Is Russia Becoming an “Energy Superpower”?

1. Is Russia Becoming an “Energy Superpower”? Robert S. Kravchuk Professor and Chair, Department of Political Science & Public Administration University of North Carolina - Charlotte and Research Fellow, Center for Slavic, Eurasian & East European Studies The University of North Carolina - Chapel Hill World View: Understanding Russia and Its Neighbors University of North Carolina at Chapel Hill Chapel Hill, North Carolina March 24, 2011

2. Many possible concepts NOT the usual notion of “superpower” (military force projection connota-tions) Actually refers to the possible influence over: Price of energy products Policies of customers Influence over world markets for other products What is an “Energy Superpower”? Russia as an Energy Superpower?

3. Existing and Potential Energy Superpowers - 2011 • Recognized Energy Superpowers: • Saudi Arabia – Est. oil production of 9.7 billion barrels daily; world’s largest conventional oil reserves • Russian Federation – Est. oil production of 10.03 barrels daily; world’s largest natural gas reserves • Potential Energy Superpowers: • Venezuela – Investment of $100B to match Saudi production; • Iran – oil: 2nd largest reserves; 4th largest producer; 5th largest exporter; • Canada – Ambiguous Status; produces 25% of world’s uranium; • Australia – Also ambiguous; 22% of world’s uranium reserves; Russia as an Energy Superpower?

4. Oil and Gas Reserves and Production *Denmark, Germany, Netherlands, Norway and United Kingdom. Source: BP Statistical Review of World Energy, June 2010. (Data are for 2009). Dr. Mamdouh Salameh, The World Bank, October 2010. Russia as an Energy Superpower?

5. The Post-Soviet Russian Economy Has Rebounded Since the 1990s Russia as an Energy Superpower?

6. Owing to Favorable Energy Prices Russia as an Energy Superpower?

7. Strong, Steady Economic Growth Has Been the Recent Trend, Fueled by Energy Products: Energy is Extractive Industry, an Inherently LOW Value-Added Business It is Not Clear How Russian Energy Can Help with Industrial Diversification into High-Tech Products Russian Economy Russia as an Energy Superpower?

8. Russia Itself is Vulnerable • Russia’s domestic energy portfolio does not include many renewable sources: • 42% natural gas; • 19% hydroelectric; • 18% nuclear; • 13% geothermal. • Its Economy and Budget are Highly Sensitive to World Energy Prices; • Gazprom provides 25% of Moscow’s tax revenue – placing the government at risk; Russia as an Energy Superpower?

9. Russian Vulnerability, cont. • Oil production increased from 6.54 to 10.032 mbd from 2000-09 -- this is not a sustainable level • Russian oil production has peaked, and is beginning a slow, steady decline; • Russia probably cannot meet its target output level of 11.32 mbd by 2015; • Its Even More Ambitious Plans for 2020-2030 are Out-of-the-Question. Russia as an Energy Superpower?

10. Russian Vulnerability, cont. • Moscow has largely taken control of the energy sector – militates against further investment; • International Energy Agency estimates $550-700 billion new investment is needed by 2020: • That calls for $7 billion a year more than the $2 billion it now spends (replacement mode); • Domestic lenders cannot provide this capital; Russia as an Energy Superpower?

11. Economic Factors in Energy Policy • Central Asian republics threaten Russia’s dominant position as European supplier; • In order to develop new fields, Moscow would have to release its hold on the energy sector: • Encourage private investment; • Perhaps involving foreign partners. • But Moscow frowns on foreign equity participation. Russia as an Energy Superpower?

12. Economic Factors - Gazprom • Failure to implement structural reforms has preserved Gazprom’s gas monopoly; • Moscow owns 51% of Gazprom; • Gazprom supplies 30% of Europe’s gas; • But Gazprom is inefficient… • E.g., U.S. gas production exceeded Russia’s for the first time in 2009, despite much lower U.S. reserves; Russia as an Energy Superpower?

13. Economic Factors - Gazprom • Gazprom has enormous reserves that it cannot tap! • Aggressive contracting has produced more customers than output • Barely able to supply the Russian market (550 bcm) • For years, Gazprom has been purchasing gas from Turkmenistan at low prices ($65 per tcm) to sell to Europe at higher prices ($250 per tcm). Russia as an Energy Superpower?

14. Economic Factors - Gazprom • Russian has not opened any new gas fields since 1991; • Fresh investment in exploration and development is badly needed; • But a perverse development is that Gazprom has been investing $billions: • in non-gas sector assets; and, • at rates that have exceed its gas investments. Russia as an Energy Superpower?

15. Moscow Views Its Energy Supplies in Global-Strategy Terms • That is, it seems unlikely that Russia is seeking to fulfill economic objectives Reserves & Pipelines Russia as an Energy Superpower?

16. The Political Economy of Energy • Nearly 100% of Russian Energy Exports go to Europe; Who is the More Vulnerable? Russia as an Energy Superpower?

17. The Kremlin’s Primary Attention is on Its Closest Neighbors: the so-called “Near Abroad,” and NATO Russia as an Energy Superpower?

18. Russian Attitudes: Deeply Wounded • Slighted by the West After the Collapse of Communism: • No Marshall-style Rescue Plan • Western Markets Not Very Welcoming • Its Sensibilities Ignored in Western Policy • Condescending Policy Advice • Recent Recognition of Kosovo Independence • Humiliated by the NATO Expansion Eastwards Russia as an Energy Superpower?

19. Nato Enlargement: A National Insult Russia as an Energy Superpower?

20. Long-Run Russian Foreign Policy Goals Worldwide Respect for Russian Strength De Facto Recovery of Russian Influence in the Region & Around the Globe Re-establishment of Much of the Former Soviet Empire Achieving Technological Parity with the Western Industrialized Countries Russia as an Energy Superpower?

21. Short-Run Policy Objectives Western Recognition of Russian Hegemony over the “Near Abroad” (Mostly, Republics of the Former Soviet Union) Creation of Fissures in the Western Alliance; NATO, especially Employ Oil Revenues as a Tool to Enhance Russian Security, Project Power In the “Near Abroad;” (Ukraine, particularly) Vis-à-vis NATO Russia as an Energy Superpower?

22. Russian Invasion of Georgia 2008 Russia as an Energy Superpower?

23. Russia’s Georgia Incursion Was About Ukraine, NATO & Gas… • Subtext: Halting Further NATO Expansion • Until 2008, Borders of the Former Soviet Republics were “Sacrosanct” • Putin-Medvedev have Expressed Grave Concerns about Ukrainian NATO Membership • NATO Membership Would Place Ukraine Permanently Beyond Moscow’s Reach Russia as an Energy Superpower?

24. To Reestablish Regional Dominance,Ukraine is “the Real Prize” Russia as an Energy Superpower?

25. Ukraine: Fast Facts • 233,090 square miles, largest in Europe • 46 million Est. 2009 population • Ethnicity: 78% Ukrainian; 20% Russian (concentrated in the East) Russia as an Energy Superpower?

26. Russia & Ukraine: Fraternal Rivalry • A Complex Relationship • Russia Traces Its Roots to Kievan Rus • Russians View Ukrainians as “Little Russians” • Some Contend That It is “In the Genes” • In More Practical Terms, Russia Seeks the Restoration of Its Empire • Fmr. Secretary of State Henry Kissinger: • Russia without Ukraine is a Manageable Nation-state • Russia with Ukraine is an Unmanageable Empire Russia as an Energy Superpower?

27. Russian & Ukrainian History and Culture are Intertwined Russia as an Energy Superpower?

28. History and Culture, Cont. Russia as an Energy Superpower?

29. Russia and Germany: The Ukrainian-Polish “Squeeze Play” 2008: Germany Agrees to Block Ukraine’s NATO Accession There is no doubt that Russia played the “energy card” in talks with Germany. Poland and Ukraine are positively terrified of Russia. They conduct joint military exercises in preparation for the day they call upon their “mutual aid.” Russia as an Energy Superpower?

30. But Some Dispute the Notion of a Russian “Energy Superpower” “The ‘energy superpower’ is an illusion with no basis in reality. Perhaps most dangerously, it doesn’t recognize the mutual dependence between Russia and energy consumers … There will come a day when European gas companies demand elimination of the take-or-pay conditions in their Russian contracts. This will threaten Gazprom’s ability to borrow. Putin’s attempt to increase Russian influence could backfire in the long run.” ____________________________ Vladimir Milov, Institute for Energy Policy, “How Sustainable is Russia’s Future as an Energy Superpower?” Remarks delivered at a meeting of the Carnegie Endowment for International Peace, March 16, 2006. Russia as an Energy Superpower?

31. “… Feet of Clay …” • Russia can strategically employ oil & gas only by restricting their availability; • It can achieve this most directly by under-investing in development of new fields; • This scholar agrees with Mamdouh Salameh of The World Bank: “Far from emerging as an energy superpower, Russia is, instead, emerging as an energy giant standing on feet of clay. In fact, energy supplies could prove to be Russia’s Achilles’ heel.” Russia as an Energy Superpower?