Richard Melson

March 2006

Russia Energy

Russia's Energy Policy:

Security Dimensions and Russia's

Realibility as an Energy Supplier

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Russia's Energy Policy:

Security Dimensions and Russia's

Realibility as an Energy Supplier

FOI-R-- 1934 --SE
March 2006
ISSN 1650-1942

Robert L. Larsson

The objective of this study is to elucidate Russia’s role as a strategic energy supplier by analysing its energy policy from a security political perspective while the aim is to assess the question of whether Russia is a reliable supplier of energy. This is done by focusing on Russia’s resource base, its perceptions, domestic market management, the state’s control of the energy sector, Russia’s foreign energy relations and its energy levers.

The conclusions are that Russia’s political reliability as an energy supplier depends on the time perspective, the receiver and the context. Further usage of the energy levers will likely be aimed at the former Soviet states, but Europe may well be affected. Beyond doubts, Russia’s coercive energy policy should be understood in a long-term geopolitical and strategic context under which political, economic and market drivers coexist. Russia has strategic priorities to keep its influence over the CIS and its energy policy is one of the means used for this reason.

The international competition for Russia’s resources is a future key factor. As a result, frictions may arise both between Russia and consumers, and between various consumers. The negative democratic trends in combination with Russia’s structural instability and unpredictability in policy underscore that the magnitude of uncertainties concerning Russia’s development are much higher than it first seems.

Foreword
This study has been conducted at the Division for Defence Analysis at the Swedish Defence Research Agency (FOI) and has been carried out within the project for study of Energy as a Global Security Issue, headed by Ambassador Ingolf Kiesow and since 2005 by John Rydqvist.

The project has during several years covered security dimensions of Eurasian affairs, in particular energy.1 The great powers of Asia has naturally been in focus and China’s energy needs and related security implications have for example been assessed both from a demand perspective2 and from the Chinese national security perspective.3

Research for the study has also been carried out with support from the project on Russia’s Foreign, Defence, and Security Policy (RUFS) under the auspices of Jan Leijonhielm, Head of Bureau. One of the core tasks for the project is to address Russia’s military capability in a ten-year perspective, in a series of major biannual reports, by assessing military factors against the backdrop of the general development and the Russian civil society.4 Non-military security dimensions have also been analysed in separate reports5 and Russia’s strategic commodities, from a supplyperspective, was the theme of a major report in 2004.6 The objective of that report was to shed light on Russia’s situation concerning crude oil, natural gas, aluminium, nickel and palladium. It briefly covered the tangled web of political and economic issues and the roles played by these strategic commodities. It relied on quantitative data and focus was on the role played by these commodities on the world markets.

This report, in contrast, refrains from reiterating time-series data and mainly opts for a qualitative approach without, other than in brief terms, looking at the resource base. Greater emphasis is instead put on Russia’s intentions, capabilities, reliability and connected security issues. By this, it tries to connect several dimensions and present them as a coherent report.

The study has been jointly commissioned by the Swedish Foreign Ministry and the Defence Ministry, and in line with FOI’s quality assessment regulations it was reviewed at a seminar headed by Robert Dalsjö. I am indebted to Dr Johannes Malminen, an expert on economic security at FOI, who at the seminar acted as opponent concerning the methodology, approach, structure and arguments of the report. He gave constructive criticism on how to improve the report, of which many have been incorporated. I am also highly indebted to Michael Fredholm, an expert on Russian energy and developments in Eurasia, at Stockholm University. He closely scrutinised the report and with great patience commented on assumptions, facts and analysis. His corrections and feedback greatly contributed to my endeavours to find the correct balance of the report. I am also grateful for the valuable support received from colleagues; especially Ingolf Kiesow, Jan Leijonhielm, Ingmar Oldberg, Caro Vendil Pallin, Jan T. Knoph, Jakob Hedenskog and Wilhelm Unge who have endured my lengthy manuscripts and provided me with the best research atmosphere. Rinat Greenberg has kindly corrected my worst linguistic errors. Needless to say, any remaining errors, omissions, misinterpretations or any other transgressions are naturally mine, and mine alone.

Main Conclusions
Russia’s political reliability as an energy supplier depends on the time perspective, the receiver and the context. By and large, Russia is a reliable supplier in such that most of its energy exports has reached (and will reach) its destination. This does not mean, however, that energy flows necessarily will be spared from interruptions or political and economic frictions.

The risk for supply interruptions aimed at the states of the Former Soviet Union (FSU) is present today. Depending on bilateral relations and the present context, the risk for partial and/or shortduration cut-offs is high, especially against Belarus, Ukraine, Moldova and Georgia. In the short-run, the risk for total and/or permanent cut-offs is low for all these states. In the long run, risks are difficult to estimate, but cannot be overlooked.

The risk for supply interruptions aimed at non-FSU Europe is presently very low. There is, however, a high risk for non-FSU Europe to be affected by interruptions aimed at any of the FSU states. Russia appears to perceive certain European states as affordable collateral damage.

Preceded by a severe political crisis, the risk for partial and/or short-duration cut-offs aimed at non-FSU Europe increases. In that case, it would likely be aimed at a specific importer rather than at a group of states (such as the EU). Risks in the long-run perspective are difficult to estimate. Anything can happen. If a total and/or permanent cut in supply to Europe would materialise, it would have to be preceded by a serious degeneration of relations in combination with a developed technical ability for Russia to export energy elsewhere.

The barriers (Russia’s needs for exports revenues, transit dependence and risks of destroyed reputation etc.) against short and partial supply interruptions and coercive policy are weak. They are only safeguards against long duration cut-offs or against important customers.

If Russia were to develop in a democratic direction and show genuine commitment to market reforms, the threshold would increase. It would also increase if Russia would ratify and follow the EU Energy Charter. It would also have to pay less attention to its strategic ambitions and adhere to the European tradition of embracing true interdependence.

Presently, there is a risk for experiencing coercive policy, ‘annoying behaviour’, ‘technical problems’, ‘contractual disputes’, ‘discriminatory price policy’ or similar problems aimed at reaching geopolitical, political, or economic goals for almost all receivers of Russian energy. The risk is higher for the FSU as Russia’s priorities and leverage are strongest there. Russia will likely not strive to use the energy lever for the sake of it, but it will by all means strive for a strengthened capability. By all means, it would be prepared to use it if it deems so necessary.

Since 1991, the energy lever has been used for putting political or economic pressure on Estonia, Latvia, Lithuania, Ukraine, Belarus, Moldova, Georgia that subsequently affected most of Europe. The number of incidents, i.e. cut-offs, take-overs, coercive price policy, blackmail or threats, is over fifty in total (of which about forty are cut-offs). Incidents appear to be equally divided on the Yeltsin and Putin eras, but the number of cut-offs have decreased by half during Putin.

The immediate reasons for Russia’s coercive policy appear to be to coerce political concession in ongoing negotiations, commandeer infrastructure take-over, and execute economically favourable deals or to make political statements. There are economic underpinnings in the majority of the cases and Russian demands for payments of debts are legitimate. However, there are also political underpinnings in more than half of the incidents, and in a few cases explicit political demands are evident.

Market actions are the norm for most non-coercive activities and Russia attempts to be a reliable trade partner. Being a reliable energy supplier gives Russia international respect and is something that Russia feels it deserves as a great power. Marketisation will likely deepen, possibly also within areas that have been politically sensitive. The Kremlin will certainly keep its grip over certain pivots and ensure that it has the capability to correct or punish unwanted actions.

Analysts who solely use the market aspect as an explanatory factor to all activities tend to be incorrect. They isolate market aspects from geopolitics and often have a narrow definition of energy security. There is also a risk that the new EU members will be disregarded when the security of supply to Western Europe is discussed. Acknowledging the priorities of new EU members would serve Europe’s security architecture.

Beyond doubts, Russia’s coercive energy policy should be understood in a long-term geopolitical and strategic context under which political, economic and market drivers coexist. Russia has strategic priorities to keep its influence over the CIS and its energy policy is one of the means used for this reason. The strategic underpinning explains why ‘marketisation’ essentially only occurs when it is politically suitable and against politically suitable objects and for politically suitable reasons. When it is not politically approved of, marketisation rarely occurs.

Ensuring national security is the fundamental task of Russia’s energy policy. Russia utilises its energy policy to create growth, extend influence, avert geopolitical and macroeconomic threats and to reduce the risk of being blackmailed. Russia’s policy predominately harmonises with stated intentions and there are some grounds in the Russian fears of becoming dependent on others (for economic and political reasons).

The Russian leadership has moreover ‘securitised’ the energy issues, which from a Russian point of view legitimises the use of exceptional means to tackle perceived problems and threats. As a result, policies are coersed and if they fail (or are not implemented), frustration grows and renewed coercive attempts are made. This encompasses both its domestic and foreign energy policy and partly explains why marketisation and increased authoritarianism occur.

The use of exceptional means (coercive policy, nationalisation, central planning, politicised policies etc.) is made possible as power over the energy sector is continuously being concentrated to the Kremlin and its loyal appointees in the corporate sector and within state structures. Formal powers have also been given to the security services, for example the FSB.

The Kremlin’s influence is larger than it appears, as subtle and informal means are used to control the energy sector. Selfcensorship and politically fine-tuned market action by the energy corporations underpins the markets’ responsiveness. The state and the energy companies often act in tune in strategic matters.

Putin is creating a culture of a politically correct market economy. The result of the Kremlin’s policy is an ostensibly functional market that covers democratic deficits and a high degree of central planning. A goal appears to be a market that acts in line with the Kremlin’s agenda, but where the ‘need’ for the Kremlin’s explicit interference is diminishing.

The power concentration and Putin’s ‘vertical of power’ have created a mirage of stability. Unpredictability however exists both at a structural level and in policy that results in conflicting trends that undermine the political and economic stability. This in combination with Russia’s perceptions, intentions, capabilities, track record, lack of democracy, and (lack of) rule of law aggravates the problems of dependence on Russian energy.

Russia’s unsustainable policy on exploitation of energy carriers has led to a circumstance where Russia might have to cut down on energy exports, especially on oil, even in the short term. This has implications as the international competition for Russia’s resources has commenced and is likely to increase gradually.

Russia has not yet been able to create the infrastructural prerequisites for obtaining full flexibility in the geographic directions of energy exports. Once necessary infrastructure projects materialise or available amounts of energy for exports decreases, Russia will be able to take political considerations when selecting receivers of energy carriers. This would apply also for exports of liquefied natural gas.

As a result of international competition for Russian resources, frictions may arise both between Russia and consumers, and between various consumers. The international competition for energy largely takes place in Russia and the CIS and is of utmost importance. Herein lays the grand politics that affects all marketbased priorities.

Despite the aforementioned problems and risks, developments have hitherto been far from a worst-case scenario. The negative political and democratic trends in combination with Russia’s structural instability and unpredictability in policy however underscore that the magnitude of uncertainties are much higher than it first appears.

Distrib. by: Central-Eurasia-L - 
Announcement List for Central Eurasian Studies


PUBL.- Robert L. Larsson, Russia's Energy Policy

Russia's Energy Policy: 
Security Dimensions and Russia's Reliability as an
Energy Supplier
Author: Robert L. Larsson

FOI-R-- 1934 --SE
March 2006
ISSN 1650-1942

The book can be downloaded for free at www.foi.se 
(English and Swedish website). 
Unless it appears direct, seach for it under 'publications'. 
For any inquiries, contact robert.larsson@foi.se

Abstract:

The objective of this study is to elucidate Russia's role as a strategic
energy supplier by analysing its energy policy from a security political
perspective while the aim is to assess the question of whether Russia is a
reliable supplier of energy. This is done by focusing on Russia's resource
base, its perceptions, domestic market management, the state's control of
the energy sector, Russia's foreign energy relations and its energy levers.

The conclusions are that Russia's political reliability as an energy
supplier depends on the time perspective, the receiver and the context.
Further usage of the energy levers will likely be aimed at the former Soviet
states, but Europe may well be affected. Beyond doubts, Russia's coercive
energy policy should be understood in a long-term geopolitical and strategic
context under which political, economic and market drivers coexist. Russia
has strategic priorities to keep its influence over the CIS and its energy
policy is one of the means used for this reason.

The international competition for Russia's resources is a future key factor.

As a result, frictions may arise both between Russia and consumers, and
between various consumers. The negative democratic trends in combination
with Russia's structural instability and unpredictability in policy
underscore that the magnitude of uncertainties concerning Russia's
development are much higher than it first seems.
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PUBL.- Robert L. Larsson, Russia's Energy Policy

Robert Larsson robert.larsson@foi.se

Wednesday, March 22, 2006