Energy Exports and Their Effects on the

Russian Domestic Economy Russian Domestic Economy

Cody J. Watson University of Maine

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AN ANALYSIS OF RUSSIAN ENERGY EXPORTS AND THEIR EFFECTS ON

THE RUSSIAN DOMESTIC ECONOMY

by

Cody J. Watson

A Thesis Submitted in Partial Fulfillment of the Requirements for a Degree with Honors

(Political Science)

The Honors College

University of Maine

May 2017

Advisory Committee: James W. Warhola, Professor of Political Science, Advisor

Sharon Tischer, Professor of English and Honors

Solomon Goldman, Adjunct Professor of Political Science

Seth Singleton, Adjunct of Political Science and International Relations

Paul Holman, Adjunct Professor of Political Science

ii

Abstract:

AstudyoftheeffectsofRussianenergyexportsonitsdomesticeconomy.Thispaper

delvesintothedifferenteconomic,environmental,anddiplomaticfactorswhichinfluence

Russia’sdecision-makingregardingitscurrentenergypolicy.Thepaperfocusesonnatural

gasandoilproductionforRussia.ThepaperbeginswithexplainingtheissuesofRussia’s

economybeingreliantonitsenergyexportsforsolvency.Thenexttopicdiscussedreveals

Russia’s place in the world diplomatically and how this has affected their energy

productionsandsales.ThispaperseekstoanswerthequestionofwhichstrategyRussiawill

pursueinordertoregainitsplaceasaworldsuperpower.

iii

TableofContents

I.Introduction…………………………………............…………………………………………………………………………………….……4

II. Putinism – The Ideology Fueling Russian EnergyProduction…………………………………………….…………………7

III. Reasons for Low OilPrices…………………………………………………………………………………….……….………………….10

IV.EffectsofLowPricesonRussiaDomestically……………………………………………………………………………………15

V.RussianForeignStrategy…………………………………………………………………………………………………………………..24

VI.RussiaandEurope……………………………………………………………………………………………………………………………35

VII.PutinandtheUS……………………………………………………………………………………………………………………………..38

VIII.RussiaandtheMiddleEast…………………………………………………………………………………………………………….41

IX.TheGrowingAsianMarket………………………………………………………………………………………………………………52

X.Conclusion………………………………………………………………………………………………………….……………………….......54

XI.Bibliography…………………………………………….....………………………………………….……………………………………….59

XII.Author’sBiography………………………………………………………………………………………………………………………….63

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I.Introduction

WithRussia’seconomy,highlydependentonthepriceofoilremaininghigh,it

comesasnosurprisethatMotherRussia’seconomyissuffering.Asof2013,Russiawas

thefifthlargesteconomyintheworldandnowasof2017doesn’tevenmakethetop

ten.1InconjunctionwitheconomicsanctionsimposedbytheWestafterRussia’s

annexationofCrimeainMarchof2014,Putin’sRussiaisputinaprecariousfinancial

state.2Russiahasbeenfacinghardtimesintheoilmarketsincelate2012.In2016

Russia’sbudget,hadplannedforapriceof$50perbarrelofoil.SinceRussiadoesn’t

controltheworldpriceofoil,thedropofoilpricesmeanslessincomeforRussiathat

thebudgetwouldnotbemet.Thus,Russiaisforcedtofindotherwaystomeetthe

budgetsuchascuttinggovernmentspendingandprivatizingstate-ownedcompanies.

ThefollowinggrowthshowstheworldpriceofoilandhowcloselyRussia’sGDPistiedto

it.

1(ICFAI),PrableenBajpaiCFA."TheWorld'sTop10Economies."Investopedia.March03,2017.AccessedApril16,2017.http://www.investopedia.com/articles/investing/022415/worlds-top-10-economies.asp.2"Ukraine:PutinsignsCrimeaannexation."BBCNews.March21,2014.AccessedApril16,2017.http://www.bbc.com/news/world-europe-26686949.

2

Source:http://marketrealist.com/2015/11/russia-dependent-on-prices-of-crude-oil-natural-gas/Accessed4/15/17

ThesanctionsimposedonRussiahavecutintoforeigninvestment,hurting

domesticindustries.Also,lackoftradewiththeWesthasledtoRussianindustrial

technologytolagbehindtherestoftheworldinmanyindustrialsectorsincluding

resourcegathering.3Theironlymethodtoremainsolventseemstobetogetofftheir

relianceonoilexports.However,withfailuresinthepasttodiversifytheeconomyand

movetoamarketbasedsystemratherthanstatecontrolled,itraisesthequestionifthis

3Mauldin,John."LowOilPricesWillMakeRussiaMoreAggressiveIn2017."Forbes.December27,2016.AccessedApril16,2017.https://www.forbes.com/sites/johnmauldin/2016/12/27/low-oil-prices-will-make-russia-more-aggressive-in-2017/#447cfa0f7367.

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willeverhappen.ThelinesbetweenhowmuchofRussia’seconomyismarketbased

versusstatecontrolledareblurred.Thiswillbediscussedbelow.Russiacontinuesto

produceoilatrecordratestomakeupfortheirlostprofits.Fornow,let’sconsiderwhat

thispaperwillpursue.Whathascausedthedropinglobaloilpriceswithinthepast

threeyears?HowreliantisRussiaonexportingoil?Howhavelowworldoilprices

affectedRussiadomestically?WhatstrategieshasRussiapursued,bothdomestically

anddiplomatically,tolimittheeffectsoflowoilprices?WhathasbeenPutin’srole?

HowwillRussiaguaranteeitsfutureasamajorinternationalplayerratherthan

marginalizedsecond-rateone?Thesequestionscanbesummedupintoone,butitis

importanttounderstandthedifferentcomponentsit.HowwillRussia,aresource-rich

nationaddictedtoenergyexports,competeinaworldwithincreasinglyloweroil

demand?TheanswerforRussia’soilexportdependencyisonetheyhaveknownfor

years--namelyeconomicdiversification--somethingwhichRussiahasstruggledto

achieve.Theanswerliesinincreasingprivatizationintheireconomy,yetit’sdifficultto

strayawayfromthemassiveprofitsgeneratedbytheirstate-runenergycompanies.The

followingmapisanillustrationofRussia’smarketshareofoilontheglobalmarket.

4

Source:http://energyfuse.org/energy-policy-2016-spotlight-on-donald-trump/.Accessed5/1/17

II.Putinism–TheIdeologyFuelingRussianEnergyProduction

HowhasPutin’spolicychangedthroughouthisyearsinoffice?Putinhasbeen

presidentoftheRussianFederationsinceheassumedtherolein2000,besidesagap

termservedbyMedvedevfrom2008-2012.Duringhistimeaspresident,Putinhasbuilt

agovernmentfocusedonhisideologies.“Putinism”,assomepoliticalthinkersaround

theglobehavecalledit,isasetofprinciplestowhichPutinadhereswhengoverning

Russia.OnethingthatisimperativetounderstandingRussianpoliticsistheRussiawants

tomaintainitsstatusasa“worldpower.”4Ofcourse,thisideaputsthenationatodds

withtheUS,somethingthatbothcountrieshavebeenfamiliarwithsincetheendof

4https://fas.org/nuke/guide/russia/doctrine/econcept.htm,Accessed4/17/17

5

WorldWarII.AnimositybetweenthenationshadbeenbuildingforyearsuntiltheUSSR

collapsedin1991,endingtheColdWar.TheUSandtheWesternworldbelievedithad

wonbybeatingcommunism.However,theendofcommunisminRussiawasnotthe

endofitsroleininternationalpolitics.WhenPutinsteppedintoofficein2000,he

startedwithapragmaticapproachtowardstheWest.Russiahadbeenmarginalized

aftertheendoftheUSSR,asalesserpowercomparedtotheUS.TheUSSRhad

challengedUScreatingamulti-polarworldwheretwosuperpowersstruggledtogain

groundontheother.PutinwantstomakeRussiaaworldpower,onewithalargesphere

influenceliketheUSSR.However,thisbecameextremelydifficultwithRussia’seconomy

inshambles.Putinsoughtapro-WeststrategytoputRussia’seconomyonparwiththe

restoftheworld.However,Putin’stonechangedashistimeinofficeprogressed.In

2008,Putinbecameincreasinglyanti-Westerninhisspeechesandpolicies.5Thisonly

continuedafterhishiatusfromthepresidentialofficefrom2008-2012(duringwhich

time,significantly,heservedasPrimeMinister).Hisanti-Westernsentimentwaslined

withRussiandominantundertones.Russiawantstoregainitsplaceasachallengerto

theWesternworld.Thus,RussiabecameevenmoreisolatedfromtheWesternworld.

ThiswasperhapsmostclearlyrepresentedwiththeEurasianEconomicUnion,whichis

essentiallyapoliticalallianceamongfiveofthecountrieswhichcurrentlyinhabitthe

post-Sovietspace.PutinsawmanyofthemovesdonebytheWestasspewingWestern

5Eltchaninoff,Michel."WhatisPutinism?"TheHuffingtonPost.November25,2015.AccessedApril16,2017.http://www.huffingtonpost.com/michel-eltchaninoff-/what-is-putinism_b_8624088.html.

6

propagandaandpushingRussiaintoacorner.Whathappenswhenyoubackthebear

intothecorner?Itbitesback.

WiththeannexationofCrimeainMarchof2014,Russiahasnowbecomeas

politicallydistantfromtheWestastheUSSRbeforeitscollapse.6“Atthetimeofthe

majorspeechcelebratingtheevent[annexationofCrimea]on18March2014,Vladimir

Putinassertedthat:“Wehaveeveryreasontoassumethattheinfamouspolicyofthe

containmentofRussia,whichwaspursuedinthe18th,19thand20thcenturies,

continuestoday.Theyareconstantlytryingtosweepusintoacornerbecausewehave

anindependentposition,becausewemaintainitandbecausewecallaspadeaspade

anddonotengageinhypocrisy.Buttherearelimits.”7WhatarethedoctrinesPutinhas

adoptedtomakeRussiacompetitiveonceagain?HowhasthisinfluencedRussia’soil

industry?WhatdoesthismeanforRussia’sfutureasaninternationalplayer?

Putinisapopulistleader.Apopulistleaderbuildspoliticalsupportaroundtheir

ownpopularity.Populistsareusuallyconservativeandareattemptingtoinstilladegree

ofnostalgiainthepeople.Populistsusean“usvs.them”mentalitywhichgovernstheir

politics.InRussia’scase,PutinattemptstodistinguishRussiafromtheWest.Hewarns

ofthefailures,corruption,anddecadenceoftheWest.Putin’spolicieshavebecome

moreanti-Westastimehasgoneon.Yet,PutinclearlymustrelyontheWesttosome

6Legvold,Robert.“ReturntoColdWar”.978-1509501892.7"U.S.EnergyInformationAdministration-EIA-IndependentStatisticsandAnalysis."UnitedStatesremainslargestproducerofpetroleumandnaturalgashydrocarbons-TodayinEnergy-U.S.EnergyInformationAdministration(EIA).AccessedMay01,2017.https://www.eia.gov/todayinenergy/detail.php?id=26352.

7

degreeforinvestmentintotheRussianeconomy.Russiannationalismhasturnedinto

anti-WesternismforPutin.Putin’scontrolofthemediainRussiahasonlyaugmentedhis

abilitytospreadhisanti-Westsentiment.Hehasusedthemediatocreateacultof

personalityabouthimself.Broadcastinghismartialartscompetitions,takingpicturesof

himselfridinghorsesshirtless,postingphotosofhimselfshootingweaponsarejust

someexamplesoftheRussianstrongmanpersonaPutinhascreated.8Thishas

translatedintoPutinbeingastrongpoliticalactor.Putinhashishandsinalmostevery

strandoftheRussiangovernment,similartoStalin’scontrolofpoliticalandeconomic

actorsoftheUSSR.ThishasmeantPutinkeepingafirmgrasponRussia’soilindustry,

especiallyinkeepingtheindustryfromgoingbankruptwiththelowworldoilprices

startinginlate-2014.

III.ReasonsforLowOilPrices

TheUS

Perhapsthebiggestdrivingforceofthelowoilpricesaroundtheworldoverthe

lastthreeyearsistheU.S.’semergenceastheworld’sleadingproducerofpetroleum

andnaturalgashydrocarbons.

8Herpen,M.H.(2016).Putinspropagandamachine:softpowerandRussianforeignpolicy.Lanham:Rowman&Littlefield.

8

Source: https.//www.eia.gov/todayenergy/detail/php?id=26352 Accessed 4/16/17

TheU.S.hasalmostdoubleditsdomesticproductionforcingmanyoftheother

oilproducingcountriestolowertheirpricesontheglobalmarket.WithadecreaseinUS

demandforcrude,manyoilexportingnationsnowareforcedtofightfortheirshareina

smallermarket.Aspricesfallproducersareforcedtorampupproductiontosellmore

oiltomakeupforthelowerprices.WhathasallowedtheU.S.increaseitsoil

production?Inaword:Fracking.

Saudi,NigerianandAlgerianoilsthatoncesoldintheUnitedStatesaresuddenlycompetingforAsianmarkets,andtheproducersareforcedtodropprices.CanadianandIraqioilproductionandexportsarerisingyearafteryear.EventheRussians,withalltheireconomicproblemsinrecentyears,havemanagedtopumpatrecordlevels.9

Hydraulicfracturingtechnology,morecommonlyreferredtoasfracking,is

behindthemassiveoilboomintheU.S.“Backin2000,therewerejust23,000fracking

9Kraus,Clifford.“OilPrices:Whattomakeofvolatility.”TheNewYorkTimes.March10,2017.AccessedMay1,2017.https://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0&module=ArrowsNav&contentCollection=Energy%20%26%20Environment%20&action=keypress&region=FixedLeft&pgtype=Multimedia

9

wellspumpingabout102,000barrelsofoiladay.Nowthereare300,000frackingwells,

churningout4.3millionbarrelsperday.”10U.S.oiloutputhasdoubledoverthepast

decade(2006-2016),primarilyduetotappingintoAmerica’senormousshaledeposits.

ThesuddenanddramaticincreaseinU.S.oilproductionwasoneofthebiggestfactors

inthedroppingofglobaloilprices.Withsuchahugeexcesssupply,pricespeakedin

mid-2014andthenplummetedbyasmuchas75%sincethattime.

Source:http://www.pringturner.com/a-new-cyclical-bull-market-in-the-oil-patch-has-begun/Accessed

4/18/17

ThestrongUSdollaroverthepastdecadehasbeenanimportantdeterminantof

lowoilpricesglobally.Thedollarhasatwelve-yearhighagainsttheEuro.Whenthe

valueofthedollarisstrong,thevalueofcommoditiesfall.Commoditiesaredefinedas

10ItrecentlyhitanewmilestoneintheU.S.FrackingnowaccountsformorethanhalfofallU.S.oiloutput."FrackingnowfuelshalfofU.S.oiloutput."CNNMoney.AccessedApril16,2017.http://money.cnn.com/2016/03/24/investing/fracking-shale-oil-boom/.

10

globalassets.11Goodssuchascorn,soybeans,andevenoilcanbetradedalloverthe

worldwhichmeanstheyallneedasingularcurrencytopegtheirvalueto.Global

commoditiesareusuallypricedinUSdollarsmeaningastrongervalueofthedollar

leadstodropintheprices.TheUSdollarisusedasthestandardforpricingcommodities

duethestabilityofthecurrency.SincetheUSdollarservesasthebenchmarkfor

commodities,thepriceanothercountrywillgetforthatcommodityisbasedoffthe

valueoftheUSdollarversustheothercountry’scurrency.Anincreaseinthestrengthof

theUSdollar,allotherthingsequal,causesthenumberofdollarsneededtopurchase

commoditiestodecrease.Atthesametime,theamountofothercurrenciesneededto

purchasecommoditiesincreases.ThestrengthoftheUSdollarhasputastrainonthe

priceofoilforthepastfewyears.In2014,theincreaseinvalueofthedollarcauseda

dropinvariouscommoditypricesincludingoil.TheUSdollarsuddenlyhadmore

purchasingpowerincommodity-basedindustries,causingtheRussianruble’s

purchasingpowertodecreasecomparatively.Thiswasakeyfactorinthedropofthe

globaloilprice.12

OPEC

Worldoil’spricehadalreadybeeninfluencedbyotherfactorsaswell.Withthe

dropinoilprices,manyoilproducersaroundtheworldrampedupproductiontomake

upforthedropinprofitperbarrel.ProducerssuchasOPEC(OrganizationofPetroleum

11Staff,I.(2014,December02).Commodity.RetrievedMay27,2017,fromhttp://www.investopedia.com/terms/c/commodity.asp12Worstall,T.(2016,January20).TheRuble'sFallIsJustWhatRussiaNeedsToDealWithOilPriceCollapse.RetrievedMay27,2017,fromhttps://www.forbes.com/sites/timworstall/2016/01/20/ruble-fall-past-80-to-the-just-what-russia-needs-to-deal-with-oil-price-collapse/#611fac70691e

11

ExportingCountries)basedintheMiddleEast,floodedthemarketwithcrude.Russiais

notamemberofOPEC.ThepriceofMiddleEastcrudehaddroppedby50%fromlate-

2014tomid-2015.Theglobalmarketbecamefloodedwithcrudeassuppliersscrambled

tomakeupforlostprofits.Thiseventuallyledtoanoversupplyofcrudeoilglobally.13

CountriesinOPECsuchasIran,Venezuela,andAlgeriaexpressedaninterestincutting

inproduction.However;SaudiArabia,theUnitedArabEmirates,othergulfnationshad

refusedtodosountilJanuary2017.Inaddition,UScrudeinventoriesareatthehighest

levelsineightyyears.Oversupplyhasbeengoingdownwiththestartof2017despite

climbingbetween2014and2017.14

13OPECdecidedonFridaynottocutoilproductiondespitethefactthatpriceshavetumbled40%fromayearago.(n.d.).OPECrefusestocutoilproduction.RetrievedMay27,2017,fromhttp://money.cnn.com/2015/06/05/investing/opec-decision-oil-prices/14Bierman,Stephen."Russia'sOilDilemma,Explained."Bloomberg.com.March08,2016.AccessedApril16,2017.https://www.bloomberg.com/news/articles/2016-03-09/russia-s-dilemma-squeeze-oil-industry-without-strangling-growth-ilk2y8i4.

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GlobalDemandChanges

Theglobalmarkethasalsoseenadeclineindemandforcrudeoil.The

economiesofEuropeanddevelopingcountrieshavebeenweakening,causingadecline

indemandforcrude.Fuelefficiencyhasalsobeensteadilyimprovingandrenewables

aremorewidelyused.Mostoftheworldisinvestedinincreasingfuelefficiencytolimit

theircarbonfootprint.However,thishashadtheunintendedeffectofdestabilizingoil

exportingnationssuchasRussia.TheIranNuclearDealwillalsoaddtooversupplynow

thattheUS,EU,andUNmultilateralsanctionshavebeendropped.Iranianexportswill

increasewiththeopeningapreviouslyclosedmarket.Thismovewillfurtheraddtothe

oversupplyofcrudeoil.Thealreadyoversaturatedoilmarketwillseepricesdropfurther

unlesstheoversupplyisfixedeitherbylimitingsupplyorincreasingdemand.These

13

factorshaveloweredtheoilpriceglobally,meaning,amongotherthings,that,Russia

mustchangetheirstrategyofoilproduction.

IV.EffectsofLowPricesonRussiaDomestically

RelianceonOilExports

RussiahasbeenhurtingeconomicallysincethecrashofworldoilpricesinAugust

of2014.Withprolongedoilpricesbeinglow,theRussianpeoplehavestartedtofeelthe

adverseeffectsofthisaswellasthePutinadministration’sattemptstostabilizethe

situation.Russia’seconomicwoesbeginwiththestructureofitseconomy.Muchofthe

country’sbudgetreliesonoilexports.LowoilpricesmeanbigtroublefortheRussian

economy.Russiastructuresitsbudgetaroundthepriceofoilperbarreltopredictthe

taxrevenuefromtheindustry.15Rosneftistheworld’sleadingoilextractionand

refinementcompany.TheRussiangovernmentisthemajorityshareholderinthis

company.

Currently,RussiaplacesdutiesonRosneft’sexports.Thisallowsthecompanyto

boostoutputdomestically,butcutsintoprofitsfromexports.Russiaalsohasextraction

taxplacedonpetroleumproducts.Thismeansthattheamountofunrefinedoil

harvestedistaxedwhichalsocutsintoprofits.LessprofitsmeanthatRussiamustbe

carefulnottotaxtheRosneft’sexportstoomuchoritcouldputthecompany’sfinancial

15Litvina,Anna."NewtaxregimemaybeimplementedforRussia'smatureoilfields."RealnoeVremya.com.February20,2017.AccessedMay01,2017.https://realnoevremya.com/articles/1201-new-tax-regime-may-be-implemented-for-russias-mature-oilfields.

14

state,andRussia’s,injeopardy.Atthesametime,Russiamustmakeupforalackoftax

revenueinotherways.Thishadworkedwellpriortolate-2014.However,whenthe

pricesofoildropdramaticallyandsuddenlylikeinlate-2014,theeffectsonthe

economycanbedisastrous.Wagesfellby9%in2015,with2millionpeoplefalling

belowthepovertyline.Inflationhasalsoremainedhighthroughoutthisentiretime.

Russia’scentralbankwasforcedtoprintmoremoneytomakeupforthelackoftax

revenue,whichcausedinflationratesexceeding10%from2015to2016.16

Source:https://tradingeconomics.com/russia/inflation-cpiAccessed4/18/17

16Gregory,PaulRoderick."Russia'sEconomicStagnation."NationalReview.November23,2015.AccessedApril16,2017.http://www.nationalreview.com/article/427481/russias-economic-stagnation.

15

MapofRussia’sOilandGasPipelines

16

Source:https://www.forbes.com/sites/greatspeculations/2012/11/19/pipeline-would-loosen-russian-stranglehold-

on-european-natural-gas-supply/#635ad9be70e9.AccessedMay01,2017

EffectsofDropofGDP

Duetothesefactors,GDPpercapitainRussiadroppedsignificantly.“GDPper

capitainRussiaisdownfromanall-timehighof$11,615in2013to$11,038in2015.”

WithadropinGDPpercapita,theaveragecitizenwillhavelesstospendforagiven

17

bundleofgoods.ThiscausestheaverageRussianpersontohavelessmoneytospendin

theireconomy.Notsurprisingly,thisworriestheRussiangovernment.Inlieuofthedrop

ofwagesin2015,Russia’swageshaveseennorealgrowth.Wagesdidgrowin2016but

duetothehighratesofinflationwagessawnoactualgrowth.17Thepovertylevel

continuestoincreasewithnoendinsight.

Source:http://www.russia-direct.org/analysis/why-russia-fails-cope-resource-curse.AccessedApril16,

2017

Inaddition,foodnowtotakesupabout50%oftheaverageRussianincome.This

hascausedsomeRussianstostartgrowingtheirownfoodinsteadoftryingtospend

17"RussiaRealWageGrowth1998-2017|Data|Chart|Calendar|Forecast."RussiaRealWageGrowth|1998-2017|Data|Chart|Calendar|Forecast.AccessedMay01,2017.http://www.tradingeconomics.com/russia/wage-growth.

18

overhalfoftheirincomeonsimplyfeedingthemselves.ThispercentageofRussian

incomededicatedtofoodpurchaseiscurrentlydropping.18Duetothislargepercentage

oftheaverageRussian’sincomegoingtofood,purchasesofother“luxurygoods”have

gonedown.Thishurtsproducersinthemarketaswell.However,consumersarehurt

themost.Withmostgoodsgoingupinpriceandwagesremainingstagnant,theaverage

Russianhasfelttheadverseeffectsoflowoilpricesforyears.Thestingoflower

incomes,allotherthingsincluded,hasstartedtoputmanyRussiansintoastateof

despair.Protestshavestartedtoeruptincitiesaroundthecountry.“Arisingnumberof

small,localprotestshaveoccurred.Theseoftenrelatetospecificeconomicissues,

particularlypensions.Thenumberofprotestsinbigcitieshasdeclined,butprotestsin

smallcitieshaveincreasedby40percentinthelastyear(2016)—accordingtotheFNPR,

thecountry’slargestworkers’association.”3Withsocialbenefitsbeingcutandreal

incomesfalling,manypeoplearerightlyangrywiththemismanagementofthe

economybythegovernment.AdroppingworldoilpriceiswhathurttheRussian

economyandthepeople.However,yearsoffailuresofeconomicdiversificationkeeps

Russia’sfatetiedtothevolatileworldpriceofoil,moreonthislater.Thishascaused

problemsforthePutinadministration.Evenworse,manypaymentsaroundthecountry

whichshouldhavebeenpaidhavenot.DifferentregionsaroundtheRussiahaveseen

wagearrearswhichhavetotaledaround$62millionasofJuly1st2016.Aboutaquarter

18"RussiaFoodInflation2010-2017|Data|Chart|Calendar|Forecast."RussiaFoodInflation|2010-2017|Data|Chart|Calendar|Forecast.AccessedMay01,2017.http://www.tradingeconomics.com/russia/food-inflation.

19

oftheseunpaidpaymentswerethepastmonth’spayofworker’swages.Thislackof

paymentsmakethingsworseandgivetheprotestersmorefuelfortheirdiscontent.3

Russianshavebecomeincreasinglyworriedaboutoilprices.Duetothevolatility

andrelianceonoilprices,theRussiangovernmentwasforcedtomakecutsinrecent

yearstovarioussocialprograms.ThishascreatedunrestinRussiaintheformof

protests.ManyRussianshavetakentothestreetschantingtohavetheirbenefits

returnedtothem.In2016,Russianlong-haultruckdrivershavebeenprotestingfor

weeksinMoscowatanewroadtax.Asoilpricesrecover,socialprogramsaroundthe

countryareseeingtheirfundingreturn.3Yet,itdoesn’tseemthatthepeopleare

primarilyworriedaboutthisrecovery.Rather,theyfocusonhowPutin’spoliticshave

causedthisperfectstorm.WithlittleworkdonetodiversifyRussia’seconomy,crudeoil

willserveasRussia’sprimesourceoftaxrevenueforyearstocome.

RussianOilProducers

Asmentionedearlier,consumersarenottheonlyoneshurtingfromthelowoil

prices.TherateofbankruptciescontinuestoriseinRussia.3UralVagonZavod(UVZ)isa

military-industrialcompanywhichconsistsoffortyentitiesandisamongthetop

hundredlargestofthissectorofcompaniesaroundtheworld.Threeofthefortyentities

filedbankruptcyandlawsuitsagainstUVZinthelatterpartof2016duetounpaiddebts.

ManyothercompaniesthroughoutRussiahavebeenhithardwiththelowoilprices.As

youmightexpect,petroleumproducershavesufferedmorethanotherindustries.

Curiously,Russia’sbiggestoilconglomeratesLukoilandRosneft,whoaccountforover

20

halfofthecountry’soilproduction,havebeenturningprofitsthepasttwoyears.This

wasmostlyduetotherubleweakeningagainstthedollar,whichmeansprofitsinrubles

rosewhileprofitsindollarsfell.Despitetheprofitsturnedbydomesticproducers,their

successwillnotlastlong.WithRussia’sbudget,soheavilyreliantontaxrevenuefrom

theoilmarket,theKremlinaimstotweaktheirtaxpolicy.TheKremlinisreluctantto

increasetaxesbutitscoffersarerunninglowandtheonlyotheralternativeistocut

governmentprogramsortaxotherindustrieswhicharealsosuffering.Thedepreciation

oftherublehashelpeddomesticproducersintheRussianmarketbuthurtconsumers.

Astringofbankruptciesinthecountrycouldbecatastrophicwhereasafallinincome

forthepeopleismanageableinlightofthedireeconomiccircumstancesintheearly

1990’s.19ThefollowinggraphdepictsthevalueoftheRussianrublefrom2012-Present

(5/1/17)inrublesperdollar,whichisrepresentedonthey-axis.

19Guriev,Sergei."Opinion|InRussia,It'sNottheEconomy,Stupid."TheNewYorkTimes.December25,2016.AccessedApril16,2017.https://www.nytimes.com/2016/12/25/opinion/in-russia-its-not-the-economy-stupid.html.

21

Source:http://www.tradingeconomics.com/russia/currencyAccessedMay01,2017

Russia’soilmarketiscomposedofseveraldifferentproducers.However,Rosneft

andLukoilproduceabouthalfofthecountry’soil.20RosneftCEOIgorSechinandPutin

workverycloselyonallmattersofoilproductionandinvestment.Thisintimate

relationshipbetweentheworld’slargestoilcompanyandthePresidentofRussiahas

meantthatmuchofRussia’spolicyisfocusedonturningprofitsforRosneft.Eachof

thesecompanieshasgreatlyincreasedcapitalexpendituresforexplorationand

productionsfor2016.Thishashelpeddrawinvestorsaswellasgivingmoreoptionsfor

accesstocheaperreserves.Bothproducersarestate-controlled.Sincetheseproducers

arestate-controlledandmakeupsuchalargepartofRussia’staxrevenue,thepriceof

oilistiedtothetaxrates.Russiacanmanipulatethetaxrateaswellasmonetarypolicy

tocreatethemostfavorablemarketconditionsfortheiroilindustry.Russiahasdone

20Rizvi,O.(2017,January09).TheSecretsBehindRussia's2016OilSuccess.RetrievedMay27,2017,fromhttp://oilprice.com/Energy/Crude-Oil/The-Secrets-Behind-Russias-2016-Oil-Success.html

22

remarkablywellsince2015atcreatinganeconomicenvironmentinwhichitstopoil

producerscouldstayabovewaterdespitethelowworldoilprices.FinancialsforRussia’s

oiltaxrevenueseemtobelookingupforthefutureasoilpricestrendupwardsand

investmentcontinuestoflowintothecountry.Foreigninvestmentandtheeffectof

economicsanctionsonit,arediscussedingreaterdepthbelow.

Source:http://energypost.eu/russia-keeps-expanding-oil-production-despite-low-oil-prices/AccessedMay27,2017

V.RussianForeignStrategy

CutsinProduction

OPECandRussiahaddecidedtocutoilproductionduringthefirsthalfof2017

downto1.8millionbarrelsperdaystartingJan.1st.Someofthecomplianceonthepart

ofRussiatocutproductionisduetoextremelylowtemperaturesinWesternSiberia

duringwinter.Extremeweathercaninfluenceifmachinerycanworkproperlyand

safely.ProductionslowsannuallyduringthistimeforRussianoil.2015and2016saw

23

recordlevelsofoilproductionforRussiainthepost-Sovietera.Thesehighlevelsof

productionwereprimarilyduetonecessityratherthanchoice.Whilethepricesofoil

droppeddramatically,productionwassetintooverdrivetoproducemoreoiltosellat

thelowerprice.Thisisn’tintuitivebecausealowerpriceforasupplierusuallydictates

lessquantityproduced.However,Russianoilproducerswerebackedintoacornerand

hadtoproducemoreoiltomakeupfortheirlostprofitspergallonsold.Russia’s

economywasprimarilyfocusedaroundtheoilmarketandhadtocontinuetoexpand

productiontoremainafloat.WithcarefulmanipulationofmonetarypolicybyRussia’s

CentralBank,Russianoilproducerswereevenabletoturnaprofitinrubles.

Source:http://www.tradingeconomics.com/russia/currencyAccessedMay01,2017

In2017,worldoilpriceshavestillnotrecoveredtotheapexofpricesin2014.

Priceshaverecoveredmodestlyoverthepasteighteenmonthswhichhavehelped

Russianoilproducers,butnotenough.YetRussiaisprojectingtobringinbillionsof

dollarsmoretothefederalbudget.HowthenisRussiaplanningtocutproductionand

24

remainfiscallyresponsible?SomecarefuldiplomacyonPutin’sbehalfisapartofthe

answerandtheothermayrelyonafocusoncleanenergyforRussia’sfuture.Russian

energyexpertAnatoliyPshegornitskiy,engineerandglobalentrepreneur,believesthat

risingoilpricescouldfuelRussia’scleanenergysectorforyearstocome.

Pshegornitskiystated,"Wehaveseenthatthedevelopmentintechnologyand

increasedfundingintherenewableenergysector,suchaswindandsolar,hasledto

thembecomingmorecost-competitiveworldwideandledtoadaptionandincreased

usage.EventhoughRussiahasvastoilresources,Putinintelligentlydeclared2017asthe

yearoftheenvironmentwhichwillcreatemomentumforskilledRussianengineersto

furtherdevelopgreenenergytechnologiesforRussiaanditstradingpartners.”21

Despitethisfact,Russiaisproducingmoreoilthanithasinthepastdecadein

ordertomaintaintheirtaxrevenue.ThismaychangesoonasPutinagreeswithOPECto

cutbackproductiontoallowtheglobalpricetogoup.Thisagreementisaddressed

below.

21Kuznetsov,Nikolai."Russia'sEnergySectorSetToThriveIn2017."Forbes.January23,2017.AccessedApril16,2017.https://www.forbes.com/sites/nikolaikuznetsov/2017/01/11/russias-energy-sector-could-thrive-in-2017/#1cd3bf9a9595.

25

Source:http://www.tradingeconomics.com/russia/crude-oil-productionAccessedApril01,2017

Putin’sDiplomacy

Putinhasbeenworkingonstrengtheningdiplomatictieswithmanyofthe

petrol-statesoftheMiddleEast,thegrowingAsianmarkets,andperhapseventheUS.

InDecemberof2016,PutinvisitedJapanfortwodaystocementvariouseconomicdeals

withthecountry.Twenty-threeoffiftydealsmadewereenergybased.Thesedealswill

germinateintoincreasingdevelopmentofoilandnaturalgasprojectsinbothcountries.

JapanandRussiabelievethistocreateflowsofmoneyinthebillionsofdollarsbetween

inthetraditionalenergymarket.However,thismovetoincreaseproductionoftheoil

andnaturalgassectorscouldalsobenefitthecleanenergymarket.IfRussiamakes

increasedprofitsfromthisdeal,itcouldpushRussiaintolookingforalternativesources

ofcleanenergytoprotectthefutureofitsenergysectorfromthevolatileoilmarket.

MoreinvestmentintocleanenergyseemstobewhatPutinisfocusedonfor2017when

hesaidthis,the"[e]nvironmenthasbeenandofcoursewillbeakeyelementofour

26

workaspartofourdomesticpolicy…Russia,asitisknown,tookonrigorous

commitments[ParisAgreementonclimatechange]andIhavenodoubtthatwewill

fulfillthem.”22InadditiontoitsdealingswithJapan,Russiahasmadebigmoves

diplomaticallywithothercountries.TheQatarInvestmentAuthority(QIA)andGlencore

purchased19.5%ofRussia’sRosneftbringingaround$10billiontotheRussian

economy.22ThisisthelargestprivatizationoftheRussianoilsectorinyearsbutisstill

ownedandoperatedbytheRussiangovernment.Ifthisinvestmentlikethiscontinues

intotheRussianenergysector,thenationcouldexperienceanenergyboom.With

Putin’scommitmenttocleanenergyin2017,Russiamayseeagrowthintheclean

energysectoraswell.PerhapsRussiaandtheUSwillalsodevelopeconomictieswith

PresidentTrumpbeingcommittedtoworkwithPresidentPutin.Russiacouldbenefit

greatlyifthesanctionsimposedbyPresidentObamawerelifted.ItseemsthatRussiais

winningdiplomaticallylatelyandseekingabetteralternativetothevolatileoilmarket.

Itissurprisingthatacountrywithsuchamassiveamountofoilandnaturalgas

reserveshasnamed2017asa“YearoftheEnvironment.”Russiawilluseitsoilreserves

tofundmoreresearchanddevelopmenttolimittheircarbonfootprint.Atthesame

time,oilproductionisstartingtobescaledbacktocutdowngreenhousegaseseven

more.Russiaalsohopestolimititsrelianceondirtyenergysourcessoitstaxrevenueis

notcutintosomuchfromfluctuationsinoilprices,whichthecountrycan’tentirely

control.

22Gloystein,Henning."OPEC,RussiaspareAsiaoilsupplycutsinfighttoholdmarketshare."Reuters.February02,2017.AccessedApril16,2017.http://www.reuters.com/article/us-asia-oil-idUSKBN15H0GA.

27

Source:http://www.eurasiareview.com/27102016-russia-energy-profile-largest-producer-of-crude-oil-analysis/April

19,2017

Russianeedstoworkondiversifyingitseconomytopreventanotheroilscare

suchaslatein2014whenoilpricesplummeted.Thelargeamountofnaturalresources

RussiapossesseshavealwaysplayedahugeroleinfundingtheSovietandnowRussian

governments.Yet,Russianeedsagamechanger.Itneedsanewsourceoftaxrevenue

whichcansupplementthetraditionalenergyproductiontaxrevenue.Russia’s

commitmenttocleanenergyseemstobethefirststepsintofindinganalternative.The

fledglingcleanenergymarketstillrequiresmuchresearchtobecomemoreefficient

thanotherformsofenergyproduction.Russiacan’tpossiblyexpecttosellrenewable

energyonthesamescaleofoilornaturalgaswithinthenearfuture.Whileinvestment

incleanenergyisgoodfortheenvironment,itisn’tgoodfortheRussiancoffers

28

currently.SinceRussiacannotobtainmorenaturalresourceswithouttakingoversome

moreterritory,Russiamustrelyondiplomacy.Establishinghubsindifferentpartsofthe

worldwhichcanexportoilandgaswouldcreateanadvantageforRussia.One,

transportationcostswouldbelower,especiallyifhubsweresetupinNorthernAfricaor

theMiddleEast.ThiswouldallowaccesstotheEUwithoutgoingthroughtumultuous

Ukraine.Two,securingalargermarketshareoftheoilandgasmarketmeansmore

pricesettingpower.Putinhashadadifficulttimeinthepastfewyearsinthediplomacy

departmentduetoitsannexationofCrimeaandtheconflictintheUkraine(the

rationaleandeffectofWesternsanctionsonRussiaarediscussedbelow).However,

withPutin’sdealingsinJapanandtheMiddleEast,itseemsheistryingtoexpand

Russia’seconomicinfluenceoutsideofthecountryanddrawinforeigninvestment.

UntilRussiafindsitsgame-changingcommodity,itshouldrelyonitsrelationshipswith

othernationstokeepthenationcompetitiveontheinternationallevel.Hereisapie

chartrepresentingcrudeoilexportsfromRussiatoothernationsin2014.

29

Source:http://www.eurasiareview.com/28072015-russia-energy-profile-worlds-largest-producer-of-crude-oil-

analysis/AccessedApril03,2017

EconomicDiversification

Foryears,Russiahasbeentryingtodiversifyitseconomy.Putinhastalkedof

economicdiversificationsincecomingintooffice.23DespitePutin’sremarks,littletono

diversificationhasoccurreduntilrecently.ThishasbeenduemostlytoRussiabeinga

23Herspring,D.R.(2007).PutinsRussia:pastimperfect,futureuncertain.Lanham:Rowman&Littlefield.

30

resourcerichcountry.Withvastoilreservesandthepriceofoilsteadilyincreasinguntil

2014,Russiacontinuedtobuilditsoilinfrastructure.Takingadvantageofthehighoil

priceshelpedfuelRussia’samazinggrowthandlimitedtheimpactsofthe2008world

financialcrisis.DuringtheMedvedevpresidentialyears(2008-2012),economic

diversificationwasthecenterofthepresident’spolicy.Russiarealizedtherelianceonoil

exportswouldnotbesustainableduetodemandforoildecreasingworldwideas

technologyincreased.However,withthecollapseofoilpricesduringtheendof2014,

Russia’seconomicdiversificationbecameanecessityratherthanagoal.Sectorssuchas

media,banking,retail,andconsumergoodshaveincreasedsignalingstepstowards

economicdiversification.Expansionofthesesectorshasbeenamoveawayfrom

resourcecollectingandexporting.ThisisimportantforRussiabecauseresource

collectioncanendduetoexhaustionofaresourceorhighcostsofcollection.Service

sectorsinsteadstimulatethedomesticeconomyanddrawforeigninvestmentwiththe

guaranteeofthecontinuationoftheindustries.Thediversificationoftheeconomyhas

beenslow.

Medvedev’seconomicpolicyslogan“ForwardRussia”wasusedthroughouthis

timeinoffice.However,thesayingcarriedlittleapplicabilityinthemarket.24Withthe

continuityofturbulenceintheoilmarket,itbecameclearthediversificationintheform

ofmacro-economicpolicychangeswasneeded.“’Itwasamistaketorelysomuchonoil

andgasoverthepast10yearsasthishasresultedintherublestrengtheningtothe

24DmitryMedvedev'sArticle,GoRussia!(2009,September10).RetrievedMay27,2017,fromhttp://en.kremlin.ru/events/president/news/5413

31

pointitdisruptedotherindustries,’saidFinanceMinisterAntonSiluanov.”25Despite

thisperception,Russia’seconomicgrowthmodelhaschangedlittle.Russianeconomic

growthisstillheavilyreliantonnaturalresourcesandenergysuchasoil.Thishasbeen

primarilytotheprevalenceofstateownedorquasi-statecompaniesinthemarket.The

privatemarketremainsweakandthestatecontrolledcompaniesenjoyinformal

relationshipswiththestatethatbenefitthemeconomically.Thegovernment

announcedfourprivatizationeffortsinthelastdecade.Thosein2007,2009,and2012

wereneverimplemented.SomeprivatizationhasoccurredwithRosneftinthepastyear,

yetitremainsastronglystatecontrolledentity.Over-relianceonenergyprofitshasnot

ledtoasteadyinflowofinvestmentandtechnologicaladvancement.Medvedev

attemptedtofixtheproblemwiththecreationoftheSkolkovohigh-techinnovation

center.PutinlaunchedtheNTI(NationalTechnologyInitiative)2014whichwasastate

sponsoredprogramaimedatstrengtheningRussiatechnologically.26Despitethese

movesbythestatetobuildtheprivatemarket,stateruncompanieslikeRosneftstill

dominatethemarketandprovidetheKremlinwithmostitstaxrevenue.Diversification

oftheRussianeconomyhasfailedthroughoutthePutinera,butwiththedrastic

changesofworldoilpricesithasbecomeanecessityintoday’seconomicclimate.With

afocusonmarketprivatization,economicdiversificationwilloccurnaturallyasnew

industriescanprosperwithoutstate-runoligarchscontrollinganentireindustry.

25Gregory,PaulRoderick."Russia'sEconomicStagnation."NationalReview.November23,2015.AccessedApril16,2017.http://www.nationalreview.com/article/427481/russias-economic-stagnation.26Adelaja,T.(2016,August16).WhyRussiafailstocopewith'resourcecurse'RetrievedMay27,2017,fromhttp://www.russia-direct.org/analysis/why-russia-fails-cope-resource-curse

32

Corruption

CorruptionisRussiahasalwaysplayedabigroleinimpedingtheeconomicwell-

beingofthecountry.27Thisgetsinthewayofbusinessdevelopmentaswellas

investment.Businesssuffersfrominconsistentapplicationoflawsandlackof

transparency,whichincreasesthecostofdoingbusiness.Naturalmarketcompetitionis

limitedduetotheproliferationofcorruptionthroughalllevelsoftheRussianeconomy.

WhileRussiaclaimstobefightingcorruptionasseenwiththeRussianFederalAnti-

CorruptionLaw,pervasivecorruptionpersists.

ThisproblemisevidentforanycompanydealingwiththeRussianjudicial

system.Corruptioninthecourtsinclude;bribery,fabricationofevidence,orinfluence

fromRussia’spoliticalactors.Highprofileandpoliticallysensitivecasesareespecially

influencedbycorruption,despiteRussia’scourtsbeingaseparateentityfromtheother

branchesofgovernment.LawsanddecreesarealsoconstantlychanginginRussiawhich

canchangetheoutcomeofanygoverncourtcase.27Foreigncompaniesareoften

advisedtoincludeforeignarbitrationclausesintheircontractstolimittheroleofthe

Russianlegalsystem.

Inarecentretrial,andperhapsoneofthemostillustrativecasesofpoliticalinfluenceoverthecourts,theprominentoppositionleaderandpotential2018presidentialcandidate,AlexeiNavalny,washandeddownafive-yearsuspendedprisonsentenceforembezzlementbyaprovincialcourtinKirov.TheconvictioneffectivelybarsNavalvyfromrunninginthe2018presidentialelection.Navalvywasinitiallysentencedin2013inconnectionwithallegationsthathehadembezzledUSD502,700worthoftimberfromthestate-ownedcompanyKirovles.However,Navalnyappealed

27Gan."RussiaCorruptionReport."GANBACP.AccessedMay01,2017.http://www.business-anti-corruption.com/country-profiles/russia.

33

thesentence,andfollowingarulingissuedbytheEuropeanCourtofHumanRightsdescribingNavalny’strialasunfair,theRussian’sSupremeCourtoverturnedtheconvictionin2016andsentitbacktoKirovforretrial(OCCRP,Feb.2017,RussiaNewsAgency,Feb.2017).27

ThiscaseshowsthehowRussiausesitslegalsystemasawayoffulfillingits

politicalgoals.CaseslikethesedeterforeigninvestmentandbusinessandRussia,thus

impedinggrowth.UnfortunatelyforRussia,corruptionsuchasthispervadesintoevery

levelofitssocietyincludingbutnotlimitedtopolice,publicservices,taxadministration,

publicprocurement,andofcourse,naturalresources.Businessesaremuchmorelikely

tobesuccessfuliftheyhaveafavorablerelationshipwithgovernmentalofficialsorif

theyagreetopaybribes.Russiacurrentlyranks45/176incorruptionaccordingto

TransparencyInternational,theglobalcoalitionagainstcorruption.28Corruption

impedeseconomicgrowthbydrivingoutforeigninvestmentandfavoringoligarchs.Itis

easiertoextralegalactivitiestocircumventthelawifyourcompanyownsalion’sshare

ofthemarket.

28E.V.,TransparencyInternational."CorruptionPerceptionsIndex2016."Www.transparency.org.AccessedMay01,2017.http://www.transparency.org/news/feature/corruption_perceptions_index_2016.

34

Soucre:http://www.transparency.org/news/feature/corruption_perceptions_index_2016AccessedMay01,2017

VI.RussiaandEurope

EuropeishighlydependentonRussianoil.Russiaisbyfarthelargestsupplierof

oiltotheEU.Rosneftalonesuppliesthemarketwith20%ofitsoilwithothercompanies

inRussiasuchasLukoilstillmakingupalargeamountofEurope’scrudeimports(about

athirdintotal).DespiterelationsbetweenRussiaandtheEUremainingrocky,

35

dependenceonRussiaoilcontinuestorise.29However,thedemandforRussianoilin

Europemaysoonchange.Aroundtwo-thirdsofdemandforoilintheEUisusedfor

transport.TransportationisthebiggestdriverfordemandofoilinEuropeaswellasthe

biggestproducerofCO2andgreenhousegases.So,fortheEUtoreduceitsenergy

dependenceonRussianoilandreduceGHGemissions,itseemsreducinguseofoilin

thetransportationsectoristheanswer.ReductionofoilusewouldreduceEurope’s

carbonfootprintwhileeliminatingPutin’sabilitytotakeawayonetheirmostimportant

commodities.ThecountriesontheperipheryofEurope,closertotheMiddleEastor

Russia,aremorereliantonRussianoilimports.Thisisprimarilyduetoeaseofaccess

andmorediversificationofoilsuppliersinothercountries.Europeisinterestedin

reducingrelianceonRussiancrudeandhascomeupwithastrategytoachievethisgoal.

“AccordingtoT&E,theEuropeanCommission‘ispreparingastrategyfordecarbonisingtransport,expectedlaterthissummer.’Itrecommendsthatthisstudyinclude:

NewCO2standardsfornewcars,vansandtrucksfor2025:

§ anintegratedstrategytoacceleratetheelectrificationoftransportthatembracesmobilityneeds

§ astrategytoincreasethepotentialofemobilitybalancingsmart,renewablegrids

§ anindustrialpolicythatsupportstheshifttoelectricvehicles

§ committingtogobeyondglobalactionintacklingCO2emissionsandoiluseofaviationandshipping”29

EuropeisRussia’slargestbuyerforoilexports.Anyreductionindemandfor

RussianoilintheEuropeanmarketwillgreatlyreducesalesandthustaxrevenue.Aplan

tomakeEuropemoregreencouldhavedisastrouseffectsforRussia.Unfortunately,

Russiahaslittletonochoiceinthematter.Putinhasalreadydeclared2017asa“Year

29Post,AboutEnergy."Europeincreasinglydependenton(Russian)oilimports."EnergyPost.eu.July19,2016.AccessedApril16,2017.http://energypost.eu/europe-increasingly-dependent-oil-imports-russia/.

36

fortheEnvironment”sospeakingoutagainstEurope’sintentionscouldcripplehim

diplomatically.Putinalsocannotcutproductiontoincreasepriceasdemandlowers

becauseothercountries,mostnotablyOPEC,wouldpickuptheslack.Oilsalesareone

ofthefewthingskeepingRussiaafloatduetothelowoilprices.ItseemsthatRussia

mustfindadifferentcommoditytosell,withEuropeandemandexpectingtodecline.In

themeantime,RussiawillcontinuetoproduceoilandsupplyEuropethroughoutthis

process.PerhapsRussiawillfigureoutanotherformoftaxrevenuenotbasedoffthe

salesofcrudewithinthenextfewdecades.Untilthen,Russia’slong-termstrategyof

securingvariousreservesaroundtheworldwilllikelycontinue.

ImportsofRussianCrudeOil

37

Souce:http://energypost.eu/europe-increasingly-dependent-oil-imports-russia/AccesedMay25,2017

38

Source:http://energypost.eu/europe-increasingly-dependent-oil-imports-russia/AccessedMay25,2017

VII.PutinandtheUS

USSanctions

WhathavethesanctionsimposedbyObamain2014meantfortheRussia

economy?30Withthesesanctions,thevalueoftherubledroppeddramatically.The

valueoftherublereachedalowpointinJanuaryof2016at1.2centsperruble,ora57

percentdropinvaluepriortothesanctions.Sincethistime,therublehassteadily

30"U.S.sanctionsalonedidn'tcrushRussianeconomy."@politifact.AccessedApril16,2017.http://www.politifact.com/punditfact/statements/2017/feb/21/anthony-tata/how-have-sanctions-impacted-russias-economy/.

39

regainedvaluereaching1.7centsperrubleor40percentofitsformervalue.The

strengtheningoftheUSdollar,increaseinmonetarypolicy,andsanctionsallcausedthe

rubletocrash.Itseemsthattherubleisonasteadypathtorecoverywhichisclosely

tiedtoworldoilpricesinchingtheirwayup.“Russia’sGDPwas$2.053trillion(inU.S.

dollars)in2014,accordingtotheWorldBank,droppingto$1.331trillionin2015—a

dropofabout35percent….Adjustedforinflation,however,thedropwasmorelike3.7

percentbecauseofthestrugglingruble.”30Withcarefulmoneymanipulation,Russia

limitedthedisastrouseffectsofthesanctions.ThesesanctionstargetedRussian

industrieswhichwerekeytoitstaxrevenue,suchastheoilindustry.Thismassively

limitedforeigninvestmentwhichstarvedtheoilmarketinconjunctionwithlowoil

prices.Thesanctionsdidn’tspecificallytargettheoilmarket,butratherallforeign

investmentandexports.However,sinceRussiareliessoheavilyonRosneft,itseemed

thiswastheintent.Putin’sworktoestablishforeigninvestmentwithouttheUSseems

tobehiswayofmakingupfortherevenuelostbythesesanctions.Mostoftheimpact

ofthesanctionswasfeltthroughtheclosureoftheEuropeanmarkettoRussia.The

energyinterdependencybetweenRussiaandEuropeisdiscussedingreaterbreadth

earlier.

PutinandTrump

40

PutinworkedwiththeUStodevelopa$500billionoilexplorationdealbetween

RosneftandExxon-Mobil.31ThisdealwaspreviouslyblockedbytheObama

administration’ssanctions.Thesanctions,putonRussiaduetoitsinvolvementinthe

Ukraine,wereloosenedonFebruary2nd.Exxon-MobilCEOandnowSecretaryofState

RexTillersonworkedhandandhandwithPutintofosterthisdeal.Thishasledto

rumorsofRussianinvolvementinaTrumppresidency,whichwouldallegedlyleadto

RexTillerson’sappointment.Regardless,Russia’soilmarketseemstobeballooningdue

toforeigninvestment.Theideaofthisdealwasoriginallyintroducedin2012and

scheduledforimplementationin2016-2017.32Theexplorationwasproposedtotake

placeintheArcticandBlackSea.Withaprojected85millionbarrelsofoilinthese

reserves,thisdealcouldmeanhugeprofitsforbothExxonMobilandRosneft.However,

relationswithRussiahaveonlycontinuedtosourthusfar.

AkeyfactorindeterminingthefutureofRussia’soilmarketishowrelations

betweentheUSandRussiawillchangewithaTrumppresidency.USpresidentstypically

gointoofficepromisingtoworkwithRussiainawaywhichwillbeinlinewithUS

interests.However,ObamawasbackedintoacornerwiththeRussianllannexationof

CrimeaandchosetoimposesanctionstopunishRussiaforitsactions.Obamahadtodo

somethingtoappearstrongintheinternationalcommunitywithoutlaunchingintoa

31McKenzie,Sheena."RussiagivesUScoldshoulder,sayingrelationsbetweencountries'frozen'"CNN.December22,2016.AccessedApril16,2017.http://www.cnn.com/2016/12/22/europe/russia-us-relations-frozen/.32Busvine,Douglas,andVladimirSoldatkin."Exxon,Rosneftunveil$500billionoffshoreventure."Reuters.April18,2012.AccessedApril16,2017.http://www.reuters.com/article/us-exxon-rosneft-idUSBRE83H0UE20120418.

41

conflictwithRussia.ThismovecausedrelationsbetweentheWhiteHouseandKremlin

tosourfortheremainderofObama’spresidency."Nearlyalllevelsofourdialogue

(withtheUS)hasbeenfrozen,"KremlinspokesmanDmitryPeskovsaidinaninterview

Wednesday(Dec.21,2016)withRussianstate-runnewsagencyRIANovosti.”31With

littletonocommunication,relationscanonlyexpecttoimprovewithTrumpinoffice.

However,asofApril2017boththeUSandRussiaareonceagaingivingeachotherthe

coldshoulder.

VII.RussiaandtheMiddleEast

Turkey

TurkeyandRussiahavealwayshadastrainedrelationship.Despitethis,Russia

suppliesTurkeywitharoundthreequartersofitsnaturalgas.In2015,Turkeyshotdown

aRussianwarplaneandtheirrelationsquicklysoured.33Russiarespondedbycancelling

theirplanstobuilda900kmlongnaturalgaspipelineknownasTurkStream.TurkStream

isadualpipelineprojectintendedtoservetheTurkishmarketaswellassouthern

Europe.ThefirstpartofthepipelinewillmeetTurkey’senergyneedsandtheotherwill

serveasaconduittothesouthofEurope.Inlate2016,PutinandTurkishPresident

RecepTayyipErodganappearedtomakeamendsandsignedtheagreementof

TurkStream.Thepipelineisscheduledtobeupandoperationalbytheendof2019.

WhileTurkeyandRussiaalreadyhaveextensiveenergyrelationswiththeBlueStream

33Turkey'sdowningofRussianwarplane-whatweknow.(2015,December01).RetrievedMay27,2017,fromhttp://www.bbc.com/news/world-middle-east-34912581

42

andWestLine,TurkStreamisexpectedtobringthecountriescloserintradeandpolitics.

TurkeyissecondlargestimporterofRussiannaturalgasafterGermany.34

OneofthemajordriversbehindbuildingthispipelineistolimitRussia’s

dependenceonexportstotheEUthroughUkraine.Thisrouteofnaturalgasaccounts

foraround40%ofRussia’snaturalgasexportstoEurope.PutinandErodganhavealso

agreeduponadiscountforTurkey’snaturalgasthroughGazprom,theworld’slargest

gasproducer.Thediscountagreeduponpriortothecancellationoftheoriginaldeal

was10.25%toTurkey’sstate-runenergycompany,BotasBoruHatlariIlePetrolTasima

AS.“‘ThedealisapieceofthepuzzleinreducingtransitdependenceonUkraine,but

doesnotrepresentamajorcoupforGazpromintermsofEuropeanmarketaccess,’said

EmilyStromquist,aLondon-basedanalystatEurasiaGroup,inane-mail.‘Thispipelineis

arerouteoption.’”35ThegoalforRussiahereistogiveGazpromawaytocircumvent

theunstablepoliticalsituationinUkrainebybuildingitsenergyinfrastructureintothe

MiddleEast.Inaddition,creatinganinterdependentenergystructurebetweenTurkey

andRussiawillhelpbuildrelationsbetweenthetwonations.Thisismuchneededafter

relationshaveonceagainbeguntosourduetoRussia’sinvolvementinSyria.However,

manycountriesincludingRussiaareawarethatpeacebetweenothercountriesis

imperativetoensureenergyexportsandimports.Thequestionisnotofthemoralityof

34Судаков,Дмитрий."AkeyprojectdrawingRussiaandTurkeynigh:TheTurkishStream."PravdaReport.April11,2017.AccessedMay01,2017.http://www.pravdareport.com/opinion/columnists/11-04-2017/137447-turkish_stream-0/.35Mazneva,Elena,StepanKravchenko,andKellyGilblom."Russia,TurkeyAgreetoBuildGasPipelineUnderBlackSea."Bloomberg.com.October10,2016.AccessedMay01,2017.https://www.bloomberg.com/news/articles/2016-10-10/russia-turkey-agree-to-build-gas-pipeline-under-black-sea.

43

engaginginconflictwithanothernationbutratherwhattheeconomicblowbackwillbe.

AswehaveseenwithRussia’sinvolvementwithSyria,moralitygoesoutthewindow

whenconsideringalltheprofitstobemade.ProfitsmadeinthelongrunifRussiacan

secureSyriaandbuildanewpipeline.

Source:http://themarketmogul.com/erdogans-victory-oil-markets/AccessedMay01,2017.

Syria

Russia’sinfluenceintheMiddleEastandNorthernAfricahasincreasedsteadily

sincethedropofoilpricesin2014.RussiaoilcompaniesandArabconglomerateshave

madeseveraloildeals.SinceenergyiscentraltoRussia’sforeignpolicyinterests,itisn’t

44

surprisingRussiahasturnedtosomeoftheoilrichnationsoftheMiddleEast.Putinhas

usedthemassivestaterunoilcompaniesRosneftandLukoiltomakesignificantpolitical

opportunitiesinaregionwherenewfossilfuelreservesarebeingproven.Russia’s

involvementinSyriahasguaranteedthecontinuationofPresidentBasharAlAssad’s

regimedespitethecountry'songoingrebellion.Thiswasduetocarefulpolitical

maneuveringonPutin’spartcoupledwithmilitaryintervention.PutinandAssadhave

developedacloserelationshipwithoneanother.Therelationshipisbroadcastedtothe

mediaasananti-terroristagendaaimedatstoppingISIL.Thisispartiallytrue.Putindoes

haveaninterestineliminatingpoliticalinstabilityinSyria.Astheconflictcontinues,

moreofSyria’soilinfrastructureisdestroyed.PutinistakingagambleonSyriawiththe

goalofeliminatingISILinhopesofnewprofitsfromfutureRussianinvestmentinto

Syria’sdebilitatedenergyindustry.Theseprofitsalsomeanincreasedtaxrevenuefor

Russia,loweringthedeficit.Syriahaslittletodowithothernationsintermsof

involvementofoilandnaturalgascompanies.Infact,whenquestionedaboutthe

reasonforthis“AssadtoldavisitingRussiandelegationoflawmakersthisweekthat

neitherIrannorChinahascompanieswithaworldwidereputationintheoilandgas

sectorlikeRussiahas.Therefore,Assad‘seesonlytheworkofRussiancompanies’”36Of

course,thisisduetoPutinkeepingAssadinpowerandpayingPutinback.Putinisalso

interestedinthepossibilityofcreatingyetanotherpipelinethroughthecountryto

36Calcuttawala,Zainab."HowRussiaIsUsingOilDealsToSecureItsInfluenceInTheMiddleEast."OilPrice.com.February26,2017.AccessedApril16,2017.http://oilprice.com/Energy/Energy-General/How-Russia-Is-Using-Oil-Deals-To-Secure-Its-Influence-In-The-Middle-East.html.

45

reachSouthernEuropeanmarkets.Syriaisnottheonlycountryintheregionwhich

Russiahasenteredinhopesofsecuringmorecrude.

Source:http://www.aljazeera.com/indepth/interactive/2015/05/syria-country-divided-

150529144229467.htmlAccessed4/19/17

Egypt

RosnefthasalsohaddealingsinEgyptrecently.Twoyearsago,Rosneftsigned

twodealstosupplyliquefiednaturalgasandotherpetroleumproductsinthecapital

cityofCairo.Russiathendoubleditsenergyinvestmentsinthecountrywitha$25

billioninvestmenttobuildanew1200MWnuclearpowerplantoverthenexttwelve

46

years.TheloanfinancedbyRussiawillincura3%interestrateannuallyforthenext35

years.Thiswillresultina$26.25billionprofitintoday’sdollarsoverthelifespanofthe

loan.37TheplantwillbethefirstnuclearpowerplantforEgypt.Inaddition,theenergy

willberelativelyclean.Oneoftheprimaryconcernswithbuildinganuclearpowerplant

ispossibilityofameltdownlikethatoftheFukushimaorChernobylmeltdownswhich

killedthousandsinJapanandtheUSSR(Ukraine),respectively.Nuclearmeltdownsalso

destroythelandmakingitinhabitablefordecades,untiltheresidualradiationdecays.

Also,thosewhosurvivedanuclearmeltdownweremaimedorsufferedradiation

poisoning.Radiationpoisoninghasalsocausedsubsequentgenerationstobebornwith

birthdefects,manyofwhichcanstillbeseentothisday.

Despitethehighrisks,thebenefitsofnuclearpowerarehardtoignore.Inthe

aggregate,nuclearpowerplantsarereasonablysafeifproperprotocolandprocedures

arefollowed.Eitherway,Russiadoesn’thavetoworryaboutthepotentialdrawbacksof

anuclearmeltdowninthisplantbecauseitisnotevenintheircountry.Assumingthe

plantdidmeltdown,itwouldcostRussiabillionsininvestmentandreparationsbutthey

wouldnotincurtheenvironmentalorhealthcostsintheirownpopulation.Russia’s

investmentforthisplantcomesatanopportunetimeforbothEgyptandRussia.“‘The

NPP(NuclearPowerPlant)constructionprojectinElDabaanearAlexandriaisimportant

initselfanditisamuchmoresignificantprojectinpositivetermsthanreturnofRussian

touriststoEgypt,’EgyptianProfessorandenergystrategistTarekHeggysaidinan

37RussiatolendEgypt$25billiontobuildnuclearpowerplant.(2016,May19).RetrievedMay27,2017,fromhttp://www.reuters.com/article/us-egypt-russia-nuclear-idUSKCN0YA1G5

47

intervieww0ithTASSthisweek.‘TheMediterraneangaswillbeenoughtocover

nationaldemandforthenext30-35years;thereforeitishighlyimportanttostart

buildingtheNPPnowinordertoprovideourselveswithelectricpowerafterthat.’”29

ThisguaranteesafutureforRussianprofitsfromtheirenergysectorwithoutrelyingon

externalfactorssuchastheworldpriceofoil.Also,iftheMediterraneangasdoesrun

outwithinthenextfortyyears,demandandthispricewillgoupforRussiannuclear

powerinthearea.Egypthasaninterestinmaintainingenergysustainabilityforits

future,whichexplainswhytheyareallowingthisnuclearplanttobebuilt.Egyptwants

tohaveenergyindependenceifpossible,andnotrelyontheunpredictableoilandgas

market.Insuchanunpredictableregionoftheworld,Egyptwantstomakesurethatits

supplyofenergyisnotcutoffbyanexternalactor.

Iran

IrangotrelieffromUSandEUsanctionsafterpromisingtoscalebacktheir

nuclearresearchprogram.ThishasledtosomepoliticalactorstoinvestintheIranian

energysector.PutinhasbeenmeetingwithIranianPresidentHassanRouhaniforwhat

mediacanonlyspeculateasanalliancebetweenthetwoenergygiants.Thisalliance

betweenthesetwonationscouldgerminateinseveralways.Onedynamicofthis

relationshipwilldealwithdevelopingIraniannuclearpowerplants.

RussianexpertswillhelptheAtomicEnergyOrganizationofIran(AEOI)constructtwonewnuclearpowerplantsinthecountry’ssoutherncityofBushehr,accordingtoIran’sEnergyMinisterHamidChitchian.‘ThecontracthasbeensignedbetweentheAEOIandRussia,and

48

includesbuildingtwo1,000-megawattnuclearpowerplants,theconstructionofwhichisabouttostart(4/20/17),’saidChitchian38

RussiaispursuingasimilarstrategytothatwhichtheyhavedoneinEgypt.The

projectisexpectedtotakeabouttenyearscosting$10billionoverthecourseofthe

process.39Iran’senergysectorisnotonlybenefitingintermsofnuclearpower.Oiland

naturalgassectorsarealsoprojectedtoseegrowth.Rosneftisexpectedtoresurrecta

2014dealinwhichRussiawouldpurchase500,000barrelsofoilperdayfromIranin

exchangeforRussiangoods,includingRussianweapons.ThiswouldgiveRussia

increasedtaxrevenueviathetransportationtaxandhelpgrowIran’ssanctiondamaged

oilsector.ThedealisnotcementedbutcouldraisetheRussian-Iraniantradeto$20

billionperyear.Inthenaturalgasindustry,GazpromsignedadealwiththeIranNatural

GasCo.toexpandhydrocarbonprospecting,exploration,andproduction.This

translatesintosubstantialinvestmentintoIrantobuildthenaturalgasinfrastructure.

AllthreeofthesemovesbytheRussianpoliticalactorsarepossibleduetoIran’s

alienationfromtherestoftheworldforthepastdecade.WithRussianenergyknow-

how,Irancouldbenefitfromininflowofbetterenergytechnologyandscientific

knowledge.Russiaalsoissettingitselfuptosupplycheaperenergyforthefutureasoil

becomeslesscosteffectiveduetolackofdemandandoversupply.Thegoalseemstobe

tostabilizethisregionoftheworldbybuildingenergyinfrastructureinaresourcerich

regionlackingcapitalandautonomy.ForRussia,satisfyingvariouscountries'energy

38"Russiatobuild2nuclearpowerplantsinIran."RTInternational.AccessedMay01,2017.https://www.rt.com/business/385394-russia-iran-nuclear-power-plants/.39RussiatolendEgypt$25billiontobuildnuclearpowerplant.(2016,May19).RetrievedMay27,2017,fromhttp://www.reuters.com/article/us-egypt-russia-nuclear-idUSKCN0YA1G5

49

needssuchasIranbenefitsRussiabygivingthecountryaseriesofinterdependentallies

focusedoneliminatingtheIslamicState(ISIL).Throughoutthisprocess,Russianenergy

mogulswillenjoyprofitsandtheRussianTreasurywillenjoymoretaxrevenue.40

Qatar

Lastyear,theQatarisovereignwealthcommoditiestraderGlencorepurchaseda

minoritystakeinRosneft.SinceinvestmenthaskeptRosneftafloatthesepastfewyears,

thispurchasewasencouragedbytheRussians.However,USofficialswereunsure

whetherthisviolatedthesanctions.Russiaarguedthatsincethe$11.3billiondidn’t

profitRosneftdirectly,butrathertheRussiangovernment,therewasnoviolationofthe

internationalsanctions.ThesanctionsnamedRosneftandLukoilspecifically.However,

nodecisionontheUS’sparthasbeenmadeifthistrulyisaviolationofthesanctions.

WithObamagone,Trumpwilllikelynotinvesthistimeinmakingthisdetermination.

Rather,hewouldfocusonimprovingrelationswithPutinandeasingthesanctions.

Besides,investmentinRussia’sstaterunoilcompanieswouldbenefitTrumpmoreby

stabilizingRussia’seconomyandhavingonelessthingtoblametheWestfor.

Libya

RussiahasalsoenteredIraqiandLibyanmarketswhichhaveexperiencedweak

domesticpolicyinpreviousyearsduetocivilstrife.Bothmarketsarecryingfor

investmentintotheiroilandnaturalgasmarkets.“‘Weneedtheassistanceand

40"RussiaandIransettostrike$10bnenergydeal."RTInternational.AccessedMay01,2017.https://www.rt.com/business/155404-russia-iran-energy-deal/.

50

investmentofmajorinternationaloilcompaniestoreachourproductiongoalsand

stabilizeoureconomy,’NOC(NationalOilCorporation)ChairmanMustafaSanallasaid.”

TheNOCaccountsforaround70%ofLibya’soilproduction.LibyapossessesAfrica’s

largestoilreserves.Libyacurrentlyproducesaround700,000barrelsofoilperday,but

wasproducing1.6millionbarrelsadaybeforetherevoltin2011.Whenthefighting

brokeout,investorswithdrewleavingtheNOCwithoutthenecessarycapitalto

continuesuchahighlevelofproduction.41RosnefthopestoincreaseLibya’soil

productionto2.1millionbarrelsadayby2020.Todothis,Rosnefthasagreedtobuyoil

fromtheNOCandencourageforeigninvestmenttoprovidethemarketwiththecapital

itsodesperatelyneeds.OPEC(OrganizationofPetroleumExportingCountries)and

Russiaagreedtolimitcrudeoiloutputto1.8millionbarrelsperdayonJan.1stto

increaseworldoilprices.However,Libyacanexceedthisoutputtorestoreandexpand

itsoilindustryinlieuofyearsofconflict.Rosneftplanstousethisexpansionof

productiontosendmoreoilintotheEuropeanmarket.

IraqiKurds

RosnefthasalsobeenworkingcloselywiththeKurdistanRegionalGovernment.

TheKurdshavedealtwithdistributionproblemsinthepastandstillare.Rosneft

believestheycansolvethisdistributionproblem.Thecompanyreleasedthisstatement;

“Rosneftwillbe‘developingnewmarketsworldwideforKurdishcrudeoil,’Chief

41"RosneftExpandsinMiddleEastWithLibyaandIraqOilDeals."Bloomberg.com.February21,2017.AccessedApril16,2017.https://www.bloomberg.com/news/articles/2017-02-21/rosneft-signs-libya-oil-deal-as-more-investors-return-to-country.

51

ExecutiveOfficerIgorSechinsaidinthecompany’sstatement.‘Theofftakeandsupply

ofKurdishcrudeoilintoRosneft’sexpandingworldwiderefiningsystemwillfurther

contributetotheincreaseinitseffectiveness.’”42HandlingtheKurdistanRegional

Government’soildistributionissuewillallowtheKurdstobypasspotentialpolitical

roadblocksinthecapitalofIraq,Baghdad.SinceKurdistanisnotrecognizedasa

country,Iraqtechnicallyhascontrolovertheregion.However,theKurdshavebeen

operatingmoreandmoreautonomouslyasoflate.Therehavebeendisagreements

betweenBaghdadandcapitaloftheKurdistanRegionalGovernment,Erbil.Oneof

whichdisagreementswasregardingoilexportcontractswhichhascausedpipeline

closures.WithRussiaasanally,KurdishoilcannowcircumventtheIraqigovernment

andfinditswayintonewinternationalmarkets.Putinhasusedthisdealtoshipmoreoil

intoEurope.MostKurdishoilisshippedtorefineriesinGermanytosupplyoneof

Russianoil'sbiggestbuyers,theEU.PutinisusingthepoliticalweightofRussiatostrong

armIraqintoallowingKurdishoiltoleavethecountry.Thisuseofhardpowerwon’t

resultinanyrebuttalonthepartofIraqbecauseofthesizeofRussia’smilitary

comparedtoadestabilizedcountryrecoveringfromyearsofarmedconflict.Iraqhas

littlecontroloverthesemi-autonomousKurds.TheKurdsbuilttheirownpipelinein

2013totransporttheiroilthroughTurkeyandtoEuropewithouttheIraqigovernment’s

position.42Inaddition,Rosneftannounceditwouldstudyexplorationandproduction

42Kaletovic,Damir."OPECCommitmentsPushIraqTowardsOilExportDealWithKurds."OilPrice.com.January17,2017.AccessedMay01,2017.http://oilprice.com/Energy/Energy-General/OPEC-Commitments-Push-Iraq-Towards-Oil-Export-Deal-With-Kurds.html.

52

opportunitiesintheregion.WithRussianexpansionintoKurdistan,Russia’soil

productionwillincrease.Thiswill,withoutadoubt,increaseprofitsofRosneft.

Source:https://www.shutterstock.com/image-vector/kurdistan-map-152187830Accessed4/12/17

IX.TheGrowingAsianMarket

Asiahasbeenoneofthefastestgrowingmarketsinpastfewyears.Withany

rapidgrowthofadevelopingcountryinthistime,industrializationandtransportation

playacrucialroleinitsexpansion.Industrializationandtransportationrelyonfossil

fuels,ofwhichRussiahasplenty.Inrecentyears,OPECandRussiahavecompetedfor

theAsianmarket,mostnotablyChina.Duetoeconomicstagnationofdeveloped

countries,countriessuchasChinahavebeenthemainsourceofanincreaseinglobal

demandforthepasttwodecades.TheMiddleEasthasexportedthemostoiltoChina

53

foryears.However,in2016theRussiapassedOPECinexportstoChina.43Thiswasdue

primarilytoadifferenceinpricesonqualityofcrude.WhenOPECandRussiaagreedto

scalebackproductiontolimitglobaloversupply,pricesofMiddleEastcrudebenchmark

rose.Benchmarksareusedtodenotealevelofqualityorvarietyofanoilandbasea

priceoffthat.Propertiesofdeterminingtheoil’scostisbytherelativevolatility(high

APIgravityismorevaluable),sweetness/sourness(lowsulfurismorevaluable)and

transportationcost.IndependentrefinersinChinabeganbuyingtheUralgradeinstead

ofpayingforthemoreexpensiveMiddleEasterngrade.Russia’sexportstoChina

jumpedby25%duetothedifferencesinprices,makingRussiatheleadingsupplierof

crudetoChina.43ThiswaspossibleduetoChinese“teapot”refineriessearchingfor

cheapercrude.RussiawasmorethanhappytosupplythesebuyersUralgradethrough

theirpipelinerunningthroughKazakhstan.Yet,Chinastillreceivesmostitsoilfromthe

Gulf.OPEChadalsobeencuttingtheamountitexportstoAsiaduetoscalingbackof

production.WhileOPEChadcutbackshipmentstotheAsianmarketleadingtheyear

off,allordersarescheduledtobefilledforMarch.OPEChasinterestinkeepingthe

lucrativeAsianmarket,somethingRussiahasalsolearned.Supplywasdivertedfromthe

AmericasandEuropebuttheAsianmarketwasstillfloodedtotakeadvantageofthe

profitabilitywhilesupplementingfurthergrowthforthemarket.Evenwiththescale

backofproductionglobalsupplyofoilstillexceedsbyabout600,000barrels.However,

thecutswithanexpecteddemandincreaseof1.6millionbarrelsperyearwilllikely

43Aizhu,Chen,andMengMeng."RussiabeatsSaudiArabiaasChina'stopcrudeoilsupplierin2016."Reuters.January23,2017.AccessedMay01,2017.http://www.reuters.com/article/us-china-economy-trade-crude-idUSKBN1570VJ.

54

balancetheglobalmarketthisyear.ThiswillmeanhigherpricesforRussiainagrowing

newmarketforitsfuture.44

Source:https://www.eia.gov/todayinenergy/detail.php?id=7110AccessedMay01,2017

X.Conclusion

Putinhasusedhisintimateinvolvementwithvariousworldleaderstoinvestin

variouscountries,asdiscussedearlier,whilealsoregulatingforeigninvestmentintothe

marketdirectly.WhenanalyzingthedifferentwaysinwhichPutinconductsforeign

policytobenefittheRussianoilindustry,twotypesofstrategiesappear:shortterm

stabilization,andlongterminvestment.InvestmentssuchthoseinEgypt’snuclearplant

44Paraskova,Tsvetana."RussiaGainsUpperHandInAsianOilWar."OilPrice.com.February19,2017.AccessedApril16,2017.http://oilprice.com/Energy/Energy-General/Russia-Gains-Upper-Hand-In-Asian-Oil-War.html.

55

andinvestmentintoLibyaareallpartofRussia’splantomaintainasourceofenergyto

sellfortheforeseeablefuture.DecreasingsupplyinconjunctionwithOPECwillalso

stabilizesupplyanddemandglobally.EvenincreasingsupplytotheAsianmarket

guaranteedabuyerforRussia’scrudeforyearstocome.However,theRussianoil

industrycan’tsurviveonlyinthelongrun.Hencetheshortrunstabilizationneededto

makesuretheindustrydoesn’tgounderwhilewaitingforabettereconomicclimate.In

theshort-term,Putinhassought:foreigninvestment,expansionofRussianoilinto

previouslycostineffectivemarkets(China),increaseofexportstoestablishedmarkets,

andfavorablerelationswiththeUSwiththeremovalofthesanctions.Thesedealswere

orchestratedbythecarefuldiplomacyonpartofPresidentPutin.Withvolatilityofthe

worldoilmarket,Russiahasbeenplayingthegameofbalancingthecontinuationofthe

Russianoilproductionandestablishingdominanceintheworldmarketforyears.Yet,

Russiacan’thelpbutstarttofeelthepressuresofbeinganoilstateinaworldwith

decliningoildemand.Putinseemstobeusingshort-termprofitsfromcurrentoilsales

tofinanceotherenergyprojectssuchasgreenenergydomesticallyandnuclearplantsin

othernations.PutinistryingtoeaseRussiaoffitsneedtoselloil,whileinvestingin

technologieswhichwillbemoreprofitableandeconomicallysustainableforthefuture.

Theseeffortshavebeenlargelyfruitlessespeciallyintermsoflong-termgrowth

prospects.DiversificationoftheRussianeconomyhasnothappenedandtheir

technologyinthisdomainhasnotimprovedasmuchasithaselsewhere--especiallyin

theWesternworld,Russia'sprimarycompetitorinthisandotherregards.Russiamust

worktofightthelargeamountofcorruptioninitseconomytodiversifyitseconomyand

56

drawforeigninvestment.However,corruptionhasbeenusedbythePutin

administrationtoensurepoliticalgoalsinthepast.Itseemsthattherewillnotbean

endtothecorruptionwhichpervadesthecountryandholdsitseconomyhostage.

Economicdiversificationisdifficultforacentrallyplannedeconomytoaccount

foraspectsofafreemarketwhilesettingpolicyinatimelymanner.ForRussia,which

hastransitionedfromacentralplanningmodelduringtheUSSRtoaquasi-marketbased

economy,privatizationhasnottakenanyseriousroleinthedomesticeconomy.Russia

hasreliedonstatecontrolledcorporationstosecuretaxrevenue.Theissuehereisthat

astatesupportedentitywillalwaysbeatitsdomesticcompetitionduetoitsrelativesize

andsupportfromthegovernment.Privatizationcan’thappenbecausethestateisthe

majoritystakeholderandusesthistopursueitsownpoliticalgoals.

Whythendoesn’tRussiajustworkonprivatizationtobuilditseconomy?There

areseverallikelyreasons.First,companieslikeGazpromandRosnefthaveonlygrown

solargeinpartbystatepartnership.Thishasallowedthecompaniestoremainsolvent

throughoutthefinancialcrisisfromwhichRussiahasbeencrawlingoutofsincelate-

2014.GuaranteeingthecontinuationofRussia’sbiggestenergycompanieshasallowed

Russiatoremaincompetitiveintheenergysectorwhilemaintainingtaxrevenue.

Second,RussiacanuseitsmajorityholdingsinRosneftandGazpromtopursueitsown

politicalagendainforeignaffairs.Russiacanestablishinterdependentconnectionswith

othercountrieswhileguaranteeingpoliticalfavors.Thismakescapitalbusinessventures

morelikelytohappenandeffective.Russiapursuesstrategiesofdevelopingaccessto

newengeryreserves,meetingnations’energyconsumptionneeds,buildingpolitical

57

stability,creatingnewtransportationroutesforenergyresources,anddeveloping

diplomatictiesbyusingitsstate-runcompaniestoaccomplishthesegoals.Thiswould

notbepossiblewithaseveralsmallercompaniesfightingforsupremacyintheindustry

duetolackofcapitalforforeigninvestment.Russiahasrealizeditismorecosteffective

tousethismethodtoensurestabilityinaregiontoreapthebenefitsoftrade,rather

secureanothercountry’sresourcesbyforce.Third,corruptioninalllevelsoftheRussian

governmenthasimpededprivatizationbylimitingcompetitionamongnewcompanies

andforeigninvestors.ThosewhohelpPutinpursuehispoliticalagenda,orhavethe

fundstobribegovernmentofficials,are“thewinners”,whilesmallercompanieslacking

theseabilitieslose.

ThekeytoRussia’seconomicdiversificationreliesinprivatizingitseconomyand

eliminatingbarriersofentryforfledgingenterprises.Theissueisthatnocleareconomic

alternativehasemergedwhichwillensurefutureeconomicdevelopmentliketheoiland

naturalgassectors.Instead,Russiamovestodiversifyitsownstaterunenergy

companiesbyexpandingitsinfrastructureandinvestmentintoforeigncountries.

Nuclearinvestmentcouldprovetobeagamechangerinthenext30yearsbycreatinga

sustainablesolutionasoilandnaturalgasreservesbecomeexhaustedortoocostlyto

harvest.Inthemeantime,Russiawillcontinuetobuilditsoilandnaturalgas

infrastructuretomaintaingrowthintheshort-term.Thiswillalsoseektocreateatrade

systemwhichismorestableduetotheinterdependenceofthecountries.Russiashould

takeadvantageofthetradewithforeigncountries,notonlyintheenergysector,but

othersinaswell.Astheworldturnstogreenenergy,Russiamustfindawaytonotrely

58

onoilandnaturalgasexportsforeconomicgrowth.Instead,Putinmustbegintofocus

privatizationoftheRussianeconomyfirstdespitealltheadvantagesofcontrollingtwo

ofthelargestenergycompaniesintheworld.Russiawillalwaysneedtomaintainclout

inenergyexports,especiallyinthefastestgrowingmarketintheworld,theAsian

market.ThegoalshouldbetoexpandtechnologicaladvancementtofindRussia’sniche’

forthefutureofenergyexportsbyusingtaxrevenuefromthecontemporaryenergy

industries.Anotheralternativewouldbetobuildbetterdiplomaticrelationswiththe

Westtopurchasecurrenttechnology,toreplacetheoutofdatetechnologyofthe

Russianenergyindustry.However,diplomaticrelationsseemtobeworseningbetween

RussiaandtheWest.Instead,Russiamustpursueitsowntechnologicaladvancementif

iteverwantstoregainitsplaceasasustainableworldpower.

59

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XII. Author’s Biography

Cody Watson was born in Bangor, Maine on April 5th, 1995. He went on to move

to Greenville, Maine, graduating from Greenville High School as Salutatorian. Pursuing

his love for politics, Cody continued his education at the University of Maine with a

major in political science and minor in economics. He plans to pursue a J.D. degree in the

fall of 2018.