Factor of ‘Power’ in the European Vector of Russia’S Foreign Policy Strategy and the Globalization of Energy Policy

Studia z Dziejów Rosji i Europy Środkowo-Wschodniej ■ L (z. 1) Nataliia Slobodian Institute of Taras Shevchenko National University of Kyiv Factor of ‘power’ in the European vector of Russia’s foreign policy strategy and the globalization of energy policy Outline of content: In the modern world of energy dependent economies, the energy component acts as a determining factor in making strategic and political decisions in the geopolitical dimensions. The article’s central interest focuses on the economic origins and financial base of the energy component of Russia’s aggressive foreign policy in the European space. It contains the qualitative and quantitative indicators of the structure of modern Russian energy market and presents the research of sources of economic basis of Russia’s military overcapacity and correlation between the size of defense spending and state budget revenues of the Russian Federation in the energy sector. Based on the findings of this study, possible ways and measures can be modeled to create an effective financial-economic and political-strategic system of the EU states to deter the current course of the Kremlin tight energy policy on the territory of European countries. Keywords: energy factor, energonomy, militarization of energy policy of the Russian Federation, sectoral sanctions, energy-dependent state Słowa kluczowe: czynnik energetyczny, energonomia, czynnik siły w polityce energetycznej Federacji Rosyjskiej, sankcje sektorowe, państwa zależne energetycznie The Russian Federation remains one of the largest exporters of energy in the world market. Occupying a leading position in oil production at the global scale, Moscow provides more than 12% of the world oil trade. About 23% of the world natural gas reserves are located in Russian subsoil, contributing a quarter of world trade volumes of this source of energy. Russian nuclear power has a 45% share of uranium enrich- ment market, 15% of reprocessing nuclear fuel market, 5% of the power generation market, 15% of the nuclear reactor construction and 8% of the world production of natural uranium [1, 2, 3]. The oil and gas sector is of vital importance for the sta- bility of the Russian economy, social security, sustainable development of scientific PL ISSN 1230-5057 http://dx.doi.org/10.12775/SDR.2015.1.06 170 Nataliia Slobodian and technological projects and a number of other fields of the Russian Federation, which directly or indirectly affect the power of the state. Over the past decade the share of export revenues of oil and gas products in the Russian economy has been growing rapidly. Fig. 1 depicts the dynamics of energy sector revenues to Russia’s budget, where oil and gas incomes accounted over 50% of the federal budget revenues for three consecutive years (2011-2013), that corresponds to about 11% of GDP. Fig. 1. Share of oil and gas revenues in the federal budget of Russia, 1994–2013 (%) [4] Fig. 2. Dynamics of crude oil Brent prices, 1987–2013 [18] Under such circumstances, P. Schweitzer, an American researcher of energy geopolitics, is sure that the main reason of political and economic bankruptcy of the Kremlin lies in the decline in energy prices, primarily of oil and gas. In particular, the scholar calculated that the reduction of world oil prices to $10 would inevitably increase the Russia’s federal budget deficit to 1.4% of GDP [17, p. 239]. This assumption is based on the direct correlation between the Russian budget and the world oil price. Thus, Fig. 2 shows dynamics of crude oil Brent prices in the energy market, since the given variety of ‘black gold’ is a basis for shaping the pricing policy for most types of world oil. A price of exported by Russia oil mixture Urals is calculated with a small discount relative to Brent oil. A comparison of the data presented in Fig. 1 and Fig. 2 covering the period from 2003 to 2012, reveals the evident growth of Russia’s energy revenues in accordance with the increase of http://dx.doi.org/10.12775/SDR.2015.1.06 Factor of ‘power’ in the European vector of Russia’s foreign policy strategy and the globalization of energy policy 171 world oil prices. A noticeable fall in average prices of the world oil market observed in 2007 and 2009 (Fig. 2) triggered a similar reduction of energy revenues of the federal budget of Russia (Fig. 1). Such a pattern, in our view, serves as sufficient evidence for an opportunity to find a solution offered by the American scientist. Indeed, even a short-term sharp decline in oil prices on the world market in early 2013 caused the actual freezing of budget revenues from energy resources of the Russian Federation at around 49,9%. Over the last decade, the energy resources have confidently occupied two thirds of Russian exports (Fig. 3). However, the content of the roll metal products, chem- ical industry, automobile industry, agricultural products and other components including weapons and agriculture combined with Russia’s export balance is three times lower than the corresponding raw-power estimated figure. In the case of major fall in the world prices and demand for oil and gas against the current Russia’s negative trade balance in services and exports of finished products, the situation could seriously affect the economy and become a catalyst for a political reboot of the Kremlin. According to the Institute of Energy Research, the Russian Academy of Sciences, as a result of ‘anti-Russian political consolidation’ in the world arena Russian oil exports could fall by 25–30%, thus reducing the state GDP by more than $100 billion [7]. It is not a coincidence that Russian Finance Minister A. Sulianov assessing the risks of economic security of the state in an explanatory note to the federal budget for 2014–2016 focused special attention on oil and gas budget deficit at 10.3% of GDP in 2013. In his opinion, it makes the economy of Russia extremely vulnerable to external factors. Following this, the statesman set the objectives to reduce the level of non-oil and gas deficit up to 8.4% by 2016, thereby to neutralize the possible threats triggered by negative trends in the world energy market [5]. Fig. 3. Structure of export balance of Russia in 2009–2011 [8] http://dx.doi.org/10.12775/SDR.2015.1.06 172 Nataliia Slobodian As noted in the 2012 annual report of the U.S. Energy Information Administration, the majority (79%) of Russia’s crude oil exports went to European countries (including Eastern Europe), particularly Germany, Netherlands, and Poland. Around 18% of Russia’s crude oil exports were destined for Asia and only the remainder (about 3%) is exported to the Americas (Fig. 4) [8]. Fig. 4. Russia’s crude oil and condensate main export destinations, 2012 (barrels per day) [8] Russia sends more than 76% of its natural gas exports to customers in Western Europe, with Germany, Turkey, Italy, France, and the United Kingdom receiving the bulk of these volumes (Energy VIP-clients). Certain volumes of natural gas owned by Gazprom are shipped to Austria, Finland, and Greece. Fig. 5. Russia’s natural gas export by destinations, 2012 (%) [8] Currently, Russia oil and gas sector remains dominated by state-owned firms. Although, it is worth mentioning that following the collapse of the Soviet Union, the initial privatization of its oil industry took place, but later the energy complex http://dx.doi.org/10.12775/SDR.2015.1.06 Factor of ‘power’ in the European vector of Russia’s foreign policy strategy and the globalization of energy policy 173 has reverted to state control. In the late 1990s, a few privately-owned companies drove growth in Russia’s oil sector and a number of international oil corporations attempted to enter the Russian market. Thus, in 2003, British Petroleum (hereinafter: BP) invested in Tyumen Oil Company (hereinafter: TNC), forming a joint venture TNK-BP, one of the country’s major oil producers. In 2012 and 2013, however, the TNK-BP partnership was dissolved, and BP had to sell its assets to Rosneft company. In the previous century, Rosneft emerged as Russia’s top producer following the liquidation of Yukos assets, acquired by Rosneft [8]. ConocoPhillips entered Russia’s oil exploration and production in the 1990s, but the attempts to increase its investments were unsuccessful. In particular, in 2004 Lukoil, the second-largest after Rosneft Oil Company in Russia, signed a strategic agreement with ConocoPhillips. As a result, in 2010 Lukoil owned 20% of Russian assets of the said U.S. oil company. So far it is a single joint oil exploration project of American Exxon Mobil Corporation and Rosneft for developing the Arctic shelf and the Black Sea (Fig. 6). Fig. 6. Oil production by Russian companies, 2012 (thousand barrels/day) [8] Russian company Gazprom is a dominant player in the national gas market with a share of 74%, while controlling nearly 65% of proven gas reserves. In addition, Gazprom has legal monopoly on Russian gas exports. The fate of other companies in the Russian gas market is not significant as shown in Fig. 7. Thus, the Russian gas market is virtually monopolized by the state-owned Gazprom company. http://dx.doi.org/10.12775/SDR.2015.1.06 174 Nataliia Slobodian Fig. 7. Natural gas production by Russian companies, 2012 (kBq/day) [8] The conclusion from the above statistical analysis is obvious. Over the last decade, Russia’s federal budget is directly dependent on the profitability of the oil and gas industry. In this sense, it is important to focus on the fact that the Russian energy sector is almost entirely monopolized by the state, while the Russia’s ruling elite is, say, the top management of the energy sector.

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