The United States of America and the Russian Federation

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Energy Diplomacy: the United States of America and the Russian Federation

Gasparyan, Arsen https://scholarship.miami.edu/discovery/delivery/01UOML_INST:ResearchRepository/12355413210002976?l#13355503220002976

Gasparyan, A. (2018). Energy Diplomacy: the United States of America and the Russian Federation [University of Miami]. https://scholarship.miami.edu/discovery/fulldisplay/alma991031447748902976/01UOML_INST:ResearchR epository

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UNIVERSITY OF MIAMI

ENERGY DIPLOMACY: THE UNITED STATES OF AMERICA AND THE RUSSIAN FEDERATION

By Arsen Gasparyan

A DISSERTATION

Submitted to the Faculty of the University of Miami in partial fulfillment of the requirements for the degree of Doctor of Philosophy

Coral Gables, Florida

August 2018

UNIVERSITY OF MIAMI

A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy

ENERGY DIPLOMACY: THE UNITED STATES OF AMERICA AND THE RUSSIAN FEDERATION

Arsen Gasparyan

Approved:

Roger E. Kanet, Ph.D. Bruce M. Bagley, Ph.D. Professor of Political Science Professor of International Studies Department of Political Science Department of International Studies

Lilian Yaffe, Ph.D. Guillermo J. Prado, Ph.D. Senior Lecturer Dean of the Graduate School Department of Geography and Regional Studies

Edward Glab, Ph.D. Graduate Faculty and Director of Global Energy and Sustainability Forum School of International and Public Affairs Florida International University

GASPARYAN, ARSEN (Ph.D., International Studies)

Energy Diplomacy: (August 2018) The United States of America and The Russian Federation

Abstract of a dissertation at the University of Miami

Dissertation supervised by Professor Roger E. Kanet No. of pages in text. (302)

New energy opportunities provide effective ways to advance energy superpowers’ foreign policy objectives. Oil and gas are capable of providing producer states with internal order and external influence and are thus a source of relative power. This research examines how energy shapes superpower nations’ foreign policy, analyzing cases of the United States of America and the Russian Federation after the end of the

Cold War till the early 21st century with a diachronic selection of the most important developments. More detailed analysis covers the period from 2000 till the present to demonstrate how widely the U.S. and Russian national security and diplomacy are affected by energy concerns. In this project energy refers to crude oil, refined products, and natural gas. Acknowledgments

My interest in energy has been influenced by my late friends Blas Ramon

Casares, a hero and survivor of the Bay of Pigs and Erwin Arrieta-Valera, the former

Minister of Mines and Energy in Venezuela. Their practical knowledge played a pivotal role in helping me understand the business world of energy. I am also grateful to my friend Arman Grigoryan, a member of Lehigh University’s faculty, who is an endless source of inspiration.

I owe a profound debt of gratitude to my principal mentors, Professors Roger

Kanet and Bruce Bagley. This research benefited immeasurably from their comments.

Both of them challenged me to make revisions to improve the quality of my arguments and conclusions.

Years ago, after the break-up of the Soviet Union, in the fledgling country of now independent Armenia, I was studying the views of various American scholars who contributed to Roger Kanet’s edited books including The Cold War as Cooperation:

Superpower Cooperation in Regional Conflict Management and Coping with Conflict after the Cold War, and later fate decided everything for me here at the University of

Miami. Professor Kanet kindly agreed to be my advisor and read and commented on the entire manuscript not only once but parts of it several times. This research also benefited tremendously from a rich and intellectual environment created by Professor Bagley and the Annual Energy Conferences held at our university under his organization and supervision.

I am deeply grateful to Dr. Lilian Yaffe and Dr. Edward Glab for their excellent suggestions and comments to improve this study. Moreover, Dr. Yaffe’s course on

iii Comparative Politics helped me a lot through my journey. Dr. Glab’s Energy

Conferences at Florida International University advanced my knowledge in the energy field.

The best comes last. I was encouraged every step of the way by my charming wife

Iren. Without her support, there would have been no dissertation. And finally, my eight- year old son Arsen was the wonderful catalyst who pushed me to complete this work, so we can spend more time together.

iv CONTENTS

Introduction 1

Chapter One. Literature Review 7

Chapter Two. Theoretical Framework and Research Design 16 The Tradition of Neoclassical Realism and Variables of this Research 19 Research Design 33

Chapter Three. Oil and Great Power Politics: Historical Overview of the 20th Century 40 Energy and Foreign Policy of the United States: 1991-2000 59 Russia’s Emergence Out of Chaos: 1991-2000 69 Conclusion 77

Chapter Four. Case Study #1: The United States 81 The Energy Strategy of the Bush Administration 84 Western Hemisphere 87 Middle East 94 Beyond the Latin America and Persian Gulf: Sources of Diversification 100 The Obama Administration and Energy 114 Oil’s Comeback 117 The Institutionalization of U.S. Energy and Foreign Policy Priorities 124 Western Hemisphere and U.S. – Latin America Energy Engagement 126 Middle East Again 131 Africa 135 Russia and Asia 139 Quantitative Approach 149 Conclusion 153

Chapter Five. Case Study # 2: the Russian Federation 169 Taking Control: Energy Assets and the Foreign Policy Concept 174 Russia in the Former Soviet Union Space: Energy and Foreign Policy 182 The EU – Russia Energy Relationship 207 OPEC, Oil Prices, and Russia’s Power Play in the Middle East 226 Russia in Asia: Energy Politics 235 Conclusion 246

Chapter Six. Conclusion 266

Bibliography 278

LIST OF FIGURES

Figure 1. Big Oil 39 Figure 2. Oil Prices and Chronology of the Major Events of the 20th Century 80 Figure 3: U.S. Petroleum Imports from 2000 to 2017 by Main Source Country 151 Figure 4. Top 7 Suppliers of U.S. Oil Imports 2000 161 Figure 5. Average Annual Brent Oil Prices 2000-2008 162 Figure 6. Top 7 Suppliers of U.S. Oil Imports 2008 163 Figure 7. 50 Years of U.S. Crude Oil Production 164 Figure 8. Top 7 Suppliers of U.S. Oil Imports 2016 165 Figure 9. U.S. Petroleum Imports from Saudi Arabia between 2000-2016 166 Figure 10. Average Crude Oil Prices 2008-2016 167 Figure 11. Who Owns “Big Oil” in the United States 168 Figure 12. The Purchase of Natural Gas by Ukraine from Russia 260 Figure 13. Nord Stream 1 and Nord Stream 2 Routes 261 Figure 14. Turk Stream 261 Figure 15. Russian Natural Gas Exports to European Countries 263 Figure 16. Dynamics of the Prices for Brent Crude Oil (2014 – January 2018) 264

LIST OF TABLES

Table 1. U.S.- Latin America Energy Cooperation Initiatives 130 Table 2. Average Petroleum Supply to the U.S.: Years 2000-2017 150 Table 3. Correlation Analysis Table 151 Table 4. Leading Russian Energy Companies 259 Table 5. Turk Stream and Nord Stream 2 262 Table 6. Sino-Russian Energy Deals (2003-2016) 265

vii

Introduction

Has energy become a priority in the foreign policy of energy superpowers, such as the United States and Russia? How is energy shaping the foreign policies of these producers, regardless of the political and economic systems of the state? How much is the global oil business an extension of the foreign policy of these countries? How would these energy superpowers meet the challenges of Asian consumption and what would be their oil game plans?

These research questions are based on my personal observations and readings and more than ten-year experience of various meetings with high ranking officials of different governments and petroleum industry executives. How energy can impact foreign policy is a puzzle that requires an intensive study of oil, geopolitics, and foreign policy. In this research, energy refers to crude oil, refined products, and natural gas.

Many scholars argue that energy resources are a strategic national asset, consolidating the foreign and domestic status of a given state.1 However, oil has only recently come to prominence as a foreign policy factor. Energy development can contribute significantly to foreign policy objectives. Jan Kalicki and David Goldwyn argue that the need to integrate energy and foreign policy should follow from the link between energy and security, and the world’s increasingly risky sources of energy supply.2 Oil and

1 See Hans Morgenthau, Kenneth Thompson, Politics Among Nations: The Struggle for Power and Peace (New York: Alfred A. Knopf, 1985), Sixth Edition, pp.133-136; Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York - London: Free Press, 2009), pp. xiv-xvii; Kenneth N. Waltz, Theory of International Politics, (Long Grove, IL: Waveland Press. 2010), pp.153-155; Amelia Hadfield, “Energy and Foreign Policy: EU – Russia Energy Dynamics,” in Steve Smith et al eds., Foreign Policy: Theories, Actors, Cases, (New York: Oxford University Press, 2008), pp. 322-324; Øystein Noreng, Crude Power: Politics and the Oil Market (London: I.B. Tauris, 2006), p. 42. 2 Jan Kalicki and David Goldwyn, “Introduction: The Need to Integrate Energy and Foreign Policy” in Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C. - Baltimore: Woodrow Wilson Center Press and The Johns Hopkins University Press, 2005), p. 5.!

1 2 natural gas possess particular geographic and tangible attributes which shape their role in the peacetime and direct their use in time of war. Energy has the ability to transform dramatically the fortunes of states: the revenue raised by the sale of energy exports usually prevails over of any other national industry.

If energy superpowers view oil and natural gas as indispensable resources in international politics, then the governing elites of these nations will make an effort to integrate their energy and foreign policy is a hypothesis of this research. Foreign policy is a dependent variable. Independent variables include energy resources, export and import of energy resources, energy security, and global prices of hydrocarbons. Internal and institutional factors are intervening variables.

The case studies of my research are the United States of America and the Russian

Federation. These two energy superpowers are fundamental players in world politics and in the global calculus of power. Both of them with their oil and gas production are becoming increasingly central to global energy. Governing elites of these two countries view oil and natural gas in a different category than other commodities or, for example, automobiles or electronics. Øystein Noreng argues that energy, and in particular oil, is too important to be left to market forces alone.3 The energy posture of the U.S. and Russia allows both of them to engage in international affairs from a position of strength with wide ranges of choice.

The limitation of this research is that energy does not prevail to a degree that it governs all foreign policy, and many disparities between superpowers remain without the involvement of oil and gas. It could also be claimed that this research lacks the third case study on China. Today China is more focused on great power status, more active in global

3 Øystein Noreng, Crude Power: Politics and the Oil Market (London: I.B. Tauris, 2006), p. 42.

3 governance, more triumphant about its political model, and more assertive throughout

Asia.4 China’s pursuit of energy security frequently clashes with U.S. national security interests, as Beijing courts oil-rich countries regarded as pariahs by Washington, such as

Sudan, Venezuela, Burma, and Iran. Moreover, the Shanghai International Energy

Exchange has intentions to introduce a crude oil futures contract denominated in Chinese yuan instead of U.S. dollar. However, the Chinese major oil companies such as China

National Oil Corporation (CNPC), China National Offshore Oil Corporation (CNOOC),

Sinopec and other energy entities are full of contradictions and inconsistencies. They are victims of China’s incomplete transition between a planned economy and a free market economy. For instance, CNPC is not driving overseas with the guidance of the Chinese state; rather, business considerations draw the company overseas where it is able to earn higher profits and enjoy greater autonomy than in its operations on Chinese territory.5 The energy factor is obviously present in the foreign policy of China, but it will take some time, effort, and institutional changes until the decision-making elites in China would consider the integration of energy and foreign policy.

The time frame of this study is after the end of the Cold War with a diachronic selection of the most important developments and more detailed research is conducted from 2000 till present time. In 2000 the Russian government approved the main provisions of the Russian Energy Strategy until 2020. In the years after Vladimir Putin came to power, Russia experienced an economic resurgence fueled by high oil prices and adopted a

4 19th CPC National Congress. “Full Text of Xi Jinping’s Report at 19th National Congress,” Accessed March 24, 2018. http://www.xinhuanet.com/english/special/2017-11/03/c_136725942.htm! 5 See more in Binbin Jiang, “China National Petroleum Corporation (CNPC): A Balancing Act between Enterprise and Government,” in David Victor, David Hults, and Mark Thurber eds., Oil and Governance: State-Owned Enterprises and the World Energy Supply (New York-Cambridge: Cambridge University Press, 2012), pp. 379-417.

4 new approach and strategy towards its energy resources. Oil and gas have been extremely important factors in Russian foreign policy in the last fifteen years. Meanwhile, U.S.

President George W. Bush created the National Energy Policy Development Group

(NEPDG) in the beginning of 2001 and nominated Vice President Dick Cheney as chairman of this task force. The NEPDG was intended to develop a National Energy Policy and its official document was released in May 2001. Later, when President Obama took office, thanks to U.S. innovation and technology, the country was finally poised to control its own energy future and consider it among its enduring strengths. Among all the top producers of crude oil and LNG, these two countries are the only ones that have fashioned their own distinctive approaches towards energy and energy security and have a capability to extract required resources to integrate their energy and foreign policy. The institutional and operational indicators discussed in the Chapter “Theoretical Framework and Research

Design” Chapter and in both Case Study Chapters provide an additional justification to this time frame and selection of these two countries.

Units of analysis of this study are states, national oil companies (NOC), international oil companies (IOC), and markets. The motivation and aim for doing this research is also related to the fact that energy has become a profoundly important aspect of national security and foreign policy of the states: the availability of reliable and affordable energy is essential to economic strength of countries.

This manuscript is divided into six chapters. The first chapter provides a “Literature

Review” and discusses the scholarly literature in the field, including the geopolitics and the resource debate in international relations. It examines the field of study of energy and foreign policy, the pivotal works of major influential researchers and research groups,

5 identifying central issues of this study and rationalizing their significance. This chapter analyzes the primary and secondary sources not only from the United States and Russia but also from the third parties, including the international organizations such as OPEC, IEA and European, and Asian materials and documents. It also addresses data collection, data evaluation, and its analysis issues used for this research.

The second chapter, “Theoretical Framework and Research Design,” defines the relevance of the neoclassical realism theory for this study and its challenges to other theories of international relations by integrating neorealist and liberal perspectives into one single framework of analysis that shapes energy superpowers foreign policy. The chapter examines the tradition of neoclassical realism, alternative views, and all variables of this research. It also focuses on the qualitative and quantitative methods used in this study and the issues of testing my hypothesis empirically.

The third chapter, “Oil and Great Power Politics: Historical Overview of the 20th

Century,” lays out the major events of the 20th century depicting U.S. and former Soviet

Union, then Russia’s involvements to demonstrate how energy emerged as one of the top priorities for both countries and as a foreign policy factor, including the period after the

Cold War till the beginning of the 21st century with diachronic selection of the most important developments.

The fourth chapter, “Case Study #1: The United States,” examines how the Bush and Obama administrations and the U.S. governing elites integrate energy and foreign policy and how U.S. government and U.S. supermajors coordinate their diplomatic efforts in the Western Hemisphere, Middle East, Africa, former Soviet Union space, and Asia to advance U.S. foreign policy goals and national interests. The Chapter also discusses all

6 institutional and operational indicators of the integration of energy and foreign policy by

Washington, and how U.S. policy is driven by its boom in oil and gas production and the end of the oil export ban, and how these changes are becoming increasingly central to global energy. This chapter examines causal mechanisms of this integration and how the interests of U.S. energy companies overlap with the state interests and how independent and intervening variables of this research determine the U.S. foreign policy in different regions. It also addresses climate change issues during the Bush and Obama administrations, another significant issue of this project. At the end, this Case Study briefly discusses the policies of the current administration related to energy and foreign policy.

The fifth chapter, “Case Study # 2: the Russian Federation,” explains how

President Putin restored state control over country’s energy assets and takes a special look at the Russian energy giants such as Gazprom, Rosneft, and Transneft. It evaluates how the new governing elites of Russia use energy as a foreign policy tool in the former Soviet

Union, Europe, Middle East, Asia and other parts of the world and how institutional changes and innovations shape the foreign policy of the Kremlin. The Chapter also focuses on how Russian national oil and private companies became an integral component of state’s energy and foreign policy and get engaged in a broad campaign to expand

Moscow’s international reach.

And finally, the sixth chapter, “Conclusion,” summarizes the major findings and scholarly contributions of this research. It also provides a brief comparison of U.S. and

Russian energy policies and discusses the government’s direct and dominant role in energy policy regardless of different system of governance in the United States and Russia.

CHAPTER ONE

Literature Review

Oil as a source of energy has become more and more important for international politics, and as an indispensable raw material it has brought about a shift in the relative power of the politically leading nations. In political models, energy and foreign policy are the result of calculated choices made by political and economic actors. States’ interests and resources, and the incentives and capabilities of the governing elites to mobilize are the key forces explaining these policy choices. Major scholarly debates on this subject are related to the geopolitics of energy, Dutch disease, oil dependency, the role of the institutions in energy affairs (mainly the activities of the Organization of Petroleum

Exporting Countries and the International Energy Agency), and the price of oil as one of the main factors of instability in the world economy.

In recent decades, climate and environmental concerns and the desire for a greener economy has added to the politicization of the energy sector and created worldwide pressures and policies for improved energy efficiency, more renewable energy, and less dependence on fossil sources. The climate debate has added to the complexity of the energy industry, not least since fossil energy, still representing as much as 87 percent of world energy usage (2016) is the main source of global CO2 emissions. The academy is divided over this issue of transitioning away from oil and coal. Some, such as Lester

Brown and Amory Lovins argue that we are at the start of a new energy transition and a

7 8 total transformation away from fossil fuels,6 while others claim that alternative fuels and technologies are infeasible in the near future.7

Energy and geopolitics have been always closely linked in the scholarly literature since the end of the Cold War. Countries have made and make national strategies to meet their energy needs, reach markets and secure national interests. Almost every major government has assigned strategic significance to economic and resource concerns in the post-Cold War era. While the particular character of this restructuring has varied from country to country, the overall result of these efforts has been what Michael Klare described as “the economization of international security affairs.”8 However, only the

United States and Russia with their capabilities to mobilize their resources, elevated energy in foreign policy in 2000s with the further restructuring of their relevant institutions. One of the goals of this project is to analyze important global and regional issues from an integrated energy and foreign policy standpoint of Washington and Moscow.

How energy shapes national interests and international relations has been examined in the major works of realist and liberal scholars, such as Hans Morgenthau, Politics

Among Nations: The Struggle for Power and Peace (1948), Robert Keohane and Joseph

Nye, Power and Interdependence: World Politics in Transition (1977), Kenneth Waltz,

Theory of International Politics (1979), John Mearsheimer, The Tragedy of Great Power

Politics (2001), and John Rothgeb Jr., U.S. Trade Policy: Balancing Economic Dreams and Political Realities (2001). Oil as an instrument of national policy and one of the most

6 Lester Brown et al, The Great Transition: Shifting from Fossil Fuels to Solar and Wind Energy (New York- London: W.W. Norton & Company, 2015; Amory Lovins, Reinventing Fire: Bold Business Solutions for the New Energy Era (White River Junction, VT: Chelsea Green Publishing, 2011). 7 Vaclav Smil, Energy and Civilization: A History (Cambridge, MA – London: The MIT Press, 2017). 8 Michael Klare, Resource Wars: The New Landscape of Global Conflict (New York: A Metropolitan | Owl Book, 2001), p. 10.

9 influential factors in world politics and energy geopolitics has been thoroughly studied in the books of the leading energy scholars and experts, Daniel Yergin and Michael Klare.

Yergin’s publications include The Prize: The Epic Quest For Oil, Money and Power

(2009) and The Quest: Energy, Security, and the Remaking of the Modern World (2012),

Michael Klare’s – Resource Wars: The New Landscape of Global Conflict (2001), Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported

Petroleum (2005), Rising Powers, Shrinking Planet: The New Geopolitics of Energy

(2008), and The Race for What’s Left: The Global Scramble for the World’s Last

Resources (2012). These works as well as Blood Oil: Tyrants, Violence, and the Rules that

Run the World (2016) by Leif Wenar allow us, also, to understand to what degree the U.S. state interests overlap with the interests of American private energy companies and how

Washington can use the supermajors’ business to advance its interests in the different regions of the world.

The new approaches to the growing range of foreign policy problems with an energy dimension have been evaluated in the edited volumes with an outstanding group of contributors, such as Energy & Security: Towards a New Foreign Policy Strategy (2005) edited by Jan Kalicki and David Goldwyn, The Geopolitics of Global Energy: The New

Cost of Plenty (2017) by Timothy Lehmann, and Oil and Governance: State-owned

Enterprises and the World Energy Supply (2012) edited by David Victor, David Hults, and

Mark Thurber. In addition, the edited volume by Kalicki and Goldwyn addresses the issue of the need to integrate energy and foreign policy for the United States.

For international relations realists, energy has always been synonymous with relative power and wealth and provokes international competition and conflict. Thus, there

10 is much less likelihood of resource politics taking on a globally cooperative hue in the long run. In contrast to these resources pessimists, others contend that cooperation among states and energy companies and shared technological innovations render energy resource use more efficient, leading to the discovery of new resource frontiers and cooperative political relations.9 Daniel Yergin has always supported this school, arguing that “the resource endowment of the planet is sufficient to keep up with demand for decades to come.”10

According to Timothy Lehmann, these resource optimists presume that governments and firms will develop key resource geographies and technologies for their many end uses with little concern for relative power, while the “resource endowment of the planet” allows one to see oil sands as mere substitutes for oil without adverse social and environmental consequences.11 The concept of neoclassical realism discussed in the Theoretical

Framework chapter of this research and both case studies demonstrate that in the early twenty-first century, one of the central points of resource political economy lies on the oil and natural gas-based political and economic order. The classic, for the International

Relations scholarship, theoretical debate between neorealism and neoliberal institutionalism is tested, so as to provide a clear and sound answer to the research hypothesis. The multi-level framework of neoclassical realism addresses the issue of rationale behind U.S. and Russia’s natural resource management and how decision-making elites in both countries setting a course for the sake of American and Russian private and state gains.

9 See more on this subject in Timothy Lehmann, “The Geopolitics of Global Energy,” in Timothy Lehmann ed., The Geopolitics of Global Energy: The New Cost of Plenty (Boulder, CO – London: Lynne Rienner Publishers, 2017), pp. 15-16. 10 Daniel Yergin, “It’s Still the One,” Foreign Policy, September/October 2009, pp. 90-95. 11 Timothy Lehmann, “The Geopolitics of Global Energy,” in Timothy Lehmann ed., The Geopolitics of Global Energy: The New Cost of Plenty (Boulder, CO – London: Lynne Rienner Publishers, 2017), p. 16.

In the chapter on Theoretical Framework and Research Design and to identify key variables of this research and methods of analysis, the primary focus revolves around the main works such as Gideon Rose, Neoclassical Realism and Theories of Foreign Policy

(1998), David Baldwin eds. Neorealism and Neoliberalism: The Contemporary Debate

(1993), Kenneth Waltz, Theory of International Politics (2010), Jeffrey Taliaferro, Steven

Lobell, and Norrin Ripsman, Neoclassical Realism, the State, and Foreign Policy (2009),

Brian Rathbun, A Rose by Any Other Name: Neoclassical Realism as a Logical and

Necessary Extension of Structural Realism (2008), Adam Quinn, Kenneth Waltz, Adam

Smith and the Limits of Science: Hard Choices for Neoclassical Realism (2013), John

Mearsheimer, Reckless States and Realism (2009) Nicholas Kitchen, Systemic Pressures and Domestic Ideas: A Neoclassical Realist Model of Grand Strategy Formation (2010), and Asle Toje and Barbara Kunz eds., Neoclassical Realism in European Politics:

Bringing Power Back In (2012). The pivotal works of major influential researchers, including Designing Social Inquiry: Scientific Inference in Qualitative Research (1994) by

Gary King, Robert Keohane, and Sidney Verba, Case Studies and Theory Development in the Social Sciences (2005) by Alexander George and Andrew Bennett, Process Tracing:

From Metaphor to Analytical Tool (2015) edited by Andrew Bennet and Jeffrey Checkel assisted to expand and refine the Research Design section.

The primary sources for the U.S. Case Study include the White House and its archives, the Departments of State, Energy, and Treasury, U.S. Energy Information

Administration, the Central Intelligence Agency, Texas Railroad Commission, U.S.

Congress and its two chambers, the Senate and the House of Representatives with their committees dealing with energy and foreign affairs. National Energy Policy (2001),

Blueprint for a Secure Energy Plan (2011), and National Security Strategy of the United

States (2002 and 2017) have been analyzed to develop this case study. The examination of the activities of the Bureau of Energy Resources of the Department of State since its inception by the Obama administration was an extremely significant matter for this study to justify the integration of energy and foreign policy. The international business of the leading energy companies such as ExxonMobil, Chevron, ConocoPhillips and others has been accessed directly through their websites or the corporate reports and statistical reviews published by their headquarters.

The following major works built the basis of analysis of the U.S. foreign policy key aspects: George F. Kennan, American Diplomacy, Christopher Layne, Peace of Illusions:

American Grand Strategy from 1940 to the Present (2006), Steve Smith, Amelia Hadfield, and Tim Dunne eds., Foreign Policy: Theories, Actors, Cases (2008), Andrew Bacevich,

The New American Militarism: How Americans are Seduced by War (2013), Barry Posen,

Restraint: A New Foundation for U.S. Grand Strategy, (2013), Angela Stent, The Limits of

Partnership: U.S. – Russian Relations in the Twenty-First Century (2014), Richard Haas,

Foreign Policy Begins at Home (2014), Bruce Bagley and Betty Horowitz, Latin America and the Caribbean in the Global Context: Why Care about the Americas? (2016), and John

Mearsheimer and Stephen Walt, The Case for Offshore Balancing: A Superior U.S. Grand

Strategy (2016).

The primary sources for the Case Study of the Russian Federation consist of the documents and materials of the Kremlin, Ministry of Foreign Affairs, and Ministry of

Energy. The evaluation of the fundamental documents such as the Energy Strategy of

Russia till 2020 and 2030, the National Security Concept (2000) and different versions of

13 the Foreign Policy Concept (2000, 2008, 2013, and 2016), and interstate agreements in energy sector also guided my research for this case study. The websites of the Russian energy companies Rosneft, Gazprom, Transneft, and Lukoil have sufficient information to investigate their international business and understand new energy strategy and market transformation in the Russian energy industry of the 21st century.

Russian Foreign Policy in the 21st Century (2011) edited by Roger Kanet, Russia and Its Near Neighbors (2012) edited by Maria Raquel Freire and Roger Kanet, The

Rebuilding of Greater Russia: Putin’s Foreign Policy towards the CIS Countries (2008) by

Bertil Nygren Crisis Amid Plenty (1989) and Wheel of Fortune: The Battle for Oil and

Power in Russia (2012) both by Thane Gustafson, Russia’s Coercive Diplomacy: Energy,

Cyber, and Maritime Policy as New Sources of Power (2015) by Ryan Mannes and

Brandon Valeriano, Putin’s Energy Agenda: The Contradictions of Russia’s Resource

Wealth (2014) by Stefan Hedlund and Pipelines: Flowing Oil and Crude Politics (2012) by

Rafael Kandiyoti are main scholarly contributions to analyze the international economic aspects of the energy strategy, foreign policy, and geopolitics in energy diplomacy of

Moscow.

The efforts of Russian scholars that generated a large amount of literature and articles on energy geopolitics, especially works by Stanislav Zhiznin are extremely helpful for this case study. The research conducted by Moscow based Gubkin State University of

Oil and Gas and International Institute for Energy Policy and Diplomacy of Moscow State

University of International Relations (MGIMO University) are also reliable sources to obtain more information on energy and foreign policy of Russia. The Putin Interviews

(2017) by Oliver Stone and other interviews of the President of Russia, high-ranking

14 government officials, and top executives of energy companies provided the required facts and information to observe how Russian governing elites prioritize the integration of energy and foreign policy.

The American Petroleum Institute (API), IHS Cambridge Energy Research

Associates (IHS CERA), Platts McGraw Hill Financial, the International Energy Agency, and OPEC regularly collect, analyze and publish information on policy-making in the field of energy and its interaction with politics, economy, and the environment. The data of the above mentioned sources, the archives of Texas and Oklahoma based leading energy publishing companies, such as Penn Well and Hart Energy and supermajors’ statistical bulletins and annual world oil outlooks, the events and research of Columbia University

Center on Global Energy Policy, Center for Energy Studies of Rice’s University’s Baker

Institute for Public Policy, Global Energy Security Forum of the Florida International

University, and the Annual Energy Conferences of the University of Miami are additional sources for this study. The analysis of these materials allows one to collect and examine sufficient information to give more substance to this research. In addition, the print and online media such as The Economist, Financial Times, and Bloomberg regularly publish articles and opinions by U.S. and international experts on the role of energy in international politics which are also extremely helpful to follow recent and current developments in oil and gas markets and activities of U.S. and Russian oil companies in the world of energy business.

Professional journals in political science, economics and related fields as well as consumer magazines such as Foreign Affairs and Foreign Policy have an increasing number of articles related to this subject.

Statistical data and documents collected from the Russian and American governmental institutions, energy companies and also from third parties, including the

European Union, OPEC and those resource-rich countries which deal with Russia and the

United States, address and introduce practical applications of the knowledge related to both case studies. Systematic collection and examination of these materials and the works of economists and scholars such as Capital in the Twenty-First Century (2014) by Thomas

Piketty, The Oxford Handbook of the Economics of Peace and Conflict (2012) edited by

Michelle Garfinkel and Stergios Skaperdas, and Energy and Civilization: A History (2017) by Vaclav Smil advanced my understanding of energy policy and economics of oil.

Needless to say, the credibility and reliability of any source used for this research was a matter of the utmost importance and an additional verification of the information accuracy. All primary and secondary relevant sources on energy and foreign policy used for this manuscript allowed to conduct the research and describe the essence of the phenomenon on the integration of energy and foreign policy conceptually and institutionally by decision-making elites in the United States and Russia.

CHAPTER TWO

Theoretical Framework and Research Design

This study is primarily concerned with the sources and uses of energy as a national power tool in international politics and the problems that political leaders encounter in conducting foreign policy. The relationship between politics and energy is not a new phenomenon. In fact, oil politics has reshaped relationships between states for over hundred years, provoking state rivalries in the form of ‘resource wars’ and generating geopolitical structures of power, war, and trade.

Three components make energy a strategic resource. First, the oil market is bigger than all raw metal markets combined. For example, in 2015, the global market for oil was

94 million barrels per day. This puts the oil market at $1.7 trillion per year with today’s prices – far more than all raw metals combined [see Figure 1]. Second, the revenue raised by the sale of energy exports usually outweighs that of any other national industry. Third, the unequal distribution of energy reserves across the globe also makes energy a strategic resource.

However, energy appears to be something of a new addition to the foreign policy agenda. What is the role of energy within the dynamics of foreign policy? Tom Donilon, the U.S. National Security Advisor between 2010 and 2013, argues that energy shapes national interests and international relations. It influences politics, development, governance, and the security and stability of the environment.12 Amelia Hadfield also puts it straightforwardly: energy indicates national prosperity and underwrites national

12 Tom Donilon, “Energy and American Power: Farewell to Declinism,” Foreign Affairs, June 5, 2013. Accessed March 12, 2018. http://www.foreignaffairs.com/print/136662

17 security.13 States desire energy security in the same sense that they desire military and economic security. Daniel Yergin defines energy security as “the availability of sufficient supplies at affordable prices.”14 According to Kalicki and Goldwyn, “energy security is assurance of the ability to access the energy resources required for the continued development of national power … and adequate infrastructure to deliver these supplies to market.”15 For the oil and gas-importing countries energy security means security of supply, in which consistent delivery of affordable energy sources is paramount. Energy- exporting countries turn the questions around. For them, the energy security is a security of demand for their oil and gas exports, which requires access to a reliable market for the long-term sales of energy products. Political and economic concerns about the supply and demand of energy resources are strongly connected.

Christopher Hill suggests that the foreign policy instruments available to policy makers are the combined result of resources, capabilities, and varying levels of power and influence available at a given time. These instruments can be ranked on a continuum of power, a spectrum denoting the actual means that a state can use to achieve its desired ends.16 Amelia Hadfield also claims that energy can feature in a variety of places on this continuum, from the hard edge of physical coercion to the softer features of diplomacy.17

As a foreign policy tool, energy frequently takes the shape of diplomacy, embargoes,

13 Amelia Hadfield, “Energy and Foreign Policy: EU – Russia Energy Dynamics,” in Steve Smith et al eds., Foreign Policy: Theories, Actors, Cases, (New York: Oxford University Press, 2008), p. 323. 14 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World (New York: Penguin Books, 2012), p. 268. 15 Jan Kalicki and David Goldwyn, “Introduction: The Need to Integrate Energy and Foreign Policy,” in Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy (Washington D.C. – Baltimore: Woodrow Wilson Center Press and The Johns Hopkins University Press), p. 9. 16 Christopher Hill, The Changing Politics of Foreign Policy (New York: Palgrave Macmillan, 2003), pp. 135-137. 17 Amelia Hadfield, “Energy and Foreign Policy: EU – Russia Energy Dynamics,” in Steve Smith et al eds., Foreign Policy: Theories, Actors, Cases, (New York: Oxford University Press, 2008), p. 324.

18 sanctions, and in some cases coercion. For foreign policy makers, the question is not only a recognition of the multi-sectoral nature of energy as a policy area, but its placement within the sequence of national interests and its ability to mediate the overall foreign policy stance of the state. Energy policy is important in its own right but as argued by Kalicki and

Goldwyn, “it becomes critical when viewed against the broader canvas of foreign policy and economic development.”18

In this research I argue that if energy superpowers view oil and gas as indispensable resources in international politics, then the governing elites of these nations will make an effort to integrate their energy and foreign policy. Foreign policy is a dependent variable of this study. Independent variables include energy resources, export and import of energy resources, energy security, and global prices of hydrocarbons.

Energy companies and state institutions are intervening variables.

Independent Variables Intervening Variables Dependent Variable

Energy resources State Export and import of energy Foreign policy institutions Energy Energy security companies

Global price of hydrocarbons

18 Jan Kalicki and David Goldwyn, “Introduction: The Need to Integrate Energy and Foreign Policy,” in Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy (Washington D.C. – Baltimore: Woodrow Wilson Center Press and The Johns Hopkins University Press), p. 14.

Kenneth Waltz’s systemic theory of neorealism emphasizes the distribution of power among states within an international system as the principal determinant of state behavior. The theory of neoclassical realism (NCR) accepts the fundamental assumption of neorealists that the international system structures and constrains the policy choices of states. However, states may differ in their ability to control the policy agenda, select policy options, or mobilize resources to respond to systemic incentives.19 NCR argues that the scope and ambition of a country’s foreign policy is driven first and foremost by the country’s relative material power. Yet it contends that the impact of power capabilities on foreign policy is indirect and complex because systemic pressures must be translated through intervening unit-level variables such as decision-makers’ perceptions and state structure.20 The natural resources, namely oil and natural gas are capable of providing states with internal order and external influence and are thus a source of relative power.

This is why I believe that philosophical position of NCR that gives causal primacy to systemic variables and posits an important intervening role for domestic variables can expand the scope of my study.

The Tradition of Neoclassical Realism and Variables of this Research

On the first appearance and according to some of its analysts and strongest proponents, NCR seems to advance its cause by adding a necessary complementary

“theory of foreign policy” to the Waltz-inspired “theory of international politics” that preoccupied the field in the aftermath of his seminal work. It has been argued not only that

19 Jeffrey Taliaferro, Steven Lobell, and Norrin Ripsman, Neoclassical Realism, the State, and Foreign Policy, (New York: Cambridge University Press, 2009), p.19 20 Gideon Rose, “Neoclassical Realism and Theories of Foreign Policy,” World Politics 51 (1) October 1998, pp. 144-172

NCR can coexist complementarily with structural realism, but that it represents a “logical and necessary extension” of that theory.21 Structural realism tells us about the imperatives of the international system – the environment that shapes and drives state choices – whereas NCR fills an explanatory gap by identifying state-level attributes that serve as an intervening variable between these imperatives and actual state behavior.

According to Kenneth Waltz, “systems theories explain why different units behave similarly and, despite their variations, produce outcomes that fall within expected ranges.

Conversely, theories at the unit level tell us why different units behave differently despite their similar placement in a system. A theory about foreign policy is a theory at the national level. It leads to expectations about the responses that dissimilar polities will make to external pressures.”22 John Mearsheimer argues that, by in essence, it is a theory of domestic politics. Waltz has not laid out his own theory of foreign policy. Mearsheimer claims that there is nothing wrong with advancing theories that include both a realist and a domestic politics component. Indeed, one could argue that such compound theories are better at explaining how the world works than straightforward realist theories.23

Nicholas Kitchen defines the study of grand strategy as the study of states’ attitudes to the international environment – of how they mobilize which elements of their power in pursuit of which causes in global politics.24 It is in this way that grand strategy may fulfill

NCR’s requirement for a coherent analytical subject that integrates both the systemic

21 Brian Rathbun, “A Rose by Any Other Name: Neoclassical Realism as a Logical and Necessary Extension of Structural Realism,” Security Studies 17 (2), 2008, pp. 294-321; Adam Quinn, “Kenneth Waltz, Adam Smith and the Limits of Science: Hard Choices for Neoclassical Realism,” International Politics 50 (2), 2013, p. 160. 22 Kenneth Waltz, Theory of International Politics (Long Grove, IL: Waveland Press, 1979), p. 72. 23 John Mearsheimer, “Reckless States and Realism,” International Relations 23 (2), 2009, pp. 245-247. 24 Nicholas Kitchen, “Systemic Pressures and Domestic Ideas: A Neoclassical Realist Model of Grand Strategy Formation,” Review of International Studies 36, 2010, p. 121.

21 realist elements and the domestic level factors that neoclassical realists have revived from classical insights. Yet, like neorealism, NCR holds that the international environment in which states interact is the primary determinant of their interests and behavior. Both neorealism and NCR, proceed from an environment-based ontology.

NCR also poses a challenge to both neorealist and liberal theories by integrating these perspectives into one single framework of analysis. Alexander Reichwein argues that

NCR take the foreign policy perspective that liberal approaches in IR, which focus on the state and its internal dynamics, have put forth, and combine it with the perspective on international politics of the neorealist camp asserted, among others, by Waltz.25 Liberal theorists share the assumption that foreign policy of a state is best understood as the product of a state’s internal dynamics and the influence of key domestic actors and institutions.26 However, solely domestic explanations for foreign policy at the unit level hide important external factors at the level of the international system. Integrating and linking the systemic and the unit levels is the constitutive aspect of NCR. Neoclassical realists point out how exactly the systemic, the cognitive, and the domestic levels come together in the foreign policy of a state.

According to Jeffrey Taliaferro, NCR stresses the causal primacy of structural variables, chiefly the relative distribution of material power and anticipated power trends,

25 Alexander Reichwein, “The Tradition of Neoclassical Realsim,” in Asle Toje and Barbara Kunz eds., Neoclassical Realism in European Politics: Bringing Power Back In (Manchester – New York: Manchester University Press, 2012), p. 32. 26 See Michael Doyle, “Liberalism and Foreign Policy,” in Steve Smith, Amelia Hadfield, and Tim Dunne eds., Foreign Policy: Theories, Actors, Cases (Oxford- New York: Oxford University Press, 2008), pp. 49- 70; Harald Muller and Thomas Risse-Kappen, “From the Outside In and From the Inside Out: International Relations, Domestic Politics, and Foreign Policy,” in David Skidmore and Valerie Hudson eds., The Limits of State Autonomy: Societal Groups and Foreign Policy Formulation (Boulder, CO: Westview Press, 1993), pp. 24-28; Laura Neack, The New Foreign Policy: U.S. and Comparative Foreign Policy in the 21st Century, (New York: Rowman & Littlefield Publishers, 2003), pp. 75-120.

22 in shaping states’ foreign policies. NCR provides a full conception of the state by specifying how systemic imperatives will likely translate, through the medium of state power, into actual foreign and security policies.27 Energy resources and their import and export which are among independent variables of this research have a profound effect on the distribution of wealth and power in the world, and they always work in the context of the political struggle among nations. In a case of energy superpowers, such as the United

States and Russia, states translate their energy security strategy into an effective foreign policy and governing elites make an effort to integrate their energy and foreign policy.

NCR suggests that state power – the relative ability of the state to extract or mobilize societal resources as determined by the institutions as well as by other factors – shapes the types of internal balancing strategies a state is likely to pursue. States with higher extraction and mobilization capacity but low external vulnerability have the luxury of engaging in innovation to enhance their long-term foreign policy, security, and power.

Conversely, states with low or constrained mobilization and extraction capacity but facing high or low external vulnerability are less likely to pursue emulation or innovation.28 The

United States and Russia both have higher extraction and mobilization capacity and given their nuclear warheads enormous inventories, low external vulnerability. Therefore, both of them have a capability to use energy as a foreign policy tool and integrate their energy and foreign policy to enhance their long-term energy security and foreign policy goals.

27 Jeffrey Taliaferro, “Neoclassical Realism and Resource Extraction: State Building for Future War,” in Jeffrey Taliaferro, Steven Lobell, and Norrin Ripsman eds., Neoclassical Realism, the State, and Foreign Policy, (New York: Cambridge University Press, 2009), p. 198. 28 Ibid, p. 197.

Foreign policy is made not by the nation as a whole but by its government.29 The ability of states to extract resources is not simply a function of the strength of institutions: it also depends on leaders’ ability to raise and maintain support for national security and foreign policy strategies. Thomas Christensen developed the concept of national political power, which he defined as “the ability of state leaders to mobilize their nation’s human and material resources behind security policy initiatives.”30 In the case studies of this research, we can observe how governing elites of both the United States and Russia via their ability to mobilize energy resources and their institutions harmonize energy and foreign policy to advance their national interests in different regions of the world.

Since the start of the twenty-first century, a periodically tight oil market and volatile prices have fueled new concern about energy security. The disruption and turmoil, including the instability on some oil-exporting countries, geopolitical rivalries, and terrorism demonstrate how fundamental energy security is to modern life. Energy security concerns are not limited to oil. The development of long-distance pipelines and the growth of LNG have turned natural gas into a global business. Energy security, another independent variable of this study is first of all physical security – protecting the assets, infrastructure, supply chains, and trade routes. It is also the ability to develop and acquire energy supplies – physically, contractually, and commercially. Daniel Yergin argues that energy security is a system composed of the national policies and international institutions that are designed to respond in a coordinated way to disruptions, dislocations, and emergencies, as well as helping to maintain the steady flow of oil and natural gas supplies.

29 Gideon Rose, “Neoclassical Realism and Theories of Foreign Policy,” World Politics 51 (1) October 1998, p. 162. 30 Thomas Christensen, Useful Adversaries: Grand Strategy, Domestic Mobilization, and Sino-American Conflict, 1947-1958 (Princeton: Princeton University Press, 1996), p. 11.

According to Yergin, energy security is also an investment. It requires policies and business climate that promote investment, development, and innovation to ensure that adequate supplies and infrastructure will be available, in a timely way, in the future.31 At this point, energy security became a foreign policy issue, and in the cases of the United

States and Russia, with the government assuming a direct role in the pursuit of imported or exported energy. Michael Klare argues that “while the U.S. government has sometimes relied on private U.S. oil firms to initiate links with foreign producers, it has borne full responsibility for ensuring security of our overseas energy investments.”32 Stanislav

Zhiznin claims that, “Russia, despite its independence in matters of energy resources, can hardly maintain its energy security only through its national efforts. The ensuring of the energy security needs the development of cooperation in this field with countries of the near and far abroad.”33 Therefore, for Russia, energy security is one of the main components of the national security and foreign policy system.

The behavior of global hydrocarbon prices, one more independent variable of this research, has attracted much attention and generated much debate about the forces that drove price changes. One view is that recent oil price behavior was due to fundamental supply and demand factors. The principal opposing view attributes the run up in prices to excess speculation, possibly manipulation, or the whims of a cartel. The empirical

31 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World (New York: Penguin Books, 2012), pp. 268-269. 32 Michael Klare, Blood and Oil: The Dangers and Consequences of America’s Growing Petroleum Dependency (New York: Metropolitan Books, 2004), p. xiv. 33 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), p. 134.

25 evidence suggests that this is not a black and white issue but that both forces may have contributed to the recent escalation in oil prices.34

Lars-Christian Talseth claims that “there is not a single oil price, but merely an average weighting of many prices, the mean of which changes every ticking second, in a perpetual dialogue of supply and demand. Economics is a game of perceptions, and perceptions vary by definition, in time and space. Therefore, the price of oil itself is heterologous.35 Likewise, the price of oil has no a priori causal value outside narratives.

The price of oil only exists in so far as it is being performed and reproduced through narratives.”36 This is a common constructivist approach which requires a detailed analysis since the global price of hydrocarbons is an independent variable of this project.

From John Rockefeller’s Standard Oil in the late 1800s, through the Railroad

Commission of Texas in 1930s, to OPEC since 1960, states and institutions have long tried to control and stabilize the oil market for their own benefit.

First, the price of crude oil, from which petroleum products are derived, is influenced by a number of factors beyond the traditional movements of supply and demand, notably geopolitics. Some of the lowest cost reserves are located in sensitive areas of the world. It is true that there is not one price for crude oil but many. However, the world crude oil prices are established in relation to three market traded benchmarks,

34 See more on this subject in James Hamilton, “Understanding Crude Oil Prices,” Energy Journal 30, 2009, pp. 179-206; Lutz Kilian, “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market,” American Economic Review 99, 2009, pp. 1053-1069; Lutz Kilian and Dan Murphy, The Role of Inventories and Speculative Trading in the Global Market for Crude Oil, Working Paper, Center for Economic Policy Research and University of Michigan at Ann Arbor, 2010; Paul Krugman, “Oil Speculation,” The New York Times, July 8, 2009. 35 I assume that the author meant to use “heterogeneous” (diverse in character or content), rather than “heterologous” (derived from a different organism), which biologists use in a very specific manner.! 36 Lars-Christian Talseth, The Politics of Power: EU-Russia Energy Relations in the 21st Century (New York: Palgrave Macmillan, 2017), p. 29.

26 namely West Texas Intermediate (WTI), Brent, and Dubai Crude37 and are quoted at premiums or discounts to these prices. Second, for the price had been driven by powerful fundamentals of supply and demand; by the demand shock arising from unexpectedly strong global growth and major changes in the world economy, led by China and India, and the aggregate disruption. These conditions have led many governments to look into preventive measures. The heads of states at the G-20 summit in 2009 committed to improving transparency in energy markets, reinforcing producer-consumer consultation, and strengthening market supervision – notably to reduce speculation. Third, perceptions are also not completely independent of empirical reality even if they can be distorted by certain biases. One of the major findings of the classic study The Golden Constant: The

English and American Experience 1560-2007 by Roy W. Jastram38 is that gold maintains its purchasing power over long periods of time, with the prices of other commodities adapting to the price of gold. Taking the broad lead from Jastram, David Ranson produced a study in which he used the price of gold as a long-term benchmark for the price of oil.

The idea behind that, if the price of oil changes dramatically, the oil-gold price ratio will change and move away from its long-term value. Forces will then be set in motion to move supply and demand so that the price of oil changes and the long-term oil-gold price ratio is reestablished. This is nothing more than a reversion to the mean.39 Thomas Piketty argues

37 Other well-known blends include the OPEC Reference Basket used by OPEC, Urals used in Russia, Tapis Crude which is traded in Singapore, and Bonny Light used in Nigeria.! 38 Roy Jastram, The Golden Constant: The English and American Experience 1560-2007 (New York: Edward Elgar, 2009). In addition, Virginie Coudert and Valerie Mignon reassess the relationship between the real oil price and the U.S. dollar over the 1974-2015 period in Virginie Coudert and Valerie Mignon, “Reassessing the Empirical Relationship between the Oil Price and the Dollar,” Energy Policy, 95 (2016), pp. 147-157. 39 CATO Institute. Steve Hanke, “Commentary on the Price of Oil,” June 2016. Accessed March 20, 2018 https://www.cato.org/publications/commentary/price-oil; David Ranson, “Tactical Asset Selection: Implications of Cheap Crude Oil for Its Future Price Trajectory” HCWE Worldwide Economics, April 2015.

27 that the annual rent derived from the exploitation of natural resources, defined as the difference between receipts from sales and the cost of production, has been about five percent of global GDP since the mid-2000s (half of which is petroleum rent and the rest rent of other natural resources, mainly natural gas, coal, minerals, and wood). According to

Piketty, sovereign wealth funds of petroleum exporting states had total investments of about $3.2 trillion, and it is almost inevitable that the sovereign wealth funds of the petroleum exporting countries will continue to grow and that their share of global assets in

2030-2040 will be at least two to three times greater than it is today – a significant increase.40 Moreover, crude oil became the world's most actively traded commodity and the NYMEX Division light sweet crude oil futures contract becoming the world’s most liquid form for crude oil trading, as well as the world's largest-volume futures contract trading on a physical commodity. The prices of oil and natural gas also have considerable distributional and macro-economic effects. Therefore, the price of oil has a posteriori a causal value outside of narratives. And finally, as observed in the Historical Overview and the Case Studies of this research, the price of oil and the system of U.S. dollar-priced

Middle Eastern oil became the core of economic redevelopment in Japan and elsewhere in the U.S. hegemonic firmament. The price of oil was also one of the causes of the collapse of the Soviet Union. Daniel Yergin argues that the preceding half-decade rise in oil prices had brought significant changes in the global economy and dramatic shifts in income.41

The economic shifts also brought political consequences. In 1998 Russia had been bankrupt. A decade later, given the oil prices and the export, bolstered with almost $800

40 Thomas Piketty, Capital in the Twenty-First Century, (Cambridge, MA – London: The Belknap Press of Harvard University Press, 2014), pp. 458-459. 41 Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York-London: Free Press, 2009), p. 769

28 billion dollars of foreign reserves and savings in it sovereign wealth funds, Russia was projecting power and influence around the world. Today, the oil price is one of the major foundations of the bilateral relationship between Saudi Arabia and Russia.

The operationalization of the dependent variable will include the bilateral interstate treaties, the agreements of the supermajors and NOCs (amounts in U.S. dollars), selection of partners, importers, exporters, consumers, transit states, and institutional changes.

One of the major issues discussed in the scholarly literature on this subject is the analysis of interdependence and type of cooperation between producing and consuming countries in global oil markets. According to Daniel Yergin, today these relations are generally based much more on interdependence and cooperation than in the past.42 Helen

Milner claims that the “strategic interdependence among the actors is at least as fundamental.”43 I agree with Yergin and Milner; while anarchy is an important condition of world politics, it is not the only one.

However, the current crises in Ukraine and Middle East demonstrate that the interdependence between energy producers and consumers is not a guarantee for a strong commercial partnership and stable supply over the long term. Kenneth Waltz argues that as one should expect in a world of highly unequal nations, some are severely limited, while others have ranges of choice: some have little ability to affect events outside of their borders while others have immense influence. The energy crisis of 1973 should have made this obvious, but it did not. The states try to avoid becoming dependent on others for vital

42 Daniel Yergin, “Energy Security and Markets” in Jan H. Kalicki and David L. Goldwyn eds., Energy & Security: Towards a New Foreign Policy Strategy, (Washington D.C.- Baltimore: Woodrow Wilson Center Press and the Johns Hopkins University Press, 2005), pp. 51-64 43 Helen Milner, “The Assumption of Anarchy in International Relations Theory: A Critique” in David A. Baldwin ed. Neorealism and Neoliberalism: The Contemporary Debate, (New York: Columbia University Press, 1993), p.167

29 goods and services. To achieve energy independence would be costly, and the dependence on foreign oil has increased in recent years. Only the few industrial countries of greatest capability are able to consider of becoming independent in energy supply.44

While I do assume that the state continues to be the primary actor in both domestic and international political and economic affairs, I do not contend that that the state is the only important actor. In this study, other significant players include the national oil companies (e.g. Rosneft, Gazprom, etc.), and international oil companies (e.g.

ExxonMobil, Chevron, etc.), which are intervening variables of this research.

David Victor, David Hults, and Mark Thurber find very little evidence that NOCs are effective geopolitical instruments. They claim that the largest political impact of host governments on their NOCs is not in using them as tools for foreign policy. Rather, it is the adverse impact on these companies’ ability to find and produce oil, with implications for the world’s energy supply and the global economy. The managers at these companies are usually highly aware of this problem and they, along with reformers in government, are usually trying to fix it – mainly by putting government at even greater distance from NOC operations.45 This might be plausible for countries like Mexico, Brazil, Nigeria, Algeria,

Kuwait, and Malaysia but not Russia. President Putin and the Russian governing elites, including Igor Sechin of Rosneft, Alexei Miller of Gazprom, and Nikolai Tokarev of

Transneft and many other government and energy industry executives have paid the most sustained attention to the details of energy policy over the years, and especially since the

2008 crash. In general, Putin remains committed to the conception of the oil industry

44 Kenneth N. Waltz, Theory of International Politics, (Long Grove, Illinois: Waveland Press. 2010), pp.153- 155! 45 David Victor, David Hults, and Mark Thurber, Oil and Governance: State-owned Enterprises and the World Energy Supply (Cambridge-New York: Cambridge University Press, 2012), p. 926.

30 founded on the following propositions: the first obligation of the oil companies is to the state and the state budget, not to their shareholders; second, the preferred vehicle of finding, producing, and transporting oil is a large, preferably state-owned, integrated company; lastly, the aim of such a company should be to provide “value added,” which in

Putin’s mind still means export of refined products in preference to crude. In short, the state remains the engine of growth and progress. The job of the oil industry is to provide the fuel for it.46 Moreover, the coordination and integration of energy and foreign policy of

Russia is institutionalized to advance Moscow’s foreign policy goals and project a power in different regions of the world, as examined in the Case Study of Russia of this research.

Further analysis of all fundamental documents of the Russian Federation, including the

Foreign Policy Concept, National Security Concept, and the Main Provisions of the Energy

Strategy of Russia demonstrate specific characteristics of Russian energy diplomacy and the integration of energy and foreign policy. The practice of agreements between the

Ministry of Foreign Affairs and Ministry of Energy of Russia and major Russian energy companies and mutual support of these units in the foreign policy issues is a significant mechanism for the realization of the Russian foreign policy goals.

As for the case of the United States, as argued by Thomas Piketty, the possibility of greater state intervention in the economy raises very different issues today than it did in the

1930s, for a simple reason: “the influence of the state is much greater than it was then, indeed, in many ways greater than it has ever been.” The role of government has been constantly challenged since the 1970s, and the challenges will never end: once the government takes on central role in economic and social life that is acquired in the decades

46 See more in Thane Gustafson, Wheel of Fortune: The Battle for Oil and Power in Russia (Cambridge, MA – London: The Belknap Press of Harvard University Press, 2012), pp. 492-493.

31 after World War II, it is normal and legitimate for that role to be permanently questioned and debated. This twofold task may seem insurmountable. It is in fact an enormous challenge, which “our democratic societies will have to meet in the years ahead. But it will be impossible to convince a majority of citizens that our governing institutions need new tools unless the instruments already in place can be shown to be working properly.”47 The state-centric position assumes that MNCs are essentially national firms competing with one another around the globe. If this is the case, then empirically we should expect that there exists certain correlation between the direct investments of MNC and the foreign policy of their home countries because home countries often benefit from these investments.48

The increased U.S. involvement can be seen in the various oil-producing regions worldwide. With strong support from Washington, major U.S. oil companies, including

ExxonMobil and Chevron, have acquired substantial stakes in the international oil and gas fields in all continents. According to Timothy Lehmann, one of the U.S. operating principles of the world’s energy system is to delegate global management to the leading

U.S. IOCs and ensure their dominance over Middle Eastern and other vital areas.49

Powerful transnational oil majors operate their autonomous policy, but they effectively work with Washington over the energy determinants of foreign policy and national economic and military power. However, in many cases their activities linked to their

47 Thomas Piketty, Capital in the Twenty-First Century, (Cambridge, MA – London: The Belknap Press of Harvard University Press, 2014), pp. 473-474. 48 Solomon Polachek, Carlos Seiglie, and Jun Xiang, “Globalization and International Conflict: Can Foreign Direct Investment Increase Cooperation Among Nations?” in Michelle Garfinkel and Stergios Skaperdas eds., The Oxford Handbook of the Economics of Peace and Conflict (Oxford – New York: Oxford University Press, 2012), pp. 733-758; Robert Gilpin, Global Political Economy: Understanding the International Economic Order (Princeton – Oxford: Princeton University Press, 2001), pp. 278-304. 49 Timothy Lehmann, “The U.S. Energy Complex: The Price of Independence,” in Timothy Lehmann ed., The Geopolitics of Global Energy: The New Cost of Plenty (Boulder, CO – London: Lynne Rienner Publishers, 2017), p. 114.

32 commercial interests rather than to grand strategy. International relations theory in this area of inquiry is underdeveloped and requires further investigation. The efforts to integrate energy and foreign policy by the Bush and Obama administrations is examined in the U.S.

Case Study. In 2016, then-candidate Trump declared that America’s domination in energy sector will be declares a strategic, economic, and foreign policy goal for the United States.

The “pillar” of embracing energy dominance is reflected in the National Security Strategy adopted in December 2017.50

The state institutions in charge of energy and foreign policy and major energy companies are the intervening variables between the international system and foreign policy in this research. NCR accepts that the leaders of this kind of institutions “sit at the intersection of domestic and international political systems and can act internationally for domestic reasons or domestically for international ends.” Yet factors such as political and social cohesion, public support for foreign policy objectives, and the quality of a government and administrative competence affect whether the state can harness the nation’s power.51 What distinguishes NCR theories from earlier classical realism that the latter did not clearly distinguish between attributes at the individual level and the state and system levels. In contrast, NCR is marked by its focus upon state-level factors as crucial intervening variables between systemic forces and foreign policy goals, investigating how and under what conditions state-level factors matter.52

50 National Security Strategy of the United States of America, (Washington D.C.: The White House, 2017). 51 Steven Lobell, “Threat Assessment, the State, and Foreign Policy: A Neoclassical Realist Model,” in Jeffrey Taliaferro, Steven Lobell, and Norrin Ripsman eds., Neoclassical Realism, the State, and Foreign Policy, (New York: Cambridge University Press, 2009), p. 56. 52 Derek Beach, Analyzing Foreign Policy (New York: Palgrave Macmillan, 2012), p. 64.

Despite the importance of the energy companies, however, I should emphasize that national governments still make the primary decisions regarding energy policy; they continue to set the rules within which other actors function, and they use their considerable power to influence political and economic outcomes. Additionally, foreign policy choices are made by state leaders and it is their assessment that matters. State leaders occupy critical positions in an administration, are the “sole authoritative foreign policymaker,” and are responsible for national security and the formation of long-term grand strategies.53

Research Design

This research requires qualitative and quantitative methods in order to test my hypothesis empirically. I will rely on a positivist study, including an adoption of ontological and epistemological assumptions and every rationally justifiable assertion should be verified through scientific theory.

My case studies include the United States of America and the Russian Federation.

This selection is based on the facts that both are leading energy producers, exporters, importers, and consumers and both are energy superpowers. Foreign energy policy of both countries is influenced by the factors of global politics and economy, as well as by the developments at regional and bilateral levels, and the dynamics of the energy market.

However, in one case the emphasis, until recently has been on guaranteed access and in the other one - on stable markets.

The responsibility for energy is divided between the public and private sectors, depends on a country. In the public sector, this includes governments and state energy

53 David Lake, Power, Protection and Free Trade: International Sources of U.S. Commercial Strategy, 1887- 1939 (Ithaca, NY: Cornell University Press, 1988), p. 37.

34 companies owned or controlled by governments. In the private sector, these are private enterprises such as international oil companies. In both cases, governments acquire a direct and dominant role in energy policy, including in the pursuit of imported energy, national policy on energy planning, establishment of regulatory institutions, fiscal policies related to energy products and services, legislation on commercial energy activities, energy use, and environmental issues. This justifies the selection of my case studies regardless of different political and economic systems of governance. Moreover, only great powers such as the United States and Russia, which care deeply about the balance of power and focus on relative gains when they consider cooperating with other states, are capable of integrating their energy and foreign policy to take political and economic advantages.

These both countries differ in their ability to mobilize resources and support for power politics.

This research includes a brief historical overview of the twentieth century with some reflections on the energy and foreign policy challenges for the United States and former Soviet Union and the end of the Cold War with a selection of the most significant developments. The major time frame of this study is from 2000 till present and more comprehensive research is conducted for this period.

The following operational indicators of recent decade demonstrate how widely the

U.S. and Russian national security, bilateral and multilateral diplomacy are affected by energy concerns:

•! in 2011, the Department of State formally introduced a new plan regarding how

it will tackle energy and environmental issues and included the creation of the

position of Under-Secretary for Economic Growth, Energy, and the

Environment. The Department also founded the Bureau of Energy Resources to

manage the geopolitics of today’s energy economy through reinvigorated

energy diplomacy with major producers and energy consumers;54

•! on April 14th, 2015 House Committee on Foreign Affairs had hearings on the

crude oil export ban. Already in 2017, U.S. crude oil exports grew to an

average of 1.1 million barrels per day, the second full year since restrictions on

crude oil exports were removed. Crude oil exports in 2017 were nearly double

the level of exports in 2016. Increased U.S. crude oil exports were supported by

increasing U.S. crude oil production and expanded infrastructure. U.S. crude oil

exports went to 37 destinations in 2017, compared with 27 destinations in 2016.

The United States exported more natural gas than it imported in 2017, marking

the first time since 1957 that the U.S. has been a net natural gas exporter. The

U.S. also surpassed Russia in 2009 as the world’s largest natural gas producer

as shale gas production drove overall increases in natural gas production;55

•! since 2002, diplomats of territorial departments of the Russian Foreign Ministry

coordinate energy and foreign policy issues if they are related to bilateral

relations, and the Department of Economic Cooperation of the Ministry

manages energy affairs when it comes to multilateral international relations;

•! Russian Foreign Ministry’s Moscow based State University of International

Relations (MGIMO University) has established the Institute of International

54 U.S. Department of State. “Bureau of Energy Resources.” Accessed March 22, 2018. https://www.state.gov/e/enr/ 55 U.S. Energy Information Administration. “U.S. Crude Oil Exports Increased and Reached More Destinations in 2017,” March 15, 2018. “The United States Exported More Natural Gas than It Imported in 2017,” March 19, 2018. Accessed March 22, 2018. https://www.eia.gov/todayinenergy/detail.php?id=35352; https://www.eia.gov/todayinenergy/detail.php?id=35392

Energy Policy and Diplomacy to conduct training and studies in the field of

energy diplomacy and international energy cooperation.56

The use of case studies of the United States and Russia is an attempt to achieve high conceptual validity or identify the indicators that best represent the concept of neoclassical realism. The cases also address causal complexity and seek to quantify phenomena and detect patterns in the flow of events. In my case studies I use deduction to test hypotheses and theories. In deductive inference, we hold a theory and based on it we make a prediction of its consequences. That is, we predict what the observations should be if the theory were correct. We go from the general - the theory - to the specific - the observations.

I use John Stuart Mill’s “method of agreement”, which attempts to identify a similarity in the independent variables associated with a common outcome in two or more cases. Mill’s method is very useful if combined with process tracing since process tracing complements other research methods. The process tracing method identifies the intervening causal process - the causal chain and causal mechanism - between independent variables and the outcome of the dependent variable. The case studies of this research chart the repertoire of causal paths via process tracing that lead to a given outcome and the conditions under which they occur. Alexander George and Andrew Bennett claim that process tracing is an indispensable tool for the theory testing and theory development not only because it generates numerous observations within a case, but because these observations must be linked in particular ways to constitute an explanation of the case. The fact that the intervening variables, if truly part of a causal process, should be connected in

56 MGIMO University. “International Energy Policy and Diplomacy Institute.” Accessed March 22, 2018. http://english.mgimo.ru/International-energy-policy-and-diplomacy-institute

37 particular ways is what allows process tracing to reduce the problem of indeterminacy.57 I use the best practices of the process tracing, including justifiable decisions on the timeframe of the research, alternative explanations, the potential bias of evidentiary sources, inductive insights if necessary, and combine process tracing with case comparisons when useful for the research goal.58

For data collection and content analysis, I will rely mainly on primary documents, secondary sources, and statistical data. The issue of access to the primary sources via local archives and libraries has been resolved although many primary sources are available online. The analysis of scholarly literature and sources mentioned in the Chapter of the

Literature Review, especially the U.S. Energy Information Administration, American

Petroleum Institute, IHS Cambridge Energy Research Associates, Platts McGraw Hill

Financial, Penn Well, Hart Energy, MGIMO University, the IEA, OPEC, and NOCs and supermajors official websites, statistical bulletins and annual world oil outlooks allow the collection and examination of sufficient information to conduct this research. All these sources allow to double-check the required information since many of them have statistics and analysis on the same subject. I use only credible and reliable sources to increase the validity of this study. I also follow the admonition of Gary King, Robert Keohane, and

Sidney Verba that “the most important rule for all data collection is to report how the data were created and how we came to possess them.”59

57 Alexander George and Andrew Bennett, Case Studies and Theory Development in the Social Sciences, (Cambridge, MA - London: MIT Press, 2005), pp. 206-207 58 Andrew Bennet and Jeffrey Checkel, “Process Tracing: From Philosophical Roots to Best Practices,” in Andrew Bennet and Jeffrey Checkel eds., Process Tracing: From Metaphor to Analytical Tool (Cambridge: Cambridge University Press, 2015), pp. 3-37. 59 Gary King, Robert Keohane, and Sidney Verba, Designing Social Inquiry: Scientific Inference in Qualitative Research (Princeton: Princeton University Press, 1994), p. 51.

Throughout of both case studies, I also conduct a detailed analysis of independent and intervening variables and identify their implications on foreign policy of the both states in order to address the following questions: How strong is the relationship between the independent and dependent variables in my hypothesis? Is this relationship a causal one? A correlation analysis is performed in the U.S. Case Study to identify the possible relationship between petroleum supply and U.S. foreign policy. Subsequently, I test my hypothesis.

The advantages of using qualitative and quantitative methods are obvious for this or any study in social sciences. I can be more confident with an outcome if different methods are used to study the same phenomena and lead to the same result. Triangulation certainly increases the credibility and validity of the research.

The theory of NCR allows to incorporate both the internal and the external determinants of state behavior into their multi-level framework focusing on the interplay of systemic and unit-level variables in shaping state’s foreign policy. Derek Beach argues that

NCR is perhaps the best example of “Lego-theorization” (the parts of different theories are seen as Lego bricks that can be mixed and matched in order to account for an outcome), where elements from structural realism are coupled with intervening variables drawn from the liberal theorization along with smatterings of cognitive theories.60

NCR accentuates systemic factors as well as cognitive and domestic factors as a common set of intervening variables translating systemic constraints into foreign policy. In both case studies, I examine the central role of the state and seek to explain how and under

60 Derek Beach, Analyzing Foreign Policy (New York: Palgrave Macmillan, 2012), p. 11.

39 what conditions governing elites of the United States and Russia integrate energy and foreign policy. Both of them view energy as a powerful tool of their foreign policy.

Figure 1. BIG OIL $1.7 trillion per year – the oil market is bigger than all raw metal markets combined.

MOLYBDENUM $5B

$3B

LITHIUM COPPER ALUMINUM $91B $90B URANIUM $4B TIN $5B RARE EARTHS $7B MANGANESE $30B ZINC $15B GRAPHITE $34B GOLD $170B LEAD NICKEL IRON $22B $21B $115B SILVER PLATINUM $8B $20B

TITANIUM PALLADIUM $6B $14B

Sources: U.S. Energy Information Administration, World Gold Council, Johnson Matthey, Cameco, Benchmark Minerals.

CHAPTER THREE

Oil and Great Power Politics: Historical Overview of the 20th Century

The purpose of this overview covering developments from the beginning of the 20th century till the end of the Cold War and the first ten years after the dissolution of the

Soviet Union is to demonstrate major events related to energy and foreign policy of the

United States and former Soviet Union, then Russia. This overview also illustrates how the increasing mechanization of warfare and the emergence of oil as indispensable raw material have gradually brought a shift in the foreign policy of great powers.

The United States and the Soviet Union in the 1920s and 1930s had both pursued an isolationist foreign policy, preferring to focus on domestic priorities rather than trying to secure a place of power internationally. Yet World War II thrust both countries into positions of international leadership that became even more important after the war ended.

During this timeframe, national power has become more and more dependent upon the control of raw materials.

Hans Morgenthau argues that oil is no longer one of many raw materials important in the measurement of a nation’s power. It is now a material factor whose very possession threatens to overturn centuries-old patterns of international politics.61 The discoveries of oil in the Middle East, the formation of OPEC and its oil embargo in 1973-1974, and many other developments briefly discussed in this overview stood at the center of the White

House and Kremlin deliberations.

This introductory chapter proceeds in the following way. First, I will discuss the major developments from the beginning of the 20th until the collapse of the Soviet Union, a

61 Hans Morgenthau, Kenneth Thomson, Politics Among Nations: The Struggle for Power and Peace, the Sixth Edition (New York: Alfred A. Knopf, 1985), p. 133.

40 41 period when petroleum and natural gas enjoyed a long history of influence, stimulating the expansion of power, provoking state rivalries in the form of ‘resource wars’ and generating a geopolitical structure of power, war, and trade with the involvement of two superpowers

– the United States and former Soviet Union. I will also provide a background discussion of energy supply, consumption, and energy policies of these two great powers prior to the

1990s. Next, I turn to an overview of my case studies from the beginning of the 1990s until the year 2000 with a diachronic selection of the most important developments. The breakdown of the Soviet Union created a vacuum in the resource-rich Caspian region and

Central Asia that placed energy within the dynamics of the foreign policy of the United

States and Russia. This chapter concludes with some reflections about the energy and foreign policy challenges of both countries for the same period before I conduct more detailed research on both countries from the year 2000 until present time.

***

By 1900, the importance of oil had increased dramatically, because gasoline, a petroleum-based product, had become the fuel for the newly invented combustion engine.

This engine, and the modes of transportation built around it, quickly became crucial to strategic affairs as it has been realized that oil-powered ships moved faster and traveled farther than those driven by steam. The newly forming air forces of the world’s great powers also used internal combustion engines, and tanks and other fighting vehicles increasingly dominated battlefields. One of the most important assets of the Western allies in World War I was oil from American wells, which produced and supplied the majority of the world’s petroleum during the war.62

62 John Rothgeb Jr., U.S. Trade Policy: Balancing Economic Dreams and Political Realities (Washington D.C.: Congressional Quarterly Press, 2001), p. 143.

The energy policies of the great powers have shown a pattern of steady development since the period of a feared shortage after World War I, and oil as a source of energy has become more and more important for industry and war. In the interwar period, virtually all of the major powers (with the exception of the USSR) labored under concerns of raw materials shortages or cutoffs in the event of war.

International friction over oil led also to the development of more comprehensive statutes in the interest of conservation and more government involvement into oil business.

In 1924 U.S. President Coolidge established a Federal Oil Conservation Board to recommend a national policy for the oil industry, in view of the expected shortages of oil, and of concern over the waste of petroleum in the process of its extraction and manufacturing. The states were developing conservation statutes, backed by interstate cooperation, and by the technical and advisory assistance of the federal government, chiefly through the Department of Interior.63

The Texas Railroad Commission, a state agency that began to regulate railroads in

1891, added responsibilities for the oil and gas industry in 1919. After the discovery of the

East Texas field brought a precipitous fall in oil prices the commission was given the right, in 1931, to control the state’s oil production through prorated quotas in the form of a monthly production allowance that set the permissible percentage of maximum output.

With Texas being the country’s largest oil producer and the U.S. dominating global oil output, this right amounted to a very effective cartel of worldwide importance run by an obscure state agency.64 In fact, the Texas Railroad Commission was the first organization

63 Eugene Rostow, A National Policy for the Oil Industry (New Haven: Yale University Press, 1948), pp. 18- 19. 64 For background of these events and operations of the Texas Railroad Commission, see David Prindle, Petroleum Politics and the Texas Railroad Commission (Austin: University of Texas Press, 1981).

43 set up explicitly to manage oil prices. 30 years later, in 1960, the Organization of

Petroleum Exporting Countries (OPEC) was modelled on the Texas Railroad

Commission.65

With the discovery of oil in the 1920s and 1930s in the Middle East, those areas became vital almost overnight. Britain and the Soviet Union competed for control of the

Iranian oil fields, while American, French, and British companies scrambled for pieces of the action in Saudi Arabia, Iraq, Bahrain, and Kuwait.

Although U.S. policies in the 1920s and 1930s reflected the domestic political priorities of the time: a commitment to big business and economic growth, as well as the desire to shield the United States from the outside world, the British were already fearful that the Americans would try to eject them from the Middle East and deny them even the oil reserves currently under their control. While “isolationism was the word commonly used to describe American policy during the years between the world wars,”66 the presence of American oil companies in the Middle East and the gaining of concessions by them would inevitably begin to change the web of political interests in the region. In the interwar period a stable supply of oil became a key national security interest for most countries.

The political and economic environment was also changing in Eurasia with the emergence of the Soviet Union. The new Soviet government’s nationalization of oil in the summer of 1918 was a huge blow to the industry – particularly to its foreign investors who had been successfully working in Imperial Russia. The New Economic Policy initiated by

65 Vaclav Smil, Oil (London: One World, 2008), p. 26. 66 John Mearsheimer, The Tragedy of Great Power Politics (New York – London: W.W. Norton & Company, 2014), p. 254.

Vladimir Lenin included a vigorous program of electrification, the establishment of technical schools for engineers and industrial managers, and the creation of a more systematic organization for the state-owned sectors of the economy, including the oil industry. After the death of Lenin in 1924, fundamental differences on both domestic and foreign policy separated two of the main contenders – Joseph Stalin and Leon Trotsky.

Whereas Trotsky advocated world revolution, Stalin favored the concept of building a strong socialist state in the Soviet Union. Stalin succeeded in demoting, exiling, and eventually assassinating Trotsky in Mexico, and by 1928 his control over both Communist party and country was virtually complete. Stalin’s program of “socialism in one country” implied a massive build-up of Soviet industry, including the field of petroleum, to make the country both self-sufficient and powerful in the face of a largely hostile world.

In fact, new discoveries and engineering advances allowed Soviet production to expand in the 1920s and 1930s. Economic growth of the young Soviet state steadily raised domestic demand, particularly for transportation fuels. The government also discovered the value of exports. According to Marshal Goldman, Soviet oil played an escalating role in the European energy balance – accounting for one in seven barrels of West European imports from 1926 to 1935.67 Besides the Baku and the North Caucasus oil fields, Soviet geologists began to explore a new frontier to the northeast – the Volga-Ural basin. Ivan

Gubkin, a well-known Russian scholar and founder of Soviet petroleum geology, who stood ahead of his time in predicting the potential of the Volga-Ural basin, advanced an even more prescient hypothesis two decades before the first discovery in West Siberia. In

1932, at a conference in Sverdlovsk, he theorized that in Mesozoic time, excellent

67 Marshal Goldman, The Enigma of Soviet Petroleum, Half-Empty or Half-Full? (London: George Allen & Unwin, 1980), p. 26.

45 conditions prevailed for the accumulation of the type and extent of organic matters that would generate vast quantities of oil and gas in West Siberia. As his advice on the potential of the Volga – Ural basin was ignored in the 1920s, his proposal on West Siberia received the same reception in the 1930s. Systemic exploration in West Siberia did not start until after World War II, almost a decade after Gubkin’s death.68

The Volga-Ural Basin was the first new basin that the Soviet regime developed.

From the Revolution to World War II, they expanded production in the traditional centers and industrialized output in Central Asia. However, the gamble of Volga-Ural paid off.

Under-funded after the initial discoveries in the 1930s, and the object of the intense focus of resources during World War II, thereafter the basin powered Soviet oil for the next two decades. In fact, as John Mearsheimer argues, a series of five-year plans on a massive build-up of Soviet industry, initiated by Stalin in October 1928, “transformed the Soviet

Union from a destitute power in the 1920s into Europe’s most powerful state by the end of

World War II.”69

In June 1941, history once more turned Russia upside down when German divisions crossed its Western border. World War II was by far the most massive and destructive of all wars. Truly a global war, it directly or indirectly involved the populations of every continent. Science-based technology accounted for many of the special new weapons, both offensive and defensive. The economic and especially the industrial capacities of the belligerents acquired new importance. One of the ultimate weapons of the victors was the productive capacity of both the American and Soviet economy.

68 John Grace, Russian Oil Supply: Performance and Prospects (Oxford – New York: Oxford University Press, 2005), p. 36. 69 John Mearsheimer, The Tragedy of Great Power Politics (New York – London: W.W. Norton & Company, 2014), p. 195.

Several months before the Pearl Harbor, in March 1941, the U.S. Congress passed the Lend-Lease Act, allowing the United States to assist countries whose defense was seen as vital to the United States by lending or leasing them war supplies, equipment, or materials. The U.S. began sending large amounts of war material to the British. The United

States did not formally go to war against Germany until December 11, 1941, when Hitler declared war against the United States four days after the Japanese attack at Pearl Harbor.

American troops did not set foot on the European continent until September 1943, when they landed in Italy. According to Daniel Yergin, if there was a single resource that was shaping the military strategy of the Axis powers, it was oil. When the United States entered

World War II, it was the world’s leading oil producer and was thought to possess nearly half of total world reserves. And as the U.S. was putting an unprecedented drain on its resource, a fear of shortage began to grow. The wartime gloom about America’s recoverable oil resources gave rise to what became known as the “conservation theory” – that the United States government had to control and develop “extraterritorial” (foreign) oil reserves in order to reduce the drain on domestic supplies, conserve them for the future and thus guarantee America’s security. Even private enterprise Republicans were calling for direct government involvement in foreign oil concessions. American policy makers articulated once again the principle of securing Gulf oil supplies in 1943, when President

Franklin D. Roosevelt authorized Lend Lease assistance to Saudi Arabia which led to the establishment of diplomatic relations between the two countries and to a face-to-face meeting between President Roosevelt and King Abdel-Aziz Ibn Saud. The official record was silent about what the two men said or agreed about oil.70 However, this meeting had

70 Daniel Yergin, The Prize: The Epic Quest for Oil, Money & Power (New York – London: Free Press, 2009), pp. 377-386.

47 forged a tacit alliance which obliged the United States to protect Saudi sovereignty and royal family in return for a Saudi pledge to uphold the American firms’ dominance of the oil fields.

In June 1941, representatives of the petroleum industry from all parts of the United

States were invited to Washington to meet with the then newly created Office of Petroleum

Coordinator for National Defense of which Secretary of Interior Harold L. Ickes had been designated Coordinator. The record of operations of the Office of Petroleum Coordinator and its successor the Petroleum Administration of War, covering the period from 1941 to

1946, is more than simply another report of one more Federal agency. It is the history of a unique experience, dealing with an unprecedented program of Government-industry cooperation. The oilmen, most of whom later acknowledged that they had been fearful of some new and far-reaching measures of Federal control, were told by the Coordinator

Ickes and the Deputy Coordinator Everette Lee DeGoyler (an American geologist recognized as the founder of applied geophysics in the petroleum industry), that all that was wanted was cooperation in what was then a vast and growing national defense effort, later to become a prodigious war job. The relationship, the leaders of petroleum were assured, was to be that of a team -- a partnership.71

Petroleum stood out from all other resources, because of its pivotal role in the global economy and its capacity to ignite large-scale combat. During World War II, some of the most important battles in the European theater were fought to prevent the oil-thirsty

Germans from breaking through to Soviet oil fields in Baku (the Stalingrad battle) and from controlling the oil of the Middle East (the El Alamein battles). In the Pacific, the

71 For background on these events, see John Frey and H. Chandler Ide eds., History of the Petroleum Administration of War, 1941-1945 (Honolulu: University Press of the Pacific, 2005).

Japanese assault on Pearl Harbor was part of a plan to seize oil fields and gain control over the petroleum supplies in the Dutch East Indies. However, all these efforts ended in failure: the Japanese plan was foiled by American air and submarine attacks on tanker ships, while the German drive on Baku was thwarted by strong Soviet resistance. Michael Klare claims that with their supplies of oil becoming increasingly scarce, Japan and Germany were unable to mount effective resistance to Allied offensives and so were eventually forced to concede defeat.72

After World War II, petroleum continued to be seen by policymakers and military planners as a vital combat necessity, especially in the United States. Fearing that the Soviet

Union would seek control over the Persian Gulf area which was rapidly becoming one of the leading sources of Western oil imports, Washington established a modest military presence in the region and sought to integrate Iran, Iraq, Saudi Arabia, and other key- producing states into the Western alliance. However, oil became the fuel of choice throughout the industrialized world because it was cheap and plentiful. Production in Iran,

Iraq, Saudi Arabia, Kuwait, Libya, Saudi Arabia, and Venezuela climbed steadily and, as a result, low-cost oil from these countries flooded markets. This spelled trouble for the U.S. domestic producers -- foreign oil was displacing locally mined coal and oil as energy sources. President Eisenhower obliged the oil interests in 1957 by establishing a voluntary quota system that became mandatory in March 1959. Under the program, imports were restricted to nine percent of the American market. John Rothgeb argues that the American quota system had international implications as well. By restricting access to the American market, the quotas contributed to a worldwide glut in oil that outstripped demand and

72 Michael Klare, Resource Wars: The New Landscape of Global Conflict (New York: A Metropolitan | Owl Book, 2001), p. 31.

49 prices began sliding downward. As prices fell, the world’s largest oil companies cut their payments to oil-exporting countries, including those in the Middle East. In the face of these price cuts by majors, five of the world’s largest petroleum exporting countries – Iran,

Iraq, Kuwait, Saudi Arabia, and Venezuela – met in Baghdad in September 1960 to set up an organization that would coordinate their bargaining efforts with the oil companies. The institution they created was christened the Organization of Petroleum Exporting Countries or OPEC.73

Compared to Western industrial countries, the Soviet Union was slow to shift to oil and gas as the basis of its economy. Following World War II, Soviet energy policy lagged in developing hydrocarbons; planners were reluctant to risk resources on exploration because they believed that oil and gas were scarce, high-cost fuels and would remain so.

As a result, the Soviet economy continued to run primarily on coal, peat, and wood. The official policy changed in the late 1950s, and the Soviet economy moved rapidly to hydrocarbons, realizing important gains in energy efficiency throughout the 1960s.74 The dramatic growth of energy investment, combined with the continuing high-priority flow of resources to the defense industry began to dominate the Soviet Union’s economic policy.

This policy was also indispensable for Moscow given the U.S. strategy to create and maintain a global system of alliances capable of containing the Soviet Union.

Needless to say, that in the context of Moscow’s East-West rivalry (the struggle of communism versus capitalism), the Middle East assumed more critical importance. As a region of close proximity to the Soviet Union but of vital interest to the United States and

73 John Rothgeb Jr., U.S. Trade Policy: Balancing Economic Dreams and Political Realities (Washington D.C.: Congressional Quarterly Press, 2001), pp. 145-147. 74 Thane Gustafson, Crisis Amid Plenty: The Politics of Soviet Energy under Brezhnev and Gorbachev (Princeton: Princeton University Press, 1989), p. 22.

50 its allies, the Middle East turned into a region where both superpowers became directly involved, raising the risk-potential of the area itself. This in turn sporadically catapulted the region to a high-priority position in Soviet foreign policy, in direct connection with the superpower relationship.

With the outbreak of the October 1973 Arab-Israeli conflict, the perception of oil as a strategic commodity took on entirely new meaning. To punish Washington for its support of Israel and to build worldwide pressure for an acceptable outcome to the conflict, the

Arab states cut off all petroleum deliveries to the United States and imposed rolling cutbacks on deliveries to other countries. At the same time, OPEC announced a fourfold increase in the price of oil. Occurring at a time when petroleum supplies were already under pressure from rapidly growing demand, the oil embargo and OPEC price increase sent a powerful shock wave through the global economy: oil shortages developed in many areas, industrial output declined, and the world plunged into prolonged economic recession. From this time on, oil was seen not only as an essential military commodity but also as a prerequisite for global economic stability.75

The Soviet Union did encourage the oil producers to maintain the oil boycott they introduced in 1973, but it clearly did not control or even instigate the move. The states most responsible for and involved in the boycott were not allied with Moscow. Saudi

Arabia and the smaller Gulf states had mostly poor relations with Moscow. Moscow’s only real partner among the major oil producers at the time was Iraq. Moreover, Moscow could not have provided an alternative market for the oil producers, nor suspended its own sales to hard-currency areas. Thus, it was a hardly a credible champion of the boycott idea. This

75 For background on these events, see D. Yergin, The Prize, pp. 588-632 and M. Klare, Resource Wars, pp. 31-33.

51 may have been the reason that although Soviet propaganda applauded the boycott, Moscow made a greater effort to encourage nationalizations.76

It was only in the 1960s that the Soviet Union reemerged on the world market as a significant exporter of oil after the discoveries of large reserves in Siberia, and then in the

1970s, of natural gas. Oil exports became a vital source of foreign currency revenues for the USSR, which used petrodollars for domestic and foreign policy purposes. The world’s longest pipeline Druzhba (Friendship) was built between 1960 and 1964, bringing Russian crude oil to Poland, Czechoslovakia, Hungary, and East Germany. Its second branch was laid between 1969 and 1974, doubling shipments of crude abroad. The state company

Zarubezhneft established by the Ministry of Oil Industry in 1967 implemented this energy expansion and helped to develop oil industries in loyal countries (Algeria, Iraq, Iran,

Libya, Syria, Vietnam, etc.), thus earning political dividends for the Soviet Union. The

Siberian oil rush, sparked by the price jump after the 1973 Arab embargo, ignited the greatest economic boom in the USSR’s history. The Soviet leadership used its oil revenues to cushion the impact of the oil shock on its European satellites. Oil money also paid for a huge Soviet military buildup that, enabled the country to reach rough parity with the

United States.77

Although the embargo was lifted after several months, with a pledge by

Washington to be more evenhanded in its Middle East policy, the embargo and the simultaneous OPEC oil-price hike caused economic havoc in the United States. The royal

76 Galia Golan, Soviet Policies in the Middle East: From World War II to Gorbachev (Cambridge: Cambridge University Press, 1990), pp. 16-17. 77 Leif Wenar, Blood Oil: Tyrants, Violence, and the Rules that Run the World (Oxford – New York: Oxford University Press, 2016), p. 83; Stephen Kotkin, Armageddon Averted: Soviet Collapse, 1970-2000 (New York: Oxford University Press, 2008), pp.15-16.

52 family of Saudi Arabia also commenced the nationalization of Aramco’s Saudi concession at this time, finally terminating the outright ownership of Saudi petroleum reserves by

American companies – which were, however, permitted to retain a significant role in the overseas marketing of Saudi oil.78

The Arab oil embargo and the events of 1973-74 left a profound and lasting impact on the perceived link between oil and the national security of the major industrialized powers. Worried that supply disruptions could occur again, the oil-importing countries sought to minimize their vulnerability by searching for new petroleum deposits in more secure locations (for example, the North Sea and the North Slope of Alaska) and by storing large quantities of oil in special reservoirs. The United States, for its part, stored hundreds of millions of barrels of oil in its newly established Strategic Petroleum Reserve (SPR) and consolidated its energy policy with the establishment of the Department of Energy in 1977.

Former Secretary of Defense James Schlesinger, who served under President Ford, was appointed as the first secretary. The establishment of U.S. Senate Committee on Energy and Natural Resources in 1977 and the transformation of the House of Representatives’

Committee on Interstate and Foreign Commerce into the Energy and Commerce

Committee emphasized also the leading role of lawmakers in the nation’s energy policy.79

The need for a national oil storage reserve has been recognized for at least five decades. Secretary of the Interior Harold Ickes advocated the stockpiling of emergency crude oil in 1944. Later President Eisenhower suggested an oil reserve after the 1956 Suez

78 Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency (New York: Metropolitan Books, 2004), pp. 44-45. 79 U.S. Senate Committee on Energy and Natural Resources. Accessed February 17, 2017. https://www.energy.senate.gov/public/index.cfm/about-the-committee; U.S. House of Representatives. “The Committee on Energy and Commerce.” Accessed February 17, 2017. https://energycommerce.house.gov/about/

Crisis. The Cabinet Task Force on Oil Import Control recommended a similar reserve in

1970. But few events so dramatically underscored the need for a strategic oil reserve as the

1973-74 oil embargo. In the aftermath of the oil crises, the United States established the

SPR. President Ford set the SPR into motion when he signed the Energy Policy and

Conservation Act (EPCA) on December 22, 1975. The legislation declared it to be U.S. policy to establish a reserve of up to one billion barrels of petroleum. The Gulf of Mexico was a logical choice for oil storage sites. More than 500 salt domes, known to be an inexpensive and secure means of petroleum storage, are concentrated along the coast. Also, the Gulf Coast is the location of many U.S. refineries and distribution points for tankers, barges and pipelines. In April 1977, the government acquired several existing salt caverns to serve as the first storage sites. Construction of the first surface facilities began in June 1977. On July 21, 1977, the first oil - approximately 412,000 barrels of

Saudi Arabian light crude - was delivered to the SPR and fill of the U.S. emergency oil reserve had begun.80 Moreover, in 1974 the U.S. and other industrial countries established the International Energy Agency (IEA) with the secretariat in Paris, to help countries coordinate a collective response to major disruptions in the supply of oil. Establishment of the new organization was proposed by the United States Secretary of State Henry

Kissinger in his address to the Pilgrims Society in London in 1973. Before becoming a member country of the IEA, a candidate must demonstrate that it has as a net oil importer, reserves of crude oil and/or product equivalent to 90 days of the prior year’s average net oil

80 U.S. Department of Energy. “Strategic Petroleum Reserve.” Accessed February 17, 2017. https://energy.gov/fe/services/petroleum-reserves/strategic-petroleum-reserve

54 imports to which the government (even if it does not own those stocks directly) has immediate access should there be activation of the Coordinated Emergency Response

Measures (CERM) – which provide a rapid and flexible system of response to actual or imminent oil supply disruptions.81

The American response to the oil crisis was not limited to defensive measures.

When, in 1979, the shah of Iran was overthrown by militant Islamic forces and the world experience a second major “oil shock,” President Carter was quick to threaten the use of force against any adversary that might seek to impede the flow of oil from the Persian Gulf area. “An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America,” he told a joint session of Congress, “and will be repelled by any means necessary, including military force.”82 In line with this principle, known since as the Carter Doctrine, the United States commenced a military buildup in the Persian Gulf area that has continued to this day. This principle has, moreover, periodically been put to the test. During the Iran-Iraq war of 1980-

88, when the Iranians stepped up their attacks on oil shipping in the Gulf (presumably to punish Saudi Arabia and Kuwait for their financial support of Iraq), the United States agreed to “reflag” Kuwaiti tankers with American flags and provide them with a U.S. naval escort.83

At the end of the 1970s, with the fall of Pahlavi monarchy in Iran, the Soviet invasion of Afghanistan, and the American determination to shore up its shaken position

81 International Energy Agency. “Member Countries.” Accessed February 17, 2017. https://www.iea.org/countries/membercountries/ 82 Jimmy Carter, “State of the Union Address,” January 23, 1980, The New York Times, January 24, 1980. 83 Michael Klare, Resource Wars: The New Landscape of Global Conflict (New York: A Metropolitan/Owl Book, 2001), p. 33.

55 by deploying new military power to the Persian Gulf area, Soviet policymakers began to suggest to West European audiences that they should think twice about relying on the

United States for their energy security. While not exactly offering itself as an alternative, the Soviet Union had been advocating for some time an expansion of energy ties between

Eastern and Western Europe. After Stalin’s death in 1953, it took another decade for foreign trade to become a significant factor again in the Soviet economy and make energy a leading hard-currency earner. As recently as 1970, energy had accounted for less than 30 percent of Soviet hard-currency income, but by mid-1980s its share had risen to 80 percent.84 A major issue for Soviet foreign-trade policy has been the priority to give to hard-currency revenue from exports to the West, weighed against exports to Eastern

Europe. Thane Gustafson argues that from the first oil shock in 1973 to the oil price collapse of 1985-1986, the Soviets sought to soften the shock of higher energy prices to their vulnerable East European clients by guaranteeing them stable oil supplies at subsidized prices.85

The larger question about Soviet foreign trade, however, after the oil glut of 1986 caused by falling demand, was whether the Gorbachev leadership could redefine its role in the Soviet economy, rethinking particularly the role of energy exports. Ever since 1977, when energy became an emergency issue, it has occupied the Soviet Union’s General

Secretary’s personal attention. Soviet energy policy remained remarkably constant despite the beginning of economic reform by Gorbachev. It was overwhelmingly oriented toward

84 Data on hard-currency income are defined as “total exports to OECD (Organization for Economic Cooperation and Development) countries less Finland.” Margaret Chadwick, David Long, and Machiko Nissanke, Soviet Oil Exports: Trade Adjustments, Refining Constraints, and Market Behavior (Oxford: Oxford University Press, 1987), p.83. 85 Thane Gustafson, Crisis Amid Plenty: The Politics of Soviet Energy under Brezhnev and Gorbachev (Princeton: Princeton University Press, 1989), pp. 272-273.

56 supply rather than demand. While the major decisions such as the volume of oil and gas exports and the share to be reserved for Eastern Europe, appear to be decided at the highest levels, the implementation was a matter of vertically integrated giants, namely the Ministry of the Oil Industry, the Ministry of the Gas Industry, the Ministry for Construction of Oil and Gas Enterprises, and the Ministry of Geology. The Soviet reformers and these institutions could not cut their dependence on oil exports as the chief regulator of their hard-currency balance to ensure a steady flow of hard currency.

In the meantime, the Carter Doctrine was again invoked in August 1990, when

Iraqi forces occupied Kuwait and positioned themselves for an assault on Saudi Arabia. At the first National Security Council (NSC) meeting convened to discuss the invasion, on the morning of August 2, President George H.W. Bush expressed considerable alarm over the safety of Saudi Arabia and the global oil supply. Saudi Arabia’s major oil fields, which are largely concentrated in al-Hasa, the Eastern Province adjoining Iraq, were immediately vulnerable; if the Iraqis used their beachhead in Kuwait to invade the kingdom, they stood to gain control over 25 percent of the world’s petroleum reserves. In four days after the

Iraqi invasion, President Bush decided on a tough military response – dispatching large numbers of American forces to defend Kuwait and Saudi Arabia and authorized Secretary of Defense Dick Cheney to begin deploying troops in Saudi Arabia.86 The U.S. administration viewed the invasion of Kuwait through the lens of the Carter Doctrine: as a threat to Saudi Arabia and the free flow of oil from the Gulf. The U.S. was importing

86 See more in Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency (New York: Metropolitan Books, 2004), p. 50; Christopher Layne, The Peace of Illusions: American Grand Strategy from 1940 to the Present (Ithaca – London: Cornell University Press, 2006), pp. 178-179.

57 nearly half the oil it consumed, and the sovereign independence of Saudi Arabia was of vital interest to the United States.

The Gulf War of 1990-91 had ramifications far beyond the Middle East. One of the most significant of these involved the role of the Soviet Union, which was already in decline as a world superpower. The Soviet Union had long been a close ally of Baghdad and could have sided with Iraq against the U.S.-led alliance. However, it adopted the role of middleman between Iraq and the West, helping to enforce U.N. Security Council resolutions on Kuwait and Iraqi disarmament. For Soviet leader Gorbachev, the Gulf War involved far more than Moscow’s policy toward Iraq. The crisis embraced a broad range of

Soviet interests, in both the West and the Third World. Coming as it did at a time of immense turmoil in Soviet politics, the crisis inevitably became the currency of a domestic power struggle as well. Above all, the Gulf War emerged as one of the most formative crises in the gradual reformulation of the principles of the foreign policy of the weakened

Soviet Union. The Cold War international order was already disintegrating. After 1989, the

United States had new and different challenges to face.

In the 20th century, as this overview has demonstrated, oil has been recognized as the critical strategic commodity for war and peace and as an essential element for national power and international predominance. Many of the key battles of World War II were triggered by the Axis Powers’ attempts to gain control over petroleum supplies located in areas controlled by their adversaries. After the 1973 oil shock, it was clear that oil companies could not and would not manage future crises by themselves, and that is up to governments to take on that role. In the years after, the United States and other industrial countries developed an energy security system built around the International Energy

Agency and the strategic stockpiles, such as the U.S. Strategic Petroleum Reserve and similar reserves in other Western countries, which can be brought into play to avert a shortfall. In fact, in 1990 and 1991, the lessons of previous crises, along with the mechanisms developed by the United States and its allies since 1970s, made the impact of the disruption that came with the Gulf War less serious than it might otherwise been.

However, the U.S. was faced with the challenge of finding politically palatable solutions to the problems of reducing America’s dependence on foreign oil and preventing high oil prices from damaging American industries that traditionally had relied on cheap oil.

The Soviet Union had another problem of dependency. The main “weak spot” of the former Soviet Union was its economy, namely the strong dependence of the budget of the USSR on energy exports. The Soviet leadership used its oil revenues for a Soviet military growth, and oil even financed the acquisition of Western technology for making cars, synthetic fibers, and other products for consumers as well as Western feed for the

Soviet livestock.87 Nikolai Patrushev, the Secretary of the Security Council of Russia, who previously served as Director of the Russian Federal Security Service (FSB), claims that a special strategy had been developed to provoke the financial and economic bankruptcy of the Soviet state: to cause a sharp decline of income from foreign trade in the budget of the

Soviet Union, combined with a significant increase of expenses to resolve internal problems. As the main measure to reduce the budget revenues was seen a decrease in world oil prices. According to Patrushev, this has been achieved by the mid 1980s when the United States as a result of collusion with the rulers of a number of oil-producing countries created an artificial surplus in the market and oil prices have fallen by almost

87 Stephen Kotkin, Armageddon Averted: Soviet Collapse, 1970-2000 (New York: Oxford University Press, 2008), p.15.

59 fourfold (in 1986, the price of Brent was $9 per barrel).88 The growth of the expenses of the Soviet Union were stimulated with a deeper involvement in the Afghan war, a new arms race, and the inciting anti-government protests in Poland and other countries of the socialist camp. These required Moscow to expend additional costs to stabilize the situation in Eastern Europe.

The collapse of the Soviet Union transformed the international system. That would redraw the map of world oil as well.

Energy and Foreign Policy of the United States: 1991 – 2000

For over forty years, from the late 1940s until 1990, the overarching goals of U.S. strategy were to create and maintain a global system of alliances capable of containing the

Soviet Union and establish an “Open Door world” – an international system made up of states that subscribe to the United States policies and institutions and that are open to U.S. economic penetration.89 These strands of a two-tiered policy often went hand in hand and gave the United States required access to resources and markets globally.

With the end of the Cold War and disintegration of the Soviet Union, the United

States was the last remaining superpower. This gave the United States a unique role in the international arena. The deterrence of a communist threat has been replaced by the acknowledgement of a globalized world and a return to trade and economic relations became a central component of the U.S. foreign policy. The maintenance and expansion of

88 The Interview of Nikolai Patrushev, the Secretary of the Security Council of Russia, Rossiyskaya Gazeta, [in Russian], October 15, 2014. 89 Christopher Layne, The Peace of Illusions: American Grand Strategy from 1940 to the Present (Ithaca – London: Cornell University Press, 2006), p. 30; Tony Smith, America’s Mission: The United States and the Worldwide Struggle for Democracy in the Twentieth Century (Princeton: Princeton University Press, 1994), p. 327.

NATO also remained an important priority. As the American economy grew and U.S. industries come to rely more on imported supplies of critical commodities, including oil, the protection of global resource flow was becoming an increasingly prominent feature of

American security policy. With the collapse of the Soviet Union, resource issues reassumed their central role in the U.S. foreign policy and military planning. This focus on resources reflected the growing importance of industrial might and the economic dimensions of security.

This “econocentric” approach to national security became official American policy when the Clinton administration took office in early 1993. Clinton promised to “elevate economics in foreign policy” already during his presidential campaign – a process, he declared, that would require reconstructing the Department of State “so that economics is no longer a poor cousin to old-school diplomacy.”90 He made the expansion of international trade and investment the top foreign policy goal of his administration. Clinton also promoted the overseas operations of U.S. companies and the main message of these policies was that “U.S. economic and security interests are inextricably linked.”91

Legislative power is one of the government’s greatest assets to stimulate change. In fall 1992, the Energy Policy Act was passed and signed into law. At the outset a Bush administration bill, the Energy Policy Act was reshaped through bipartisan efforts in

Congress into its final form. According to Richard Williamson, Deputy Assistant Secretary for International Affairs of the Department of Energy, that form sets the tone for the 1990s.

By enacting the more than 500 provisions of the act, government is forming partnerships

90 Bill Clinton, “Address to the World Affairs Council of Los Angeles,” August 13, 1992, The New York Times, August 14, 1992. 91 U.S. National Security Council, A National Security Strategy for a New Century (Washington, D.C.: White House, December 1999), p. 21.

61 with industry and non-governmental organizations to work directly with energy consumers and energy-industry stakeholders. Richard Williamson stated that U.S. priorities need to change. “The priorities we’ve had in the past – the goals, the missions, the way we’ve done business – just don’t meet the needs of moving into the 21st century.”92 For this reason, the administration of President Clinton decided to make energy a part of its economic policy.

Resources are tangible assets that can be exposed to risk by political turmoil and conflict abroad – and so, they require physical protection. Michael Klare claims that, while diplomacy and economic sanctions can be effective in promoting other economic goals, only military power can ensure the continued flow of oil and other critical materials from

(or through) distant areas in times of war and crisis.93 Undoubtedly, as their unique contribution to the nation’s economic security, the armed forces have systematically bolstered their capacity to protect the international flow of oil. However, in the early

1990s, Washington recognized the need to integrate gradually America’s energy interests into its foreign policy in a strategic, coordinated fashion, and the energy dimension loomed large for Washington. The Gulf War had once again demonstrated the risks of the United

States’ dependence on the Persian Gulf. U.S. diplomacy was aimed at the reconnection of recourse-rich newly-independent countries of Azerbaijan, Kazakhstan, Turkmenistan, and

Uzbekistan to world energy markets and industries. Building a new relationship with

Russia was one of the priorities of the Clinton administration but at the same time,

Washington entered into the competition with Moscow for Caspian and Central Asian oil with the involvement of major U.S. oil companies.

92 Richard Williamson, “The Clinton Administration’s New Energy Policies,” Tulsa Journal of Comparative and International Law, 115 (1994), p. 115. 93 Michael Klare, Resource Wars: The New Landscape of Global Conflict, (New York: A Metropolitan | Owl Book, 2001), p. 9.

Russia’s abrupt transition from communist dictatorship was chaotic, but a fragile democratic process and nascent capitalism were taking hold. U.S. officials entertained visions of a Western-friendly Russia as a partner in a stable and secure Europe. To that end, Presidents Clinton and Yeltsin had built an alliance on the shared goal of preventing a revanchist security state from taking power in Moscow and returning the U.S. and Russia to a Cold War state of hostility. Clinton wanted a friendly and stable Russia as a foreign policy success story. Yeltsin needed American support and money to avoid an economic collapse. Yeltsin did not object when Washington raised plans to expand the NATO alliance into eastern Europe. The two presidents even discussed that Russia itself might one day join NATO – a concept that seems downright unrealistic today.

In the energy sector Washington developed a collaborative approach with Moscow aimed at the development of energy resources and transportation in the former Soviet

Union. This development was necessary to meet the two objectives: helping to consolidate the nationhood of the newly independent states and enhancing energy security by bringing additional supplies to the world market. In 1997 the U.S. Department of State informed

Congress that the Caspian basin holds as much as 200 billion barrels of oil – about ten times the amount found in the North Sea, and a third of the Persian Gulf total reserves.94

The Caspian region is also valued for its large reservoirs of natural gas, especially

Turkmenistan. Therefore, after the dissolution of the Soviet Union, the Caspian became potentially one of the world’s most important new energy producing regions. The U.S. and foreign energy companies have been pouring into the area in pursuit of exploration and development rights. The most significant problem, however, was the task of moving the

94 U.S. Department of State, Caspian Region Energy Development Report, Report to the House International Relations Committee Pursuant to H.R. 3610, April 15, 1997, p. 1.

63 energy from the points of production to markets elsewhere: because the Caspian Sea is landlocked and the United States opposed future reliance on the existing, Soviet-era pipeline system (which extends through Russia to eastern Europe) – an entirely new system of pipelines would have to be constructed. A number of external powers, including the United States, Russia, Turkey, Iran, and China sought to determine future pipeline routes in accordance with their perceived strategic interests and foreign policy goals. It is these calculations, rather than the purely financial interests of the oil companies, that ultimately determined the fate of the Caspian Sea region. At its core, this was a struggle of governments for control over the distribution of energy resources: both Washington and

Moscow sought to exercise ultimate dominion over the flow of Caspian oil and natural gas to markets in other areas of the world.

Washington had two key objectives: first to develop Caspian basin energy as an alternative to Persian Gulf supplies; second, to ensure that the Caspian oil and gas get to markets in the West without passing through Russia and Iran. “This was about America’s energy security, which depends on diversifying our sources of oil and gas worldwide,”

Energy Secretary Bill Richardson explained in 1998. “It is also about preventing strategic inroads by those who don’t share our values.”95 U.S. Government tried to contain the possible reemergence of a powerful Russia, and at the same time President Clinton and

U.S. government officials invested great effort in the contest working with the leaders of

Kazakhstan, Azerbaijan, and Turkmenistan and persuading these states to endorse a new pipeline system connecting the Caspian area with Turkey and the Mediterranean. The collaborative approach with Moscow developed by Washington ensured some participation

95 Quoted in Stephen Kinzer, “On Piping Out Caspian Oil, U.S. Insists the Cheaper, Shorter Way Isn’t Better,” The New York Times, November 8, 1998.

64 of Russian energy firms, however they left out from the Baku-Tbilisi-Ceyhan pipeline project.96

Another important development of this period related to the oil industry was the

Asian financial crisis. In July 1997, Thailand, one of the most buoyant economics of Asia, was slammed by this crisis. Soon the crisis spread, threatening the whole region and Asian economies with far-reaching impact on global finance and the world economy. The Asian financial crisis had generated enormous economic ruin. The OPEC agreement of the

Jakarta meeting of petroleum ministers in November 1997 to increase its output created additional problems since demand was falling. The price of oil collapsed to $9 a barrel and for some grades of oil, to as low as $6. There was too much oil in the world and not enough demand. As oil prices plummeted, the finances of the oil industry collapsed as well. The industry went through remarkable mergers between 1998 and 2002 in order to be more efficient, managing its cost better, and leveraging skills and technology across a larger span. Below is a timeline of some of the major oil industry deals from the period of

1998 – 2002, including those approved by the United States Federal Trade Commission

(FTC):

•! in December 1998, the U.S. FTC approved British Petroleum’s $55 billion

acquisition of Amoco Corp. The new BP Plc became the third-largest oil company

in the world;

96 British Petroleum. “Baku-Tbilisi-Ceyhan Pipeline.” Accessed February 20. https://www.bp.com/en_az/caspian/operationsprojects/pipelines/BTC.html

•! in September 1999, French oil groups TotalFina and Elf ended a months-long

takeover battle and agreed on a merger. The deal was valued at 52.6 billion euros.

The company is now Total SA;

•! in November 1999, the U.S. government approved Exxon’s $82 billion purchase of

Mobil Corp. The acquisition created Exxon Mobil Corp, the largest publicly traded

oil company in the world of that period;

•! in April 2000, the U.S. FTC approved BP Amoco Plc's purchase of Atlantic

Richfield Co, or Arco, for $27 billion. The deal was approved after Arco sold its

Alaska operations for $7 billion;

•! in September 2001, the U.S. FTC allowed Chevron Corp. to complete its $39.5

billion deal to buy Texaco Inc;

•! and finally, in August 2002, the shareholders and the FTC approved an $18 billion

union between Conoco and Phillips Petroleum that created ConocoPhillips, the

third-largest U.S. oil company.97

All the merged companies came out not only bigger, but also with greater efficiencies and with the capacity to take on more projects – projects that were larger and more complex. Although the overall effects of the Asia crisis on the United States were modest and localized, however, none of the managements of the major oil companies would ever have expected that the distress of this rather obscure Southeast Asian currency

97 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World (London – New York: Penguin Books, 2011), pp. 85-107; Tom Bower, Oil: Money, Politics, and Power in the 21st Century (New York – Boston; Grand Central Publishing, 2009); Reuters, “Big Oil’s Years of Merger Mania,” July 14, 2011. Accessed February 21, 2017. https://www.reuters.com/article/us-conocophillips- mergers/chronology-big-oils-years-of-merger-mania

66 crisis would trigger a collapse in the price of oil and the massive restructuring of their own industry.

The role of mergers and acquisitions dramatically changed the composition of the

U.S. major energy companies during the 1990's. The number of major U.S. energy companies dropped from nineteen in 1990 to ten in 2000.

By the end of 2000, the U.S, was importing 56% of its petroleum, and petroleum imports increased by 40% during the decade. Overall, imported energy increased from

17% of total energy consumption in 1990 to 25% in 2000. In the mid-1990s aggregate energy imports surpassed the previous peak level reached in 1977 and by 2000 had exceeded that import level by 36%. By the end of the decade, the U.S. was far more dependent on imported energy in general and imported petroleum in particular than it had been since the mid-1970s, just before the second oil shock.98 Besides the Western

Hemisphere, these imports were from the Middle East where the United States developed substantial strategic interest following World War II. The interests of the United States in the Middle East, as they developed during the Cold War, besides the containment of Soviet

Union, involved security of oil supplies and support for Israel. The United States also developed an extensive network of military bases around the world and responsibilities for global security on an unprecedented scale. By the end of 1990s, only in the Middle East,

U.S. had military presence in Bahrain (Administrative Support Unit, South West Asia),

Egypt (Cairo West AFB, Cairo East, and Multinational Force and Observers), Saudi

Arabia (Eskan Village and Price Sultan Air Base), and Turkey (Balikesir Air Field, Incirlik

98 Paul Joskow, “Energy Policy During the 1990s” in Jeffrey Frankel and Peter Orszag eds., American Economic Policy in the 1990s (Cambridge: The MIT Press, 2002), pp. 509-563.

Air Base, Izmir Air Station, and Vecihi Akin Garriosn).99 The U.S. military and diplomacy were more deeply involved in the security of the Middle East than at any time since World

War II and to ensure the continued flow of oil was one of their major tasks.

The period of 1991 through 2000 covers the last two years of the George H. W.

Bush administration and the entire Clinton administration. It begins with an “energy crisis” stimulated by the invasion of Kuwait by Iraq and the subsequent Gulf War and ends with an “energy crisis” caused by the Asian financial recession.

The dependence on Middle East oil, and the absence of any sustained coherent U.S. energy policy were major concerns of U.S. policymakers and the media. The Bush administration and the Department of Energy developed a national energy strategy document and proposed federal energy policy legislation to Congress. It focused on increasing oil, natural gas, and nuclear power production, including oil and gas exploration in the Arctic National Wildlife Refuge (ANWR). The proposals were opposed by

Democrats and environmentalists and finally rejected by the Congress in June 1991.100

The debate about energy policy continued in 1992, though the public concern about high oil prices, potential shortages and dependence on imported oil faded away quickly with the end of the Gulf War. Indeed, in retrospect, the oil shock of 1990-91 was much more modest, narrower and short-lived than the previous two oil shocks and it is surprising that it generated so much media attention and legislative activity. The debate subsequently shifted away from the Bush administration’s supply-side initiatives to a very different energy policy program advocated by House Democrats. The Energy Policy Act of 1992, PL

99 Directory of U.S. Military Bases Worldwide, William Evinger ed. (Phoenix: Oryx Press, 1998), pp. 246- 289. 100 See Vito Stagliano, A Policy of Discontent: The Making of a National Energy Strategy (Tulsa: PennWell, 2001).

102-486 was passed in October 1992. It was the only piece of major energy policy legislation passed during the 1990s and grew out of legislation proposed by Congressman

Phil Sharp entitled “The National Energy Efficiency Act of 1991.” It was a very different piece of energy legislation than that which the Bush administration had proposed in 1991.

Rather than being a supply-side program oriented toward conventional fuels it focused on creating tax and direct subsidies for energy efficiency and renewable energy technologies and on encouraging all states to develop and implement “integrated resource planning” programs for their utilities which were to include utility-sponsored energy efficiency programs in their resources planning processes.101

The Administration also pursued foreign policies to strengthen relationships with governments of oil producing countries and to encourage Caspian Sea countries and U.S. oil companies developing resources in these countries to build pipeline to Turkey in order to avoid routes through Iran and Russia, reducing dependence on these two countries.

These foreign policy initiatives also had a purpose to diversify the nation’s oil imports.

The integration of North American energy markets has also increased steadily since the 1990s. The most important transformation has occurred in natural gas, but crude oil and refined products have evolved as well. Market-oriented policies of the United States and Canada have resulted in a more than doubling of trade in natural gas as the necessary infrastructure has expanded. In the 1990s, the implementation of the North American Free

Trade Agreement (NAFTA) reinvigorated the natural gas trade between northern Mexico and the United States, pulling Mexico into the booming continental market. To set up an energy security agenda for Latin America and the United States was another need for the

101 Paul L. Joskow, “Energy Policy During the 1990s” in Jeffrey A. Frankel and Peter R. Orszag eds., American Economic Policy in the 1990s (Cambridge: The MIT Press, 2002), pp. 509 – 563.

1990s. During this period, recognizing the difficulties in reducing U.S. dependence on foreign oil, it made economic and political sense to have Latin American countries as major suppliers. The Clinton administration’s “econocentric” approach to national security somewhat determined the various functions of energy as a foreign policy tool. As suggested by Clinton in 1999, “Prosperity at home depends on stability in key regions with which we trade or from we import critical commodities, such as oil and natural gas.”102

In the post-Cold War period, U.S. foreign policy has been guided largely by the need to respond to the most pressing crisis or conflict. President Clinton came into office with a focus on the economy but found quickly that he had to respond to more immediate foreign policy issues and that they could easily time and political capital from domestic priorities. His administration suffered several foreign policy disasters, including Haiti,

Somalia, the inability to address the ethnic conflicts in Balkans and the genocide in

Rwanda, but surely new energy opportunities provided highly effective ways to advance

U.S. foreign policy objectives.

Russia’s Emergence Out of Chaos: 1991 - 2000

The natural resources – particularly oil and gas – were as critical to the new

Russian state as they had been to the former Soviet Union. By the middle 1990s, oil export revenues accounted for as much as two thirds of the Russian government’s hard currency earnings. Russia accounts for nearly 13 percent of the world’s oil output, 22 percent of non-OPEC production, and 12 percent of proven oil reserves outside the Middle East.103

102 U.S. National Security Council, A National Security Strategy for a New Century (Washington D.C.: White House, 1999), p. 21. 103 See British Petroleum Statistical Review of World Energy, 2011. Accessed February 24, 2017. https://www.bp.com/content/dam/bp- country/de_de/PDFs/brochures/statistical_review_of_world_energy_full_report_2011.pdf

However, the oil sector was swept up in the same anarchy as the rest of the economy of

Russia after the collapse of the Soviet Union.

The oil industry of the Soviet Union was structured to meet the needs of a centrally planned system. It was organized horizontally, with different ministries, namely the

Ministry of the Oil Industry, the Ministry of the Gas Industry, the Ministry for

Construction of Oil and Gas Enterprises, Ministry of the Foreign Trade, and the Ministry of Geology – each controlling its segments of the industry. After the dissolution of the

Soviet Union, Moscow momentarily realized that the typical organization found in the rest of the world – vertically integrated companies with exploration and production, refining and marketing all in one company – was the way to organize its modern oil industry. In

November 1992, President Yeltsin adopted this approach in Decree 1403 on privatization in the oil industry.104

This restructuring would have been hard to do under any circumstances. The state was weak, and law and order were in short supply. There was violence at every level and incentives of different criminal groups were clear: oil was wealth and getting control of some part of the business was the way to quickly accumulate capital on a scale that could not even dreamed about in Soviet period. But eventually the state reasserted its powers, and the newly established oil companies built up their own security forces, often with veterans of law-enforcement agencies, including the KGB, and the bloody tide of violence and gang conflicts began to recede.

By 1995 the Russian government was desperately short of funds, and the Yeltsin administration came up with a solution that went by the name of “loans-for-shares.”

104 Thane Gustafson, Wheel of Fortune: The Battle for Oil and Power in Russia (Cambridge, MA – London: Harvard University Press, 2012), pp. 71-82.

Businessmen and banks would loan the Russian government money, taking highly discounted shares in petroleum and other companies as collateral. When the government defaulted on the loans, the shares would end up as the property of the lenders. Daniel

Yergin argues that it was an unusual way to privatize the assets, and “loans-for-shares” was immortalized as the “sale of the century.”105 For instance, Mikhail Khodorkovsky lent the Russian government $309 million and won control of Yukos company’s shares. Roman

Abramovich and Boris Berezovsky lent $100 million to the government for half of another prominent oil company – Sibneft, which was later sold by Abramovich to the Russian gas giant Gazprom.106 Through a series of rigged auctions, a group of the richest and most powerful new financial barons acquired the state’s controlling stakes in several of the largest oil companies. The “loans-for-shares” affair of 1995 was the critical moment of takeover by oligarchs, including their interference into Russian politics via the “family” around the Yeltsin.

Overall by 1998, within six-seven years of the collapse of the Soviet Union, the

Russian oil industry had gone from a system run by a series of ministries and subordinated to central planning to a system of large vertically integrated companies, organized similarly to the traditional companies in the West. During these years, they all operated largely autonomously from the state. Eventually, the Russian Federation would have four large energy companies (Yukos, Lukoil, Surgutneftegas, and TNK-BP) each of whose oil reserves were comparable to the size of the largest western majors. The dissolution of the

105 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World (London – New York: Penguin Books, 2011), p. 31. 106 Chrystia Freeland, Sale of the Century: The Inside Story of the Second Russian Revolution (London: Abacus, 2009), pp. 114-123; David Hoffman, The Oligarchs: Wealth and Power in the New Russia (New York: Public Affairs, 2005), chapters 5, 12; Tom Bower, Oil: Money, Politics, and Power in the 21st Century (New York – Boston; Grand Central Publishing, 2009), pp. 115-128.

Soviet Union also provided a vast new prospect to Western companies: the potential to participate in a region rich with hydrocarbons, perhaps comparable to the Middle East in the scale of resources, and world-class opportunities.107 But, as time went on, the Western companies realized that it was not easy to work in the Russian Federation. The Westerners were convinced that they would be welcome in Russia because they brought technology, capital, expertise, and management skills. However, this is not how Russian oilmen looked at it. First of all, given the accomplishments of the Soviet industry, in their view, the

Russian oil business did not need outsiders telling them what to do. Second, it did not need substantial direct foreign participation in order to transfer technology. If Russians needed technology, they could purchase it on the world market from service companies. Third, neither the government nor the emerging Russian political and business elites saw any reason to give up control over any substantial assets or resources to foreign companies.

However, the energy liberalization was taken to an extreme under Boris Yeltsin. As a result, production fell by half and the Russian energy sector was divided between emerging

Russian oligarchs and foreign groups.108

Therefore, the mid 1990s, roughly from 1993 to 1998, were the critical years when the Russian majors – large integrated oil companies – emerged out of the Soviet ruins.

These companies were also involved in various energy projects in former Soviet Union area. Basically, the history of Russia’s relations to these newborn states under Yeltsin was closely tied to that of the CIS – the Commonwealth of Independent States – founded in

December 1991, at the same time as the USSR was dissolved. The bottom-line strategic

107 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World, (London – New York: Penguin Books, 2011), pp. 32-33. 108 See Thane Gustafson, Wheel of Fortune: The Battle for Oil and Power in Russia (Cambridge, MA – London: Harvard University Press, 2012), pp. 63-98.

73 threat was that “if Russia is to remain a great power able both to defend itself and to assert some influence globally, it needs to retain its sphere of influence in the CIS.”109 After the first two years of euphoria for the West under Foreign Minister Kozyrev, the CIS surfaced as the expressed highest priority in Russia’s foreign relations. The new Foreign Policy

Concept that followed in April 1993 placed the CIS countries first. This attempt to redefine Russia’s role in the world was largely promoted and handled later in 1996 by

Foreign Minister Evgeny Primakov, a survivor from the Soviet era, former Director of

Foreign Intelligence Service (1991-1996), and stern proponent of Russia’s national interests. As foreign minister, Primakov gained respect at home and abroad with a reputation as a tough but pragmatic supporter of Russia’s interests and as an opponent of

NATO’s expansion into the former Eastern bloc. During Primakov’s tenure of office, the principles of “statehood” and “great power” status, both critical tenets of the statist school of foreign policy thinking, became central. Geopolitics of power balancing within a political-military context resurfaced, with Primakov arguing that “Russia is both Europe and Asia, and this geopolitical location continues to play a tremendous role in formulating its foreign policy.”110

Russian oil companies also started to pursue their interests in resource rich former

Soviet Union republics, including Kazakhstan, Turkmenistan, Uzbekistan, and Azerbaijan.

In the 1990s, Lukoil, one of the biggest and most influential Russian oil company, was the first to embrace the going-abroad policy. Though its President and CEO, Vagit Alekperov, preferred to position Lukoil as a Western-style corporation driven by commercial rather

109 Barry Buzan and Ole Waever, Regions and Powers: The Structure of International Security, (Cambridge: Cambridge University Press, 2003), pp. 409-410 110 Andrei Tsygankov, Russia’s Foreign Policy: Change and Continuity in National Identity, (Lanham: Rowman & Littlefield Publishers, 2010), p. 98.

74 than political goals, the company often acted as petroleum ambassador of Russia in the

Caspian region. Alekperov’s close ties with Victor Chernomyrdin, Russia’s prime minister for most of the 1990s, helped Lukoil’s advances abroad. Russia wanted to maintain its long-standing political and economic dominance of the Caspian region and launch an energy dialogue with the former republics. This policy was implemented, largely through

Lukoil’s efforts, by maximizing Russian involvement in Caspian petroleum projects

(where drilling costs were much lower and daily output of wells much higher than in West

Siberia) and by controlling export routes out of this landlocked region. For example, the cooperation of Azerbaijani and Russian sides in the oil sector after the attainment of independence of Azerbaijan can be associated with the supply of Azerbaijani oil via the

Baku-Novorossiysk pipeline. SOCAR (the State Oil Company of Azerbaijan) carries transshipment of oil from its own fields through Novorossiysk, as well as transfers oil of joint ventures and companies operating onshore in Azerbaijan. Filling the pipeline with oil started in October of 1996. The Baku-Novorossiysk oil pipeline in the northern direction is

1,330 km long. SOCAR is the operator of the Azerbaijani part of the pipeline which is 231 km long. The Russian sector is operated by state-owned Transneft.111

The Caspian Pipeline Consortium (CPC) is another major crude oil transportation project with the participation of Russia, Kazakhstan, and leading international oil and gas companies, initially created in 1992 for construction and operation of a trunk pipeline more than 1.5 thousand kilometers long. The primary source of crude oil is from prolific fields in

Western Kazakhstan with additional crude oil from Russian producers. The crude is transported through the CPC pipeline to the company’s terminal in the Novorossiysk area

111 Socar. “Transportation.” Accessed February 24, 2017. http://www.socar.az/socar/en/activities/transportation/baku-novorossiysk-oil-pipeline

75 where the crude oil is loaded on ocean going tankers for further delivery to the world markets. The Russian Federation is a major shareholder (24%) of the CPC.112

Gas industries in both landlocked Kazakhstan and Turkmenistan (the latter being the largest gas producer in Central Asia) were tied to another Russian giant, Gazprom and its pipeline network, meaning that their economies depended on Russia, who could potentially bar them from European markets. When the USSR collapsed, Turkmen gas was gradually isolated from its main consumers, mainly through the efforts of Gazprom, who used its monopoly on gas pipelines. As a result, exports of Turkmen gas declined. In 1995, however, Gazprom allowed Turkmenistan access to the largely insolvent former Soviet republics. In December 1999, Turkmenistan and Gazprom signed an agreement on the delivery of Turkmen gas, mainly to Ukraine. When Gazprom could not produce enough gas in Russia to satisfy domestic demand and meet export commitments, utilizing Turkmen gas eased pressure on the company.

Gazprom also tried to establish a foothold in Europe. By the mid-1990s Gazprom had several other joint ventures in Germany, Austria, Italy, France, and Finland among others – to deliver gas to domestic consumers. During this period, gas exports to Europe were essential to the Gazprom, which suffered from low domestic gas prices and rampant non-payments. Shipments to solvent European consumers permitted Gazprom to subsidize its loss-making gas deliveries within Russia and to the former Soviet republics, the latter for political reasons. Gazprom delivered gas to Western Europe under long-term take-or- pay contracts and in 1995 the company accounted for 21 percent of the Western European

112 Caspian Pipeline Consortium. “Shareholders.” Accessed February 24, 2017. http://www.cpc.ru/EN/about/Pages/Shareholders.aspx

76 market and 55 percent of the Eastern European market.113 It offered the lowest-priced gas and delivered gas to consumers without any disruptions.

During this same period, Russia was becoming the principle supplier of solid fuels to Europe. Europe’s dependency upon imported Russian gas and oil has only increased.

Heavily conditioned by the increasing salience of energy security, as well as the rising sense of importer and exporter relationship characterizing both sides, the political relationship between the two has become far shakier.

The breakdown of the Soviet Union created both the need and the basis for a new

Russian foreign policy, and the first years of ‘reactive’ pro-Western foreign policy in the euphoric Kozyrev period only emphasized the lack of a strategic outlook. During the

1990s, the weak Russian government, also lacking a coherent energy strategy, often hindered rather than helped the international expansion of its energy companies.

Nevertheless, Russia has used its energy power in an attempt to influence the foreign and security policies of its neighbors, including former Soviet Union republics and some

European countries.

By the end of Yeltsin era, Russia’s foreign and energy policies were neither consistent nor effective. The Primakovian re-orientation was finally verbalized after several years of progress in the National Security Concept and the Foreign Policy Concept of the Russian Federation (both adopted in 2000) which became, in effect, the ‘starting point’ for President Putin’s foreign policy. Following the political turmoil and economic depression of the Yeltsin years, under Vladimir Putin’s leadership Moscow entered an era

113 See Gazprom. “Operations | Gas and Oil Production.” Accessed February 24, 2017. http://www.gazprom.com/about/production/extraction/

77 of political stability and economic rebound. Russia’s oil and gas reserves were key to economic recovery, to the entry of Russia into the world economy, and to restoring

Russia’s status as a great power. Given their strategic importance, President Putin called for the government to reassert control over the country’s natural resources. The spike in the price of oil that marked Putin’s first term in office and bonanza of hydrocarbon revenues added a new dimension to his foreign policy.

Conclusion

Energy appears to be something of a new addition to the foreign policy agenda of great powers. Michael Klare, who undertook the intensive studies of oil, geopolitics, and

American foreign policy, claims that petroleum had been an important source of conflict throughout the twentieth century as well as other resources, including water, land, and minerals. Now, in the twenty-first century, oil seemed to have outpaced all others in its potential for sparking armed violence.114 Throughout the years, oil has come to be treated differently from other trade commodities. Hans Morgenthau argues that oil has brought about a shift in the relative power of the politically leading nations.115 Oil has been treated as a resource so vital to American prosperity that access to it is protected at any cost, including the use of military force. In the name of national security, military force has frequently been used over the past fifty years to guarantee access to foreign petroleum and to protect such key suppliers as Saudi Arabia and Kuwait from internal revolt and external attack. Another large issue was how U.S. policy can affect Soviet energy developments

114 Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency, (New York: Metropolitan Books, 2004), p. xiii 115 Hans Morgenthau, Kenneth Thomson, Politics Among Nations: The Struggle for Power and Peace (New York: Sixth Edition, Alfred A. Knopf, 1985), p. 133

78 and in light of that how whatever leverage is available might be used to meet important

U.S. policy goals. Oil has also occupied the Soviet Union’s General Secretary’s personal attention, and there surely were issues facing Soviet leaders that touched on both foreign policy and domestic economic policy. Energy was one of the most important sectors in the

Soviet economy where developments had foreign policy implications. Ed Hewett argues that Soviet energy ministers needed Western technology to minimize the cost and meet supply plans. The state of the energy sector influenced the costs the Soviet Union had to bear in meeting its commitments to Eastern Europe, commitments whose basic rationale stemmed from the fundamental importance of Eastern Europe in Soviet foreign policy.116

Later, after the dissolution of the Soviet Union, energy, as a foreign policy tool, frequently took a shape of coercion in Russian politics. Russia has oil, natural gas and pipeline leverage over the most states of post-Soviet space, either in the form of oil and gas dependency or pipeline access.

The control (whether actual or potential) that oil-producing nations exert over the price of oil has become one of the main factors of instability in the world economy and one of the main sources of inflation. For the majority of importer states, energy security means security of supply, in which the stable delivery of affordable energy is paramount. For exporter states, security of demand requires access to a developed and reliable market for the long-term sale of energy products. For both sides, energy assurance can be swiftly undermined by price shocks and unexpected reductions of supplies. OPEC oil embargo in

1973, oil glut caused by falling demand in 1986, and Asian financial crisis of 1998 have been defining economic events and have shaped how policymakers and economists address

116 Ed Hewett, Energy, Economics, and Foreign Policy in the Soviet Union, (Washington D.C.: The Brookings Institution, 1984), p. 195.

79 oil price shocks [see Figure 2]. In recent years, a large literature on the economic determinants of oil price fluctuations has also emerged.

In the 1990s, post-Soviet space has continued to be a domain where U.S. and

Russian interests clash over policy issues, including energy. Given the NATO expansion, the importance of these regions cannot be understated as it provides buffer zones for

Russia. The great powers have always battled for control over important sources of wealth and advantage. The United States, and Russia have a vital stake in the global flow of oil, and both of them seek some degree of control over the political dynamics of the most important oil-producing regions.

At this point, energy becomes a foreign policy issue for both countries. In the end of 1990s, Russia’s international energy policy had two main objectives: influence and profit whereas the U.S. federal government assumed a direct role in the pursuit of imported energy. And while the government had sometimes relied on private U.S. energy companies to initiate links with foreign producers, it has borne full responsibility for ensuring the security of American overseas energy investments. My further research on both case studies from the year 2000 until the present will reveal how governing elites of both countries integrate their energy and foreign policies and how widely the U.S. and Russian national security, bilateral and multilateral diplomacy are affected by energy concerns.

Figure 2.

Oil Prices and Chronology of the Major Events of the 20th Century

60 Asian%Financial% Crisis%Begins%price% declines%to%$12.72% 50 IranJIraq%War%Begins% in%1998 Collapse%of% 11JSep the%Soviet% 40 Union%

ArabJIsraeli% 30 October%War%in% Great% 1973J$3.29%in% Start%of% 1974J$11.58% WW%I% Depressio 20 n%Begins% $0.81 End%of% OPEC% Ford% $1.27 WW%I% formed% Model%T% $1.98 Start%of% $1.90 10 introduced%% WW%II% End%of%WW% $0.72 $1.02 II%$1.05

0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Year US dollars per barrel

Source for the oil prices: BP Statistical Review of World Energy, June 2014.

CHAPTER FOUR

Case Study # 1: The United States of America

As we observed in the previous chapter, the policies of the United States throughout the twentieth century were guided by national interest defined by economic growth. Energy and the need to secure its supply have been fundamental to the U.S. national security, and from President Carter’s time, down to the present day, the doctrine bearing his name has remained untouchable. Consequently, each of President Carter’s successors has expanded the level of U.S. military involvement and operations in the

Middle East to assure the unimpeded flow of oil from this region. The preservation of the

American way of life was another motive for action for the successive U.S. administrations. Andrew Bacevich argues that what Americans wanted for themselves and demanded from their government was freedom, defined as more choice, more opportunity, and above all greater abundance, measured in material terms. That meant that they (along with other developed nations whose own prosperity helped sustain that of the United

States) needed assured access to cheap oil and lots of it.117 The United States too often dealt with energy policy in domestic rather than international terms. James Schlesinger, the first U.S. Secretary of Energy under President Carter claims, that for too long, energy policy has not been sufficiently connected to foreign policy, either conceptually or institutionally.118

117 Andrew Bacevich, The New American Militarism: How Americans are Seduced by War, (Oxford – New York: Oxford University Press, 2013), p. 182. 118 James Schlesinger, “Foreword”, Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C. - Baltimore: Woodrow Wilson Center Press and the Johns Hopkins University Press, 2005), p. XV.

In the new millennium, the supplies of oil to the U.S. were more diverse than in

1970s. The United States depended less on OPEC – though its members remained major suppliers – and received increasing imports from non-OPEC regions such as Western

Hemisphere, Africa, and Eurasia. Given the U.S. dependency on imported energy, there was a need to develop a foreign policy that creates an economic environment where enough priority is assigned to the objectives of oil market stability and security of supply.

The following international developments explain why energy became a matter of concern for U.S. foreign policy:

First, the competition in world markets has resulted in oil and gas deals that included political arrangements in addition to commercial terms and the concern was that the system of open markets was unable to ensure secure supply. The economic rise of

China and the Chinese oil investments in Middle East, Africa, and other parts of the world, include the funding for infrastructure and communications projects, in addition to the oil agreements. Obviously, these investments include equity stakes for state-controlled

Chinese companies. Rapidly growing consumers such as China and India create fears in scarce of supply which will have unfavorable political and economic consequences for the

United States and other Western importing countries. To prevent an interruption of oil supply and keep the open market of oil and gas trading, undoubtedly involve matters of foreign policy, such as dialogue and coordination with other countries to find measures to prevent or diminish the consequences of the supply disruption.119

Second, the control over oil revenues gave exporting countries the flexibility to ignore U.S. policies and interests. Over 80 percent of world reserves are controlled by

119 National Security Consequences of U.S. Oil Dependency, Report of an Independent Task Force, (Washington D.C.: Council of Foreign Relations, 2006), pp. 26-30.

83 governments and their national oil companies. Of the world’s twenty largest oil companies, fifteen are state-owned. The government-owned national oil companies have assumed a preeminent role in the world oil industry.120 Because of huge revenues from oil and gas exports, Russia and other producer countries are capable to pursue interests inimical to

U.S. national security and foreign policy.

Third, political alignments based on supplier and consumer relationship and dependency on imports, constrain the ability of the U.S. foreign policy to achieve its objectives in different regions. Russia and China challenge the U.S. influence in Central

Asia, especially in Kazakhstan, Turkmenistan, and Uzbekistan. China, Russia and even several Western European countries continue to invest in Iran. China is also aligning its relationship with Saudi Arabia, Nigeria, Sudan, and Latin American countries to secure oil supplies. Beijing, developing its political and economic relations with Russia, can be expected to push the United States out of the Asia-Pacific region.

These systemic incentives of how to maintain oil market stability, security of supply, and conduct relations with producers caused a new set of questions: how foreign policy can best advance U.S. energy interests and how energy can be used to advance broader U.S. foreign policy goals. Therefore, the new millennium is a starting point to investigate how the U.S. governing elites make an effort to integrate their foreign and energy policies, and as argued by Michael Klare, “George W. Bush assumed the presidency at a critical juncture in this evolution of U.S. energy policy.”121

120 Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power, (New York – London: Free Press, 2009), p. 770. 121 Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency, (New York: Metropolitan Books, 2004), p. 56.

The remaining sections of this case study are concerned with the examination of the integration of foreign and energy policies by the Bush and Obama administrations. First, I focus on the Bush administration, the National Energy Plan and its implementation in the

Western Hemisphere, Middle East, Africa, Russia, Caspian Sea, and Asia. Second, I discuss oil and gas production boom in the United Sates and the institutionalization of energy and foreign policy integration by the Obama administration. Then I analyze

President Obama’s energy and foreign policies in the same oil and gas producing regions.

In the Quantitative Approach section, a correlation analysis is performed to identify the possible relationship between top U.S. petroleum suppliers and U.S foreign policy. Both sections on the Bush and Obama administrations have brief conclusions, and in addition, the main conclusion of this case study focuses on the evidence analyzed in this Chapter to support the hypothesis and theory of this research.

The Energy Strategy of the Bush Administration

By the end of the 20th century, the United States had passed a disquieting benchmark of energy dependency: for the first-time the country had imported more than half of the oil it consumed – and the proportion had a tendency to expand. In the summer and fall of 2000, the eastern United States and much of the Midwest suffered a shortage of oil and natural gas. George W. Bush inherited this deteriorating situation when he became president in January 2001. Bush acknowledged the necessity for a major review of energy policy and during his second week in office, he created the National Energy Policy

Development Group (NEPDG), a new body staffed with the Secretary of State Colin

Powel, the Secretary of Energy Spencer Abraham, the Secretary of Commerce Donald

Evans, the Secretary of Treasury Paul O’Neill, the Secretary of the Interior Gale Norton

85 and other high-officials from the Government and the White House. The former oilman

George W. Bush122 had nominated Vice-President Dick Cheney as the Chairman of the

NEPDG. Cheney was the former CEO of Halliburton, one of the world’s largest providers of services and products to the energy industry, and obviously he had close ties with senior executives at other large energy companies. Lawrence Lindsey, the Assistant to the

President for Economic Policy and member of the NEPDG has been on the Enron payroll as a consultant. Secretary of the Army Thomas White had been vice chairperson of Enron

Energy Services before joining the administration. Of the top 25 energy industry donors to the Republican Party before the November 2000 election, 18 corporations sent executives or representatives to meet with Vice-President Cheney, or members of the task force and its staff. These companies include ExxonMobil, the Enron Corporation, the Southern

Company, BP, the TXU Corporation, FirstEnergy, Anadarko Petroleum, and Peabody

Energy owned by Lehman Brothers. The Marathon Oil Corporation, among other oil companies, chose to have the American Petroleum Institute to represent them before the task force. 123 These companies paved the way for the rise of an administration that ultimately supported much of the agenda of the energy industry.

The major task of the NEPDG was to examine every aspect of the nation’s energy situation, including the issue of the imported petroleum. The major review of energy policy was finally addressed at the highest levels of government. The first seven chapters of the

122 The White House Archives. “Biography of President George W. Bush.” The White House. Accessed July 2, 2017. https://georgewbush-whitehouse.archives.gov/president/biography.html George W. Bush’s family made much of its fortune under the following Texas special state laws for private ownership of oil: the landowner owns the oil beneath his or her land, but any adjacent landowner who drains that oil out gets title to it. See more in Leif Wenar, Blood Oil: Tyrants, Violence, and the Rules That Run the World, (Oxford - New York: Oxford University Press, 2016), p. 205. 123 See Don van Natta Jr. and Neela Banerjee, “Top G.O.P. Donors in Energy Industry Met Cheney Panel,” The New York Times, March 1, 2001; Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency, (New York: Metropolitan Books, 2004), p. 58.

Cheney’s team report, formally titled the National Energy Policy (NEP), focus on domestic energy output, particularly by removing or diminishing the regulatory bars to greater exploitation of domestic oil, gas, and coal deposits. The eighth and final chapter,

“Strengthening Global Alliances: Enhancing National Energy Security and International

Relationships,” begins with the following statement, “U.S. national energy security depends on sufficient supplies to support U.S. and global economic growth.”124

Consequently, the NEPDG explains that the United States should secure more petroleum from abroad because it cannot generate enough oil from domestic reserves. This chapter underlines the U.S. need for foreign oil and urges the president and administration “to make energy security a priority of our trade and foreign policy.”125

National Energy Policy was a commitment to the expansion of the U.S. oil economy. During this period, the U.S. was the world’s second largest natural gas producer and the third largest oil producer. The United States consumed over 25 percent of the oil produced worldwide, slightly more than half of which it imports. In 2000, nearly 55 percent of U.S. gross oil imports came from four countries: 15 percent from Saudi Arabia,

14 percent each from Canada and Mexico, and 12 percent from Venezuela. [See Figure 3]

The security of U.S. energy supply was enhanced by several factors characterizing U.S. diplomatic and economic relationships with these top four suppliers. These factors range from geographic proximity and free trade agreements to integrated pipeline network, reciprocal energy-sector investments, shared security commitments, and in all cases, long-

124 National Energy Policy Development Group (NEPDG), National Energy Policy (Washington D.C.: White House, May 2001), p. 8-1. 125 Ibid, p. 8-18.

87 term reliable supply relationships.126 Basically under the Bush administration, the relationship between energy and foreign policy and national security has been visualized primarily in terms of supply side. The regional analyses would demonstrate how further integration of energy and foreign policies implemented by the Bush administration.

Western Hemisphere

During the presidential campaign of 2000, then candidate George W. Bush made it clear that the United States would chart its own course in foreign policy. Bush indicated that under his administration, the United States would return to a more unilateralist policy characterized by U.S. action consistent with what the president perceived to be in the national interest. He stressed his desire to strengthen ties south of the border (especially to

Mexico), rather than look primarily to the traditional allies in Europe.127 Later, September

11, 2001 terrorist attacks against New York City and Washington, D.C. transformed the

Bush administration foreign policy. Nevertheless, increased U.S., Canadian, and Mexican energy cooperation remained in the administration’s agenda and, through American economic links in the North America Free Trade Agreement (NAFTA), advanced each country’s economic security.

An integrated network of Canada – U.S. natural gas and oil pipelines demonstrates the seamless nature of North American energy trade. The Enbridge Pipeline System operates one of the world’s longest crude oil and liquids transportation system with 17,018 miles in length of active pipe, including multiple paths.128 According to a report by the

126 National Energy Policy Development Group (NEPDG), National Energy Policy (Washington D.C.: White House, May 2001), p. 8-4. 127 Joyce P. Kaufman, A Concise History of U.S. Foreign Policy, (New York: Rowman & Littlefield Publishers, 2010), p. 140. 128 Enbridge. “Who We Are.” Accessed on August 27, 2017. https://www.enbridge.com/about-us/our- company.aspx

North American Energy Working Group (NAEWG), a panel established as a result of a

2001 agreement between U.S., Canada, and Mexico, North America constitutes the largest single energy market in the world. In 2000, the three countries combined were responsible for 31 percent of total world oil demand and nearly one-third of world natural gas consumption. Canada supplied 27 percent of total U.S. net energy imports, and Mexico another 9 percent.129

The further harmonization and integration of energy markets in North America has been emphasized by the White House through the initiative of the Security and Prosperity

Partnership (SPP) signed by President Bush with Canada and Mexico in Waco, Texas on

March 23, 2005, which has been superseded by the annual North American Leaders’

Summit after SPP became inactive in 2009. The issue of delivering natural gas to the North

American market at a competitive, affordable price remained one of the main issues, especially for the Bush administration and Canadian government. Despite Mexico’s then

President Vicente Fox’s best efforts, reform proposals to increase Mexican production of natural gas met with limited success in the Mexican Congress.130 Natural gas demand in three North American countries was estimated to grow at an average annual rate of 2.2 percent between 2001 and 2025. The United States alone would account for two-thirds of the total North American increase in consumption, mainly driven by natural-gas-fired combined-cycle electricity generating plants.131 This issue is equal to oil supply as an

129 North America Energy Working Group (NAWEG), “North America: The Energy Picture,” June 2002. Accessed August 27, 2017. http://www.eia.doe.gov/emeu/northamerica/engnaweg.htm 130 Shirley Neff, “North America,” Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C.: Woodrow Wilson Center Press, Baltimore: The Johns Hopkins University Press, 2005), p. 370. 131 U.S. Energy Information Administration (EIA), International Energy Outlook 2003 (Washington D.C.: EIA, 2003), p. 47.

89 energy security challenge for twenty-first century, and LNG supplies are also critical to maintaining environmental quality in the United States, Canada, and Mexico.

To address the importance of U.S. foreign and energy policies in the Western

Hemisphere, including Latin America, could take volumes. When recognizing the difficulties in reducing U.S. dependence on foreign oil, it makes political and economic sense to have Latin American countries as major suppliers. Latin America has more than

110 billion barrels of proven reserves,132 and it could increase its oil production capacity from 10.6 million barrels per day in 2001 to 17.1 million barrels per day by 2025.133 Bruce

Bagley and Betty Horwitz argue that in the face of the September 11, 2001 terrorist attacks and the subsequent U.S. invasions of Afghanistan (2001) and Iraq (2003), the U.S. effectively abandoned multilateralism in its approach to Latin America and Western

Hemisphere security. Since the heyday of the Cold War, the U.S. has been gradually reducing bilateral assistance to Latin America. Although U.S. aid was about the same in

2005 as it had been in 1985, when adjusted for inflation it has fallen by a third. Moreover, almost half of U.S. aid in 2005 went to just five countries on the front line of the drug war:

Colombia, Peru, Bolivia, Ecuador, and Mexico. The only other countries receiving aid were Haiti and Central American states. Military assistance was similarly concentrated in the drug war states, which received 85 percent of the total.134 However, the hemisphere’s rich natural resource base of oil and natural gas (Venezuela, Mexico, Brazil, Argentina,

Columbia, Trinidad and Tobago, and Ecuador) provides an opportunity for greatly

132 British Petroleum Statistical Review of World Energy, June 2002, p. 22. 133 U.S. Energy Information Administration (EIA), International Energy Outlook 2003 (Washington D.C.: EIA, 2003), p. 235. 134 Bruce Bagley and Betty Horowitz, Latin America and the Caribbean in the Global Context: Why Care about the Americas? (New York – London: Routledge, 2016), pp. 191-192.

90 increased trade with the United States. In 2001, only Venezuela, Mexico, and Columbia contributed approximately a quarter of U.S. imports. Nevertheless, the profoundly troubled

Andean region continued to be a source of particular concern. This may help explain why

John Maisto, former ambassador to Venezuela (1997 – 2000) who also advised the U.S.

Southern Command on Columbia policy, was picked as Bush’s special assistant for Latin

America at the National Security Council. The messy situation in Columbia and

Venezuelan President Hugo Chavez, who has shaken the region with greater force than any other leader since Fidel Castro, have been watched closely by the Bush Latin America team, CIA and the Department of State. To some extent, reflecting the fact that Venezuela is a major oil supplier to the United States, John Maisto advocated a fairly retrained, “wait- and-see posture” when he was U.S. ambassador to Venezuela.135 This factor played a major role that Chavez’s unpredictable and unsettling moves in the international arena, and his authoritarian impulses at home, did not push the limits of U.S. tolerance during the

Bush administration.

Ambassador Roger Noriega, U.S. Assistant Secretary of State for Western

Hemisphere Affairs, emphasized trade and energy among other issues in his speech on the

Administration’s Western Hemisphere policy at the Council of Americas on January 6,

2004. He mentioned that the U.S. will remain committed to the Free Trade Area of the

Americas (FTAA) process and move forward with the Central America Free Trade

Agreement (CAFTA). According to Noriega, these new agreements will be built on the historic success of NAFTA. “Trade represents the best opportunity for the countries in this hemisphere to attract the capital that they need to create jobs and sustain a level of

135 Michael Shifter, “Latin American Policy and the Bush Administration,” Foreign Policy in Focus. January 1, 2001. Accessed September 1, 2017. http://fpif.org/latin_american_policy_and_the_bush_administration/

91 economic growth.”136 However, when the FTAA missed the targeted deadline in 2005, the

United States not wanting to lose any chance of hemispheric trade expansion moved in the direction of establishing a series of bilateral trade deals.

In the meantime, U.S. energy companies continued to play an important role in bringing capital and expertise to produce oil and gas, generate power, and build related infrastructure in the region. ExxonMobil had a long-term presence and operations in

Mexico, Argentina, Brazil, Colombia, Guyana, and the Caribbean region.137 Chevron was among the largest international oil companies in Venezuela, where it partnered with the national oil company, Petróleos de Venezuela, S.A., on several projects. Other areas of exploration and production in the region included Argentina, Brazil, Colombia, Mexico and Suriname.138 U.S. oil service providers like Sclumberger, Baker Hughes, Halliburton, and National Oilwell Varco have for decades played an unusually large role in Latin

American countries oil sector, as their local companies struggled to manage all their oil and gas fields.

During the Bush presidency, the first goal of the diversification plan was to increase imports from Canada and Latin America, notably Mexico, Venezuela, and

Colombia. The National Energy Plan portrayed these three countries as especially attractive because they have large reserves, are relatively close, and fall within the

American sphere of influence.139 These countries needed substantial investment in new

136 Roger Noriega, “The Bush Administration Western Hemisphere Policy,” Remarks to the Council of Americas, New York, January 6, 2004. U.S. Department of State Archive. Accessed on September 2, 2017. https://2001-2009.state.gov/p/wha/rls/rm/27975.htm 137 ExxonMobil. “Worldwide Operations | Locations.” Accessed on September 2, 2017. http://corporate.exxonmobil.com/en/company/worldwide-operations/locations 138 Chevron. “Exploration and Production in Latin America.” Accessed on September 2, 2017. https://www.chevron.com/operations/exploration-production/exploration-production-in-latin-america 139 National Energy Policy Development Group (NEPDG), National Energy Policy (Washington D.C.: White House, May 2001), Chapter 8, pp. 9-10.

92 infrastructure to boost production in older fields and start the development of new ones; and again, they had significant problems assembling the necessary capital. Mexico’s constitution banned foreign investment in its oil industry. Columbia’s government could not expand its oil exports to the United States, because of the continuing civil war. 140

Venezuela’s Hugo Chavez, opposes any deeper American involvement and became the strongest advocate in OPEC for cutting back on production and observing quotas.

Moreover, two non-Hemispheric actors, namely China and Russia made their contributions to the regime in Venezuela. Since 2005, China became a principal source of credit for the

Venezuelan government and PDVSA, and gradually a key source of a broad range of goods and services fundamental to economic sustainability of the regime. Russia focused more on arms sales and investments in the petroleum sector.141 Overcoming these barriers to American investment and business was not easy but doing so was vital to the Bush energy plan and foreign policy.

Many Latin American countries, including Mexico and Venezuela, view natural resources as a political expression of their sovereignty. For instance, the 2001

Hydrocarbons Law in Venezuela (which restricted private participation, particularly in exploration and production), the hydrocarbons law submitted to Bolivian Congress on July

2004 (which contemplates giving the state greater control by strengthening the state-owned oil company), and the failure of the energy sector restructuring process in Mexico are good

140 Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency, (New York: Metropolitan Books, 2004), p. 65. 141 See more on this subject in R. Evan Ellis, The Influence of Extra-Hemispheric Actors on the Crisis in Venezuela, Testimony to the Subcommittee on Western Hemisphere Affairs, Foreign Affairs Committee, U.S. House of Representatives, September 13, 2017.!!

93 examples of governments retaining and regaining state control over natural resources.142

Some countries’ fiscal budgets are also highly dependent on oil revenues. Oil prices remained high during the period of the Bush presidency [see Figure 4] and there were no incentives for the political establishments in these countries, including Mexico and

Venezuela pay the short run political cost and change this pattern.

U.S. Secretaries of State and Commerce, their respective departments, and U.S. major oil companies have been working with Venezuela, Mexico, and Brazil to improve the energy investment climate for the growing level of investment flows between the

United States and each of these countries. President Bush directed Secretaries of State,

Energy, and Commerce to work through the Summit of the Americas Hemispheric Energy

Initiative to develop stable and effective regulatory frameworks and foster reliable supply sources of all fuels within the region. U.S. Departments of State, Commerce, and Energy were continuously engaged in a dialogue through the North American Energy Working

Group to develop closer energy integration among Canada, Mexico, and the United States.

NAEWG provides a necessary framework for coordination of these polices. The United

States diplomacy started to play an important role during the Bush administration to develop a strategy toward the consolidation of an energy security plan for the hemisphere.

However, highly “oil dependent” fiscal revenues of the regional countries, the absence of solid institutions, corruption, the uncertainties surrounding their energy-producing sectors, particularly those related to social unrest and legal restrictions were still obstacles to achieve the goals of the U.S. policies in the Western Hemisphere. Nevertheless, U.S.

142 Luis Tellez Kuenzler, “Latin America,” Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C.: Woodrow Wilson Center Press, Baltimore: The Johns Hopkins University Press, 2005), p. 388.

94 energy companies and investors remain key partners in developing energy resources and supplying markets in the Western Hemisphere. The U.S. – Latin America energy cooperation and initiatives will be developed even more persistently by the Obama administration and its foreign policy.

Middle East

President George W. Bush entered the White House with every intention of expanding the nation’s combat capacity. This determination reflected both his own views and those of his close associates, many of whom had served in senior Pentagon positions in prior Republican administrations. As Michael Klare has observed, these individuals – notably Vice-President Dick Cheney, Secretary of Defense Donald Rumsfeld, and Deputy

Secretary of Defense Paul Wolfowitz – “had used their years of exile from power during the Clinton era to devise plans for an expanded U.S. military establishment; now, back in power again, they quickly moved to put their plans into effect.”143 Needless to say that using the military actively as an instrument of foreign policy was the hallmark of Bush administration foreign policy after September 11 attacks. Al-Qaeda’s direct assault on the

United States left thousands of dead and exposed the acute vulnerabilities of the world’s sole superpower. The Bush administration and U.S. Congress made a decision to send military force to attack Afghanistan and oust the Taliban government, which supported and harbored the terrorist groups of Al-Qaeda. The Bush doctrine, as it became known, became the basis for the later decision to go to war against Iraq in March 2003 and to do so without the formal backing of the international community. Formally titled the “National Security

Strategy of the United States,” this document, which was issued in September 2002, puts

143 Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency, (New York: Metropolitan Books, 2004), p. 67.

95 forward a new direction for American foreign policy. The Bush doctrine clearly and unequivocally states that the United States is justified in going to war preemptively against any group that potentially threatens country or its allies and it will not hesitate to act alone if necessary.144 The formulation “global war on terror” became the centerpiece of the Bush presidency and his administration’s foreign policy. Later in 2005, in the midst of wars in

Afghanistan and Iraq, President Bush tried to summon the spirit of Woodrow Wilson and assured his fellow citizens that “the expansion of freedom in all the world” had become

“the calling of our time.”145 Charles Glaser and Rosemary Kelanic claim that although

Washington has had a number of interests in the Persian Gulf over the years, including preventing nuclear proliferation and fighting terrorism, the main rationale for its involvement has always been to keep oil flowing.146 “With Saddam gone,” Richard Clarke,

Special Advisor to the President on cybersecurity has written, “the U.S. could reduce its dependence on Saudi Arabia and could open up an alternative source of oil.”147 Andrew

Bacevich argues that Bush and members of his inner circle conceived of this as a great crusade and using armed might to secure American preeminence across the region, especially in the oil-rich Persian Gulf, remained the essence of U.S. policy.148 Therefore, in the months before 9/11 and years after, not only President Bush himself but leading

144 The National Security Strategy of the United States of America, September 2002. Accessed September 6, 2017. https://www.state.gov/documents/organization/63562.pdf 145 See more on President Bush and Wilsonian idealism in Andrew Bacevich, “Saving “America First”: What Responsible Nationalism Looks Like,” Foreign Affairs, September/October 2017, pp. 59- 60; Joyce P. Kaufman, A Concise History of U.S. Foreign Policy, (New York: Rowman & Littlefield Publishers, 2010), pp. 151-152. 146 Charles Glaser and Rosemary Kelanic, “Getting Out of the Gulf: Oil and U.S. Military Strategy,” Foreign Affairs, January/February 2017, p. 122. 147 Richard Clarke, Against All Enemies: Inside America’s War on Terror, (New York: Free Press, 2004), p. 283. 148 Andrew Bacevich, The New American Militarism: How Americans are Seduced by War, (Oxford – New York: Oxford University Press, 2013), pp. 201-202.

96 members of American foreign policy elite fashioned a comprehensive strategy for

American domination of the Persian Gulf and the procurement of ever-increasing quantities of petroleum.

In 2001, the United States imported 800,000 barrels per day from Iraq.149 In 2003, the immediate issue for the U.S. governing elites was the state of the Iraqi oil industry. A more stable Iraq, it was certainly thought, would be a more reliable provider and could expand its capacity. Just prior to the war, Deputy Defense Secretary Paul Wolfowitz had declared that, with restored oil exports, Iraq “can really finance its own reconstruction.” He suggested that Iraq could soon be at 6 million barrels per day, double its current capacity.150 The U.S. Government even put an advisory group on Iraqi oil and involved professionals with considerable international experience such as Philip Carroll, former

CEO of Shell Oil U.S.A, who was succeeded by Rob McKee, Head of Worldwide

Exploration and Production for ConocoPhillips.151 However, during the war, Iraqi oil industry was under attack. The former Baath Party and other Sunni activists put high priority on sabotaging the industry. Pipelines were blown up; the export line, from Iraq into Turkey and to the Mediterranean, was shut by repeated bombings. The Department of

Defense was preparing to seize the oil fields and installations at the very outbreak of hostilities in order to keep Iraqi forces from sabotaging them. According to the Wall Street

Journal, the special U.S. Army units assigned to occupy fields were also being given intensive training in oil-field maintenance.152 At the same time, the Department of Defense

149 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World, (New York: Penguin Books, 2011), p. 149. 150 Thomas Ricks, Fiasco: the American Military Adventure in Iraq, 2003-2005, (New York: Penguin Books, 2007), pp. 96-98. 151 See more in Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World, (New York: Penguin Books, 2011), pp. 143-160. 152 Chip Cummins, “Oil Companies Aid Military Planners,” The Wall Street Journal, March 27, 2003.

97 awarded a multibillion-dollar, no-bid contract to a subsidiary of Dick Cheney’s old firm,

Halliburton to repair any damage Iraqi forces inflicted on the installations during the war and to commence the rehabilitation of the country’s massive oil infrastructure once it was over.153 Nevertheless, the great expectations for the rapid expansion of Iraqi output were being punctured. Before the war in Iraq, some poorly informed commentators suggested that liberated Iraq could counterbalance and replace Saudi Arabia154 since after 9/11 Saudi

Arabia became viewed as the main source of terrorism, or at least its funding and inspiration. But senior officials in the Bush administration with experience in Gulf, recognized that this was not realistic. The basic strategic deal between the United States and Saudi Arabia is quite straightforward: Saudi Arabia, a major U.S. oil supplier, uses its influence over oil markets to try to stabilize the world economy, and in return, the United

States protects it militarily. Lief Wenar and Rachel Bronson claim that strategic alliance between Saudi Arabia and the United States has always been much deeper than oil-for- security, and for that reason, it has been extremely durable.155 The American alliance with the Saudi royals lasts for more than seventy years – since 1945, when Franklin D.

Roosevelt met modern Arabia’s founding king at the Great Bitter Lake.

153 Chip Cummins and Thaddeus Herrick, “Halliburton Units Tapped to Oversee Oil Fields in Iraq,” The Wall Street Journal, March 7, 2003; Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency, (New York: Metropolitan Books, 2004), p. 100. 154 J. Robinson West, “Saudi Arabia, Iraq, and the Gulf,” Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C.: Woodrow Wilson Center Press, Baltimore: The Johns Hopkins University Press, 2005), p. 214; Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World, (New York: Penguin Books, 2011), p. 149. 155 Leif Wenar, Blood Oil: Tyrants, Violence, and the Rules That Run the World, (Oxford - New York: Oxford University Press, 2016), pp. 89-90; Rachel Bronson, Thicker than Oil: America’s Uneasy Partnership with Saudi Arabia, (New York: Oxford University Press, 2006).

However, after 9/11, Saudi Arabia was alarmed by the possible change in U.S. approach since fifteen out of nineteen September 11 hijackers were Saudi nationals,156 accusations of senior Saudi officials of complicity with terrorist attacks on the United

States, and the attack on the U.S. consulate in Jeddah in late 2004, have led some to raise serious questions about the Kingdom’s ability to function as a regional partner of

Washington and stable supplier of oil. Many policymakers, mainstream media, including the Washington Post, the Wall Street Journal, the New York Times, and think tanks such as the Rand Corporation were particularly strident in their demands for strong punitive measures against Saudi leaders. The first and possibly most formidable challenge facing the U.S. diplomacy in this period was to preserve the status quo in Saudi Arabia and stabilize bilateral relations with the country that has proven reserves of almost 300 billion barrels of oil. Secretary of State Colin Powell and the Department of State bore the cost of doing damage control and made clear that those views bandied by certain individuals and institutions do not reflect the views of the President nor of the U.S. government.

Dismissing charges that the Saudis had been slow to cut off funds for charities linked to terrorism, the State Department’s spokesperson expressed gratitude for “steps taken by

Saudi Arabia to help combat the problem of terrorism financing.” The two countries might have “differences” on some issues, but not enough to damage their warm and cooperative relationship.157 President Bush himself has been communicating with Crown Prince

Abdullah, the kingdom’s de facto ruler and Prince Bandar bin Sultan, Saudi Arabia’s ambassador to the United States to assure them of Washington’s continued friendship. To

156 Central Intelligence Agency. Accessed September 11, 2017. https://www.cia.gov/news- information/speeches-testimony/2002/DCI_18_June_testimony_new.pdf 157 Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency, (New York: Metropolitan Books, 2004), p. 85.

99 replace the royal family with a handpicked successor regime, as Washington did in Iraq was out of question because of the close ties between Republican leaders and the House of

Saud. Many prominent Saudis had long-term close relations with senior American officials, including the two Bush presidents and investors in the multibillion-dollar Carlyle

Group, one of the world’s largest investment firms, managed by well-known and influential Republicans, including former secretary of defense Frank Carlucci and former secretary of state James Baker III.158 The American diplomacy produced required results:

Saudi Royal family reached a consensus on how to respond. A tough crackdown has been undertaken, terrorists arrested or shot, funding to potential al Qaeda sympathizers cut off, and extremist clerics pressured to moderate their position.159 Saudi Arabia was seen in

Washington as a better partner in the war on terrorism and energy security was achieved by the United States on the basis of a realistic recognition of the continuing role of Saudi

Arabia as a swing producer not only in the region but also in the global oil market.

While sanctions on Iran, another major OPEC member were maintained during the

Bush presidency, the Departments of State and Energy and major U.S. energy companies improved dialogue and business with other Gulf producing countries, such as Kuwait,

Bahrain, Qatar, and the United Arab Emirates. These countries initiated to open up areas of their energy sectors for foreign investments. The pervasive instability of the Persian Gulf undoubtedly portends the continued presence of a large American force in the region. At the beginning of 2004, approximately 160,000 American soldiers were deployed in Iraq

158 For background, see Tim Shorrock, “Crony Capitalism Goes Global,” The Nation, March 14, 2002, Accessed September 12, 2017. https://www.thenation.com/article/crony-capitalism-goes-global/, Mark Fineman, “Arms Buildup Is a Boon to Firm Run by Big Guns,” The Los Angeles Times, January 10, 2002. Accessed September 12, 2017. http://articles.latimes.com/2002/jan/10/news/mn-21728 159 J. Robinson West, “Saudi Arabia, Iraq, and the Gulf,” Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C.: Woodrow Wilson Center Press, Baltimore: The Johns Hopkins University Press, 2005), p. 214.

100 and Kuwait, and several tens of thousands more were stationed in Qatar, Bahrain, and the

United Arab Emirates and aboard ships in the Gulf proper.160 Some of these forces were recalled when the regime of Saddam Hussein was overthrown in Iraq and the fighting in

Iraq receded but the White House and the Department of Defense could not lower

American troop strength too far without impairing U.S. Central Command’s161 ability to ensure the outward flow of Persian Gulf oil. The Bush administration chose to preserve

America’s existing posture by tying some part of its karma to Persian Gulf oil.

Beyond the Latin America and Persian Gulf: Sources of Diversification

The United States needed as much as African, Russian, Caspian, and European oil as it can get. Such diversity of supplies enhances security. The goal of the U.S. energy and foreign policies is to achieve balance between OPEC and non-OPEC oil in such a way that energy security could be maintained over the long term. This goal was more achievable by the alignment of interest between the United States and major oil producers on oil price – with both sides seeking to avoid either prices that are too high, with their destabilizing economic effects, or prices that are too low, with their negative impact on oil production.

The Bush administration’s National Energy Policy enhanced an inter-Department process and coordination within the U.S. government dealing not only with major producers of oil and gas in Western Hemisphere and Middle East but also with other producers, including the post-Soviet region and Africa. The Departments of Energy and

Commerce were kept informed of all foreign policy matters that had an important foreign

160 David Vine, How U.S. Military Bases Abroad Harm America and the World, (New York: Metropolitan Books, 2015), pp. 150-152. 161 U.S. Central Command (Centcom) is the center for all U.S. military operations in the Persian Gulf region, including in Iraq and Afghanistan. It is based in at MacDill Air Force Base in Tampa, Florida.

101 policy aspect. Energy issues were involved in U.S. bilateral relations with Russia,

Kazakhstan, Azerbaijan, Nigeria, Angola, Algeria, Libya, Egypt, U.K., and Norway.

Needless to say, that in the beginning of 2000s Nigeria, Angola, and Norway were among top ten suppliers of U.S. oil imports.162 In addition, energy was also involved in U.S. relations with China and India, rising consumers of 2000s. By 2007, China’s energy demand reached the level that some prominent Chinese and foreign institutions had earlier projected for 2020. In the six years, between 2001 and 2007, China’s demand for energy increased by 90 percent. About three-quarters of this growth came from coal, which met more than two-thirds of China energy requirements. During this period, China became the world’s second largest oil consumer after the United States (2003) and the world’s third largest oil importer behind the U.S. and Japan (2004).163 China’s demand for energy was also reshaping geopolitical relations in different regions and its rise often viewed as a threat to the United States energy and environmental security. The 2001 National Energy

Policy lists eight countries whose reserves were of potentially great advantage to the

United States. These countries included Mexico, Venezuela, Colombia, Russia,

Kazakhstan, Azerbaijan, Nigeria, and Angola.164 U.S. Department of State devoted particular attention to the majority of this group, especially to Russia, Caspian Sea, and

West Africa states. In the meantime, Chinese national oil companies also accelerated their efforts to enhance supplies from these regions.

162 National Energy Policy Development Group (NEPDG), National Energy Policy (Washington D.C.: White House, May 2001), p. 8-4. 163 Erica Downs, “China’s Energy Rise,” in Brantly Womack ed., China’s Rise in Historical Perspective, (New York: Rowman & Littlefield, 2010), pp. 174-176. 164 National Energy Policy Development Group (NEPDG), National Energy Policy (Washington D.C.: White House, May 2001), pp. 8-9 – 8-14.

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In a view of the central importance of energy throughout the world and especially in Russia, it was no surprise that energy has been at the core of U.S.-Russian relations.

According to Angela Stent, the U.S.-Russian energy relationship had three major components: the U.S. private sector’s involvement in Russian oil and gas development; the

U.S. government’s attempts to cooperate with Russia on a variety of energy projects; and

U.S. efforts to encourage the diversification of pipeline routes that transport Eurasian energy to Europe, reducing Russia’s pipeline monopoly.165 The latter goal has led to conflicts with Russia, while the former two have promoted a more cooperative relationship. The Russian energy sector remains attractive for U.S. business because of

Russia’s vast resources. In May 2002, President Bush met with Russian president Vladimir

Putin to talk about how these assets might be more exploited. Together they inaugurated the U.S.-Russian Energy Dialogue, with the aim of developing “bilateral cooperation in the energy sphere,” facilitating “commercial interaction between U.S. and Russian companies in the exploration, production, refining, transportation, and marketing of energy,” and promoting the “access to world markets for Russian energy.”166 Five months later, the

Department of Energy convened the U.S.-Russian Commercial Energy Summit at the

James A. Baker III Institute for Public Policy in Houston to solidify ties between the two nation’s energy firms. This inaugural summit brought together senior government officials and corporate executives representing more than 70 American and Russian energy companies. It discussed, inter alia, U.S. investment in the Russian energy sector as well as

165 Angela Stent, The Limits of Partnership: U.S. – Russian Relations in the Twenty-First Century, (Princeton and Oxford: Princeton University Press, 2014), p. 193. 166 White House Press Office Archive, “President Bush, President Putin Announce New Energy Dialogue,” May 24, 2002. Accessed September 18, 2017. https://georgewbushwhitehouse.archives.gov/news/releases/2002/05/20020524-8.html

103 future U.S. imports of Russian oil. 167 U.S. companies have the advanced technology that

Russia needs and the experience of executing complex megaprojects. For their part,

American companies need access to major new oil resources. Russian oil production of 8.2 million barrels per day in 2003 nearly broke even with the level of oil production in Saudi

Arabia, where 2003 crude oil output reached 8.8 million barrels per day.168 U.S. major oil and service companies such as ExxonMobil, Chevron, ConocoPhillips, Halliburton,

Schlumberger, and Weatherford, one of the pioneers of foreign investment in the Russian oil and gas industry, expanded their operations in Russia and continued to identify new business opportunities. However, the Russian state was becoming a larger player in the energy sector, and the government was taking control over the country’s natural resources.

American energy companies had to deal more with top Russian officials and unanticipated changes in the rules of the game related to taxes and environmental regulations. Russia’s growth in oil production, steady rise of oil prices during this period, and Russia’s substantial role as a natural gas and oil provider to Europe have also brought major changes to the Russian foreign and energy policy. Moscow’s opposition to U.S.-backed oil and gas pipelines that bypass Russia and transport Caspian hydrocarbons and Russian gas cutoffs to Ukraine in 2006, which affected the United States’ European allies in the depths of winter, caused major strains in relations between Washington and Moscow. Although the energy dialogue continued, the U.S.-Russian relationship remained in a familiar pattern of a selective partnership characterized by incremental improvements on some issues and

167 Rice University’s Baker Institute for Public Policy, “U.S. – Russia Commercial Energy Summit,” October 1-2, 2002. Accessed September 18, 2017. https://www.bakerinstitute.org/events/1427/; For a full report of the conference, see “U.S. – Russia Commercial Energy Summit,” Baker Institute Study, No. 21 February 2003. 168 U.S. Energy Information Administration (EIA), Country Analysis Briefs, June 2004 and May 2004.

104 continued disagreements over the most difficult issues – arms control, missile defense,

Iran, and the post-Soviet space. In June 2002, the United States unilaterally withdrew from the Anti-Ballistic Missile Treaty, leading to its termination. In 2004, with the U.S. government as a driving force, Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia formally became members of NATO by depositing their instruments of accession with the United States government.169 President Putin and other Russian officials were opposing NATO expansion with a question why NATO continued to grow movement, when the enemy it was created to fight, the Soviet Union, had ceased to exist.

However, Vice President Dick Cheney, Secretary of Defense Donald Rumsfeld and other conservatives as well as hawkish Democrats remained suspicious of Russia and eager to expand NATO. They argued that no American president should reject demands from

Eastern European nations to escape Russian dominance.

Another issue between Washington and Moscow was the U.S. government’s enormous attention to the Caspian region, particularly to oil-rich Azerbaijan and

Kazakhstan. The driver of the United States here, in part, was energy security with the key manifestation of U.S. government interest for the Baku – Tbilisi – Ceyhan oil pipeline

(BTC) which will bring Caspian oil to markets via Turkey, and in part, to create countries that could stand on their own without Russia and become U.S. allies.

The Baku – Tbilisi – Ceyhan pipeline has been described as “the first great engineering project of the twenty-first century.” It had to cross some 1,500 rivers and water courses, high mountains, and earthquake fault zones, while meeting stringent environmental and social impact standards. The first barrel arrived at the Turkish oil port

169 NATO, “Seven New Members Join NATO,” March 29, 2004. Accessed September 19, 2004. http://www.nato.int/docu/update/2004/03-march/e0329a.htm

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Ceyhan, on the Mediterranean coast, in the summer of 2006 welcomed in a grand ceremony.170 This pipeline is operated by the British Petroleum which is the shareholder of the BTC with 30.1 percent, and Chevron owns only 8.9 percent of shares and ExxonMobil

– 2.5 percent.171 The U.S. energy companies were not interested to play a major role in financing this project because they could not see a return on the investment, particularly when measured against risk. The reason Chevron and ExxonMobil agreed to take a piece of the action was because of their desire to remain on good terms with Azerbaijan, where both invested in producing oil. Washington’s goal was to bypass Russia and exclude the participation of the Russian energy companies from the ownership and operation of BTC.

Eventually, U.S. long-term diplomacy achieved its goals with the involvement of British,

French, Italian, and Turkish energy companies – the Russian territories and Russian companies were out of the BTC project.

Pipeline projects like BTC from Azerbaijan or Caspian Pipeline Consortium

(CPC)172 from Kazakhstan took nearly a decade to complete, placing a particular burden on the direction of U.S. policy. Julia Nanay argues that the U.S. commitments to specific countries and pipelines have to last at least as long as it takes to construct these projects, but even longer if security guarantees are required. Supporting pipelines in difficult geopolitical regions demands a political and military commitment, and it costs money.173

170 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World, (New York: Penguin Books, 2011), p. 63. 171 BP Azerbaijan, “Baku – Tbilisi – Ceyhan Pipeline,” Accessed September 20, 2017. http://www.bp.com/en_az/caspian/operationsprojects/pipelines/BTC.html 172 Only two U.S. companies have equity interest in CPC: Chevron - 15 percent and ExxonMobil – 7.5 percent. The major shareholders of the CPC are Russian Federation (24 percent) and Kazakhstan via national oil company KazMunaiGaz (19 percent). See more on the CPC at http://www.cpc.ru/en 173 Julia Nanay, “Russia and the Caspian Sea Region,” Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C.: Woodrow Wilson Center Press, Baltimore: The Johns Hopkins University Press, 2005), p. 146.

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Alternatively, if U.S. policy can change within the course of a decade – the time it takes to plan, finance, and build a major pipeline – why should companies be willing to invest in policy-dependent projects?

In Azerbaijan and Kazakhstan, the national oil companies – Socar and

KazMunaiGaz – are the dominant domestic actors. Azerbaijan experienced a dynastic presidential transition, as power was handed from father to son. Azerbaijan’s president,

Ilham Aliyev rules country since 2003, secured the third five-year term in the 2013 presidential elections, and keeps his hand in the oil sector.174 Kazakhstan’s president

Nursultan Nazarbayev governs this republic even before the collapse of the Soviet Union, and his family is closely involved with the oil sector and state company KazMunaiGaz.

However, the regime does not matter for Washington when it comes to energy security and if there is a possibility to extend the Carter doctrine.175

Chevron and ExxonMobil had a continuous business presence in Azerbaijan and

Kazakhstan. Besides above mentioned participation in the pipeline projects, Chevron has an 11.3 percent and ExxonMobil – 8 percent interest in the Azerbaijan International

Operating Consortium (AIOC) which produces hydrocarbons from the Azeri-Chirag-

Guneshli field in the Caspian Sea.176 Chevron holds a 50 percent interest and ExxonMobil

– 25 percent in Tengizchevroil, company formed between Kazakhstan and Chevron, which operates the Tengiz, one of the world’s deepest giant oil fields. Estimated oil in place in

174 One of the best descriptions of the activities of the Aliyev dynasty and accumulated wealth, property and business interests around the world is featured at the CNBC film Filthy Rich: The Aliyev Family of Azerbaijan 175 See more about other cases on this subject in Cynthia Arnson and Michael T. Klare, Supplying Repression: U.S. Support for Authoritarian Regimes Abroad, (Washington D.C.: Institute for Policy Studies, 1981). 176 Chevron. “Azerbaijan.” Accessed September 23, 2017. https://www.chevron.com/worldwide/azerbaijan; Exxon Mobil. “Azerbaijan.” Accessed September 23, 2017. http://corporate.exxonmobil.com/en/company/worldwide-operations/locations/azerbaijan#About

107 the Tengiz field is 25.5 billion barrels with 1.6 billion barrels in the Korolev field.177

Chevron is also a partner in Kazakhstan’s other major onshore oil and gas producing field,

Karachagansk. And ExxonMobil is a member of the North Caspian Operating Company which is exploring and developing Kashagan structure in the Caspian Sea and several other fields. Kashagan holds many billions of barrels of oil reserves, and its size and scale will probably exceed even that of Tengiz.178 However, the Kashagan field is described as one of the most complex projects in the world. Specialists familiar with its conditions have called it “the project from hell.” The field lies in very shallow waters that freeze over for about five months each year. The geology is extremely complex. The oil deposits have large sulfur concentrations and contain many pockets of natural gas under very high pressure.

The result has been significant cost overruns and disappointment to the Kazakh government.179

Asked to describe America’s interests in Kazakhstan, Secretary of Defense

Rumsfeld replied, “it is Caspian security, the Western portion of Kazakhstan [where most of the oil lies], which is important to this country.”180 U.S. government and its diplomacy have always supported the activities of the American major oil companies in this region since the break-up of the Soviet Union and coordinated their efforts to ensure more U.S. presence and to break Russia’s monopoly of control over the transportation of oil from the region. However, as Angela Stent claims, President Putin’s international energy policy had

177 Tengizchevroil. “Company Overview.” Accessed September 23, 2017. http://tengizchevroil.com/about/overview 178 North Caspian Operating Company. Accessed September 23, 2017. http://www.ncoc.kz/en/ncoc 179 Carole Nakhle, “Caspian Oil and Gas in a World of Plenty,” Geopolitical Intelligence Services, June 12, 2017. Accessed September 23, 2017. https://www.gisreportsonline.com/caspian-oil-and-gas-in-a-world-of- plenty,energy,2240.html 180 Michael Klare, Blood and Oil: The Danger and Consequences of America’s Growing Petroleum Dependency, (New York: Metropolitan Books, 2004), p.139

108 two main objectives: influence and profit.181 The Caspian region was not an exception. Ten years after President Clinton exploited America’s Cold War victory to prize the oil reserves around the Caspian Sea from Russian influence, Putin had begun to reverse the humiliation of his predecessors.

U.S. foreign policy and the business of U.S. major oil firms face also intense competition from their Chinese rivals. During the Bush presidency, this competition between the United States, Russia, and China for energy resources of this region and other areas became even more severe. Chinese and Russian national oil companies began to expand their international portfolios worldwide. All three powers have a vital stake in the global flow of oil, and all three seek some degree of control over the political dynamics of oil producing regions.

One of these regions is West Africa which in 2003 accounted for about six percent of global oil supplies and about three percent of the world’s proved oil reserves, according to the U.S. Energy Information Administration’s estimates. In addition, more than ten percent of U.S. crude oil imports originated in West Africa, with Nigeria and Angola both ranking among top ten oil suppliers to the United States. The discovery and exploration of oil in the Gulf of Guinea, Cameroon, Equatorial Guinea, Sao Tome e Principe, as well as exploration projects in Chad, Gabon, and Democratic Republic of Congo pushed the Bush administration to declare the region an area of vital interest. In 2002, Secretary of State

Colin Powell was dispatched to Angola and Gabon for a goodwill visit. On 13 September

2002, President Bush met with leaders from eleven West African countries (including

Angola, Cameroon, Chad, Democratic Republic of Congo, Equatorial Guinea, Sao Tome e

181 Angela Stent, The Limits of Partnership: U.S. – Russian Relations in the Twenty-First Century, (Princeton and Oxford: Princeton University Press, 2014), p. 190.

109

Principe, Gabon, and Nigeria). The discussions encompassed a wide range of issues including, foreign investments in energy sector. Additionally, the U.S. energy secretary, during a congressional hearing in June 2002, stated that "energy from Africa plays an increasingly important role in our energy security."182 The Bush administration reinvigorated the U.S. – Africa Trade and Economic Cooperation Forum and the U.S. –

Africa Energy Ministerial process. In 2002, Secretary of Energy, Spencer Abraham co- hosted U.S. – Africa Energy Ministerial meeting attended by some 40 African energy ministers. Departments of State, Energy, and Commerce deepened bilateral and multilateral engagement to promote more receptive environment for the U.S. oil and gas trade, investment, and operations. ExxonMobil, Chevron, and ConocoPhillips were involved in the exploration and production of crude oil and natural gas in the region, operating several joint venture concessions and production sharing contracts. The Bush administration clearly has developed a comprehensive energy policy in West Africa regardless of all difficulties related to the ethnic clashes, civil strife, disruptions to oil production, corruption, kidnapping, extensive environmental damage, and human rights abuses by domestic military and law-enforcement organizations.

***

By the end of 2003, the Bush’s administration’s energy policy had become thoroughly integrated into the nation’s security strategy and foreign policy. The National

Energy Policy document developed by Vice President Dick Cheney and senior officials of the administration in consultations with the energy industry executives paved the way for this integration of energy and foreign policies of the United States. However, this study

182 J. Anyu Ndumbe, “West African Oil, U.S. Energy Policy, and Africa’s Development Strategies,” Mediterranean Quarterly, 15 (1), 2004, pp. 99-100.

110 takes into consideration that the activities of U.S. private energy companies in many cases linked to their commercial activities and not to grand strategy.

Contrary to popular belief, a surprisingly large amount of U.S. imported energy, from oil and natural gas to electricity, comes not from the volatile Middle East but from the Western Hemisphere, primarily Canada, Mexico, and Venezuela with other Latin

American countries accounting for much of the rest. In the beginning of the 21st century,

Canada was already U.S. largest source of imported oil, [See Figure 5] including crude oil and refined petroleum.

In June 2002, during the hearing called “Oil Diplomacy: Facts and Myths Behind

Foreign Oil Dependency,” before the Committee on International Relations of the House of Representatives, Alan Larson, Undersecretary of Economic, Business, and Agricultural

Affairs of the Department of State announced that U.S. energy security policy has two main goals: first, to assure that reliable supplies of energy are available at reasonable prices so that U.S. can foster the growth and prosperity of its economy; and secondly, to ensure that America's foreign policy cannot be held hostage by foreign threats to use control over oil supplies as a weapon.183

The foreign policy of George W. Bush can be divided into two parts: before or after

September 11, 2001.184 Some experts and commentators claim that Bush had distanced himself from the oil industry in the aftermath of the terrorist attacks of September 11.185

183 In 2002, 52 percent of the oil used in America was imported from foreign sources. See more on this subject in House of Representatives, Committee on Internationals Relations. One Hundred Seventh Congress, Second Session. June 20, 2002., p. 31. Accessed September 25, 2017. http://commdocs.house.gov/committees/intlrel/hfa80291.000/hfa80291_0.HTM 184 Joyce Kaufman, A Concise History of U.S. Foreign Policy, (New York: Rowman & Littlefield, 2010), p. 140. 185 Tom Bower, Oil: Money, Politics, and Power in the 21st Century, (New York – Boston: Grand Central Publishing, 2009), p. 232.

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Leon Fuerth argues that consumption during the Bush presidency was left to the marketplace, and so too were the consequences. Global warming is the largest of those consequences, and here the administration’s legacy is its repudiation of the Kyoto Protocol and its failure to introduce any credible substitute.186 The global war on terror was the highest foreign policy priority of President Bush, however, during both terms of his presidency, his administrations, regardless of the fact that administration's National Energy

Plan was written before the events of September 11th, consistently executed the main guidelines of this document making energy security another priority of U.S. foreign and trade policy.

In July 1997, the Senate unanimously passed a resolution (S. Res. 98) stating that it would not ratify any global climate treaty that would seriously harm the U.S. economy or that failed to require developing countries to reduce their emissions within the same time frame as the developed countries.187 Despite this Senate opposition, the Clinton

Administration agreed to the Protocol five months later and then signed it on November

12, 1998.188 Recognizing the lack of support for the Protocol on Capitol Hill, however,

President Clinton never submitted it to the Senate for ratification -- a step necessary for it to take effect.

The Kyoto Protocol sets targets for industrial countries, such as the United States,

Japan, Canada, and members of the European Union to reduce their overall emissions of

186 Leon Fuerth, “Energy, Homeland, and National Security,” in Jan Kalicki and David Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C.: Woodrow Wilson Center Press, Baltimore: The Johns Hopkins University Press, 2005), p. 420.! 187 S. Res. 98, introduced by Senators Robert Byrd (D-WV) and Chuck Hagel (R-NE), was passed by a vote of 95-0 on July 25, 1997. 188 Susan Fletcher, "Global Climate Change: The Kyoto Protocol," Congressional Research Service, CRS Report for Congress No. RL30692, September 28, 2000, p. 2

112 greenhouse gases by at least five percent below 1990 levels between 2008 and 2012.189

The Clinton Administration committed the United States to a seven percent reduction from

1990 levels and agreed that developing countries -- including China, India, and Brazil -- should be excluded from these targets. President Bush walked away from the Kyoto

Protocol. According to his administration logic, it would drastically increase the cost of gasoline, electricity, and fuel oil for Americans, cause significant harm to the U.S. economy, and will place the United States at a competitive disadvantage. This logic also covers up the big benefactors of his energy policy i.e. the U.S. oil and coal industry and its business perspectives, which has a powerful lobby with the administration and conservative Republican legislators.

The Bush administration has been also making the alignment of interests between the United States and major oil producers, including OPEC and non-OPEC on oil price.

This goal was achievable seven years until on July 11, 2008 oil price peaked historic high at $147.27 per barrel and then due to financial global recession dropped to $33.87 five months later. In 2008, OPEC cut production by more than five million barrels per day in response to lower prices, trying to stabilize markets by decreasing the amount of available crude. But the issue of oil prices and their impact on the U.S. energy policy was already a burden of next U.S. administration.

Since President Bush took office, the Federal Government has invested more than

$44 billion for climate-change and energy security programs, including more than $22

189 Carbon dioxide (CO2), one of six greenhouse gases covered by the Protocol, receives the most attention from climate scientists and policymakers. The others are methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. See Larry Parker, "Global Climate Change: Market-Based Strategies to Reduce Greenhouse Gases," Congressional Research Service, CRS Report for Congress No. IB97057, August 24, 2000, p. 3.

113 billion for technology research, development, and demonstration. Technology funding for

2008 alone exceeded $4 billion. In 2008, President Bush removed the executive prohibition on offshore exploration for oil and gas. In addition, the President successfully pressured Congress to remove its ban on offshore exploration and took steps to attempt to increase domestic oil exploration to reduce the U.S. dependence on foreign oil.190 The bright example how U.S. government and lawmakers support American energy companies and do not tolerate competition in America itself is a bid for Unocal, America’s ninth- largest oil and natural gas company, operating in the Gulf of Mexico, Southeast Asia, and

Azerbaijan. With a market value of $14 billion, Unocal’s principal attraction was 1.8 billion barrels of proven reserves, especially in Burma and Thailand. In June 2005, a

Chinese state-controlled CNOOC (China National Offshore Oil Corporation) made a $18.5 billion unsolicited bid for Unocal two months after Unocal agreed to be sold to Chevron for $16.8 billion. David O’Reilly, CEO of Chevron (2000-2009) urged politicians in

Washington to block CNOOC’s bid with an argument that national oil companies were competing on unfair terms against the privately-owned oil majors. O’Reilly claimed that

CNOOC’s higher bid was feasible because the Chinese government had provided interest- free loans. CNOOC’s bid was rejected, and Washington made clear that such a deal could threaten U.S. national security and violate the rules of fair trade. O’Reilly improved

Chevron’s offer to more than $17 billion in cash and stocks and completed the transaction.

On the first day of the Chevron’s ownership, Unocal’s name disappeared and the employees who remained were absorbed into Chevron’s organization. According to

Senator Byron Dorgan (D-ND), the Chinese energy needs are under federal review and the

190 Energy Security for the 21st Century. The White House Archives. President George W. Bush. Accessed September 28, 2017. https://georgewbush-whitehouse.archives.gov/infocus/energy/

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Senate will specifically examine the issue of Chinese state-controlled companies purchasing U.S. oil firms.191

Constant coordination of the work among the U.S. Congress, Departments of State,

Energy, Commerce, and major U.S. oil firms diversified U.S. sources of supply and expanded international engagement with consumer and producer nations. American ambassadors conveyed to host government officials worldwide that energy security is a priority of U.S. trade and foreign policy, and that energy cooperation would be an important measurement of overall bilateral relationship.192 U.S. diplomacy has been involved in all regions of the major oil fields and facilities to support the business of

American energy companies.

The Obama Administration and Energy

As a presidential candidate, Obama’s areas of emphasis regarding U.S. foreign policy were on the need to rebuild alliances and institutions that he felt had been undermined during the years of the Bush administration and to allow the United States to regain its place as a global leader and enhance common security.193 Despite criticism by his Republican opponents, Obama remained adamant that the most effective foreign policy would not be based solely on reliance on military might, but it must be balanced with cooperation, negotiation, and diplomacy.

191 Tom Bower, Oil: Money, Politics, and Power in the 21st Century, (New York – Boston: Grand Central Publishing, 2009), pp. 321-322, and Ben White, “Chinese Drop Bid to Buy U.S. Oil Firm,” The Washington Post, August 3, 2005. 192 Statement by Alan Larson, Undersecretary of Economic, Business, and Agricultural Affairs, Department of State. Hearing at the House of Representatives, Committee on Internationals Relations. One Hundred Seventh Congress, Second Session. June 20, 2002., p. 31. Accessed September 28, 2017. http://commdocs.house.gov/committees/intlrel/hfa80291.000/hfa80291_0.HTM! 193 See more in Barack Obama, “Renewing American Leadership,” Foreign Affairs, July/August 2007, pp. 2- 16.

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The financial disaster of 2008, the $17 trillion national debt, and failing infrastructure left Americans fearful about imperial overstretch. Experts and scholars have taken to writing books with titles that counsel the United States to be “The Frugal

Superpower” and assert that “Foreign Policy Begins at Home.”194 It was hard to believe that only few years ago the orthodox formula for economic success was known as the

Washington consensus. As Barack Obama made clear in his inaugural speech in January

2009, he came into office facing critical challenges to the United States foreign and security policy. President Obama has struggled to escape from the legacy of George W.

Bush’s presidency: Americans were tired of war, and he decided that the administration will no longer be employing the phrases “war on terror” and “enemy combatants,” words that defined the Bush’s administration’s foreign policy after the events of September 11,

2001. Obama also understood that diminished relations with the Islamic world was one of the major results of the Bush administration policies. He decided to begin the process by making a speech about U.S. relations with the Islamic world in April and June 2009, several months after taking office, and to do so in Muslim countries.195 However, rather than renovate geopolitics, President Obama has been taken up by the economy and the wars in Iraq and Afghanistan. A year into his second term, he could no longer lay so much blame for his difficulties on President’s Bush policies. The world was changing, and the rise of China and Russia was challenging the U.S. interests in different regions. It is hardly

194 See Michael Mandelbaum, The Frugal Superpower: America’s Global Leadership in a Cash-Strapped Era, (New York: Public Affairs, 2011); Richard Haas, Foreign Policy Begins at Home, (New York: Basic Books, 2014). 195 See the White House Archives. President Barack Obama. “Remarks by President Obama to the Turkish Parliament,” Ankara, Turkey, April 6, 2009. Accessed September 28, 2017. https://obamawhitehouse.archives.gov/realitycheck/the-press-office/remarks-president-obama-turkish- parliament and “The President’s Speech in Cairo: The New Beginning,” Cairo, Egypt, June 4, 2009. Accessed September 28, 2017. https://obamawhitehouse.archives.gov/issues/foreign-policy/presidents- speech-cairo-a-new-beginning

116 business as usual when foreign countries lay claim to nearly 50 percent of publicly held

U.S. government debt, with an emerging rival -- China -- holding about one-quarter of the

American treasuries owned by foreigners. Charles Kupchan argues that unless or until the rest of the world is forced to choose sides, most developing countries will keep their options open, not automatically aligning themselves with Washington and follow

America’s lead.196

And as the global demand for petroleum rose and more of these emerging countries began to rely on oil and gas rich regions for their energy, U.S., China, and Russia already bolstered their strategic positions trying to curb the influence of their rivals. China and

Russia were leading the way in the strategic deployment of state-owned enterprises and not only in oil and gas industries. Their ultimate motive was not only economic (maximizing growth), but political – maximizing the state’s power. Ian Bremmer argues that the United

States, European Union, and other free market economies are likely to find common cause in protecting themselves against the effect of this trend and that rivalry between state- driven capitalism and free-market capitalism will shape the next generation in international politics.197

Starting from his campaign, President Obama’s energy policy was defined with a focus on creating green jobs and a more comprehensive environmental policy. The president has first set extreme environmental objectives, and then calibrated the nation’s energy agenda to suit those goals. Nevertheless, the facts of the 2008 election show that

Obama was the favorite of major oil companies such as ExxonMobil, Chevron, and BP.

196 See Charles A. Kupchan, “The Decline of the West: Why America Must Prepare for the End of Dominance,” The Atlantic, March 20, 2012. 197 Ian Bremmer, “The Long Shadow of the Visible Hand,” The Wall Street Journal, May 22, 2010.

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Exxon donated $117,946 to Obama and $73,326 to McCain. Chevron pumped $77,875 into Obama war chest and $61,313 to McCain. Oil and energy interests donated more than twice as much as to McCain as Obama, $2.4 million versus $902,000.198

There is also a great irony that spans the presidential terms of George W. Bush and Barack Obama. President Bush, widely viewed as a Texas oil man, presided over eight straight years of declining U.S. crude oil production. In the year 2000, just before President

Bush took office, U.S. crude oil production averaged 5.8 million barrels per day, according to the Energy Information Administration. During President Bush's last year in office,

2008, U.S. crude oil production averaged 5.0 million barrels per day. The irony is that

President Obama - who was not viewed as a friend of the oil and gas industry - has presided over rising oil production in each of the first seven years he has been in office.

From that low point in 2008, U.S. oil production has grown each year to reach 9.4 million barrels per day in 2015 -- a gain of 88% during Obama's presidency. This is in fact the largest domestic oil production increase during any presidency in U.S. history.199 [see

Figure 6] Increased domestic production of oil and gas driven by private sector has been viewed as motivating force for the muscular United States energy diplomacy, power that exists in tandem with the Obama administration’s efforts to wean the world off fossil fuels.

Oil’s Comeback

After falling for more than two straight decades after 1985, during the first term of the Obama presidency U.S. crude oil production has risen for four consecutive years, and

198 Danielle Kurtzleben and Paul Bedhard, “Exxon, Chevron, BP Greased Obama’s Campaign,” U.S. News, March 14, 2011. Accessed September 28, 2017. https://www.usnews.com/new/blogs/washington- whispers/2011/03/14/exxon-chevron-bp-greased-obamas-campaign 199 Robert Rapier, “The Irony of President Obama’s Oil Legacy,” Forbes, January 15, 2016. Accessed September 28, 2017. https://www.forbes.com/sites/rrapier/2016/01/15/president-obamas-petroleum- legacy/#4d04bdc1c10f!

118 in 2012, it posted its largest one-year increase since the dawn of the oil industry more than

150 years ago. Meanwhile, in 2011, natural gas surpassed coal as the United States’ biggest source of domestically produced energy, thanks to surging output and plunging prices. And all this growth in U.S. fossil fuel production has not prevented the rise of zero- carbon energy sources: the amount of electricity generated from cutting-edge renewables – wind, solar, and geothermal – had doubled since 2008, and prices have plummeted.200

This optimism about the U.S. energy picture was a relatively new development.

According to Tom Donilon, National Security Advisor (2010 – 2013), when President

Barack Obama took office, energy experts predicted that the United States would need to double its imports of liquefied natural gas over the next five years. However, thanks to

U.S. innovation and technology nearly all of those estimates have been turned on their head. Domestic oil and gas production has increased every year Obama has been in office

– in 2013 at seven billion barrels of oil per day, the highest level in over two decades. The

International Energy Agency projects that the United States could be the world’s largest oil producer by the end of the decade. And the United States is already the top natural gas producer in the world. Tom Donillon argues that the United States’ new energy posture allows Washington to engage in international affairs from a position of strength. Increasing

U.S. energy supplies acts as a cushion that helps reduce country’s vulnerability to global supply disruptions and price shocks. It also affords Washington a stronger hand in pursuing and implementing its international security goals.201

200 Michael Levi, “America’s Energy Opportunity: How to Harness the New Sources of U.S. Power,” Foreign Affairs, May/June 2013, p. 92. 201 See Tom Donilon, “Energy and American Power,” Foreign Affairs, May/June 2013.

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This crude oil and gas production surge happened in the United States despite the policies of the Obama administration and not because of it. President Obama coincidentally happened to enter office just as the shale oil boom in the U.S., driven by the private sector, was getting started. Few businesspeople have done as much to change the

United States as George Mitchell, who is also known as a father of fracking. Gregory

Zuckerman in the book “The Frackers”, claims that “Mitchell’s impact eventually might even approach that of Henry Ford and Alexander Graham Bell.”202 Mitchell did not discover shale gas and oil: geological surveys had revealed them decades before he started.

He did not even invent fracking: it had been in use since the 1940s. Mitchell worked and invested with partners approximately $6 million dollars over a ten-year period in the 1980s and 1990s to make fracturing an economically viable process.203 Mitchell was convinced that immense reserves trapped in shale rock deep beneath the surface could be freed. He spent decades perfecting techniques for unlocking them: injecting high-pressure fluids into the ground to fracture the rock and create pathways for the trapped oil and gas (fracking) and frilling down and then sideways to increase each well’s yield (horizontal drilling). The result was a revolution – fracking turned the American energy market upside down. In

2000, shale gas represented just 1% of American gas supplies. In 2013, it was 30% and rising. In August 2012, the Energy Information Administration released a comprehensive report on the then reality of shale energy. The EIA used the best data available at the time, which had been gathered by December 2011. They pegged American shale oil output at 2 million barrels per day, about the same as Norway’s shale output. In December 2013, only

202 “From Sunset to New Dawn,” The Economist, November 16, 2013. p. 67. 203 George Mitchell left a fortune of more than $2 billion and a Texas landscape studded with examples of philanthropy: he was particularly generous to university research departments and to Galveston. See more in “The Father of Fracking,” The Economist, August 3-9, 2013, p. 58.

120 sixteen months after the EIA’s report, shale oil output had increased from 2 million bpd to

3.8 million bpd – that’s not only more than Canada’s oil output but is about 50 percent more than the EIA’s projection for U.S. shale oil output for 2020. As of 2014, the United

States was the world’s largest energy producer, bringing up more oil than Saudi Arabia and more natural gas than Russia.204 A combination of innovation (hydraulic fracturing), finance, and enterprise have now opened up reserves, even to small oil and gas firms with low costs. According to IHS, the shale energy generated around 1.7 million jobs in the

United States for energy sector and related industries such as transport, mining, and steel.

In 2012, $62 billions of government revenues were generated from this business.205

Therefore, the United States, propelled by its boom in oil and gas production, was becoming increasingly central to global energy. Some foreign policy wonks argue that this dramatic change in America’s fortunes calls for a fundamental change in the country’s foreign policy. If America can produce its own oil, why waste so much blood and treasure policing the Middle East? 206 Daniel Yergin claims that the surge of American oil and gas production, the growth of oil sands in Canada, and the development of oil off of Brazil make the Western Hemisphere to become largely self-sufficient. “Not completely, because oil will still flow in, but it means a change in the position of the Western Hemisphere and the United States.”207 The next question was whether the United States should lift its ban on the export of crude oil dating from the 1970s intended to secure supplies for American

204 Peter Zeihan, The Accidental Superpower: The Next Generation of American Preeminence and the Coming Global Disorder, (New York - Boston: Twelve, 2014), pp. 119-120. 205 “Interview: Daniel Yergin on Promise, Perils of U.S. Oil Boom,” Radio Free Europe Radio Liberty. June 7, 2013. Accessed on September 29, 2017. http://www.rferl.org/articleprintview/25004829.html 206 “The Petrostate of America,” The Economist, February 15th, 2014, pp. 10-11. 207 “Interview: Daniel Yergin on Promise, Perils of U.S. Oil Boom,” Radio Free Europe Radio Liberty. June 7, 2013. Accessed on September 29, 2017. http://www.rferl.org/articleprintview/25004829.html

121 consumers. America did not ban the export of natural gas, but it made getting permits insanely slow.

On August 14th, 2015, the Obama administration allowed American firms to swap some oil from Mexico, so easing the restraint and earn an honorable footnote in the story of the ban’s inevitable demise. The Department of Commerce allowed about 100,000 barrels a day of light crude and condensates to flow into Mexico, in exchange for a similar amount of heavier Mexican crude heading to American refineries. It was not the first breach of the ban. Canada has long enjoyed a privilege similar to the one granted to

Mexico.208 Later in December 2015, Congress passed a $1.1 trillion spending measure that averts a U.S. government shutdown and ends a 40-year-old ban on crude oil exports, a plan that ensures fiscal peace in Congress through most of 2016. The Senate passed the bill 65-

33, shortly after 316-113 House vote. The legislation, which will finance the government through September 2016, went to President Barack Obama, who signed it. According to

House Speaker Paul Ryan, the end of the 40-year ban is a “big win” and it is a top priority for Republicans. Democrats call it a giveaway to oil companies, and in exchange they negotiated extensions of environmental measures including solar and wind energy tax credits. The largest American oil producers, including ConocoPhillips, Pioneer Natural

Resources Co., Continental Resources Inc., and others have been pressing for decades to end the restrictions on exports of most raw, unprocessed crude oil imposed at a time of shortages in the U.S.209 According to the IHS report, government revenues from energy-

208 “Nafta Naphtha: A Long-Overdue Easing of a Protectionist Export Ban,” The Economist, August 22, 2015, p. 58; Christian Berthelsen and Lynn Cook, “U.S. Set to Export First Oil Since 70’s,” The Wall Street Journal, June 25, 2014. 209 Hilly House and Erik Wasson, “Congress Passes U.S. Spending Bill to End Oil Export Ban,” Bloomberg, December 18, 2015. Accessed September 30, 2018. http://www.bloomberg.com/politics/articles/2015-12- 18/house-passes-u-s-spending-bill-that-ends-crude-oil-export-ban

122 related taxes and royalties would increase $1.3 trillion from 2016 to 2020. Jobs during that period, in both crude production and at oil field service companies, would rise an average of 340,000 a year and peak at an additional 964,000 in 2018.210 Fracking has also made gas extraordinary cheap in America. In Asia, it sells for more than triple the price; in Europe, double. Even allowing for the hefty cost of liquefying it and shipping it, there are huge profits to be made from this spread. To the extent that gas exports displace coal, they would be good for the environment. Could they pay foreign policy dividends, such as offering Europeans an alternative to Russian gas and so reducing Russia’s influence in

Europe? Will traditional petro-powers such as Saudi Arabia and Russia lose their bargaining strength? Is North American shale becoming a genuine rival to Saudi Arabia as the world’s marginal producer?

Michael Levi argues that increased oil production will not free the United States from involvement in global petroleum markets, natural gas alone will not solve climate change, renewables remain expensive, and vehicles that do not rely on oil are far from being broadly economically competitive.211 Council on Foreign Relations experts claim that liberalizing the crude oil export regime would advance U.S. foreign policy. It would demonstrate Washington’s commitment to free and fair trade, even in a politically sensitive sector, bolstering its negotiating position on other trade issues and its leverage as an oil trade partner would grow significantly.212

210 Timothy Gardner, “Lifting Oil Export Ban Would Spark U.S. Economy,” Reuters | Business & Financial News, May 29, 2014. Accessed September 30, 2017. www.reuters.com/assets/printaid=USKBN0E9U2014052990 211 Michael Levi, “America’s Energy Opportunity: How to Harness the New Sources of U.S. Power,” Foreign Affairs, May/June 2013, p. 94. 212 See Blake Clayton, “The Case for Allowing U.S. Crude Oil Exports,” Policy Innovation Memorandum No. 34., Council on Foreign Relations, July 2013, (Washington D.C.: Council on Foreign Relations Press).

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Alan Greenspan, the chairman of the U.S. Federal Reserve (1987 – 2006) even argues that the shale technology breakthrough is likely to be a far more effective stabilizer of oil prices than OPEC, the cartel of oil producing countries. The reason is that shale technology is far more flexible. Shale oil wells can come on stream faster than most conventional wells and drain far more rapidly. More than half of the oil content of shale wells is run off in the first two years of operation, while conventional wells keep producing for 20 years or more. Thus, shale oil output can expand and contract more rapidly than conventional wells. Unlike the production decisions of a monopolistic OPEC, fluctuations in market prices will automatically guide shale expansion and contraction.213 However, the price of oil depends on global supply and demand, so the Middle Eastern producers will remain vital for the foreseeable future. Half of the Global Fortune 500’s top ten listed companies produce oil, and unlisted Saudi Aramco still dwarfs them all. U.S. companies around the world faced even more intense competition from their Chinese rivals. It was in the U.S. interests to keep Gulf sea lanes open and not to invite China to do the job instead.

The North American oil and gas surplus was a sign of some sort of paradigm shift in the energy industry with a potential change in U.S. foreign policy calculations. The central challenge for the Obama administration was figuring out how to capitalize on all the new opportunities for the U.S. economy, foreign policy, and national security. Building upon these achievements while addressing ever-present energy security and foreign policy threats and environmental challenges during a time of unsustainable national debt create difficult but necessary policy choices for the Obama administration – choices that were unlikely to be resolved without national leadership and reaching across party lines.

213 Alan Greenspan, “OPEC Has Ceded to the U.S. its Power Over Oil Price,” The Financial Times, February 19, 2015.

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The Institutionalization of U.S. Energy and Foreign Policy Priorities

The most important early energy initiatives of President Obama’s first term were contained in the American Recovery and Reinvestment Act of 2009, which provided more than $90 billion in tax credits and direct spending for programs to promote clean energy and transportation improvements.214 In 2009, Obama established a new White House

Office of Energy and Climate Change Policy to oversee the development and implementation of national climate change policy. However, climate legislation failed to pass the Senate. In March 2011, Obama released a national energy plan titled Blueprint for a Secure Energy Future;215 this was followed by an energy progress report released by six federal agencies in March 2012. However, the Obama administration has not proposed specific legislative action on a new national energy plan.

During his first term in office, President Obama rolled out also a new plan together with the Department of State to tackle energy, economic, and environmental issues by combating them all into one bureaucratic structure. On December 8, 2011, Undersecretary

Robert Hormats became the leader of the newly expanded “E” team and his position was renamed into the Undersecretary for Economic Growth, Energy, and the Environment.

Before December 8, Hormats was the Undersecretary for Economic Growth, Energy, and

Agricultural affairs. This change moved several offices under Hormats’ supervision, and

214 American Recovery and Reinvestment Act of 2009, PL 111-5 (included renewable-and electricity transmission loan guarantees, weatherization, energy R&D, Section 1603 Treasury cash-grant program). For example, the American Recovery and Reinvestment Act directed $11 billion to smart-grid investments, $5 billion to low-income weatherization programs, $4.5 billion to efficiency retrofits in federal buildings, $6.3 billion to state and local energy programs, $600 million to green jobs training, and $2 billion to advanced battery technologies. Available at the U.S. Government Publishing Office: https://www.gpo.gov/fdsys/pkg/PLAW-111publ5/pdf/PLAW-111publ5.pdf 215 White House Archives. Blueprint for a Secure Energy Plan. Accessed September 30, 2017. https://obamawhitehouse.archives.gov/sites/default/files/blueprint-secure-energy-future.pdf

125 also placed him in charge of two new offices that never existed before. One of these new offices was the Bureau of Energy Resources led by former U.S. Ambassador to Mexico

Carlos Pascual. Hormats was in charge of three bureaus led by assistant secretaries and their teams: Bureau of Oceans and International Environmental and Scientific Affairs, the

Bureau of Economic and Business Affairs, and the Bureau of Energy Resources. The new

“E” family will also, for the first time, include the Office of the Science and Technology

Advisor, and a new Office of the Chief Economist. The idea was to combine these three bureaus into cohesive team which can take advantage of the increasing overlap between foreign policy, energy and environmental policy, and the economy. After completing the formation of the new Bureau of Energy Resources, the Department of State was uniquely positioned to develop, harmonize, and promote U.S. energy security overseas. In 2014, the

Bureau has grown from a staff of fewer than 30 to 75.216 Specifically, the Bureau of

Energy Resources leads the Department of State’s efforts to forge international energy policy, strengthen U.S. energy security, and respond to energy challenges from around the world that affect U.S. economic policy and national security. This unit also maximizes the

U.S. diplomacy engagement with leading energy producing and consuming countries.

In fact, the Obama administration institutionalized the integration of foreign and energy policies by establishing the Bureau of Energy Resources within the Department of

State. Of course, not all energy policy at the federal level has emanated from the White

House, Department of Energy or the Department of State. On the contrary, other executive

216 U.S. Department of State. “Bureau of Energy Resources.” Accessed October 1, 2017. https://www.state.gov/e/enr/; Josh Rogin, “State Department Unveils New Super-Office: Economics, Energy, and the Environment,” Foreign Policy, December 8, 2011 Accessed October 1, 2017. http://foreignpolicy.com/2011/12/08/state-department-unvels-new-super-office

126 branch agencies had responsibility over some facet of energy-relevant policies or programs, including the Department of Commerce (energy trade and competitiveness policy), the Department of Defense (security of energy transportation routes, technology, research and development), Department of the Interior (management and conservation of most federal land and natural resources, including oil and natural gas development), and

Department of Treasury (tax policy, international currency and banking).

The Unites States government remained a big backer of fossil fuel production. For example, the Export-Import Bank (EX-IM) of the U.S. underwrote a $1.5 billion bond guarantee in 2013, enabling Mexico’s state-owned oil monopoly, Pemex, to patronize

United States companies. In 2010, the bank lent $3 billion for a liquefied natural gas project in Papua New Guinea. The project, led by ExxonMobil started shipping gas to

Japan in 2014 and had contracts with clients in Taiwan and China. The United States

Agency for International Development spent more than $391 million for energy services by 2013. The Overseas Private Investment Corporation (OPIC) financing of energy projects soared from $123 million in 2007 to $1.21 billion in 2013, roughly tenfold.217

The Bureau of Energy Resources is well placed to provide guidance to this inter- agency process in aligning energy sector assistance efforts to support and realize broader

U.S. foreign policy objectives and developing a coordinated message for U.S. engagement on energy sector supply, demand, and sector management issues.

Western Hemisphere and U.S. – Latin America Energy Engagement

The future of North America’s energy security lies in greater continental integration of energy markets and infrastructure, coupled with increased energy efficiency.

217 David Wallis, “Oil’s Comeback Gives U.S. Global Leverage,” The New York Times, October 7, 2014.

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Canada and the United States share the closest energy relationship in the world even with the rejection of the Keystone XL pipeline by President Obama in 2015. Energy infrastructure – including oil and gas pipeline networks and electricity grids – is tightly integrated. Canada is the United States’ largest and most secure supplier of oil, natural gas, electricity and uranium. In 2010, Canada exported over 2.5 million barrels per day of crude oil and refined products to the United States, more than any other country. The same year,

Canada provided 87 percent of all U.S. natural gas imports, representing 12 percent of U.S. consumption. According to the EIA, in 2015, the U.S. imported 3.2 million barrels per day from northern neighbor (43.1 percent of U.S. crude oil imports) – triple the amount the

U.S. imported from Canada 20 years ago. The oil sands of Canada are a strategic resource that contributes to economic opportunities and energy security for North America and the global market.218 They comprise more than 97 percent of Canada’s 174 billion barrels of proven oil reserves.219 Much like Canada’s conventional oil development since World War

II, nearly all of the tar sands oil comes to the United States. The U.S. oil majors are heavily invested in the tar sands project, and they dispose of the oil largely as they see fit. The

Obama administration also established a Working Group on Climate Change and Energy with Energy Ministries of Canada and Mexico. The new trilateral working group supports implementation of clean energy and climate change goals of each of the three countries, including respective Paris targets.220

218 The 15.1 billion takeover of Canadian oil and gas company Nexen Inc. in 2013 by Chinese state-owned entity CNOOC represents the example of foreign interest towards Canada’s booming oil and gas industry. Despite the opposition of some members of the Canadian government, the CNOOC gained control of Nexen’s Long Lake oil sands project in the oil-rich province of Alberta. See more Nexen. “A CNOOC Limited Company.” Accessed October 1, 2017. http://www.nexencnoocltd.com 219 See more in Oil Sands: A Strategic Resource for Canada, North America, and the Global Market. Public Works and Government Services Canada. August 2011. 220 Department of Energy. “North American Energy Ministers Establish a Working Group on Climate Change and Energy,” Accessed October 1, 2017. https://energy.gov/articles/north-american-energy-

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The surge in U.S. production and subsequent decline in imports, resulted in more oil available for trade on the global market and that the United States started to import more from Latin American countries. During the Obama administration, the list of top seven U.S. crude oil suppliers with Canada on the first place, besides traditional Mexico and Venezuela, included Colombia and Ecuador [See Figure 7] and Brazil in top ten.

Mexico’s energy sector has fully opened to foreign investment, offering a wealth of new opportunities for U.S. investors. The country’s constitution prohibited foreign involvement in most activities in the oil and power sectors until 2013 when President

Enrique Peña Nieto successfully garnered a majority in Congress to enact a sweeping energy reform that ended Pemex’s monopoly over oil exploration and production and control by state-owned utility, the Federal Electricity Commission over electricity generation. At the same time, the involvement of China and Russia in Mexico and other

Latin American countries has already become a reality. For example, Venezuela and

Ecuador have become highly reliant on oil-backed loans and oil sector investment from

China. Russian state-owned and private major oil companies are involved in various projects in Mexico, Venezuela, and Brazil. Evan Ellis argues that China has become

Venezuela’s principal banker. In August 2014, PDVSA, which is legally is more vulnerable to the seizure of its global assets than the Venezuelan government, moved its banking primary relationships for petroleum accounts from the Banco Espirito Santo, in

Portugal, to China’s CITC Bank. In addition, since at least 2011, it is believed that

Venezuelan government has maintained a portion of its gold reserves in China. The key-

ministers-establish-working-group-climate-change-and-energy; in April 2016, the Obama administration signed the Paris Climate Agreement within the United Nations Framework Convention on Climate Change dealing with greenhouse gas emissions.

129 feature of China’s role in the long-term sustainability of the regime in Venezuela is revolving credit relationship known as “loans for oil.” To pay down Venezuela’s line of credit, oil is extracted from Venezuelan oil-fields operated as China- PDVSA joint ventures, including the Sinovensa joint venture in the Orinoco tar belt.221 Russia’s activities in Venezuela have been more limited than those of China in terms of dollar value and the range of activity, yet are still significant. Russian engagement continued to be has principally concentrated on arms sales, military exercises, and investments in the petroleum sector. The Obama and previous U.S. administrations did not establish clear

“red lines” regarding the Venezuelan regime since Venezuela remained the major supplier of crude oil to the United States.

A host of US government initiatives has been established over the past decade to assist Latin American countries to develop regulatory standards that in line with those of the United States. These initiatives such as regulatory assistance for shale development in

South American countries create commercial opportunities for U.S. companies and facilitate clear and consistent investment rules. The U.S. is also deeply integrated economically with Latin America; it is the top export market for many countries in the region, and Latin America is also a destination for many U.S. goods and services. Table 1 on some major energy cooperation initiatives clearly demonstrates how oil and gas cause the direct involvement of the Department of State in energy policy and support of commercial opportunities for the U.S. businesses in Western Hemisphere.

221 R. Evan Ellis, The Influence of Extra-Hemispheric Actors on the Crisis in Venezuela, Testimony to the Subcommittee on Western Hemisphere Affairs, Foreign Affairs Committee, U.S. House of Representatives, September 13, 2017, pp. 3-4.

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Table 1: U.S. - Latin America Energy Cooperation Initiatives

PARTICIPATING PROGRAM / INITIATIVE / AGENCY / DEPARTMENT DESCRIPTION COUNTRIES IN THE MEMORANDUM NAME REGION INCLUDE Aims to improve energy security and St. Kitts and Nevis, sustainable economic growth by Haiti, Jamaica, Caribbean Energy US Department of State with attracting investment in diverse energy Dominican Security Initiative local government partners technologies with a focus on governance, Republic, Antigua finance, and donor coordination and Barbuda Unconventional Gas Argentina, Chile, Provides regulatory and technical Technical Engagement US Department of State Colombia, Peru, guidance to expand shale development Program Uruguay Provides support for oil, gas and mining Brazil, Chile, Energy Governance oversight, for example, through technical US Department of State Colombia, Mexico, and Capacity Initiative training for international regulators and Guyana officials Provides technical, legal and regulatory St. Kitts & Nevis, Power Sector Program US Department of State support to entities like Central America’s Central America regional electricity market regulator Works to promote two-way energy US-Mexico Energy US-Mexico High Level industry investment, trade in goods and Mexico Business Council Economic Dialogue services, binational value chains and rapid deployment of new technologies Multiple institutions including: Tasked with generating data, statistics Canada’s Department of and mapping for energy infrastructure North American Natural Resources; Statistics and imports and exports; exchanging Cooperation on Canada; Mexico’s Secretariat views and projection information on Canada, Mexico Energy Information of Energy, Pemex; US Energy cross-border energy flows; and Initiative Information Administration; harmonizing terminology, concepts, and US Department of Energy definitions of energy products Tasked with advancing solutions for reliable and resilient low-carbon energy Working Group on Established by the energy grids, modeling and deployment of clean Climate Change and departments of the United energy technologies, energy efficiency, Canada, Mexico Energy States, Canada, and Mexico carbon capture, use and storage, climate change adaptation and resilience and emissions from the oil and gas sector Establishes consultation mechanisms for hydrogen cell technology, carbon credits, biofuels, and electricity transmission; Consultative Group on 2010 BEWG expands cooperation to Energy/Binational Energy departments of the include energy security and climate Brazil Energy Working United States and Brazil change, renewable energy, energy Group (BEWG) efficiency, oil, gas & coal, nuclear energy, research cooperation, and research development in both countries Memorandum of Recognizes the importance of ethanol Signed by Presidents George Understanding to both as a fuel for cars and in terms of W. Bush and Luiz Inácio Lula Brazil Advance Cooperation diversifying energy sources and da Silva on Biofuels improving the environment

Source: See Lisa Viscidi and Rebecca O’Connor, U.S.-Latin America Energy Investment, Energy Working Paper, Washington D.C. The Dialogue, May 2017.

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Despite the projection of power by China and Russia in some countries of the region, the United States maintains hegemony in Western Hemisphere and its diplomacy gets the job done to dominate the hemisphere.

Middle East Again

Obama came to the office with a conviction that reducing the United States’ massive military and political investment in the Middle East was a vital national security interest in its own right. This was not a policy much beloved in Washington but it was a coherent strategy that, as argued by Marc Lynch, led Obama to undertake major initiatives on the problems he viewed as rising to the level of core national security interests: Iran’s nuclear weapon program, terrorism, the Israeli-Palestinian conflict, and the war in Iraq.222

The wars in Afghanistan and Iraq cost between $4 trillion and $6 trillion and killed nearly

7,000 U.S. soldiers and wounded more than 50,000. Veterans of these conflicts exhibit high rates of depression and suicide, yet the United States has little to show for their sacrifices.223

According to Andrew Bacevich, oil – not freedom, democracy or human rights – defined the principal American interest in the Middle East.224 However, some scholars raise the question if Persian Gulf oil is still worth defending with American military might.

They also claim that it is time for the United States to give itself the option of ending its military commitment to protecting Gulf oil, by increasing its investment in measure that

222 See Marc Lynch, “Obama and the Middle East: Rightsizing the U.S. Role,” Foreign Affairs, September/October 2015, pp. 18-27. 223 John Mearsheimer and Stephen Walt, “The Case for Offshore Balancing: A Superior U.S. Grand Strategy,” Foreign Affairs, July/August 2016, p. 77. 224 Andrew Bacevich, “Even if We Defeat the Islamic State, We’ll Still Lose the Bigger War,” The Washington Post, October 3, 2014.

132 would further cushion the U.S. economy from major oil disruptions.225 Contrary to leading academics’ many decades old admonitions for the United States to leave the Middle East because, it is not strategically vital, the United States governing elites remain diplomatically and military anchored in the Middle East.226

Thanks to fracking, the United States has become the world’s leading producer, and most probably within a decade the North American continent stands to produce as much energy as it consumes. But the oil price is global, and the Middle East still accounts for 30 percent of world production. Self-sufficiency do not make the United States immune to upheaval in energy markets. During his presidency, Obama met several times with the members of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Saudi Arabia, Qatar, the U.A.E.) and visited Saudi Arabia four times. Not only does this country produce more than ten percent of global output, but it also possesses spare capacity that could be used to offset disruptions elsewhere. Saudi exports to the U.S. appear safe and stable. [See Figure

8] The Saudi royal family is widely perceived as legitimate, much of the population benefits from the country’s oil wealth, and the regime’s security forces are highly capable to protect critical nodes in the country’s oil infrastructure.

The United States was becoming the world’s biggest producer, but because consumption still exceeds what it pumps it must still shop on the world market. This does not make it dependent on Saudi Arabia, though. Selling weapons is a big part of American diplomacy in the kingdom as well. Both ambassadors of the U.S. to Saudi Arabia during

225 Charles Glaser and Rosemary Kelanic, “Getting Out of the Gulf: Oil and U.S. Military Strategy,” Foreign Affairs, January/February 2017, pp.122-123. 226 Barry Posen, Restraint: A New Foundation for U.S. Grand Strategy, (Ithaca, NY: Cornell University Press, 2013), p. 112; Christopher Layne, Peace of Illusions: American Grand Strategy from 1940 to the Present, (Ithaca, NY: Cornell University Press, 2006), pp. 188-189; John Mearsheimer and Stephen Walt, “The Case for Offshore Balancing: A Superior U.S. Grand Strategy,” Foreign Affairs, July/August 2016, pp. 82-82.

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Obama presidency were political appointees and had a military background. Ambassador

James Smith (2009 – 2013) spent a 28-year career in the United States Air Force and worked for Raytheon, the world’s biggest producer of guided missiles. Ambassador Joseph

Westphal (2014 – 2017) was the U.S. Undersecretary of the Army, before his diplomatic assignment.227

American policy in the region, starting with the invasion of Iraq in 2003, created criticism of the United States and its foreign policy in the region. In a case of the President

Obama, critics say that was so keen on his “pivot” to a security policy focused on East

Asia that he neglects the Middle East. The charge that he has ignored the Middle East is denied by insiders. One White House veteran says “it never felt like we pivoted away from the Middle East. About 80 percent of our main meetings at the national Security Council have focused on the Middle East.”228 President Obama is neither pacifist, nor isolationist.

He has bombed targets in Afghanistan, Pakistan, Yemen, Libya, Iraq, and Syria. He ordered the operation that killed Osama bin Laden. However, John Mearsheimer and

Stephen Walt argue that in the Middle East, the Obama administration duplicated the miscalculation of the previous administrations abandoning the policy of “offshore balancing” while recognizing that it is sometimes necessary to come onshore. The Clinton administration adopted the policy of “dual containment,” which required keeping ground and air forces in Saudi Arabia to check Iran and Iraq simultaneously. The Bush administration adopted even more ambitious strategy, dubbed “regional transformation,” which produced costly failures in Iraq and Afghanistan. The Obama administration

227 See U.S. Embassy and Consulates in Saudi Arabia. Accessed October 5, 2017. https://sa.usembassy.gov/category/ambassador/ 228 “A Dangerous Modesty,” The Economist, June 6, 2015, p. 15.

134 repeated the error when it helped topple Muammar al-Qaddafi in Libya and when it exacerbated the chaos in Syria by insisting that Bashar al-Assad “must go” and backing some of his opponents. According to Mearsheimer and Walt, abandoning offshore balancing after the Cold War has been a recipe for failure.229

The Obama administration had a key success in 2015, when after twenty months of negotiations with Iran, the United States, and other powers agreed to a landmark nuclear deal. It was not in Washington’s interest for Tehran to abandon the nuclear agreement and race for the bomb. The United States had also an obvious interest to discourage the

Chinese - Iranian and Russian - Iranian security and energy cooperation. Oil, nuclear proliferation, and terrorism identified the Obama administration interests in the Middle

East.

In 1949, George Kennan saw the strategic benefits in controlling other’s energy imports, and Japan’s case he noted: “If the U.S. created controls foolproof enough and cleverly enough exercised really to have power over what Japan imports in the way of oil and other things as she has got overseas, then we could have veto power over what she does.”230 Timothy Lehmann argues that the United States enjoys the benefits of this system to this day. Lehmann claims in contrast to nearly all other international relations scholars that the strategic purpose of Middle East oil has never been a liberal-derived concern for domestic U.S. consumption. In fact, the Middle East has not supplied even 25 percent of total U.S. crude oil imports since the early 1980s. The most recent peak year of U.S. reliance on Middle Eastern crude oil imports was 2005, when the United States consumed

229 John Mearsheimer and Stephen Walt, “The Case for Offshore Balancing: A Superior U.S. Grand Strategy,” Foreign Affairs, July/August 2016, p. 76. 230 Laura Hein, Fueling Growth: The Energy Revolution and Economic Policy in Postwar Japan, (Cambridge, MA: Harvard University Press, 1990), p. 204.

135 a postwar record 20.8 million barrels of oil per day and imported about 2.2 million barrels per day of Middle East crude oil. Even in this year, Middle East oil comprised only 22 percent of total crude oil imports and 10.6 percent of total domestic U.S. oil consumption.231 Nevertheless, the vast stores of Middle Eastern oil and the relationship with Saudi Arabia and other OPEC members from the region have been essential to U.S. hegemony. In 2012, 46 percent of the world’s traded crude oil came from the Middle

East.232 The United States governing elites always entrust international management to the leading U.S. oil companies and ensure their dominance over Middle Eastern resource areas, and the Obama administration was not an exception.

Africa

While global oil prices have declined more than 50 percent since mid-2014 (closing at below $50 already in fall 2015) and U.S. production was off its recent highs, net increases in U.S. production have impacted economies and oil markets around the world.

Prior to developments in unconventional fossil-based resources, Africa played an important role in the U.S. strategy to diversify its energy base over the last twenty years.

However, the U.S. energy boom has affected Africa, particularly oil-producing countries of the Western Africa, such as Algeria, Angola, and Nigeria – all members of OPEC.

Nigeria has experienced the biggest blow from U.S. shale revolution. In 2005,

Nigeria was the fifth largest U.S. supplier. The U.S. was an attractive market for Nigeria’s light sweet crudes (Bonny Light and Brent crude) that are low in sulfur content and most

231 Timothy Lehmann, “The U.S. Energy Complex; The Price of Independence,” in Timothy Lehmann ed., The Geopolitics of Global Energy: The New Cost of Plenty, (London: Lynne Rienner Publishers, 2017), pp. 111-112. 232 OPEC Annual Statistical Bulletin 2013, (Vienna: OPEC Publications, 2014), p. 49.

136 similar in composition to shale oil, particularly that produced in North Dakota’s Bakken field. In 2010, 43 percent of Nigeria’s oil exports (amounting to 373.3 million barrels) were sent to the United States. By 2014, Nigeria’s oil exports to the U.S. had fallen to 33.6 million barrels in the first six months of the year, reflecting 91 percent decline.233

Algeria and Angola has been also affected by the U.S. production. In 2010, the

United States was the biggest single destination for Algerian oil exports (53 percent), compared to 31 percent heading to Europe. U.S. imports of Algerian crude peaked in 2007

(244 million barrels annually) and have declined by 84 percent to 40 million in 2014. In

2014, only 7.5 percent of Algerian oil exports went to the United States, compared to 72 percent to Europe.234 Angola, another largest U.S. supplier, accounted for 5 percent of total

U.S. crude oil imports on average over the period 2005-2009. As of 2014, only 1.9 percent of U.S. imports came from Angola. In 2009, Angola sent 31 percent of its crude oil to the

United States; by 2014, only 8 percent of crude oil went to the United States.235

After this decline, Nigeria has increased exports to India, overtaking Saudi Arabia as the largest supplier to India. Angola has also responded to the U.S. energy boom by redirecting more of its crude oil to China and India. The lion’s share (almost 50 percent) of

Angola’s exports headed to China. As of 2015, Angola was the second-largest supplier of oil to China (behind only Saudi Arabia).236

233 Nancy Brune, “The Impact of the U.S. Shale Boom in Africa,” Journal of International Affairs, Fall/Winter 2015, pp. 102-103. 234 U.S. Energy Information Administration. “Country Analysis Brief: Algeria,” July 24, 2014. Accessed October 4, 2017. http://www.eia.gov/beta/international/analysis_includes/countries_long/Algeria/Algeria/pdf 235 U.S. Energy Information Administration “Country Analysis Brief: Angola,” March 19, 2015. Accessed October 4, 2017. http://www.eia.gov/beta/international/analysis_includes/countries_long/Angola/Angola/pdf 236 Nancy Brune, “The Impact of the U.S. Shale Boom in Africa,” Journal of International Affairs, Fall/Winter 2015, p.105.

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The case of Equatorial Guinea and U.S. engagement with its president Obiang237 represents an explicit example how energy causes a foreign policy with the only justification of economic gain. The “public relations” challenge to the Department of State was to explain publicly why the U.S. government has authorized oil purchases from

Obiang since oil exports began in 1996. As of 2014, Equatorial Guinea had proven oil reserves of 1.1 billion barrels. Oil production is the basis of the country’s economy, accounting for 99 percent of export revenues (2011) and 90 percent of all government revenues (2015). In 2010, almost 30 percent of Equatorial Guinea’s crude oil export were sent to the United States. ExxonMobil’s upstream affiliate, Mobil Equatorial Guinea Inc., is the largest oil producer in the country.238 Equatorial Guinea’s health and education scores have not risen even over the years when floods of American cash went to Obiang.

No Secretary of State could assert that the U.S. decision to channel hundreds of millions of dollars to Obiang in exchange he has stolen from his nation has been good for governance, development, or human rights – for any of the goals on the State Department’s webpage.

Leif Wenar argues that when Secretary of State Condoleezza Rice, then President Obama and Secretary Clinton engaged with Obiang, they exercise their authority to violate popular sovereignty for the sake of American private advantage. In 2014, Equatorial Guinea accounted for less than 0.2 percent of U.S. oil imports, an amount that could have been imported from any other sources.239 The U.S. decision to engage diplomatically and

237 Teodoro Obiang is the one of the longest-serving dictators of the world. He has been President of Equatorial Guinea since 1979. 238 ExxonMobil. “Equatorial Guinea Operations.” Accessed October 4, 2017. http://corporate.exxonmobil.com/en/company/worldwide-operations/locations/equatorial-guinea#About 239 Leif Wenar, Blood Oil: Tyrants, Violence, and the Rules That Run the World, (Oxford - New York: Oxford University Press, 2016), pp. 248-253.

138 commercially with Obiang is not politics of war and peace; it is purely politics of trade. Its only justification is America’s and ExxonMobil’s economic gain.

On a global scale, other African countries are not significant producers, except

Libya that exports 70-80 percent of its oil to Europe. The United States energy relationship with African nations has been shaped by practical considerations as well as its overall foreign policy goals in the region and the larger geopolitical context. The combination of low global oil prices and significant shift in export markets have battered oil-producing countries in Africa. Most of these countries also rely heavily on oil revenues to fund the government. The fall in revenues came at a time when oil-producing countries such as

Nigeria, Algeria, and others face growing internal and transnational security challenges.

Underscoring the tension, President Obama expanded military assistance to

Nigeria, including more military training and equipment to fight the Boko Haram terrorist group. Recognizing the regional threat of this group, the United States has also increased military and financial assistance to Chad, Cameroon, and Niger. Obama also launched the

Power Africa Initiative in 2013 and pledged $7 billion of investment over the next five years to increase energy production in Nigeria, as well as in Ethiopia, Ghana, Kenya,

Liberia, and Tanzania. The lack of energy and power infrastructure continues to hinder economic growth and development of these countries.

Foreign investments in energy and modernization of oil sector are another area of mutual interest for the U.S. energy companies and Africa. By many accounts, global investors are looking for upstream and downstream assets in oil-producing countries in

Africa. ExxonMobil is one of the largest foreign investors in the continent. Over the last years, it has committed more than $24 billion to energy exploration and development.

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ExxonMobil operates in twenty-one African countries. Among the largest U.S. oil companies, Chevron has operations in Angola, Botswana, Nigeria, Republic of Congo, and

South Africa, while Andakro Petroleum operates only in Mozambique.240 The United

States was also a leading investor in Cameroon, largely through the Chad – Cameroon pipeline operated by ExxonMobil and participation of Chevron. However, in 2014,

Chevron announced that its subsidiary, Chevron Global Energy Inc., has sold its 25 percent non-operated interest in a producing oil concession in southern Chad and the related export pipeline interests to the Republic of Chad for approximately $1.3 billion.241

How will the United States maintain diplomatic and cooperative security relationships with resource dependent countries in Africa and protect its interests while recognizing the decline in oil revenues for these countries could be very destabilizing?

This question to be more addressed by the successor of President Obama and if energy may no longer be the major source to define U.S. policy in Africa. Given the deployment of the United States military bases in Africa, Washington still has a continued interest in the region.

Russia and Asia

The unipolar moment of the U.S. dominance that began in 1991 has already ended.

A new multipolar world has brought more uncertainty into international affairs. The United

States, Russia, China, and the European Union are striving to define their proper roles in the world.

240 “The Race of Oil and Gas in Africa,” Al Jazeera, October 23, 2016. Accessed October 4, 2017. http://www.aljazeera.com/indepth/interactive/2016/10/race-oil-gas-africa-161020104953200.html 241 Chevron. “Chevron Announces Sale of Interests in Chad and Cameroon,” Accessed October 5, 2017. https://www.chevron.com/stories/chevron-announces-sale-of-interests-in-chad-and-cameroon

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Many of the key issues with which the United States and Russia have dealt have remained the same: NATO expansion, missile defense, arms control, nonproliferation,

Iran, and regulation of U.S.-Russian relations in the post-Soviet space. Angela Stent argues that U.S. – Russian relationship remains a structural anachronism given the focus on hard security issues. As the world’s two nuclear superpowers, Russia and the United States are caught in a time warp that is difficult to unravel.242 John Mearsheimer claims that the

United States and its European allies share most of the responsibility for the crisis. The taproot of the trouble is NATO enlargement, the central element of a larger strategy to move Georgia and Ukraine out of Russia’s orbit and integrate them into the West.243 By taking action in Georgia, Ukraine, and Syria, Russia has made clear its intention to restore it status as a major international player.

In 2014, the United States and the European Union have coordinated efforts through sanctions and trade controls to respond to Russian activity in Crimea and Ukraine.

The U.S. sanctions on Russia are focused on energy, defense industries, and the financial services. The sanctions include both economic measures administered by the Office of

Foreign Assets Control (OFAC) and export controls administered by the Department of

Commerce, Bureau of Industry and Security, the Department of State, and the Directorate of Defense Trade Controls. The Sectoral Sanctions Identifications (SSI) is organized according to the four directives. The first directive targets the financial services sector of the Russian Federation, the second targets Russia’s energy sector, and the third – the

Russian defense industries. Directive four expands on sanctions targeting the energy sector

242 Angela Stent, The Limits of Partnership: U.S. – Russian Relations in the Twenty-First Century, (Princeton-Oxford: Princeton University Press, 2014), p. 256. 243 John Mearsheimer, “Why the Ukraine Crisis is the West’s Fault: The Liberal Delusions that Provoked Putin,” Foreign Affairs, September/October 2014, pp. 77-78.

141 prohibiting “the provision, exportation, or re-exportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian

Federation and extending from its territory” that involve any person identified on the SSI list.244 Russia responded by a list of reciprocal sanctions but eventually these sanctions slowed down the trade between Russia and the European Union, causing damage to both

Russian and European economies. ExxonMobil has turned into a collateral victim of the

U.S. economic sanctions against Russia. As of early 2015, seven months after the sanctions were launched, ExxonMobil had suffered losses amounting to about $1 billion from its

Russian operations.245

The intention of the Obama administration was clear: to put a break on President

Putin via major sectors of the Russian economy, including oil and gas. George Kennan believed that internal factors ultimately drive change in any society and that outside actors

– even in the unlikely event they know what they are doing – can only influence events on the margins. Kennan thought that this logic applies to Russia: “of one thing we may be sure: no great and enduring change in the spirit and practice of government in Russia will ever come about primarily through foreign inspiration or advice.”246 President Putin brushed aside all measures and sanctions imposed by the U.S. and the European Union and

244 U.S. Department of the Treasury, “Sectoral Sanctions Identifications (SSI) List.” Accessed October 5, 2017. https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/ssi_list.aspx; U.S. Department of State, “Ukraine and Russia Sanctions.” Accessed October 5, 2017. https://www.state.gov/e/eb/tfs/spi/ukrainerussia/ 245 Irina Slav, “Exxon Has Lost Over $1 Billion From Russian Sanctions,” Oil Price. Accessed October 5, 2017. http://oilprice.com/Energy/Energy-General/Exxon-Has-Lost-Over-1-Billion-From-Russian- Sanctions.html 246 George F. Kennan, American Diplomacy, (Chicago – London: The University of Chicago Press, 2012), p. 158.

142 moved swiftly to maintain Moscow’s recent gains in Crimea and Ukraine and revive the

Russian military. During the last years of the Obama presidency, the relationship between the United States and Russia were more dangerous and detrimental than it has been at any point since the end of the Cold War.

Russia and the United States both control the largest and most important oil and gas reserves of the world. Part of the grand bargain that is taking shape involves this factor as well, especially when Washington realized that low oil prices after 2014 and the sanctions so far could not change the policy of Kremlin. Russia has also played a master stroke in the

2015 oil crisis by taking the lead in negotiations with the OPEC members, especially with

Saudi Arabia. The meeting between Russia, Qatar, Saudi Arabia and Venezuela on

February 16, 2016 was the first step. During the next meeting in mid-March, which is with a larger group of participants, and Russia is attempting to discuss an output cut of three- five percent and build a consensus, since the OPEC meeting on this issue in December

2015 ended without any agreement. Until this oil crisis, Saudi Arabia called the crude oil price shots; however, its clout has been weakening in the aftermath of the massive price drop with the emergence of U.S. shale. Moscow senses the opportunity that is almost tangibly floating about in the low crude price environment and appears to be ready to capitalize on it in a way that would reshape the geopolitical landscape exponentially.247

These major geopolitical shifts and internal dynamics are setting the stage for increased great-power competition in Azerbaijan and Central Asia between the United

States, Russia, and China, and these regions were becoming less hospitable to the projection of U.S. power. While Russia remains an important trading partner for Central

247 See James Henderson and Bassam Fattouh, Russia and OPEC: Uneasy Partners, University of Oxford, The Oxford Institute for Energy Studies, February 2016.

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Asia, China’s emergence in the region’s energy sector had profound geopolitical and geo- economic consequences. Russia also had achieved a certain measure of success in asserting itself in Central Asia through its latest economic and geopolitical structure - the Eurasian

Economic Union. Military security was another sphere where Russia continues to play a unique and leading role in Central Asia. In the meantime, the United States energy boom in unconventional energy sources has had far reaching effects around the world. The facts that the Caspian’s oil and gas potential,248 while far from negligible, can hardly threaten that of its not-so-distant neighbor – the Persian Gulf, and Asian increasing oil demand somewhat diverted the U.S. foreign and energy policy attention.

In the first decade of this century, China’s growing appetite for oil helped drive crude oil prices above $100 a barrel, for the first time ever, in February 2008. The conventional wisdom claims that oil prices plunged in 2014, from over $110 a barrel in

June to less than $50 by January 2015 because of an unexpected surge in U.S. oil production, which had risen from an average of five million barrels a day in 2008 to more than nine million six year later and creating a surplus of supply. [See Figure 9] Most analysts noted that Middle Eastern countries, led by Saudi Arabia, could have cut their own production to balance the market. When it became clear that they wouldn’t, prices collapsed. Michael Levi argues that this explanation is accurate but incomplete. Asia’s slowing demand for oil was indispensable to the price crash. In 2010, 2011, and 2012,

248 In 2003, the Energy Information Administration estimated the Caspian basin area to hold 48 billion barrels of oil and 292 trillion cubic feet of natural gas in proved and probable reserves. Because these figures conflate proven and probable reserves (proven reserves have a better than 90 percent chance of being produced, while probable reserves have a better than 50 percent chance), they are closer to a high-end estimate. By comparison, the Middle East’s proven reserves alone amount to more than 803 billion barrels of oil and about 2,827 trillion cubic feet for gas. (This estimate includes Iran, which holds about 158 billion barrels of oil and 1,201 trillion cubic feet of gas). For more details, see Carole Nakhle, “Caspian Oil and Gas in a World of Plenty,” Geopolitical Intelligence Services, June 12, 2017. https://www.gisreportsonline.com/caspian-oil-and-gas-in-a-world-of-plenty,energy,2240.html

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Asian oil consumption rose by a million barrels a day or more. But in 2013 and 2014, it grew by less than half a million barrels a day. Had Asian demand kept its trend, there would have been no massive glut and probably no earthshaking price collapse. According to Levi, the balance between Asian consumption and U.S production – not one or the other

– will be critical to setting energy prices for decades to come. 249

The United States still has a big economic stake in Middle Eastern stability, but increased oil exports to Asia, combined with a regional naval buildup, will lend another area new strategic importance: East Asian seas. These crowded waters include the Strait of

Malacca, the South China Sea, and the East China Sea. These waters have already acted as the conduit for massive quantities of oil and gas. For example, for decades, Middle Eastern oil producers have shipped more oil to Japan than to the United States. The presence and global operations of ExxonMobil, Chevron, ConocoPhillips, and other multinational energy companies dominated by U.S. capital in East Asia facilitate the interactions between the two sides of the Pacific supported by U.S. diplomacy. The United States will continue to provide security for oil shipments to its allies by maintaining its naval presence in the region.

The State’s Department’s Bureau of Energy Resources has already tried to persuade China, India and other countries to reduce imports of Iranian crude oil. “We were able to have a different kind of conversation than we could have ten years ago,” recalls the

Director of Bureau, Pascual, providing negotiating partners with an “analysis of global oil markets, where supply was coming from – in particular, from the United States.”250 Since

249 Michael Levi, “Go East, Young Oilman: How Asia is Shaping the Future of Global Energy,” Foreign Affairs, July/August 2015, p. 109. 250 David Wallis, “Oil’s Comeback Gives U.S. Global Leverage,” The New York Times, October 7, 2014.

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2009, American strategic partnerships have generally expanded more in the region, than they did from 2001 to 2008. Nevertheless, any historically informed assessment of

Obama’s legacy in Asia should therefore begin by acknowledging that there is more continuity and bipartisan consensus around Asia policy than not.

The Obama administration’s significant achievement in Asia has been to establish an enduring framework for engagement with Southeast Asia. Since the Vietnam War,

American diplomacy in Southeast Asia has been episodic, often buffeted by more pressing challenges such as human rights or terrorism. Obama’s real “rebalance” was between

Northeast Asia and Southeast Asia. He joined the East Asia Summit, which was hosted by the Association of Southeast Asian Nations, and he established his own U.S.-ASEAN summit. Since 2009, U.S. relations have improved with every country in ASEAN other than Thailand (because of the 2014 coup in Bangkok).251

In the meantime, as U.S. firms have prepared to export liquefied natural gas, market watchers in Asia have braced for transformation of global natural gas markets.

According to ExxonMobil’s the Outlook for Energy, Asia Pacific and Europe account for about 90 percent of global LNG imports, and Asia Pacific for over two-thirds of global

LNG growth.252 Many Asian countries have relatively few ways of getting spare LNG when they run into shortages, since most of the world’s available gas is already contracted to a fixed destination. With U.S. LNG available to plug sudden supply gaps, that problem won’t be as severe. Michael Levi claims that Asia’s best chance is to emulate another key feature of U.S. and European markets: trading hubs for natural gas. A hub – a physical

251 Mike Green, “The Legacy of Obama’s “Pivot” to Asia,” Foreign Policy, September 3, 2016. 252 ExxonMobil. “The Outlook for Energy.” Accessed October 7, 2017. http://corporate.exxonmobil.com/en/energy/energy-outlook/charts-2017/asia-pacific-demand-drives-lng-trade

146 trading center for a commodity – brings together large number of buyers and sellers to bargain over transactions in a single space; their deals set prices that can then be used in transactions elsewhere.253 In the United States, for example, the Henry Hub in Louisiana254 plays a prominent role in setting domestic prices for natural gas well beyond that state; in continental Europe, several hubs do the same. Asian governments, most likely China,

Japan, or Singapore, would need to seize this opportunity.

It is obvious that in the energy sphere, China is changing its links with the outside world. The stimuli for this change, stemming from the natural economic necessities of the most populous society in the world, will definitely continue. How the United States prevents Chinese “energy belligerence” and supports Chinese “energy engagement” in any form – be it by stimulating stability of oil supply to China, or by encouraging investments in the Chinese energy sector and granting security guaranties for energy communications, depends the future and success of U.S. energy diplomacy in Asia.

*** During the Obama presidency, three major developments have shaped the administration’s approach towards energy and its foreign policy: first, climate change and the necessity for more sustainable and cleaner energy solutions; second, the substantial increase of oil and gas production within the United States, and third, the reverse of a 40- year old ban on oil exports by U.S. lawmakers.

President Obama compiled a remarkable record of environmental achievements, most of which have been overturned in the first year of his successor’s administration.

253 Michael Levi, “Go East, Young Oilman: How Asia is Shaping the Future of Global Energy,” Foreign Affairs, July/August 2015, p. 113. 254 U.S. Energy Information Administration. “Henry Hub Natural Gas.” Accessed October 7, 2017. https://www.eia.gov/dnav/ng/hist/rngwhhdm.htm

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Besides institutional and legislation improvements in the United States, President Obama succeeded in obtaining the 2009 Copenhagen Accord and later the 2015 Paris Agreement, the first international agreement including developing nation commitments to address emissions. The Obama administration was also successful in negotiations to curb super- strong greenhouse gases using the Montreal Protocol and in negotiations for emissions limitations on commercial aviation. President Obama laid the foundation for the renewable energy boom in the United States, and according to Tom Donilon, the administration has made unprecedented investments in clean energy, research and development, and renewable fuels.255 The United States commitments to action on climate change became also an important dimension in the Transatlantic relationship with its European allies.

The United States, driven by its boom in oil and gas production and the end of oil export ban, is also becoming increasingly central to global energy. The Obama administration tried to capitalize on all new opportunities and find a balance between environmental and energy policies to strengthen the nation’s economy. The recognition of the importance of energy policy to U.S. strategic interests and foreign policy was the foundation for the first Quadrennial Diplomacy and Development Review’s256 recommendation to establish the Bureau of Energy Resources within the Department of

255 Tom Donilon, “Energy and American Power: Farewell to Declinism,” Foreign Affairs, May/June 2013. 256 The Quadrennial Diplomacy and Development Review (QDDR): provides a blueprint for advancing America’s interests in global security, inclusive economic growth, climate change, accountable governance and freedom for all. As a joint effort of the Department of State and the U.S. Agency for International Development, the review identifies major global and operational trends that constitute threats or opportunities, delineates priorities and reforms to ensure our civilian institutions are in the strongest position to shape and respond to a rapidly changing world. The first Quadrennial Diplomacy and Development Review was completed in December 2010. The second review began being conducted during 2014 and was released in April 2015. See U.S. Department of State: https://www.state.gov/s/dmr/qddr/

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State in order to unite U.S. diplomatic and programmatic on oil, natural gas, coal, electricity, renewable energy, energy governance, and strategic resources.257

The Obama administration, as previous administrations, supported the increased structural power of Houston-based oil majors and their financial sectors to advance U.S. interests in oil-producing regions worldwide. While after the U.S. energy revolution, energy may no longer be the source of the ties that bind the United States with some regions, including Africa, President Obama tried to identify other ways to pursue mutually beneficial partnerships.

Many opponents of President Obama assumed that from the outset he would preside over national retrenchment. However, despite several foreign policy miscalculations related to Libya, Syria, and Russia, the Obama’s administration generally held on advancing traditional American goals of security and energy security through deep global engagement in Western Hemisphere, Asia, Middle East, including nuclear deal with

Iran, and the confident assertion of U.S. power.

The Obama administration did seize important opportunities. Building closer ties with countries across Asia is the right strategic impulse, and Obama had real achievements.

He built on the transformation of ties with India that began under Bush, strengthened alliances with Korea and Japan, and won rotational access for U.S. troops in Australia and the Philippines. The administration also engaged in the East Asia Summit, ratified a treaty with the Association of Southeast Asian Nations, and strengthened ties with Indonesia,

Vietnam, and Singapore. Given the dominance of China in this area, the U.S. diplomacy made an attempt to shift patterns in Asia’s energy consumption. Whether rising U.S. oil

257 Leading through Civilian Power, The First Quadrennial Diplomacy and Development Review, U.S. Department of State and U.S. Agency of International Development, Washington D.C., 2010, p. vii.

149 and natural gas exports could transform these markets will depend on decision that Asian leaders make. But the question then becomes how the next administration will continue to build on all these gains.

Quantitative Approach

Given the “oil boom” in the United States during the Obama presidency and increase of oil production, the security of supply is being gradually transformed into security of markets. Nevertheless, the United States is still one of the top net importers and consumers of the energy. The safety of resource supply influences the relationship of the

U.S. with its top suppliers, namely Canada, Saudi Arabia, Mexico, Venezuela, and Nigeria and as well as Washington’s foreign policy towards these countries. The question is whether the U.S. foreign policy is more or less oriented towards the integration with energy policy in the cases with these top five suppliers of crude oil.

Since I hypothesize in this study that foreign policy certain dispositions derive from the integration of energy and foreign policy, the following research questions and hypotheses are examined in this section:

Research Questions and Hypotheses

RQ1: What is the average petroleum supply to the United States from the selected five

countries between the years of 2000 through 2017?

RQ2: What is the relationship between year, country, petroleum supply, and U.S. foreign

policy?

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H20: There is no relationship between year, country, petroleum supply, and U.S.

foreign policy.

H2a: There is a relationship between year, country, petroleum supply, and U.S.

foreign policy.

Data Analysis

Descriptive Statistics. To answer the first research question, the mean as the measure of central tendency and the standard deviation (SD) as the measure of variability for petroleum supply between the years 2000 through 2017 from these five countries to the

United States were obtained. Table 2 presents the mean and the standard deviation of petroleum supply by the five top U.S. crude oil suppliers.

Table 2

Average petroleum supply to the U.S.: years 2000-2017

!! Mean SD Canada 2671.38 691.74 Mexico 1247.44 354.70 Nigeria 718.06 378.09 Saudi Arabia 1355.61 249.20 Venezuela 1154.39 313.53

As Table 2 suggests, for some countries the standard deviation (SD) seems much smaller than it can be expected (e.g. Saudi Arabia, SD = 249.20) meaning somewhat steady average supply, whereas for Nigeria, it is much higher (SD = 378.09) compared to its much lower level of supply (M = 718.06) compared to other countries.

Figure 10 below presents the petroleum supply between the years 2000 and 2017.

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5000

4000

3000

2000

1000

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Canada Mexico Nigeria Saudi!Arabia Venezuella

Figure 3: U.S. petroleum imports from 2000 to 2017 by main source country (in 1,000 barrels per day); Source: U.S. Energy Information Administration

Based on the mean of the petroleum supply, the countries were numerically coded in the following way: Nigeria = 1, Venezuela = 2, Mexico = 3, Saudi Arabia = 4, Canada =

5 to enter the country variable into a correlation analysis. U.S. foreign policy was numerically coded in the following way: FP1 = 1 (high-rank of energy and foreign policy integration), FP2 = 2 (mid-rank of energy and foreign policy integration), FP3 = 3 (low- rank of energy and foreign policy integration).

Correlation Analysis.258 A correlation analysis was performed to identify the possible relationships between year, country, its petroleum supply, and U.S. foreign policy.

Table 3

Petroleum Foreign !! Year Supply Country Policy Year 1 -.101 .000 .000 Petroleum Supply -.101 1 .648** -.795** Country .000 .648** 1 -.671** Foreign Policy .000 -.795** -.671** 1 **. Correlation is significant at the 0.01 level (2-tailed).

258 The analysis was performed using SPSS 24.0.

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The correlation analysis suggested that there is no significant relationship between the years and petroleum supply to the United States. The positive significant relationship between country and petroleum supply (r =.648, p (one-tailed) <.001) is identified.

However, this relationship is due to the coding (as stated above numbers 1 to 5 were assigned to countries based on the order of their average petroleum supply). The analysis also identified negative significant relationship between petroleum supply and U.S. foreign policy (r = -.795, p (one-tailed) < .05). This means that if the petroleum supply increases, the country could move to a lower numeric value on foreign policy (i.e. FP 1) that corresponds to high-rank of energy and foreign policy integration. This is exactly what energy contributes to the architecture of the U.S. foreign policy towards Canada. In the meantime, Saudi Arabia, Mexico, and Venezuela represent the FP 2 (mid-rank of energy and foreign policy integration). And finally, the case of Nigeria stands for FP 3 (low-rank of energy and foreign policy integration). As discussed earlier in the U.S. Case Study, the

United States energy boom and a steady increase in energy production have affected

Nigeria and other African producers that have resulted from the fall in U.S. demand for

Africa’s oil resources.

This quantitative analysis allowed to triangulate the findings in the qualitative section of this study.

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Conclusion

The economic strength of the United States is the foundation upon which all else depends, including the survival of this country as a democracy and as a unified state.

Access to energy – primarily, access to stable and affordable supplies of fuel for transportation and electrification, at stable prices is a fundamental requirement for the stability and development of the economy of the United States.

As Leon Fuerth points out, the United States grand strategy requires that it never lose the ability to respond to any serious threat to the stability of the energy marketplace.259

The Carter Doctrine, i.e. the protection of the access to oil by “any means necessary, including military force” represents one of the most explicit and forceful expressions of the relationships among oil, geography, military and foreign policy. President Jimmy Carter, who established the Department of Energy in 1977, appointed the first Secretary of

Energy, James Schlesinger to develop the nation’s first National Energy Plan as required under Section 801 of the DOE Organization Act of 1977.260 All successors of Carter developed their comprehensive national energy strategies, however, the focus of national energy policy shifted under the administration of President George W. Bush, whose

National Energy Policy Development Group, led by Vice President Dick Cheney, produced a new comprehensive plan with implications for U.S. foreign policy. Bush had entered office amid blackouts in California as well as significant oil and natural gas shortages in many parts of the country. The Bush administration’s National Energy Plan

259 Leon Fuerth, “Energy, Homeland and National Security,” Jan H. Kalicki and David L. Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy, (Washington D.C.: Woodrow Wilson Center Press, Baltimore: The Johns Hopkins University Press, 2005), pp. 411-422. 260 Section 801 of the Department of Energy Organization Act of 1977 requires the president to submit a National Energy Policy Plan to Congress every two years. See Cornell Law School. Legal Information Institute. “42 U.S. Code 7321 – National Energy Policy Plan.” Accessed October 11, 2017. https://www.law.cornell.edu/uscode/text/42/7321

154 also included a chapter on how to strengthen global alliances and enhance international relationships. This document raised a question how energy can be used to advance broader

U.S. foreign policy goals. Therefore, President Bush assumed the presidency at a critical juncture in this evolution of U.S. energy policy and the new millennium became a starting point to examine how the U.S. governing elites make an effort to integrate the energy and foreign policy. However, this study takes into account that U.S. energy companies operate their autonomous policy and in many cases their activities consider only their commercial interests. The coordination of energy policy issues among the Departments of State,

Energy, and Commerce was another important part of this plan and its further implementation. This starting point justifies the beginning of the case study of the United

States in my research.

This chapter focuses on sequential process within a particular historical case, which covers the periods of George W. Bush and Barack Obama administrations. It attempts to identify the intervening causal process – the causal chain and causal mechanisms between the independent variables (oil and gas, export and import of energy resources, energy security, and global price of hydrocarbons) and the outcome of the dependent variable

(foreign policy). The case study generates numerous observations within the governance of both administrations on how energy defines the foreign policy of the United States and how the governing elites of both administrations address the integration of energy and foreign policy. The Obama administration went even further and institutionalized this integration by establishing the Bureau of Energy Resources within the Department of

State. This Bureau deepens the Department’s human resource expertise on energy matters and institutionalizes capabilities of the U.S. diplomacy to engage more broadly and deeply

155 on the United States global energy priorities. The Bureau of Energy Resources is well placed to leverage the Under Secretary of State for Economic Growth, Energy, and the

Environment’s Board seats and influence with OPIC, EX-IM, USTDA and international financial institutions like the World Bank and Inter-American Development Bank to harmonize U.S. energy and foreign policies. The Bureau also leverages the Department’s leadership positions in international organizations, including Department’s Governing

Board seat in the International Energy Agency and representation in the International

Energy Forum. These institutional changes operationalize the dependent variable of this research.

The numerous observations of this case study and the quantitative analysis demonstrate how energy considerations significantly influence foreign policy decisions important to the United States. In the early twenty-first century, the central focus of resource political economy still lies on the future of the carbon-based political and economic order. Collectively, oil, coal, and natural gas still make up over 80 percent of all energy consumption. Petroleum accounted for 63% of the U.S. government’s total energy consumption in fiscal year 2016, and it has generally remained between 63% and 69% for more than two decades.261 Consequently, energy defines the principal American interest and it is viewed as indispensable resource in international politics.

Energy security is an increasingly prominent feature of the international political landscape and bear on effectiveness of U.S. foreign policy. Among other priorities, the energy issues became an integral part of the policymaking process. The process of

261 U.S. Energy Information Administration. “U.S. Federal Government Energy Costs at Lowest Point since Fiscal Year 2004,” October 2, 2017. Accessed October 12, 2017. https://www.eia.gov/todayinenergy/detail.php?id=33152

156 expanding sources of oil and gas production and protection of transit routes of these fuels to the market of the United States has been examined in this case study. During the Bush presidency, the diversification of foreign oil supplies included Western Hemisphere,

Middle East, West Africa, Russia, Caspian Sea, and Central Asia. The increased U.S. involvement has been analyzed in the oil-producing areas of all these regions. The Obama administration continued the same foreign policy engagements except in those regions like

Africa where net increases in U.S. production have resulted the fall in U.S. demand for oil resources.

Timothy Lehmann argues that U.S. management of the world’s energy system has always had two operating principles: first, delegate global management to the leading U.S. international oil companies and ensure their dominance over vital resource area; second, insulate the Western hemispheric bulwark from undue reliance on non-hemispheric sources of oil, while simultaneously using the largest and most open domestic market in refining and distributed oil products sales to bind in other’s self-interested operations.262 U.S. strategic decision making in oil and the broader construct of “energy” has been conditioned by policy pursuits and trade-offs among these two cardinal principles ever since the 1950s.

In addition, with the proper integration of foreign and energy policies, U.S. faces four major foreign policy challenges: asserting its interests with energy suppliers and consumers, strengthening collective energy security, and addressing the rise of state control in energy, especially in Russia and China. These challenges bring more trade-offs for the U.S. policy.

262 Timothy Lehmann, “The U.S. Energy Complex: The Price of Independence,” in Timothy Lehmann ed., The Geopolitics of Global Energy: The New Cost of Plenty, (Boulder, CO - London: Lynne Rienner Publishers, 2017), p. 115.

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An alternative explanation that international oil companies are private enterprises and U.S. government does not have control over them to delegate above mentioned functions has been claimed by Daniel Restrepo.263 However, the U.S. government have always worked closely with its oil and gas industry, often in response to industry requests and both have common interests in oil-producing regions of the world. David Painter argues that to gain and maintain control of overseas oil reserves, reflects a symbiosis of national security interests and interests of the oil companies.264 The cases of Saudi Arabia,

Venezuela, Equatorial Guinea, Azerbaijan, Kazakhstan and many other oil-producing regions with authoritarian regimes demonstrate that U.S. foreign policy acts for the sake of

American private gain or national security. The agreements of companies like

ExxonMobil, Chevron, ConocoPhillips with oil producing countries on upstream, midstream, and downstream sectors of oil and gas industry as well as the bilateral interstate agreements, of the U.S. government operationalize dependent variable of this study. U.S. government and major oil companies frequently set joint agendas that advance the U.S. foreign policy and maximize the growth of these companies when their interests are compatible. Oil lobby which includes these large energy corporations regularly attempts to influence U.S. executive and legislative branches and both political parties. The international oil companies together with other internal factors and institutions such as the

U.S. Government and Congress constitute the intervening variables of this study.

The process-tracing method and the causal chain between the independent variables and the dependent variable in this case study support the theory of neoclassical realism.

263 Daniel Restrepo, Keynote Address at the University of Miami Energy Conference “Consequences of the Fall: Energy Security, Sustainable Development, and Global Warming,” October 27, 2016. Accessed October 16, 2017. http://www.as.miami.edu/ins-program/annual-conference/activities-and-events/ 264 David Painter, “Oil and the American Century,” Journal of American History 1, June 2012, pp. 24-29.

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The Bush and Obama administrations define the “national interests” and conduct their foreign policy based upon their assessments but always subject to domestic constraints.

The administrations with access to privileged information from the state’s apparatus and their efforts to integrate energy and foreign policies to some extent, bargain with domestic actors such as Congress and American oil companies in order to enact policy and extract resources to implement policy choices.

Another alternative explanation that energy is an important aspect of U.S. national security and foreign policy but not a priority could be examined in the context if the independent variable (energy) is a necessary condition for the outcome of the dependent variable (foreign policy). For example, the basic strategic deal between the United States and Saudi Arabia is that Saudi Arabia supplies oil to the United States and uses its influence over OPEC and oil markets to try to stabilize the global oil prices, and in return the United States protects it militarily. The deal between the U.S. and Saudis and other

Middle Eastern partners of Washington is that oil be priced in U.S. dollars, giving the

United States the unique privilege of simply printing the money that buys petroleum. Oil also held the cards between increasingly authoritarian rules of Chavez and Maduro and the

Bush and Obama administrations. Even when Chavez in 2007 issued a decree requiring all foreign companies to surrender majority control of their Venezuelan oil operations to

PDVSA and many foreign companies, including ExxonMobil and ConocoPhillips, responded to this demand by abandoning country altogether, Venezuela remained one of the major suppliers of the United States for many years. The presence of hydrocarbons and if the regime is more or less hospitable to the projection of U.S. power are necessary conditions for U.S. diplomacy to promote energy security in foreign countries and

159 maximize engagement with leading energy producers. The American oil alliance with the

Shah of Iran lasted only for twenty-five years till the revolution of 1979 and the overthrow of the Shah. Cases of Equatorial Guinea, Azerbaijan, and Kazakhstan and U.S. foreign policy in these regions also verify the independent variable as a necessary condition for the outcome of U.S. foreign policy.

The policy of the new U.S. administration seems to be taking a 180 degree turn on many issues, including the environmental problems and climate change. However, energy remains one of the central issues of the U.S. foreign policy and national security. President

Trump’s first Secretary of State, Rex Tillerson joined Exxon in 1975 and served as the

Chairman and CEO of ExxonMobil from 2006-2016. The head of one of the intervening variables (ExxonMobil) of this study became one of the major figures to implement the foreign policy (dependent variable). In addition, Tillerson maintained and strengthened the

Bureau of Energy Resources of the Department of State established by the Obama administration.

The U.S. energy boom has been a game changer and it had far reaching effects around the world regardless who occupies the White House. The U.S. increasing imports of crude oil in 2017 support this argument. Moreover, the United States exported more natural gas than it imported in 2017, marking the first time since 1957 that the United

States has been a net natural gas exporter.265 President Trump, members of Congress,

Cabinet Officials at the Departments of Energy and State, and energy industry executives

265 U.S. Energy Information Administration. “The United States Exported More Natural Gas than It Imported in 2017.” March 19, 2018. Accessed March 28, 2018. https://www.eia.gov/todayinenergy/detail.php?id=35392

160 have already agreed to unleash America’s boundless capacity for energy production and ensure energy dominance of the United States.266

If “Big Oil” defined as the large publicly traded company, it has more or less the same set of the investor categories as other industries. The study of Robert Shapiro and

Nam Pham illustrates that holdings of oil stocks in 2014 belonged to pension funds (28.9 percent), asset management companies, including mutual funds (24.7 percent), individual investors (18.7 percent), individual retirement accounts (17.9 percent), other institutional investors (6.9 percent), and corporate management of oil companies (2.9 percent).267

[Figure 11] Therefore, many Americans do well when oil companies do well, and access to secure, affordable, and clean energy is a national interest of the United States and a top priority for those who got entrusted with the U.S. national security and foreign policy.

266 See more in The White House | Energy and Environment. “President Trump Vows to Usher in Golden Era of American Energy Dominance.” June 30, 2017. Accessed March 28, 2018. https://www.whitehouse.gov/articles/president-trump-vows-usher-golden-era-american-energy-dominance/! 267 Robert Shapiro and Nam Pham, “The Financial Contribution of Oil and Natural Gas Investments to Public Employee Pension Plans in Seventeen States, Fiscal Years 2005-2013,” Sonecon, April 2015. Accessed March 28, 2018. http://www.whoownsbigoil.com/#/?section=whoowns-the-oil-companies-2

161

Figure 4.

TOP 7 SUPPLIERS OF U.S. OIL IMPORTS 2000 Thousand Barrels per Day 318 Colombia 629 Iraq

875 Nigeria

1,223 Venezuela

1,313 Mexico

1,348 Canada

1,532 Saudi Arabia

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

Source: U.S. Energy Information Administration

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Figure 5.

Average Annual Brent Crude Oil Price 2000-2008 USD per barrel 120

100 96.99

80 72.52 65.14 60 54.38

40 38.1 28.4 28.83 24.45 25.01 20

0 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Statista

163

Figure 6.

TOP 7 SUPPLIERS OF U.S. OIL IMPORTS 2008 ThousandBarreles per Day

504 Angola

627 Iraq

922 Nigeria

1,039 Venezuela

1,187 Mexio

1,503 Saudi Arabia

1,956 Canada

0 500 1,000 1,500 2,000 2,500

Source: U.S. Energy Information Administration

164

Figure 7.

50 Years of U.S. Crude Oil Production

President Bush enters office 1 President Obama enters office

0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: U.S. Energy Information Administration

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Figure 8.

TOP 7 SUPPLIERS OF U.S. OIL IMPORTS 2016 Thousand Barrels per Day 237 Ecuador

419 Iraq

442 Columbia

582 Mexico

741 Venezuela

1,099 Saudi Arabia 3,227 Canada

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Source: U.S. Energy Information Administration

166

Figure 9.

U.S. Petroleun Imports from Saudi Arabia 2000-2016 Thousand Barrels per Day

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Statista

167

Figure 10.

Average annual Brent Crude Oil Price 2008-2016 USD per barrel 120 111.27 111.63 108.56 99.03 100 96.99

80 79.47

61.51 60 52.35 43.55 40

0 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: U.S. Energy Information Administration

168

Figure 11

Who owns "Big Oil in the Other%Institutional%U.S.?" (holdings of oil stocks, 2014) Investors: 7% Corporate% Management%of%Oil% IRAs: Companies: 18% 3%

Asset%Management% Companies% (Including%Mutual% Funds): 24%

Pension%Funds: 29%

Individual%Investors: 19%

Source: Robert J. Shapiro and Nam D. Pham, “The Financial Contribution of Oil and Natural Gas Investments to Public Employee Pension Plans in Seventeen States, Fiscal Years 2005-2013,” Sonecon, April 2015

CHAPTER FIVE

Case Study # 2: the Russian Federation

The coming to power of Vladimir Putin represented a new stage in the development of the Russian foreign policy and oil and gas industry, the largest sector of the Russian economy. Russia emerged out of the “time of troubles” of Yeltsin, and President Putin set out to assemble the powerhouse of his envisioned energy superpower by restoring state control over the country’s energy assets and by rolling back the influence of foreign oil supermajors established in the 1990s.

The National Security Concept of the Russian Federation adopted and approved by the presidential decree on January 10th, 2000 articulates the major thrusts of Russia’s foreign policy. Identifying the role of the country in the world community and its national interests this document clearly states that “it is necessary to enhance the role of the state in regulating the activities of foreign banking, insurance, and investment companies and to introduce definite and justified restrictions on the transfer of exploitation of deposits of strategic natural resources, telecommunications, and transport and commodity-distribution networks to foreign companies.”268

Putin inherited the system of oligarchic capitalism tied to political power, and these measures were justified and necessary. A group of seven-to-nine oligarchs controlled more than 50 percent of the entire Russian economy and finances between 1996-2000 and influenced the most important internal political decisions in Russia. In his first years of power, Putin dismantled much of the Yeltsin oligarchic clan, either taming them or making

268 The Ministry of Foreign Affairs of the Russian Federation. “The National Security Concept of the Russian Federation.” January 10, 2000. Accessed October 25, 2017. http://www.mid.ru/en/foreign_policy/official_documents/- /asset_publisher/CptICkB6BZ29/content/id/589768 169

170 them to exile. He also created a mechanism for ending the conflicts among oligarchs and restoring the capacity of the center to collect rents. Gaddy and Ickes argue that Putin’s deal with oligarchs was that state would collect rents, and oligarchs would cease trying to buy protection against the state. As long as they followed Kremlin’s rules they would be allowed to successfully run their businesses.269

Russia’s energy agenda is driven by domestic and foreign policy motives. Although domestic motives are not a subject for this study, it is important to examine how Putin used the administrative resources of the state to consolidate the power and how new political and economic elites are symbiotically connected in this system. This examination will also allow to understand how energy came to prominence as a foreign policy factor, how Russia addressed the integration of energy and foreign policy and identify the role of the intervening variables of this case study.

Between 1999 – 2008, Russia was one of the fastest-growing economies of the world. GDP grew by seven percent per annum, the stock market increased twentyfold, and poverty rates fell from 30 percent of population in 1998 to 14 percent in 2007. Real wages rose by 140 percent. These policies involved paying back Russia’s $130 billion sovereign debt to the IMF by January 2005 – three and one-half years ahead of schedule – and building up reserves from rising oil prices to create stabilization funds on the Norwegian model. By 2008, Russia had $600 billion in currency reserves and had the third largest currency and gold reserves in the world. Only China and Japan had more.270

269 Clifford Gaddy and Barry Ickes, “Russia after the Global Financial Crisis,” Eurasian Geography and Economics 51 (3), 2010, p. 299. 270 See more in Angela Stent, The Limits of Partnership: U.S. – Russian Relations in the Twenty-First Century (Princeton – Oxford: Princeton University Press, 2014), pp. 180-183; Clifford Gaddy and Barry Ickes, “Russia after the Global Financial Crisis,” Eurasian Geography and Economics 51 (3), 2010, p. 288; Andres Aslund and Andrew Kuchins, The Russian Balance Sheet (Washington D.C.: Peterson Institute, 2009).

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The driving force behind the economic transformation of Russia was also the sharp increase in oil prices that began during Putin’s first term in office. The key state taxes applying to oil – the export tax and a new consolidated production tax (usually referred to by its Russian abbreviation as NDPI)271 – were simply tied to export price, thus bypassing at one stroke the entire issue of transfer prices. The new system was a blunt instrument – it was based on gross revenues regardless of field quality or performance. But because of its extreme simplicity it was easily collectible, and as oil prices continued to mount, it proved remarkably effective in capturing the lion’s share of the windfall. Between 1999 and 2005, the share of oil company profits collected by the government grew from 45.1 percent to

83.8 percent and by 2008, as oil prices reached their peak ($147.27 a barrel), the state’s take at the margin swelled to well over 90 percent. In dollar terms, the state’s oil tax revenues exploded from $5.6 billion in 1999 to $83.2 billion in 2005.272 However, the major issues of the Russian economy -- the ability to diversify the economy through structural reforms, to make it more competitive in the world market, and expand the major export products, except energy and military hardware -- still remain unresolved.

During his first term Putin saw the first task in improving the state of the Russian economy by capitalizing on domestic oil and gas reserves and increasing the ability to export to the West. The energy cooperation was one of the key concentrations in other regions as well, including CIS and Asia. In building ties with Asian neighbors, Russia was especially determined to win markets in arms and energy. At the same time, as argued by

Andrei Tsygankov, such economic improvement was seen a way to confirm Russia’s great

271 NDPI translates as Tax on Production of Natural Resources. 272 Thane Gustafson, Wheel of Fortune: The Battle for Oil and Power in Russia (Cambridge – London: The Belknap Press of Harvard University Press, 2012), pp. 260-264

172 power status and to preserve the required space to maneuver to defend Russia’s political interests in world politics.273 In fact, Primakovian re-orientation discussed in the Chapter of the Historical Overview of the 20th Century of this research, was finally verbalized (after several years in progress) in the National Security Concept and in the Foreign Policy

Concept (adopted on June 28, 2000), which according to Bertil Nygren, became, in effect, the ‘starting point’ for Putin’s foreign policy.274 In addition to the National Security

Concept, Russia also adopted a new Military Doctrine and the Basic Provisions of the

Energy Strategy in Russia till 2020 - both in 2000. Later, in August 2003, the Government approved the updated latter document as the Energy Strategy till 2020. This new strategy defined the prospects of the Fuel and Energy Complex’s (FEC) development and set priorities, aims, principles, and the direction of the state policy till 2020. Foreign-economic issues and the perspectives of the Russia’s FEC in international markets were covered in several chapters of this document, namely “Foreign Energy Policy of Russia,” and “Russia in World Energy Markets.”275

The emergence of the new governing elites in Moscow brought a focus on pragmatism and self-concentration in foreign policy. From 2000 till present time Russia had four consecutive foreign policy concepts adopted in 2000, 2008, 2013, and 2016 making necessary adjustments due to the changes in the political situation in the world and justifying the implementation of its foreign policy dimensions. However, the strategy of

Russia on the perspective for maximizing the returns on political investments and converting oil and gas earnings into political dividends remained unchanged. According to

273 Andrei Tsygankov, Russia’s Foreign Policy (New York: Rowman & Littlefield Publishers, 2010), p. 134. 274 Bertil Nygren, The Rebuilding of Greater Russia: Putin’s Foreign Policy towards the CIS Countries (London – New York: Routledge, Taylor & Francis Group, 2008), p. 19. 275 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), p. 99.

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Stefan Hedlund, this was the essence of the country’s new status as a great energy power, and the challenge was to convince the Europeans and other partners that Moscow could be trusted as a reliable provider of energy.276

Roger Kanet argues that in early 2000s, as Moscow began to use the supply of gas and oil to neighboring states as an explicit foreign policy tool, Washington became concerned about Western energy dependence on Russia and renewed its role in encouraging the development of alternatives routes for the delivery of energy, especially natural gas, from the new fields in Central Asia to the West. The Russians, understandably, have viewed this U.S. initiative – especially in conjunction with the expansion of NATO eastwards – as a continuation of policy of containment. However, Russia has positioned itself effectively to control the production and distribution of energy across almost the entirety of former Soviet space and, thus to Europe as well, as part of President Putin’s commitment to reestablish Russia as a major global actor.277

Therefore, Putin’s arrival in the Kremlin was the starting point of the integration of energy and foreign policy and energy became a foreign policy tool wielded by the Russian state. President Putin re-ordered Russia’s oil and gas assets to serve national interests and foreign policy.

This Chapter that follows is divided into six sections. The first section examines how President Putin and the new Russian governing elites restored state control over the country’s energy assets and developed the new foreign policy concept of Russia. It also

276 Stefan Hedlund, Putin’s Energy Agenda: The Contradictions of Russia’s Resource Wealth (Boulder – London: Lynne Rienner Publishers, 2014), p. 14. 277 Roger Kanet, “From the ‘New World Order’ to ‘Resetting Relations’: Two Decade of U.S.-Russian Relations,” in Roger Kanet ed., Russian Foreign Policy in the 21st Century (New York: Palgrave Macmillan, 2011), pp. 217-218.

174 examines the operational indicators to demonstrate how widely Russian national security and diplomacy are affected by energy concerns. Other consecutive sections look at how

Russian governing elites prioritize the integration of energy and foreign policy in different regions of the world, namely former Soviet space, the European Union, the Middle East, and Asia respectively, with special emphasis on the Kremlin’s foreign policy and the business of its agents, Russian energy companies in these regions. The section on the

Middle East also examines how partnership with OPEC and the agreement between Saudi

Arabia and Russia to cut back on oil production has boosted oil prices and strengthened

Russia’s position in the Middle East. Finally, the Conclusion of this Chapter evaluates the main dimensions of the Russian energy and foreign policy, and how Russian governing elites blend commercial opportunities with important foreign policy objectives.

Taking Control: Energy Assets and the Foreign Policy Concept

When Putin ascended to the presidency in 2000, reforming the Russian energy sector was on the top of his priority list. Putin’s first reform effort was to remove the oligarchs who could challenge him politically and replace them with his own political allies, many of whom were either former KGB associates or political upstarts from Putin’s hometown of Saint Petersburg. It was especially important to the new administration that

Russia’s natural resource companies be controlled by professionals and executives who share the same vision on the development of Russia.

Putin’s first target was Gazprom. During the 1990s the gas industry, though never officially privatized, had gradually drifted out of the state control. Gazprom, which had become one the largest and richest companies in Russia by the end of the 1990s, was

175 nominally under state ownership, but actual control of the company had increasingly passed into hands of its senior managers, beginning with its general director Rem

Viakhirev, a protégé of former prime-minister Chernomyrdin, and his relatives and friends.

On May 30, 2001, when Viakhirev’s contract as general director expired, Viakhirev was summoned to the Kremlin and dismissed. Putin replaced him with the 39-year-old Alexei

Miller from Saint Petersburg who was a staff member of the Committee on International

Relations led by Putin in the Saint Petersburg mayoralty in the early 1990s and had never worked in the gas industry, and thus had no connection whatsoever to the Viakhirev management and his “gas family kraken.” By the end of 2003, Miller had largely carried out the mission that Putin entrusted him, that of restoring Gazprom’s control over the gas industry and bringing Gazprom back under the control of the Kremlin.278

Today, Gazprom is the world’s largest natural gas producer and holds the largest natural gas reserves. The company also owns the world’s largest gas transmission system with a total length of 171.2 thousand kilometers. Gazprom’s share in the global and

Russian gas reserves amounts to 17 and 72 percent respectively. Gazprom sells more than half of its gas to Russian consumers and exports gas to more than thirty countries, benefiting both from close Kremlin patronage (the Russian state is its largest shareholder) and from a web of business and political relationships in countries it sells gas to, notably

Germany and Italy. Gazprom, through its oil subsidiary, GazpromNeft, is also among

Russia’s top four oil producers. The company owns major power-generating assets accounting for some 17 per cent of the total installed capacity of the national energy

278 Thane Gustafson, Wheel of Fortune: The Battle for Oil and Power in Russia (Cambridge – London: The Belknap Press of Harvard University Press, 2012), pp. 266-268; Karen Dawisha, Putin’s Kleptocracy: Who Owns Russia? (New York – London: Simon & Schuster, 2014), pp. 280-285; Valery Panyushkin and Michael Zygar, Gazprom: A New Russian Weapon [In Russian]. (Moscow: Zakharov, 2008).

176 system. In addition, Gazprom ranks number one in the world in terms of thermal energy generation.279

Oil transportation was next. Transneft, another state-owned company remained the monopoly owner of all oil-export pipelines and the largest oil pipeline company of the world. Today Transneft is operating more than 69 thousand kilometers of trunk pipelines, owns about of 23 million cubic meters of storage tanks, more than 500 pumping stations, and transports 85 percent of the oil extracted in Russia, in addition to considerable volumes of oil and oil products from Russia’s neighboring countries. 100 percent of Transneft’s voting shares are in federal ownership.280 Since 2007, the President of Transneft is Nikolay

Tokarev, former KGB operative who worked together with Putin in Dresden, Germany.

Currently, Transneft and Summa Group control Primorsk (the Baltic Sea) and

Novorossiysk (the Black Sea), the two largest oil trading ports of Russia.281

The turning point came with the October 2003 arrest of the Chairman and CEO of

Yukos, Mikhail Khodorkovsky for tax fraud and evasion. Yukos was the largest oil company in Russia, and Khodorkovsky had been negotiating simultaneously with Chevron and ExxonMobil the possible sale of an equity stake in the company.282 The takeover of

Yukos by state-owned Rosneft demonstrated Russia’s consistent bias toward control and a preference for state ownership. This case is identical to some extent to the rejection of the

Chinese state-controlled CNOOC’s bid for the Unocal by the U.S. government and lawmakers examined in the U.S. Case Study of this research. Washington supported

279 Gazprom. “About Gazprom.” Accessed October 27, 2017. http://www.gazprom.com/about/ 280 Transneft. “About Transneft.” Accessed October 27, 2017. http://en.transneft.ru/about/ 281 Roman Shleinov, “Nikolay Tokarev: from KGB to Transneft,” [In Russian]. Vedomosti, November 2, 2013. 282 Thane Gustafson, Wheel of Fortune: The Battle for Oil and Power in Russia (Cambridge – London: The Belknap Press of Harvard University Press, 2012), pp. 272-318; Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World (New York: Penguin Books, 2011), pp. 39-40.

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Chevron, an American private oil company to purchase Unocal and kept out the foreign investment while Moscow’s preference was state-owned Rosneft.

Rosneft, which had barely survived the 1990s, emerged as an increasingly powerful national corporation. It was only after buying assets formerly belonging to Yukos starting in 2004 and acquiring TNK-BP in 2013 that Rosneft grew to be the world’s largest listed oil company in terms of production and reserves.283 Today, Rosneft is the leader of

Russia’s petroleum industry. The company’s largest shareholder (50.00000001% of the equity) is JSC Rosneftgaz, fully owned by the Russian Government, while British

Petroleum holds 19.75% of shares, QHG Shares Pte. Ltd. (a joint venture between the

Qatar Investment Authority and the Swiss oil trading firm Glencore) holds 19.5% of shares, one share belongs to the Russian Federal Agency for the State Assets Management, whereas the remaining shares are free floating. The company’s main activities include prospecting and exploration of hydrocarbon deposits, oil, gas and gas-condensate production, upstream offshore projects, processing, as well as oil, gas, and product marketing in Russia and abroad. Rosneft is a leader in oil refining in Russia, as well.284

Igor Sechin, CEO and Chairman of the Management Board of Rosneft and President

Putin’s close associate from Saint Petersburg, always saw Rosneft as Russia’s flagship company and a key part of international diplomacy. For Sechin this means expansion abroad, and currently Rosneft has major assets located in Russia and a diversified portfolio

283 In 2013, Rosneft has entered into agreement on the acquisition of TNK-BP from BP and AAA consortium. The deal was valued at $56 billion. After this acquisition, Rosneft produces some 200 million tons of oil a year in Russia and became world-leading public oil company be production and reserves. For comparison, ExxonMobil had an output of $115 million tons a year. Rosneft accounts for 5 percent of total global oil production and has proven international category reserves of more than 5 billion tons of oil equivalent. Source: The Oil Post, Rosneft Corporate Newspaper. “Rosneft to Become World-Leading Public Oil Company by Production and Reserves.” [in Russian]. 2013. 284 Rosneft. “Rosneft at a Glance.” Accessed October 27, 2017. https://www.rosneft.com/about/Rosneft_today/

178 in promising regions of international oil and gas sector, including assets in Venezuela,

Ecuador, Canada, Brazil, Norway, Germany, Italy, Algeria, China, Vietnam,

Turkmenistan, UAE and wherever else the Kremlin seeks to plant a flag.

Putin has fought and defeated all major oligarchs; in the meantime, others pulled back and accepted the new rules of the game, including other major oil companies such as

Lukoil, Surgutnefgas, and Tatneft. According to Putin, his administration put an end to some manipulation schemes which allowed the state property to be sold for free and led to the creation of oligarchs. These schemes also “led to the situation where the government either lost control of strategic industries or just led to the destruction of those industries.

So, my goal was not to stop privatization, but to make it more systemic, more equitable.”285

The Putin’s administration consolidated the oil and natural gas industries into the state-controlled giants Gazprom (natural gas, natural gas pipelines, and oil), Rosneft (oil and refineries), Transneft (oil pipelines). Gazprom’s Alexey Miller and Rosneft’s Igor

Sechin -- allies who followed Putin to Moscow from Saint Petersburg – both wield considerable influence in the Kremlin. These two top executives together with Nikolay

Tokarev of Transneft assisted president Putin to ensure Russia’s global importance as an energy provider. The oil and gas industry were viewed by the new governing elites of

Russia not just a source of wealth but as a resource for political power and state policy.

[See Table 4. Leading Russian Energy Companies]

The following operational indicators also demonstrate how widely Russian national security, bilateral and multilateral diplomacy are affected by energy business and interests:

285 ShowTime Documentary Films. The Full Transcripts of the Putin Interviews. Oliver Stone Interviews Vladimir Putin (New York: Hot Books, 2017), p. 19.

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•! in 2000, the Russian Foreign Ministry’s Moscow based State University of

International Relations (MGIMO) has established International Energy Policy

and Diplomacy Institute to conduct training and studies in the field of energy

diplomacy, geopolitics, and international energy cooperation. Given

the importance of the Institute’s mission, the Ministry of Foreign Affairs of

Russia established the Supervisory Board, chaired by the Minister Sergey

Lavrov to oversee the development of the Institute. The Board includes heads

of major Russian resource-producing jurisdictions as well as heads of leading

Russian energy companies. The International Energy Policy and Diplomacy

Institute in cooperation with Italian, German, French, Norwegian, and Icelandic

universities and business schools also established five international institutes to

study energy diplomacy, energy policy and cooperation, including

renewables.286

•! an additional contribution to improve the effectiveness of the Foreign

Ministry’s interaction with industries and its diplomatic support to Russian

business is made by the Business Council of the Minister of Foreign Affairs,

which was established in May 2006. The main tasks of the Council are to

develop close relations with the Russian business, including energy companies

in order to protect Russia's political and economic interests abroad. As a part of

the implementation of the overall external economic objectives, the Ministry

286 MGIMO University. “International Energy Policy and Diplomacy Institute.” Accessed October 29, 2017. [In Russian]. http://www.miep.mgimo.ru

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concluded cooperation agreements with the Union of Oil and Gas Producers of

Russia, Rosneft, and Lukoil among others.287

•! since 2001, diplomats of territorial departments of Russian Foreign Ministry

coordinate energy and foreign policy issues if they are related to bilateral

relations, and the Department of Economic Cooperation of the Ministry

manages energy affairs when it comes to multilateral international relations.

The examination of the Russian foreign policy concepts adopted in the twenty-first century demonstrates that in the Concept of 2008, great importance was attached to the maintaining of Russia’s reputation as a responsible partner in the world energy markets and promoting the balance of these markets. In the Concept-2013, this approach was developing into the task of promoting modernization and diversification of the Russian economy, increasing the share of science and innovation in the overall economic structure by attracting advanced scientific knowledge and technologies as well as foreign investments. In addition, a fundamentally new target has emerged; that is, the consolidation of Russia’s status as a key transit corridor to ensure trade and economic ties between Europe and the Asia-Pacific region. Moreover, one of the major dimensions of the

Foreign Ministry’s activities became the diplomatic support and assistance to the interests of the Russian businesses and their operations abroad.288

287 The Ministry of Foreign Affairs of the Russian Federation. “Diplomatic Assistance to the Russian Business.” February 8, 2017. [In Russian]. Accessed October 29, 2017. http://www.mid.ru/ru/foreign_policy/economic_diplomacy/asset_publisher/VVbcI0If1FVU/content/id/2631726 288 Official Internet Resources of the President of Russia. “Foreign Policy Concept of the Russian Federation.” July 15, 2008. [In Russian]. Accessed October 29, 2017. http://kremlin.ru/acts/785; The Ministry of Foreign Affairs of the Russian Federation. “Foreign Policy Concept of the Russian Federation.” February 12, 2013. [In Russian]. Accessed October 29, 2017. http://news.kremlin.ru/media/events/files/41d447a0ce9f5a96bdc3.pdf

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The events that took place within the period of 2013 - 2016, such as the crisis in

Ukraine, the introduction of anti-Russian sanctions by the United States and its European allies, counter-sanctions, and the terrorist attacks of the ISIS in the Middle East and worldwide, affected Russia’s foreign policy course. The new Foreign Policy Concept adopted in 2016, responds to these challenges, and Russia reserves “the right to firmly respond to hostile actions of the United States, including the bolstering of national defense and taking retaliatory or asymmetrical measures.” Russia views the creation of the global missile-defense system by the U.S. as a threat to its national security and also reserves the right to take adequate retaliatory measures.289

One of the key objectives of Russian diplomacy remains integration within the

Commonwealth of Independent States (CIS) and the Eurasian Economic Union (EAEU).

The expansion of ties with partners within the Group of Twenty, BRICS (Brazil, Russia,

India, China and the Republic of South Africa), and the Shanghai Cooperation

Organization (SCO) is also one of the priorities of the Russian foreign policy.290 In the meantime, energy became an increasingly important part in the bilateral and multilateral diplomacy of Russia, and the concept of 2016 reflects on the volatility of commodity markets and the need of states to diversify their presence on global markets to ensure their energy security. It is notable that in the concept of 2016, Russia favors the expansion of the international cooperation to ensure environmental security and supports the Paris

Agreement’s solid regulatory framework for long-term climate policy.

289 The Ministry of Foreign Affairs of the Russian Federation. ““Foreign Policy Concept of the Russian Federation.” November 30, 2016. Accessed October 30, 2017. http://www.mid.ru/en/foreign_policy/official_documents/asset_publisher/CptICkB6BZ29/content/id/2542248 290 Ibid.

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However, Stefan Nedlund argues that it is highly dubious that the use of hydrocarbon exports for foreign policy purpose was a priority of the Putin administration.

Domestic agendas relating to a reassertion of state control for its own sake also played a role, as did motives of asset redistribution.291 Whereas, Ryan Maness and Brandon

Valeriano claim that energy power is perhaps Russia’s most important coercive tool in its arsenal of new power and the most evidence of use of coercive diplomacy is found in the arena of energy politics. In order to achieve its objectives and utilize the power that is available, Russia has been using coercive tactics in the energy arena.292 As stated earlier in the introduction of this case study, the Kremlin’s energy agenda is driven by both domestic and foreign policy motives. According to Ekaterina Svyatets, the energy industry decision- makers in Russia are mostly the same personalities who are responsible for foreign policy.

Normally, they are united around the Russian president and promote the government line.293 The further analysis of Russia’s policy in different regions assists in tracking evidence of how the integration of energy and foreign policy is advanced by Moscow, including the utilization of Russian energy arms such as Gazprom, Rosneft and others.

Russia in the Former Soviet Union Space: Energy and Foreign Policy

Russian foreign policy is based on traditional notions of strength and power determining actions and motives in the international realm. The location of region where a foreign policy challenge arises is also an important context. One of the fundamental stated

291 Stefan Hedlund, Putin’s Energy Agenda: The Contradictions of Russia’s Resource Wealth (Boulder – London: Lynne Rienner Publishers, 2014), p. 61. 292 Ryan Maness and Brandon Valeriano, Russia’s Coercive Diplomacy: Energy, Cyber, and Maritime Policy as New Sources of Power (New York: Palgrave Macmillan, 2015), p. 30; p. 42. 293 Ekaterina Svyatets, Energy Security and Cooperation in Eurasia: Power, Profits, and Politics (London – New York: Routledge, 2016), p. 64.

183 objectives of Russia’s foreign policy is “to pursue neighborly relations with adjacent

States, assist them in eliminating the existing and preventing the emergence of the new hotbeds of tension and conflicts on their territory.”294 The formation of a good-neighborly belt along the perimeter of Russia’s border is a one of the traditional security goals advanced by former foreign minister Primakov. The reasoning for Russia’s interests in its neighboring countries is explained by preserving stability and the current status-quo, preventing further NATO infiltration, and creating favorable external conditions for the steady development of Russia. Much like the American Monroe doctrine of regional control in the Western Hemisphere, Russia operates similarly in the so-called near abroad region.295

Bertil Nygren argues that the European sub-complex consisting of the two Slavic states Ukraine and Belarus and the small non-Slavic Moldova has a special status among other sub-complexes of the larger Russia-led regional security complex. When the Baltic states became members of NATO and the EU, the next geographical “buffer” to Europe and NATO, i.e. Belarus, Ukraine, and Moldova became more important.296 These three republics are completely dependent on Russia for their natural gas needs, as are many other states that were part of the Soviet Union. Ukraine, Belarus, and Moldova fall under the category of importers and transit countries.

294 The Ministry of Foreign Affairs of the Russian Federation. ““Foreign Policy Concept of the Russian Federation.” November 30, 2016. Accessed October 30, 2017. http://www.mid.ru/en/foreign_policy/official_documents/- /asset_publisher/CptICkB6BZ29/content/id/2542248 295 See more in Mette Skak, “Russia’s New “Monroe Doctrine,” in Roger E. Kanet ed., Russian Foreign Policy in the 21st Century (New York: Palgrave Macmillan, 2011), pp. 138-152. 296 Bertil Nygren, The Rebuilding of Greater Russia: Putin’s Foreign Policy towards the CIS Countries (London – New York: Routledge, 2008), p. 47.

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Ukraine has a powerful gas transportation system, which not only allows the gas supply to domestic customers, but also the export of Russian gas to Central and Western

Europe. The total capacity of Ukraine’s gas transportation network amounts to 287.7 billion cubic meters per year, while output capacity is 170.3 billion cubic meters per year, including capacity of output to the European countries – 134.3 billion cubic meters per year.297 These great transit volumes make Ukraine the largest chain of transiting Russian natural gas to Europe.

In summer 2000, the Ukrainian gas debt to Russia developed into a major conflict issue studied by scholars worldwide, including Stefan Hedlund, Roger Kanet, John

Mearsheimer, Bertyl Nigren and many others. The political leaderships of both countries tried to solve it by including the gas debts in the general Ukrainian state debt to Russia.

Nevertheless, the gas debt and increase of its prices by Russia continued to affect the bilateral relations. In 2006, Gazprom suggested a price of $180 per thousand cubic meters instead of the planned $160, which was already raised from $50. This was not accepted by the Ukrainian side. Russia wanted both sales and transit to be settled by cash payments and not by barter. The position of Russia was straightforward: a higher price for the gas distributed and sold to Ukraine, and at the same time a secure delivery of the Russian gas through Ukraine to Europe. Given an outstanding growing debt of Ukraine, Gazprom several times closed the gas tap and reduced the gas supplies by 25-35 percent.

In 2008, with Medvedev in the Kremlin, Gazprom had hinted at a price for 2009 of some $400 per thousand cubic meters, in effect a so-called “European prices.” Gazprom made overt threats of sanctions if the $2 billion gas debt for November and December was

297 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), p. 221.

185 not paid and if no agreement for 2009 was signed. On New Year’s Day 2009, Gazprom cut off its gas supplies to Ukraine, and the impact on Europe was being felt already in the beginning of January. Romania was the first to be hurt with a drop of some 30 to 40 per cent in supplies. Hungary, Czech Republic, and Bulgaria also began to feel the cuts in deliveries. Gazprom promptly accused Ukraine of stealing gas in transit to Europe. The general Russian argument was that Gazprom simply wanted to be paid for its gas deliveries to Ukraine and that Ukraine was to blame for the freeze that East Europeans were experiencing because of gas thefts. On January 19th, the prime ministers Putin and

Tymoshenko signed a ten-year agreement, and the price was set at $360 per thousand cubic meters.298

The Russian-Ukrainian relationship contained the most dangerous conflict in the

CIS region, when the major issues ranged from possible NATO membership for Ukraine and Kiev’s pro-Western path to the status of Crimea and the Russian Black Sea fleet based there. While some analysts and scholars believe that political undertones prevail over commercial argument of the Ukrainian debt for gas, it is clear that Ukraine, being much dependent upon import deliveries of gas from Russia, often failed to fulfill its financial obligations.

In 2010 Ukraine formally agreed to an extension of the Black Sea Fleet lease in

Crimea for another twenty-five years after 2017, i.e. to 2042 – in return for which Ukraine would get cheaper gas from Russia – the price was lowered to $230 per thousand cubic

298 See more on so-called ‘gas wars’ between Russia and Ukraine in Bertil Nygren, “Russian Resource Politics towards the CIS Countries,” in Roger Kanet and Maria Raquel Freire eds., Russia and its Near Neighbors (New York: Palgrave Macmillan, 2012), pp. 224-226; Bertil Nygren, The Rebuilding of Greater Russia: Putin’s Foreign Policy towards the CIS Countries (London – New York: Routledge, 2008), pp. 59- 62.

186 meters.299 Later, Putin suggested that Gazprom and Naftogaz, the Ukrainian state gas company, should merge. Bertil Nygren argues that such a merger would be similar to a rendezvous between a wolf and sheep, and the control over Ukrainian gas pipeline networks was the ultimate Russian goal.300

Ukraine has been asking for EU membership since 1995, but for years the

European Union was too occupied with incorporating Central and East European countries, which was completed in 2004 and 2007, respectively. Ukraine’s intention to sign an

Association Agreement for political association and economic integration with EU in 2013 has raised a furor in the Kremlin, which was trying to block Ukraine from aligning itself with the European Union and NATO. Russia’s aim was to transform the Eurasian Customs

Union into a Eurasian Economic Union by 2015 - a political counterpart to the EU and include Ukraine in the Eurasian integration projects.

In November 2013, in an-unexpected move, then-President Yanukovych rejected the EU-Ukraine Association Agreement, and thousands of Ukrainians took to the streets in protest, seeing the move as a result of strong-arm tactics from Russia. The Russian response to the rejected EU deal was a bailout package and economic deal of its own. The deal was worth nearly $20 billion and was to ensure that Ukraine remained in Moscow’s political orbit for decades to come. It forgave the $5 billion debt already owed by Ukraine to Russia and also included a steep decline in the price of natural gas for the country. The protests in Ukraine escalated and turned violent, which eventually led to the ouster of

299 TASS. “Russia denounced agreements with Ukraine on the Black Sea Fleet of Russia.” [In Russian.] Accessed November 21, 2017. http://tass.ru/politika/1091419 300 Bertil Nygren, “Russian Resource Politics towards the CIS Countries,” in Roger Kanet and Maria Raquel Freire eds., Russia and its Near Neighbors (New York: Palgrave Macmillan, 2012), p. 228.

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Yanukovych and his subsequent exile in February 2014.301 Russia responded by taking

Crimea, a peninsula that is strategically important as a base for the Russian navy in the

Black Sea. Moreover, in the Donbass region of Ukraine, dominated by heavy industries such as coal mining and metallurgy, pro-Russian protests escalated into a civil war between self-declared Donetsk and Luhansk republics and the Ukrainian government.

According to the prevailing wisdom, the Ukraine crisis can be blamed almost entirely on

Russian aggression. However, John Mearsheimer argues that NATO enlargement, the EU expansion eastward, and the West’s backing of the pro-democracy movement in Ukraine – beginning with the Orange revolution in 2004 – were critical elements to move Ukraine out of Russia’s orbit. For Putin, the illegal overthrow of Ukraine’s democratically elected and pro-Russian president – which is rightly labeled as a “coup” – was the final straw.

According to Mearsheimer, great powers are always sensitive to potential threats near their home territory.302

The new Ukrainian leadership is not strong enough to withstand Russian economic and political interests. Since the break-up of the Soviet Union, Ukraine was economically dependent on Russia in more than one respect, perhaps best seen in the fields of energy and capital. Moreover, the ongoing civil war in the south-eastern regions of Ukraine and takeover of Crimea complicated bilateral relations between two countries. Russia also won an early verdict in a London lawsuit that may force Ukraine to repay a defaulted $3 billion

301 Ryan Maness and Brandon Valeriano, Russia’s Coercive Diplomacy: Energy, Cyber, and Maritime Policy as New Sources of Power (New York: Palgrave Macmillan, 2015), p. 121. 302 John Mearsheimer, “Why the Ukraine Crisis Is the West’s Fault: The Liberal Delusions that Provoked Putin,” Foreign Affairs, Sep/Oct 2014, Vol. 92., Issue 5., pp. 77-89. See also Stephen Cohen, “Four Years of Ukraine and the Myths of Maydan,” The Nation, January 3, 2018. Accessed January 15, 2018. https://www.thenation.com/article/four-years-of-ukraine-and-the-myths-of-maidan/

188 bond to Russia.303 The crisis in Ukraine not only underscores the challenges of managing

U.S. and European relations with Russia whose geopolitical reach rises to some extent with the price of oil and gas. It also points out the difficulty for European countries and Ukraine

[See Figure 12] of breaking their dependence on a single energy supplier. On its side,

Russia makes an effort to integrate energy and foreign policy and uses its energy arm,

Gazprom to advance its interests in the region.

Energy is the main engine of power for Russia in its near abroad. Besides pure economic revenues, factors such as close ties to the Russian government, relations with the

West, whether or not the country is a pipeline transport territory for Russian energy exports, and the presence of ethnic Russians in former Soviet Union countries are all relevant to the examination of Russia’s use of energy as a diplomatic weapon and source of power over those countries.

Belarus and Moldova have also been the occasional subjects of gas delivery problems. After Putin’s victory in the presidential elections in March 2000, he visited

Minsk within a couple of weeks and firmly placed the economic aspects of the Russia-

Belarus Union treaty signed by Yeltsin and Lukashenka at the center of bilateral relations rather than the political, security or defense aspects. It became evident that Putin and

Lukashenka have very different perspectives on integration. According to Putin, the economic ties should be the root of integration and that “defense and political plans cannot be built on a shaky economic foundation” and the two countries should concentrate on a

303 Bloomberg. “Russia Wins Early Verdict in $3 Billion Ukrainian Bond Case.” March 9, 2017. Accessed December 30, 2017. https://www.bloomberg.com/news/articles/2017-03-29/russia-wins-early-verdict-in- case-over-3-billion-ukrainian-bond

189 single tax policy, customs area, and joint tariff regulations.304 The energy and pipeline sector has been a prime object of Russian interest. A political and legal ground for energy cooperation between Russia and Belarus has been regulated by different interstate agreements, including the “Agreement on equal conditions in pricing.” Nevertheless, the pricing of gas deliveries to Belarus was directly linked to the issue of selling shares in the

Belarusian gas transit and distribution company Beltransgaz. In the end of 2003 – beginning of 2004 Russian government decided to cancel gas supplies to Belarus at beneficial prices. As a counter-step Belarus threatened to stop transit of Russian gas to

Germany and Poland, which would have led to serious problems in relations between

Gazprom and its European partners. In 2004, Belarus and Gazprom concluded an agreement on gas supplies and transit cooperation. According to this agreement, the price of gas supplied by Gazprom to Belarus in 2004 was set to $46.68 per thousand cubic meters. In 2006, Gazprom initiated the issue of its participation in the privatization of the

Belarus gas transportation system and started negotiations on the market prices for the gas deliveries to Belarus. The outcome of negotiations between parties was the compromised price of $100 per thousand cubic meters instead of $130 proposed by Gazprom.305

Between 2007 and 2010, Gazprom also acquired 50 per cent stake in Beltransgaz. On

November 25, 2011, in furtherance of the intergovernmental agreement between Russia and Belarus, Gazprom and the State Property Committee of Belarus entered into the purchase and sale contract for the remaining 50 per cent stake of Beltransgaz. The company became a wholly-owned subsidiary of Gazprom and was renamed Gazprom

304 Bertil Nygren, The Rebuilding of Greater Russia: Putin’s Foreign Policy towards the CIS Countries (London – New York: Routledge, 2008), pp. 70-74; 260. 305 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), pp.214-217.

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Transgaz Belarus. The total length of gas pipelines of the Republic of Belarus, providing transit of Russian natural gas to European countries, is more than 2,500 km. In addition,

Gazprom Transgaz Belarus performs operator functions for the operation of the Yamal-

Europe main gas pipeline owned by Gazprom, which delivers gas to Poland and

Germany.306

The Russia-Belarus energy dispute involved the issue of transit tariffs of Russian oil, as well. Russia also claimed that in 2007 Belarus began siphoning large amounts of oil off the pipe. The Russian pipeline company Transneft stopped pumping oil into the

Druzhba pipeline and resumed oil exports through the pipeline only after Belarus ended the extremely high transit tariffs that sparked the shutdown. Bertil Nygren argues that Russia-

Belarus relations saw a downward spin under Putin, and the grand design for political integration inherited from the Yeltsin era was effectively stopped by Putin’s

“economization” of Russian foreign policy.307 The energy and pipeline sector has been a prime object of Russian interest. At the same time, Russia and Belarus constitute the closest military ties that exist in the post-Soviet space, and the importance of this fact should not be overlooked.

Moldova, another transit state and importer, does not possess any oil, gas, or coal reserves. In order to satisfy domestic demands, it has to import from Russia and Ukraine, and Russian gas is Moldova’s major energy source. Today Moldova’s natural gas industry is mainly controlled by a joint Russian-Moldovan enterprise Moldovagaz, in which

306 Gazprom. “Beltransgaz renamed Gazprom Transgaz Belarus.” Accessed January 30, 2018. http://www.gazprom.com/about/subsidiaries/news/2013/april/article161005/ ; Gazprom Transgaz Belarus. “The Field of Activities.” [In Russian.] Accessed January 30, 2018. http://belarus- tr.gazprom.ru/about/activities/ 307Bertil Nygren, The Rebuilding of Greater Russia: Putin’s Foreign Policy towards the CIS Countries (London – New York: Routledge, 2008), p. 80.

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Gazprom has a 50 percent share.308 Lukoil-Moldova, a subsidiary of Russian oil company

Lukoil, is also one of the leaders in the hydrocarbon market of Moldova.309 Russian-

Moldovan interstate energy cooperation is developing in accordance with the “Agreement on transit and supply of natural gas from the Russian Federation to the Republic of

Moldova,” signed in November 2001.310 The unsettled status of the Transnistria region, a landlocked self-proclaimed state between Ukraine and river Dniester is the main controversy in relations between Russia and Moldova. Besides the Transnistrian problem, one of the most difficult issues between the two countries is Moldova’s debt on payments for supplied gas. The price on gas supplied by Gazprom to Moldova was considerably lower than on gas supplied to neighboring Romania and Bulgaria. Nevertheless, Moldova insists on restructuring of the accumulated debts and readdress more than 80% of the debt to the authorities of Transnistria. Gazprom claims that the current agreement between

Moldova and Gazprom does not separate the payment obligations between Moldova and

Transnistria. For Moscow, a probable solution might be a transfer of some of the country’s energy industry facilities to the ownership of the Russian companies. Moldovan inability to pay old and current energy debts has been used by Gazprom to acquire desirable Moldovan assets.

The cases of Ukraine, Belarus, and Moldova demonstrate how Russian governing elites prioritize the integration of foreign and energy policy and use energy as an efficient instrument in Russian foreign policy.

308 Moldovagaz. [In Russian.] Accessed January 30, 2018. http://www.moldovagaz.md/rus 309 Lukoil-Moldova. “About Us.” [In Russian.] Accessed January 30, 2018. http://www.lukoil.md/ru/about_us 310 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), p. 218.

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Other importers in the post-Soviet space, besides these three countries, are Armenia and Georgia in South Caucasus, and Tajikistan and Kirgizstan in Central Asia. The Baltic states are also dependent upon supplies of Russian gas.

The political situation in South Caucasus is rather unstable. Unsolved Nagorno-

Karabakh conflict, tensions between the governments of the South Ossetia and Abkhazia on the one side and the Georgian government on the other have a negative impact on the prospects of the regional energy cooperation, including the implementation of oil and gas transit projects.

Armenia has been Russia’s main ally in the South Caucasus since the break-up of the Soviet Union. Gazprom Armenia, which manages country’s gas transportation system, is a subsidiary of Gazprom. It is also responsible for gas supplies on domestic markets, management of interstate transit of Russian gas, as well as for domestic and international sales of electric energy generated using Russian gas resources. This company was founded in 1997 as a joint Russian-Armenian project and Gazprom owned only 45 percent of stock.

In 2014, Gazprom became a sole owner of the company.311 This company also owns the majority of shares of the Armenian section of the Iran-Armenia gas pipeline which runs from Tabriz to the Armenian border with a small capacity of 2.3 billion cubic meters of gas per year. Russia is a main supplier of the refined products to Armenia as well. Both countries have similar views on many international issues and the intergovernmental agreements between Armenia and Russia provide a framework for political, military, and economic cooperation.

311 Gazprom Armenia. “About Company.” [In Russian.] Accessed February 1, 2018. http://armenia.gazprom.ru/

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Russia is also a Co-Chair of the OSCE Minsk Group, the only mediating body of the Nagorno-Karabakh conflict, the most protracting one in the former Soviet Union.

Moscow tremendously profits from weapons sales to the parties to the conflict and is seeking the kind of unilateral role in this conflict resolution. Russia has a military alliance with Armenia and a fairly close relationship with Azerbaijan. The presence of the Russian military base in Armenia, significant debt of Armenia to Russia, and activities of the

Russian companies in the main industries of the Armenian economy, including in the field of nuclear energy keep Armenia in the firm grip of Moscow.

Georgia, neighboring country of Armenia, strives for increasing its role as an important transit state. The Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the Baku-Tbilisi-

Erzurum gas pipeline project which runs parallel to BTC, provide the state with significant economic benefits. Georgian international energy policy is determined by its desire to make possible transportation of the Caspian hydrocarbons bypassing Russia. In the meantime, most of domestically consumed gas is imported via the North-South (Mozdok-

Tbilisi-Yerevan) gas pipeline from Russia. The gas transit route to Armenia also crosses the territory of Georgia. This pipeline network has always been a kind of hot spot of political and economic importance. First of all, it is a generally negative background of bilateral political relations between Georgia and Russia. The situation aggravated even more after new forces headed by former president Saakashvili came into power in Georgia in 2004 for two consecutive terms. In this period, Georgia demonstrated its pro-American position as far as the issue of energy independence of Russia is concerned. Starting in

January 2007 Gazprom increased natural gas prices to Georgia to $235 per thousand cubic

194 meters. Georgia’s government was considering the refusal to import gas from Russia.

Since then, the key supplier of gas to Georgia is Azerbaijan.

The intention of Georgia to become a member of NATO led to the further deterioration of bilateral relations. In 2008 war Russian forces routed troops loyal to the

Georgian authorities and secured the breakaway regions of Abkhazia and South Ossetia as

Russian protectorates. Dmitri Trenin argues that the five-day campaign was a clear success: Moscow prevented NATO from expanding into a former Soviet state that was flirting with membership, confirmed its strategic supremacy in its immediate southern neighborhood, and marked the limits of Western military involvement in the region.312

Russia recognized Abkhazia and South Ossetia as independent states, then proceeded to integrate them into the Russian military, economic, and political space. However, new

Georgian authorities are gradually normalizing their relations with Russia despite the 2008 war. According to Nicu Popescu, Georgia’s pro-Western consensus remains strong, but a striking 31 per cent of Georgians are willing to join the Russia-led Eurasian Union, a number that would have been hard to imagine a decade ago.313 Another issue that complicates this uneasy political and economic situation – negotiations of the Georgian government and Gazprom over transit of Russian gas to Armenia via Georgia. Both parties update the agreement every year. Gazprom offers cash payment for the transit, while

Georgia insists on ten percent of the transited gas not to face gas deficit. In 2006, the state- run Georgian Oil and Gas Corporation, which owns and manages the pipeline that

Armenia uses as a transit route to import gas from Russia, put some efforts with the

312 Dmitri Trenin, “The Revival of the Russian Military,” Foreign Affairs, Volume 95. Number 3. May/June 2016, p. 24. 313 Nicu Popescu, “Why Georgia’s Lessons for Russia Don’t Apply in Ukraine,” Carnegie Moscow Center. Accessed February 2, 2018. https://carnegie.ru/commentary/75483

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Georgian government to sell shares of the company i.e., the Georgian segment of the

North-South pipeline, which connects Mozdok, Tbilisi, and Yerevan. The poor condition of the pipeline required private investment for reconstruction. Gazprom was interested to purchase this segment, and the deal almost had been concluded when the United States offered $49.5 million to renovate the pipeline. In return for the U.S. investment, the

Georgian government agreed to ban the sale of the pipeline for five years. In 2010, the issue again returned to the agenda. The Georgian Parliament passed a bill, which removed the pipeline form the list of strategic government-owned facilities and made a sale possible.314 The attempts to sell the pipeline in 2011 and 2012 also failed. Among the potential companies that are interested in purchasing the pipeline are Gazprom and

Azerbaijan’s state-owned company SOCAR. Russia’s desire to buy this segment is obviously driven by its intention to gain additional economic leverage for implementing its foreign policy in the region.

Two other importers, Kyrgyzstan and Tajikistan express strong interest in attracting

Russian companies to take part in reconstruction and development of their oil and gas industry infrastructure. In 2014, Kyrgyzstan, which is a member of the Eurasian Economic

Union, and Gazprom signed in Bishkek a Sales and Purchase Agreement pursuant to which

Kyrgyzgaz assigned a 100 per cent stake in its subsidiary KyrgyzgazProm to Gazprom.

The company Gazprom Kyrgyzstan, which is a wholly owned subsidiary of Gazprom, is focused on natural gas supplies and marketing within the Kyrgyz Republic.315 In 2003,

Gazprom and the government of Tajikistan signed a cooperation treaty for a term of 25

314 Lusine Badalyan, “Interlinked Energy Supply and Security Challenges in the South Caucasus,” Caucasus Analytical Digest, No. 33, 12 December 2011, pp. 2-6. 315 Gazprom. “Gazprom Kyrgyzstan.” Accessed February 5, 2018. http://www.gazprom.com/about/subsidiaries/list-items/kyrgyzstan/

196 years on the participation of Gazprom in exploration, development, and exploitation of new deposits and reconstruction of pipelines. Some Russian oil companies, such as

Rosneft and Sibneft strive for a right to take part in development of oil deposits in

Tajikistan. Needless to say, that Russia has military bases in both countries and both of them are heavily dependent on Russia.

The evolution of the Russian energy interests and foreign policy objectives in post-

Soviet space should be also reviewed with the group of producers and exporters of energy resources – Azerbaijan, Kazakhstan, Uzbekistan, and Turkmenistan.

The construction of the Baku-Tbilisi-Ceyhan and the Baku-Tbilisi-Erzurum pipelines introduced significant changes to the South Caucasus and left Russia out of these projects. For a long period after the break-up of the Soviet Union, Azerbaijan was giving preference to the U.S. and the EU to attract foreign investments to develop oil and gas fields and ensure sustainability of the state’s oil and gas infrastructure. However, Putin and

Russia’s new governing elites significantly changed the direction of bilateral relations. The influx of Russian arms into Azerbaijan, trilateral regular summits of the presidents of

Russia, Iran, and Azerbaijan and as a result the construction of the Azerbaijani railroad segment of the International North-South transport corridor which will increase the trade connectivity between major cities such as Mumbai, Tehran, Baku, Astrakhan, and

Moscow, the Russia’s major role in restoring the ceasefire after four-days war in Nagorno-

Karabakh in April 2016, left President Aliyev with the impression that Russia alone calls the shots in the South Caucasus. Moreover, according to Alexey Pushkov, Member of the

Council of the Federation, the upper chamber of the Russian Parliament and Vladimir

Solovyov, a Russian TV journalist, President Aliyev understands that the United States has

197 an intention to change the regime in Azerbaijan316 and if he does not maintain good relations with Russia, he might face the fate of Muammar Gaddafi or the best-case scenario, the destiny of ex-Georgian president Saakashvili.317

Another issue between Russia and Azerbaijan is to define a legal status of the

Caspian Sea which also involves other coastal countries such as Iran, Turkmenistan, and

Kazakhstan. To find a balance of interests among these five countries is required to develop oil and gas resources of the Caspian Sea, invest into the development of these deposits and provide reliable transportation of the Caspian hydrocarbons to the world markets. Oil and gas are not the only resources of the Caspian. It also concentrates about

90% of the world sturgeon fish reserves.

The international legal status of the Caspian can be determined by an answer to a basic question: whether the Caspian Sea is an international border lake or an internal sea because the legal regime of international lakes and internal (closed) seas greatly differs. If the Caspian Sea is recognized as an internal sea, the UN Convention on the law of the sea of 1982 shall apply to it. If the Caspian is identified as a lake, then its legal status can be covered by the principles and provisions of international law recorded in the agreements as to lakes, on the coast of which two or more states are located (customary international law). But the Caspian countries failed to find an answer and consensus to such question that seems to be simple at first glance.

Russia’s current position accepts as expedient the Caspian Sea bed division between the Caspian countries. However, Russian diplomacy opposes the Caspian Sea

316 One of the best descriptions of the activities of the Aliyev dynasty and accumulated wealth, property and business interests around the world is featured at the CNBC film Filthy Rich: The Aliyev Family of Azerbaijan. 317 TV Channel Rossiya 1. “The Evening with Vladimir Solovyov,” [in Russian], August 1, 2017.

198 being divided into national sectors under the sovereignty of the coastal states and does not recognize the unilateral actions to this effect. According to the Russian position, only the near-Caspian countries possess exclusive rights to the Caspian Sea and its resources. This means that the Caspian Sea is a unique closed continental basin that should have a special legal status and the norms and concepts of the international marine law are not extended to the Caspian Sea, in particular, the UN Conventions on the law of the sea of 1982. Russia suggests that a new Caspian legal status shall be based on the formula “we divide the sea bed for subsoil use while the water is common.”318 While the coastal countries have serious discrepancies over the status of the Caspian, Russian Lukoil expanded its strategy in Azerbaijan and got shares in a number of sea bed development projects. Rosneft continues feasibility studies on projects to be implemented in the Caspian region and views

Caspian as advantageous investment destination. Igor Sechin is seeking a stake in

Azerbaijan’s Absheron gas project and discussed this issue with president Aliyev.319

Gazprom and SOCAR reached an agreement to resume natural gas supplies to Azerbaijan.

Gas supplies started on November 22, 2017. It is planned to deliver a total of 1.6 billion cubic meters of Russian gas to Azerbaijan under this contract.320 The Russian government has also announced the construction of a highly sophisticated naval facility for its Caspian

Flotilla, moving it from Astrakhan to Kaspiysk, Dagestan by 2020. The new base will be one of Russia's most technically advanced naval facilities. This facility will entrench

318 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), pp. 255-257. 319 Reuters. “Russia’s Rosneft Seeks Azeri Gas Field Stake: Sources,” Accessed February 6, 2018. https://www.reuters.com/article/us-rosneft-total-azerbaijan/russias-rosneft-seeks-azeri-gas-field-stake- sources 320 Gazprom. “Gazprom Resuming Gas Deliveries to Azerbaijan,” Accessed February 6, 2018. http://www.gazprom.com/press/news/2017/november/article381898/

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Moscow’s military hegemony over the Caspian region for years to come.321 During August

2013 Putin’s visit to Baku, Russian warships arrived in the port of Baku to demonstrate the naval power of the Russian Caspian Flotilla. According to Bertil Nygren under Putin,

Azerbaijan has been a cooperative partner with respect to the Caspian Sea and its resources, and bilaterally electricity grids as well as the export of Azeri oil and gas to and via Russia have constituted important integrative measures.322

The foreign policy of Russia in the Caspian and Central Asian regions and its relations with oil and gas producers of this region (Azerbaijan, Turkmenistan, Kazakhstan, and Uzbekistan) are significantly influenced by energy. Gas is much more a problem than oil for Caspian producers since their landlocked position means that they cannot develop

LNG for shipping as a way of overcoming their dependency on pipelines. As a result of its pre-eminent position as ‘gatekeeper’ to export markets, Russia controls around 80 percent of Turkmenistan’s gas exports and a similar proportion of Kazakhstan’s oil exports. Russia has exploited the situation with gas over much of the past 20 years by using Central Asia gas as backfill for is domestic needs. It has bought this gas at a very substantial discount, which it could then sell abroad for a substantial profit. Finally, as claimed by John Lough,

Russia extends its influence further through its ability to compete with proposed new pipeline systems from the Caspian region in its attempt to prevent Caspian producers from

321 Samuel Ramani, “Russia Security Inroads with Turkmenistan,” The Diplomat, November 24, 2017. Accessed February 6, 2018. https://thediplomat.com/2017/11/russias-security-inroads-with-turkmenistan/ 322 Bertil Nygren, “Russian Resource Politics towards the CIS Countries,” in Roger Kanet and Maria Raquel Freire eds., Russia and its Near Neighbors (New York: Palgrave Macmillan, 2012), p.232.

200 exporting independently of Russia. The case of South Stream also known as Turk

Stream323 versus Nabucco324 provides a clear example.325

The proved reserves of oil in Turkmenistan are estimated at 200-300 million tons.

According to estimations of Russian and western experts, Turkmenistan’s maximum gas reserves are amounted to more than seven trillion cubic meters, which ranks the country sixth in the world. Turkmenistan is largely dependent on gas export incomes; the gas industry provides around 50 per cent of the GDP value. Turkmenistan stayed out of deep engagements with Russia in the security and defense sphere. It has been the most ‘neutral’ of all new-post Soviet states – Turkmenistan is neither a CIS member nor one of the

Eurasian Economic Union. Putin’s first foreign visits as a head of state were to Uzbekistan and Turkmenistan. After these visits, the energy policy of Russia in Central Asia and in particular Gazprom’s strategy radically changed. Central Asia became a polygon to be taken under control.

Since the collapse of the Soviet Union, Turkmenistan has constantly raised a question of cooperation in oil and gas, transport, and refining industries. Under Putin, the leaders of Turkmenistan realized that it would be impossible to do without strong liaisons with Russia. In the beginning of the 21st century, the “Treaty of Friendship and

Cooperation between the Russian Federation and Turkmenistan” was signed by the

323 Turkstream is a currently implemented international project of a gas pipeline from the Krasnodar region of Russia along the bottom of the Black Sea to the western part of Turkey. Gazprom intends to transport fuel via this pipeline to the countries of south-eastern Europe. 324 Nabucco was a proposed natural gas pipeline from the Turkish-Bulgarian border to Austria. The potential suppliers of the Nabucco project were considered to be Iraq, Azerbaijan, Turkmenistan, Kazakhstan, and Uzbekistan. The aim of the Nabucco pipeline was to diversify the natural gas suppliers and delivery routes for Europe, thus reducing European dependence on Russian energy. The project was backed by several European Union members and the U.S. however, it has effectively been cancelled. 325 John Lough, “Russia’s Energy Diplomacy,” Chatham House, May 2011. Accessed February 17, 2018. www.chathamhouse.org.uk

201 president Putin and former president-for-life Niyazov. Another important agreement is the

“Gas Industry Cooperation Act between Russia and Turkmenistan until 2028” signed in

2003 in Moscow by both presidents. Gazprom signed an agreement with Turkmenneftegaz to increase the volumes of imported gas from five billion cubic meters in 2004 to 70-80 billion cubic meters in 2028.326

The Central Asia – Center gas pipeline system which runs from Turkmenistan via

Uzbekistan and Kazakhstan to Russia was already controlled by Gazprom. After Niyazov’s death, in 2007 new president of Turkmenistan Berdymukhammedov signed an agreement with Putin and Kazakh President Nazarbayev to build the new pre-Caspian pipeline around the northern shore of the Caspian Sea, bringing an additional 30 billion cubic meters per year of Turkmen gas to Russia (and thence to Europe) by way of Kazakhstan. Stefan

Hedlund argues that this was the peak of the Kremlin’s ambition to secure the Caspian

Basin and build a pipeline which looked set to substantially alter the map of the game.

Designed to hug the northern shore of the Caspian, it was to ensure that the bulk of Central

Asian gas would flow north into Russian grid.327 Although Berdymukhammedov used to insist that he remains open to the idea of participating in Nabucco, the proximity of

Russian market appear to have made the pre-Caspian pipeline a higher priority.328

Kazakhstan, another member of the Eurasian Economic Union, with the output of about 1.4 million barrels per day is the largest oil producer in the Caspian region. Russia and Kazakhstan have strong ties at the levels of the CIS, the Eurasian Economic Union,

326 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), p.207. 327 Stefan Hedlund, Putin’s Energy Agenda: The Contradictions of Russia’s Resource Wealth (Boulder – London: Lynne Rienner Publishers, 2014), p. 79. 328 Valery Panyushkin, Michael Zygar, Gazprom - novoe russkoe oruzhie, [in Russian] (Moscow: Zakharov, 2008), pp.183-190.

202 and the Shanghai Cooperation Organization. A legal framework of Kazakh-Russian cooperation, including the energy sector is set out in more than 260 bilateral agreements.

The state-owned KazMunaiGas and Timur Kulibaev,329 son-in-law of the President

Nazarbayev have full control of the country’s oil and gas industry. KazMunayGaz and

Gazprom established the company KazRosGas with a 50/50 stake in 2002 to consolidate efforts across a number of new projects in Kazakhstan.

Driving Russian policy in Kazakhstan are the activities of four major Russian energy companies: Gazprom, Lukoil, Transneft, and Rosneft. These companies allow

Moscow to keep Kazakhstan within the sphere of Russian interests and help prevent China from dominating Kazakhstan’s economy. Their participation in local energy projects gives

Russia access to oil and gas reserves, while binding the two countries in the energy, including nuclear industry, transport, space, and agriculture sectors.

The basis of the partnership rests on agreements covering petroleum contracts and energy supplies transiting through Kazakhstani and Russian territory to European or

Chinese markets. Currently, the leading Russian investor in Kazakhstan is Lukoil, which operates seven projects and has a stake in the cross-country pipeline Caspian Pipeline

Consortium (CPC). In 2013, 32.7 million tons of oil was pumped through the pipeline, 28 million tons of it exported from Kazakhstan.

Since January 1, 2014, Rosneft has been able to transport 7 million tons of oil each year via the Priirtyshsk-Atasu-Alashankou route under an intergovernmental agreement on sending Russian oil to China via Kazakhstan, which was inked at a meeting of the

Supreme Eurasian Economic Council on December 24, 2013. Russian authorities have

329 Timur Kulibaev is a Chairman of the Kazakhstan Association of Oil and Gas Sector Organizations (KazEnergy) and member of the Board of Directors of Gazprom.

203 stated that the transported amount can be increased to 10 million tons. This will allow

Moscow to expand long-term economic cooperation with Astana and guarantee the latter additional budget revenues of 54.6 million dollars as a transit charge. Moreover, the agreement extended the Atasu-Alashankou pipeline capacity from 12 to 20 million tons of oil per year.

The third important pipeline of Russia and Kazakhstan is the Atyrau-Samara route, which transfers Kazakh oil to Russia and then on to Europe. In 2013, 15.4 million tons of oil was transported via this route. Finally, both countries use a maritime route in the

Caspian Sea between Aktau and Makhachkala to deliver 2.7 million tons of oil. This stable energy partnership is also evident in the gas sector. Two gas pipelines - Central Asia -

Center and Bukhara - Ural – that run through Kazakhstan territory let Gazprom expand its resource portfolio and guarantee an uninterrupted gas supply abroad.330

Russian foreign policy and the Eurasian Economic Union seek to enhance the strong ties between the two countries and shared heritage of the former Soviet Union.

Astana’s position also makes clear that Russia will remain a primary partner of

Kazakhstan.

While Russia maintains an entrenched energy trade partnership with Kazakhstan, it has looked to supplement its ties with Astana with deeper relations with Uzbekistan, another energy-rich Central Asian partner. The oil and gas industry is the largest in this country. Uzbekistan possesses large proved reserves of gas, which in the beginning of

330 Rafael Kandiyoti, Pipelines: Flowing Oil and Crude Politics, (London- New York: I.B. Tauris, 2012), pp. 185-190; Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), pp. 199- 203; Arthur Gushchin, “China, Russia, and the Tussle for Influence in Kazakhstan,” The Diplomat. March 23, 2015. Accessed February 18, 2018. https://thediplomat.com/2015/03/china-russia-and-the-tussle-for- influence-in-kazakhstan/

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2005 were estimated at 1.9 trillion cubic meters and about 4-5 trillion cubic meters of undiscovered gas reserves. The country’s gas extraction capacity in 2005 exceeded 53 billion cubic meters, which ranks Uzbekistan the third among the CIS states, after Russia and Turkmenistan.331 Uzbekistan’s proved oil reserves amount to 100-200 million tons.

The country exports gas to Russia, Kazakhstan, Kyrgyzstan, and Tajikistan and small amounts of oil and refined products to neighboring countries.

Since 2003-2004 Uzbekistan leaders have begun to promote strategic and economic cooperation with Russia, including energy cooperation. It correlates with the fact that

Uzbekistan did not receive desirable western investments in proposed energy projects.

Therefore, Uzbekistan started to pay greater attention to energy cooperation with Russia, especially in the gas industry. Uzbekistan’s gas transport network is also connected with the CIS integrated system of gas pipelines.

Besides the strategic partnership treaty signed by Putin and former president

Karimov in 2004, which gave a new boost to development of interstate political and economic cooperation, another agreement was signed between Lukoil and UzbekNefteGaz

National Holding Corporation on the development of Kandym-Khauzak-Shady deposit situated in the southern Uzbekistan. In the consortium Lukoil has 90 per cent and

UzbekNefteGaz - 10 per cent of shares. In November 2007, the consortium started the supply of gas from the Khauzak area.332

331 U.S. Energy Information Administration. 2004. Caspian Sea Region. Washington D.C., 2004; BP Statistical Review of World Energy 2005. (London: British Petroleum, 2005). 332 Rigzone. “Lukoil and Uzbekneftegaz Begin Supplying Gas from Khauzak Area.” November 14, 2007. Accessed February 18, 2018. https://www.rigzone.com/news/oil_gas/a/52891/lukoil_and_uzbekneftegaz_begin_supplying_gas_from_khau zak_area/

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Uzbekistan’s weakening economic position and rising inflation provides Russia with an opportunity to consolidate a durable trade partnership with Tashkent. By settling a debt dispute with Tashkent that dates back to the early 1990s, Putin has taken his first step toward capitalizing on Uzbekistan’s growing vulnerability. In synchrony with its debt forgiveness pledge, Gazprom took an advantage with the UzbekNefteGaz to purchase 5 billion cubic meters of Uzbek natural gas annually.333 In the landmark “Agreement on strategic cooperation in the gas industry” from December 17th, 2002, Gazprom and

UzbekNefteGaz National Holding Corporation agreed on long-term supplies of

Uzbekistan’s natural gas for 2004-2012 as well as on cooperation in geologic exploration of some deposits on terms of production sharing agreement. Moreover, Russia has considerable leverage over the Uzbek economy. Three million Uzbek migrant workers live in Russia, and their productivity is responsible for 25 percent of Uzbekistan’s GDP.

In addition to improved counter-terrorism cooperation agreed between Putin and the new president Mirziyoyev, Uzbekistan has a vested interest in cooperating with Russia to ensure that its borders with Kyrgyzstan, Tajikistan and Afghanistan remain secure.

Russia’s foreign policy and energy relations with Tashkent are giving required results in achieving economic and political influence in Uzbekistan.

Since the beginning of his presidency, Putin sought to rebuild lost “great power,” first and foremost by controlling energy resources, to be followed by economic dominance and integration of the former Soviet space, and in the longer term, also by much closer political integration. Putin’s Kremlin team has been extremely skillful at nationalizing

333 Uzbek gas sold to Russia went from $44 to $60 per thousand cubic meters and was resold by from $120 per thousand cubic meters. See Bertil Nygren, “Putin’s Use of Natural Gas to Reintegrate the CIS Region,” Problems of Post-Communism, Vol. 55. No. 4, July/August 2008, p. 10.

206 energy resources and advance the business of the state-owned energy giants such as

Gazprom, Rosneft, and Transneft in the post-Soviet area. These three companies and private energy companies such as Lukoil, Surgutneftegas are highly integrated with the federal state elite. These governing elites hand-picked by Kremlin’s inner circle prioritize the integration of energy and foreign policy of Russia in the former Soviet Union. Whether it is an investment in Armenia’s energy infrastructure, gas supplies to Ukraine and Belarus, or geologic exploration of Kazakhstan’s and Uzbekistan’s deposits, Russia is the dominant player.

Tyan Mannes and Brandon Valeriano claim that countries of the former Soviet

Union whose governments have closer diplomatic ties to Russia than to the West will have lower natural gas prices relative to those post-Soviet countries that do not have close ties to

Russia.334 The extent to which energy is an efficient instrument in Russian foreign policy depends in part on the general price level. Countries on friendly terms with Russia

(Armenia and Belarus) have managed to postpone price increases, but in the end have not been able to withstand Russian demands for higher prices. Countries too poor to pay higher prices (or their accumulated energy debts - Tajikistan, Kyrgyzstan, and Armenia) have been forced to sell what little energy independence they had by paying with domestic energy infrastructures, production, and transportation. Countries on not-so-friendly terms with Russia (Georgia and Moldova) have not been able to postpone price raises, and in addition have seen separatist parts of their territories (Transdniester, Abkhazia, and South

Ossetia) being more or less offered lower domestic Russian gas prices.335

334 Ryan Maness and Brandon Valeriano, Russia’s Coercive Diplomacy: Energy, Cyber, and Maritime Policy as New Sources of Power (New York: Palgrave Macmillan, 2015), p. 113. 335 Bertil Nygren, “Putin’s Use of Natural Gas to Reintegrate the CIS Region,” Problems of Post- Communism, Vol. 55. No. 4, July/August 2008, pp. 13-14.

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Central Asian gas exporters, largely because of their geographic isolation behind the Caspian Sea and Russia, do not have too many alternative routes and infrastructure for their gas exports. At the end, they had to face geographical realities and accept long-term solutions beneficial to Russia, which is, in effect, a monopsony buyer.

Russia’s vast energy resources are a mainstay of its foreign policy and an essential source of its current political projection in its near abroad. These resources act as a source of economic attraction for Russia’s neighbors, and they are significant factor in bilateral relations with these countries. They can be traded by Kremlin for both economic and political benefits. Hard power, the kind Moscow deployed against Georgia in August 2008 and in Ukraine in 2014, has only reinforces Russian dominance in the energy sphere, raising the stakes for countries in the region that would seek to escape its grip.

The EU – Russia Energy Relationship

Russia’s reputation in the Europe as a reliable energy supplier had been built over decades of cooperation with the Soviet Union and pre-Putin Russia. In the broader picture of first the Western Europe and later the European Union natural gas suppliers, traditionally, there have been three large exporters: Russia, Norway, and Algeria. Two of them, Norway and Algeria, have been partly supplying different regions of the EU.

Norwegian gas supplies have been earmarked for the UK and northwest continental

Europe, while Algerian supplies have been designated for the Iberian Peninsula and Italy.

The third, Russia, has been the main supplier, filling the needs across the EU in the continental northern, central, and southern gas markets.

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For Russia, the EU has been its primary export market, and energy trade with the

EU is still crucial to the Russian economy. The EU, on the other hand, has no other bigger natural gas supplier in its import portfolio, a fact that certainly adds to the latter’s special weight in the bilateral relationship. Moreover, market prices for natural gas are much higher in Europe than in other markets. Boussena and Locatelli argue that this is caused partly by the growing demand for energy, a demand that must be covered by external suppliers – and here Russia is by far the most important.336

The EU – Russia Energy Dialogue was launched in Paris at the EU-Russia Summit on October 30, 2000. Recently-then elected President Vladimir Putin, France’s President and the President of European Council Jacques Chirac, the President of the Commission of the European Communities Romano Prodi, and the EU’s High Representative for Common

Foreign and Security Policy Javier Solana were present at the ceremony. The parties had agreed to initiate a dialogue that would “enable progress to be made in the definition of an

EU-Russia energy partnership and arrangements for it.”337 World energy prices were on the rise, and the EU needed to secure a steady inflow from its main supplier, which was only pleased to oblige its biggest export market. The legal basis for the EU-Russia energy relations was considered the EU-Russia Partnership and Cooperation Agreement (PCA) which was signed in 1994, which came into force on December 1, 1997 for an initial duration of ten years.

However, the reputation of Russia as a reliable supplier turned out to be questionable in the European Union in the aftermath of the “energy wars” between Russia

336 Sadek Boussena and Catherine Locatelli, “Energy Institutional and Organizational Changes in EU and Russia: Revisiting Gas Relations,” Energy Policy, 55 (April) 2013, pp. 180-189. 337 EU – Russia Energy Dialogue. The First Ten Years: 2000-2010, (Brussels: European Commission, 2011), p. 6.

209 and several former Soviet republics, especially Ukraine, discussed in the previous section of this chapter. Although some observers have argued that this aggressive energy tactic has been used “exclusively within the CIS space”338 and that energy deliveries to Europe were never manipulated, these conflicts led many European policy makers to view Russia as a potential threat to European energy security. Busygina and Filippov argue that Russia, on the other hand, saw EU decisions and policies as a direct challenge to its dominant position on the European energy market and as an attempt at undermining country’s own strategic energy and geopolitical interests.339

In developing the argument on the integration of energy and foreign policy in

Europe by the Russian governing elites, this part of my study pursues a two-level analysis:

Russia – EU (supranational institutions level) and Russia – EU member states (national level) where member-states interact with the Russian government and energy companies.

In recent years the integration processes in the EU significantly stimulated the efforts to develop and implement a common energy policy both inside the EU and towards the third countries and international organizations. The original European initiative was a deep engagement with Russia, in order to minimize the potential political chaos and economic disarray emerging from the collapse of communism in Eastern Europe. The

Caspian and Central Asian regions were also central to any discussion of diversifying

Europe’s energy supplies and minimizing its dependence on the Russian supplies.

338 Laszlo Poti, “Evolving Russian Foreign and Security Policy: Interpreting the Putin doctrine,” Acta Slavica Iaponica, 25, 2008, pp. 29-42. 339 Irina Busygina and Mikhail Filippov, “Resource Curse and Foreign Policy: Explaining Russia’s Approach towards the EU,” in Jakub Godzinirski ed., Russian Energy in a Changing World, (Surrey, England: Ashgate 2013), p. 91.

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The European Energy Charter (EEC) was signed in 1991 to help set the political context of tackling east-west energy issues. Amelia Hadfield argues that operating solely as a political declaration, the EEC was inspired by the general logic of establishing closer economic relations with Russian and former Soviet energy suppliers, with the goal of creating a reliable framework of hydrocarbon trade and transit across Europe.340 As expected, both the upsurge of free market principles and the need to guarantee security of supply led to the binding multilateral Energy Charter Treaty (ECT) signed in 1994. The

ECT came into effect in April 1998. To date the Treaty has been signed or acceded to by fifty-two states, the European Union and Euratom (the total number of its Signatories is therefore fifty-four).341 The Energy Charter Treaty provides a multilateral framework for energy cooperation, including the cross-border business in the energy industry. The EU was attaching a great importance to the ratification of the Energy Charter Treaty by Russia.

Priorities of EU bilateral energy relations shall be also considered with regard to Brussels’ focus on the development of cooperation not only with Russia but also with some other energy rich CIS countries, mainly with Azerbaijan, Kazakhstan, Turkmenistan and also

Ukraine, Belarus, Moldova, and Georgia which are transit countries for the EU.

Partnership and Cooperation Agreements (PCA) with “energy” chapters were signed with

Russia, Ukraine, and Moldova also in 1994.

In the EU energy supply and distribution system a leading place is occupied by large energy companies. Some West-European transnational corporations are among the world’s leading oil and gas companies. Royal Dutch Shell, British Petroleum, Eni, and

340 Amelia Hadfield, “Energy and Foreign Policy: EU – Russia Energy Dynamics,” in Steve Smith et al eds., Foreign Policy: Theories, Actors, Cases, (New York: Oxford University Press, 2008), p. 326. 341 International Energy Charter. “The Energy Charter Treaty.” Accessed February 22, 2018. https://energycharter.org

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Total are the world leaders by production level and resource base. However, a share of these companies in the global production and the world reserves of oil and gas is less than the American companies. The collapse of the Soviet Union provided vast prospect to these

European companies to participate in a region rich with hydrocarbons and with a potential of world-class opportunities.

As observed in this study, the geopolitics of energy were an important element in relations between the West and Russia during the 1990s. The oil and gas relationship became truly central during Vladimir Putin’s first presidency (2000-2008). As a result,

European energy security has become intimately linked with both Russian foreign policy objectives and the interests of a small number of state-owned companies such as Gazprom,

Rosneft, and Transneft. The Russian understanding of the overlap between its energy and foreign policies was reflected in the 2003 Energy Strategy, which noted that Russia’s significant energy resources and powerful fuel-energy complex was “an instrument for conducting domestic and foreign policy” and that the role of the country on global energy markets to a great degree determines its geopolitical influence.342 From 2004 Russia benefited from a steady increase in the global oil price that transformed its international position and fueled a level of economic growth that was unimaginable in the late 1990s.

The energy weapon of Russia could conceivably become more powerful with the completion of Gazprom’s new offshore bypass pipelines. Nord Stream 2 (under the Baltic

Sea directly to Germany with a capability to transport enough gas to supply to 26 million households)343 and the Turk Stream (two parallel pipelines running through the Black Sea

342 Energeticheskaya Strategiya Rossii na period do 2020 goda. [In Russian]. (Moscow: The Government of the Russian Federation, 2003). 343 Nord Stream 2. Accessed February 22, 2018. https://www.nord-stream2.com

212 with a 31.5 billion cubic meters total supply capacity per year).344 These two pipelines will increase the proportion of Russian gas consumed in countries along their routes, including

Germany (Nord Stream) and Turkey and south and south-east Europe (Turk Stream) [See

Figure 13 and 14; Table 5]. Moreover, by bypassing current transit countries Ukraine,

Belarus, and Poland, the new pipelines will allow Gazprom to cut supplies to those countries entirely without repeating the experience of the two January crises reviewed in the previous section of this Chapter. The natural gas cutoffs to European supplies as a result of a dispute over gas prices between Russia and Ukraine raised great concerns in the

EU on the European energy security and clearly demonstrated Europe’s vulnerability.

At the same time, the EU is by far the largest trade partner of the Russian

Federation: in 2014, 45 percent Russia imports originate from the EU, and 55 percent of its exports go to the EU, including 88 percent of Russia’s total oil exports, 70 percent of its gas exports and 50 percent of its coal exports. The export of raw materials to the EU represents around 40 percent of the Russian budget, and the EU represents 75 percent of cumulative foreign investments in Russia. In terms of infrastructure, Europe is the natural destination for Russian energy exports.345 Overall the intensity of EU-Russia energy relations has been increasing within the period of 2000-2010. EU enlargements in 2004 and 2007 were a further step in the relations, as most of the new member states fully relied on gas and oil supplies from Russia.

However, while energy is a key facet in foreign policy of Russia and especially in its relations with the EU, it is not yet a predominant feature. According to Amelia

344 South Stream. The TurkStream Offshore Pipeline. Accessed February 22, 2018. http://www.south-stream- transport.com/project/; TurkStream - http://www.turkstream.info 345 EU – Russia Energy Dialogue. The First Ten Years: 2000-2010, (Brussels: European Commission, 2011), p. 62.

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Hadfield, plenty of imbalances between major powers will continue without energy being factored in.346 Dmitri Trenin claims that after the end of the Cold War, the Euro-Atlantic countries failed to create a regional security system that would include Russia. This failure lies at the heart of Europe’s current security problem, in which Russia is challenging the world order that emerged at the end of the Cold War under American leadership. Trenin also argues that Russia strove to become part of a Greater Europe, while the EU was willing to share everything with Russia except its institutions. Now this foundation has been totally dismantled.347 The U.S. diplomat and the architect of America’s successful containment of the Soviet Union, George Kennan articulated this perspective in a 1998 interview, shortly after the U.S. Senate approved the first round of NATO expansion. “I think it is the beginning of a new cold war,'' Mr. Kennan said. ''I think the Russians will gradually react quite adversely and it will affect their policies. I think it is a tragic mistake.

There was no reason for this whatsoever. No one was threatening anybody else.”348 Most realists in the United States also opposed the expansion. They feared that enlargement would only give Moscow an incentive to cause trouble in eastern Europe.349

From 1999 to 2004 ten European countries joined NATO. In 1999, Poland,

Hungary, and Czech Republic joined the organization. Another expansion came in 2004 with the accession of seven European countries: Bulgaria, Estonia, Latvia, Lithuania,

Slovakia, Slovenia, and Romania. At the same time, the EU’s expansion eastward and the

346 Amelia Hadfield, “Energy and Foreign Policy: EU – Russia Energy Dynamics,” in Steve Smith et al eds., Foreign Policy: Theories, Actors, Cases, (New York: Oxford University Press, 2008), p. 336. 347 Dmitri Trenin, “European Security: From Managing Adversity to a New Equilibrium,” Carnegie Moscow Center, February 21, 2018. Accessed February 24, 2018. http://carnegie.ru/2018/02/22/european-security- from-managing-adversity-to-new-equilibrium-pub-75606 348 Thomas Friedman, “Foreign Affairs: Now a Word from X,” The New York Times, May 2, 1998. 349 John Mearsheimer, “Why the Ukraine Crisis Is the West’s Fault: The Liberal Delusions that Provoked Putin,” Foreign Affairs, Sep/Oct 2014, Vol. 92., Issue 5., pp. 77-89.

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West’s support to Ukraine’s Orange revolution in 2004 and Georgia’s aspiration to bringing the country into NATO were critical elements too. The 2008 five-day war between Russia and Georgia should have dispelled any remaining doubts about Putin’s determination to keep Georgia and Ukraine from joining NATO.

The EU is still Russia’s principal trading partner, but political relations have deteriorated. The Energy Charter Treaty (ECT) and the Energy Charter Protocol on Energy

Efficiency and Related Environmental Aspects which entered into force in 1998 was never ratified by Russia. Russia used the possibility of the ECT provisional application and repeatedly returned to the consideration of this issue at the level of the State Duma (in

1997, 2001, and 2006) accompanied by broader discussions in academia and business but without any results. The analysis of previous studies and documents on Russia’s participation in the ECT suggests that the following arguments prevail for the non- ratification of the Treaty among others: (1) the ECT is an organization of energy consuming countries and uneven representation of energy consuming, producing and transit countries creates risks during voting; (2) the ECT requires a third party access to the

Gazprom pipelines for cheap gas form Central Asia; (3) objections to the first refusal right prejudice Gazprom with respect to its access to European pipelines and benefit European companies regarding their access to Russian pipelines; (4) the ECT seeks to disrupt the system of long-term contracts for the supply of Russian gas to the European countries; (5) the ECT opens up a long-term and free access to Russian natural resources; (6) the ECT does not address the issue of trade in nuclear fuel with the EU.350

350 Irina Pominova, Risks and Benefits for the Russian Federation from Participating in the Energy Charter, (Brussels: Energy Charter Secretariat, 2014); International Energy Charter. “Russia and the Energy Charter Treaty,” Accessed February 24, 2018. https://energycharter.org/what-we-do/knowledge-centre/occasional- papers/russia-and-the-energy-charter-treaty/

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The June 2008 EU – Russia Summit in Khanty Mansiysk, Russia, saw the launch of negotiations of a new EU-Russia Agreement to replace the PCA. The PCA, being renewed annually since 2007, remains the legal basis for EU-Russia relations until replaced by a new agreement.351 Not unexpectedly Poland blocked several times the beginning of negotiations between Brussels and Moscow on the development of a new basic partnership agreement. Among the conditions put forward by the Poles is the ratification of the ECT by Russia.

This process culminated on March 23, 2009 when the Russian delegation, led by former Minister of Energy Sergei Shmatko, walked out of Brussels negotiations on the future of the Ukrainian pipeline system, and Vladimir Putin threatened the EU with a revision of overall EU – Russia relations.352

Despite the annual EU – Russia Summits, the EU – Russia Energy Dialogue also has not solved the outstanding energy security issues. According to Amelia Hadfield,

Russia stands opposed to what it perceives as an unwelcome imposition of a generic EU- style model of liberalization targeted at itself and its neighbors. Russian reform preferences take the shape of a gradual reduction of subsidized oil and gas to its neighbors, coupled with implicit foreign policy signals to encourage them to remain politically committed to

Kremlin perspectives.353

351 EU – Russia Energy Dialogue. The First Ten Years: 2000-2010, (Brussels: European Commission, 2011); Delegation of the EU to Russia. “Legal Framework: The Partnership and Cooperation Agreement.” Accessed February 24, 2018. http://eeas.europa.eu/archives/delegations/russia/eu_russia/political_relations/legal_framework/index_en.htm 352 Irina Busygina and Mikhail Filippov, “Resource Curse and Foreign Policy: Explaining Russia’s Approach towards the EU,” in Jakub Godzinirski ed., Russian Energy in a Changing World, (Surrey, England: Ashgate 2013), pp. 91-92. 353 Amelia Hadfield, “Energy and Foreign Policy: EU – Russia Energy Dynamics,” in Steve Smith et al eds., Foreign Policy: Theories, Actors, Cases, (New York: Oxford University Press, 2008), pp. 326-327.

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As a result, the Dialogue has effectively promoted only dialogue, rather than viable progress on energy security. During the same period, Europe’s dependency upon imported

Russian gas has only increased.

The year 2014 marked the end of the post-Cold War order in Europe. The immediate cause was the Ukraine crisis but, as argued by Dmitri Trenin, underlying reason was the inability of the West and Russia, over the quarter century that had elapsed since the end of the Cold War, to build an inclusive security system on the continent in terms acceptable to all parties.354 In response to the crisis in Ukraine, the United States and the

EU have imposed restrictive measures against Russia.355 However, Europe’s grand strategy to become less import dependent on Russian gas and oil, which has been discussed since the 1990s, looks more and more like a failure [See Figure 15].

In 2015, at the Eastern Economic Forum in Vladivostok, Russia, Gazprom clinched three major deals with some of Europe’s biggest energy companies. One of the most important was the revival of a lucrative asset swap between Gazprom and Wintershall, the energy division of BASF, a German chemical company. Under the terms of the deal between BASF and Gazprom, BASF’s subsidiary Wintershall will obtain a stake of 25 percent plus one share in the Urengoy natural gas fields in Siberia. Both firms will develop the fields. In return, Wintershall will transfer to Gazprom its jointly owned gas storage and trading business in Germany as well as a stake in its business in Austria. Through the asset swap, Gazprom will also receive a 50 percent stake in Wintershall’s exploration and

354 Dmitri Trenin, “European Security: From Managing Adversity to a New Equilibrium,” Carnegie Moscow Center, February 21, 2018. Accessed February 24, 2018. http://carnegie.ru/2018/02/22/european-security- from-managing-adversity-to-new-equilibrium-pub-75606 355 European Union | Newsroom. “EU Sanctions against Russia over Ukraine Crisis.” Accessed February 24, 2018. https://europa.eu/newsroom/highlights/special-coverage/eu-sanctions-against-russia-over-ukraine- crisis_en

217 production of oil and gas in the North Sea. According to BASF, these activities amounted to sales of over 12 billion euro in 2014.356

The second deal agreed to in Vladivostok involves Gazprom and a European consortium building a second Nord Stream pipeline under the Baltic Sea already discussed in this research. This will enable Russia to send more of its gas directly to Germany, bypassing Ukraine. The consortium of financial investors consists of Wintershall, a wholly-owned subsidiary of BASF, the German energy company Uniper, the French electricity company Engie, the Austrian oil and gas firm OMV, and Royal Dutch Shell.

These five European energy companies will provide long-term financing for 50 percent of the total cost of the project. Gazprom will own a 50 percent shares of a new company which will develop the project.

The third deal reached in Vladivostok involves Austrian OMV’s participation in the

Urengoy oil and gas field. When the deal is concluded, OMV will acquire a 24.8 percent stake in the project in exchange for Gazprom obtaining some of the assets of OMV.357

On October 28, 2016, the EU gave Gazprom the green light to increase its gas supply via the Nord Stream pipeline. Gazprom used up to 80 percent of the Opal pipeline in Germany which takes gas from its Nord Stream Baltic Sea pipeline to end-users in

Germany and the Czech Republic.358

356 See more on these three deals in Judy Dempsey, “Europe’s Energy Companies Go Back to Business with Russia,” Carnegie Europe. September 7, 2015. Accessed February 24, 2018. http://carnegieeurope.eu/strategiceurope/61207 357 Ibid. 358 Energy Post. Cyrill Widdershoven, “EU is Losing the Energy Battle with Russia,” Accessed February 24, 2018. www.energypost.eu/eu-losing-energy-battle-russia/

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It is also obvious that Nord Stream 2, in combination with Turk Stream, will reduce the role of Ukraine in Russian gas transport to Europe, leaving that country at the mercy of

Moscow.

Despite all concerns about Russia’s dominance of supply, in 2017 Russia's gas exports to Europe rose 8.1 percent to a record level of 193.9 billion cubic meters.

Gazprom’s supplies close to 40 percent of Europe’s gas. But it has been forced to lower its prices in recent years to protect its market share in the face of moves by the EU member states to buy more gas from the U.S., Qatar and other producers. Poland and Lithuania have built terminals to receive shipments of liquid natural gas with an eye to rising exports of the super-cooled fuel from the U.S. and elsewhere. Gazprom reported record exports to

Europe for the second year in a row, with consumers turning to Russian gas to offset falling domestic production in the Netherlands and elsewhere in Europe. According to

Gazprom chairman Alexei Miller “the second consecutive year of record exports on the one hand demonstrates the rapidly growing demand for Russian gas in European countries, and on the other hand, its reliability to supply the required volumes.”359

Gazprom, together with two other state-owned companies, Rosneft and Transneft, are generally assumed in Europe to be highly influential agents of the Kremlin’s energy policy. In particular, Gazprom and Rosneft collaborating with most of the main EU energy companies, not only cemented their presence at the national level, but also built such a complex and inextricable web that would “short-circuit” every EU collective effort to stand against Russian interests. This business is supported by the bilateral Russian diplomacy on the governmental levels.

359 Financial Times. “Russia’s Gas Exports to Europe Rise to Record High,” January 3, 2018. Accessed February 24, 2018. https://www.ft.com/content/7b86f4be-f08e-11e7-b220-857e26d1aca4

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Russia developed distinctive bilateral energy dialogues and relations of its own with most countries of Western and Central Europe, especially with Germany, Italy, and

France. It is highlighted in the Foreign Policy Concept of Russia, that mutually beneficial bilateral ties with the Federal Republic of Germany, the French Republic, the Italian

Republic, the Kingdom of Spain and other European countries have substantial potential in terms of promoting Russia’s national interests in European and world affairs.”360

Energy represents a major factor in the German-Russian relationship. Russia and

Germany enjoy deep interaction and cooperation with each other in this area – the Russian

Federation remains Germany’s leading energy supplier, while Germany is one of the main export markets, trading partners, and investors for Russia. The energy cooperation between

Russia and Germany covers a broad spectrum of technical and scientific areas, aiming at becoming something much more substantial and stable than just a cyclical supplier- consumer relationship.

Former Chancellor of Germany, Gerhard Schroder (1998 – 2005), cultivated close personal ties with President Putin,361 in an attempt to strengthen the partnership between

Berlin and Moscow. As Chancellor, Gerhard Schroder was a strong advocate of the Nord

Stream pipeline project, which aimed to supply Russian gas directly to Germany, thereby bypassing transit countries. The agreement to build the pipeline was signed two weeks before the German parliamentary elections in 2005. Soon after stepping down as

360 The Ministry of Foreign Affairs of the Russian Federation. ““Foreign Policy Concept of the Russian Federation.” November 30, 2016. Accessed February 24, 2018. http://www.mid.ru/en/foreign_policy/official_documents/asset_publisher/CptICkB6BZ29/content/id/2542248 361 See more on the friendship of Putin and Schroder in Rossiya 1 TV Channel. Documentary Putin by Andrei Kondrashov. [In Russian.] Released March 21, 2018. Schroder is closely connected both with the political elites of Europe and with the major Western oil and gas companies and is capable to mediate between Moscow and European countries if necessary.

220 chancellor, Schroder accepted Gazprom's nomination for the post of the head of the shareholders' committee of Nord Stream AG (51 percent owned by Gazprom).362

The Nord Stream 2 was formally agreed to in September 2015, and Schroder was named chairman of Nord Stream 2 in October 2016. Russian diplomacy and Gazprom had long before sounded out German politicians, European energy businesses, and others on the plans. The plan provoked outrage from a number of Central and Eastern European states, with Poland and the three Baltic States of Latvia, Lithuania and Estonia repeatedly seeking to block it; the issue was regularly debated on a European level.

Before Germany’s September 24, 2017 general election, Nord Stream 2 did not carry significant political baggage within the German government. The pre-election coalition partners - Chancellor Angela Merkel’s Christian Democratic Union (CDU) and the Schroder’s former Social Democrats (SPD) - both supported the Nord Stream 2 pipeline’s construction, although even then there was some, at that point relatively muted, opposition to the plan from within the CDU.

In the meantime, the U.S. Deputy Assistant Secretary of State for the Bureau of

Energy Resources, John McCarrick announced that U.S. officials “don't see the possibility that Nord Stream 2 can be built.”363 The latest round of U.S. sanctions, the Countering

America’s Adversaries through Sanctions Act, puts European companies at risk if they fund the pipeline. Brussels also pushes new regulations that would require the project to receive EU backing. However, senior SPD member, Vice-Chancellor and Foreign Minister

362 Nord Stream. “Our Shareholders.” Accessed February 25, 2018. https://www.nord-stream.com/about- us/our-shareholders/ 363 Radio Free Europe | Radio Liberty. “U.S. Diplomat Says Nord Stream 2 Pipeline Probably Won’t be Built.” November 29, 2017. Accessed February 25, 2018. https://www.rferl.org/a/us-diplomat-nord-stream-2- wont-be-built/28886312.html

221 of Germany Sigmar Gabriel, effectively endorsed the Nord Stream 2 during his November

2017 visit to Russia.364

So far, the threat of U.S. sanctions has not affected Gazprom’s partners. During

ÖMV’s third-quarter conference call its CFO Reinhard Florey sounded positive following the most recent U.S. State Department guidance. On November 14, 2017, Wintershall CEO

Mario Mehren announced the company planned to continue its participation in the project.

Germany’s largest business lobby, the Federation of German Industries, also explicitly criticized the U.S. actions.

As a result, even amid uncertainty around the impact of U.S. sanctions and

Brussels’ regulations, it will be German and Russian politics and common interests that are the ultimate arbiters of whether or not the pipeline is built. In the meantime, the astonishing career of Gerhard Schroder in the Russian energy industry reached new heights

– on September 29, 2017 he was elected to the Rosneft Board of Directors as an

Independent Director and the Chairman of the Board.365 Trust is a vital asset among

Russia’s ruling elite, and it seems Mr. Schroder is a trusted ally in a crucial industry.

Needless to say, Rosneft is the third largest petroleum refiner in the German market, with a total refining capacity of 12.5 million tons per year, which is over 12 percent of all refinery capacity in Germany. The operations are performed by Rosneft’s subsidiary Rosneft

Deutschland GmbH, which manages the following three plants in partnership with other

364 Bild. “Nord Stream 2. Gabriel stellt sich hinter Russen-Pipeline. November 29, 2017.” [in German]. Accessed February 25, 2018. https://www.bild.de/politik/ausland/headlines/gabriel-fuer-nord-stream- pipeline-54029270.bild.html 365 Rosneft. “Board of Directors.” Accessed February 25, 2017. https://www.rosneft.com/governance/board/item/187923/

222 energy companies: PCK Raffinerie GmbH, Schwedt, Brandenburg, MiRO Refinery,

Karlsruhe, Baden-Württemberg, Bayernoil Refinery, Neustadt an der Donau.366

Together, all these activities demonstrate that Germany and its big energy companies want to return to business as usual with Russia, despite the continuing conflict in Ukraine and the U.S. and EU’s continuing sanctions on Russia. But Russia too has its reasons for forging ahead with such deals. It needs technology and Germany’s reliable and stable market.

Since the coming to power of Vladimir Putin, Russia’s energy diplomacy also developed a strong influence in France and Italy. The French company Total is the largest buyer of Russian oil and oil products (more than 20% of the total export from Russia).367

Total is also involved in the development of oil and gas deposits in Russia with Gazprom.

Gas de France and Engie are in a long-term strategic partnership with Gazprom. In 2016,

Gazprom exported to France 11.5 billion cubic meters of gas which was 18.2 percent higher than in 2015.

President Putin developed quite a good personal relationship almost with the all

Prime-Ministers of Italy since 2000, including Silvio Berlusconi, Romano Prodi, and

Matteo Renzi. Russia is one of the main oil and gas suppliers of Italy, and energy cooperation issues are constantly included in the agenda of negotiations between Russian and Italian authorities at all levels. Italian Eni and Gazprom have an agreement which envisages long-term cooperation in E&P, transportation of oil, gas, and gas condensate.

Agip, the subsidiary of Eni is the strategic partner of Lukoil in some projects, and Lukoil

366 Rosneft. “Oil Refining Assets in Germany.” Accessed February 25, 2018. https://www.rosneft.com/business/Downstream/Neftepererabotka/Refining_assets_in_Germany/ 367 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), p. 310.

223 holds the strongest positions in the Italian oil market. Italy annually receives 20-25 million tons of Russian oil, which is transported mainly by tankers.368

In 2012, Rosneft and Eni signed a Strategic Cooperation Agreement which provides for joint development of areas in the Black and Barents Sea in Russia, and for

Rosneft to participate in Eni’s international projects, including Egypt’s largest hydrocarbon field with Eni and BP. In May 2017, Rosneft and Eni reinforced this document and entered into a Cooperation extension agreement in the areas of upstream, refining, marketing and trading during the visit of an Italian delegation to Russia. The document was signed by

Rosneft CEO Igor Sechin and Eni CEO Claudio Descalzi in the presence of President

Vladimir Putin and Italian Prime Minister Paolo Gentiloni. The Agreement provides for the development of cooperation between Rosneft and Eni in Russia and abroad in the following areas: exploration and production of hydrocarbons, refining, trading, logistics, marketing and sales, petrochemicals, technology and innovation. In addition, the parties will consider further expanding their international cooperation, including the Zohr project offshore Egypt, as well as the potential for joint supplies of refined products to the country.

Rosneft and Eni agreed to assess the potential for cooperation in refining at German refineries where both companies are shareholders, including the optimization of feedstock supplies. The parties also intend to consider using Eni technologies to refine heavy oil residues at Rosneft refineries.369

A rather interesting aspect of the partnership of Russia with some European countries in a field of energy was an establishment of five international joint institutes by

368 Lukoil. “Lukoil Italia S.r.l.” Accessed February 25, 2018. http://lukoil.it/it 369 Rosneft. “Rosneft and Eni to Extend Cooperation Agreement in Russia and Abroad.” May 17, 2017. Accessed February 25, 2018. https://www.rosneft.com/press/releases/item/186667/

224 the Russian MGIMO University of the Ministry of Foreign Affairs. These organizations include Russian-Italian Institute of World Energy Power Industry (in cooperation with

Milan Luiggi Bocconi University); Russian-German Institute of Energy Policy and

Economics (with Leipzig University); Russian-French Institute of Energy Diplomacy (with the French Petroleum Institute); Russian-Norwegian Institute of Energy Cooperation (with

Nord University Business School); and Russian-Icelandic Institute of Renewable Energy

Sources (with the School for Renewable Energy Science, the University of Iceland and

Akureyri University).370

Russian governing elites integrate their energy and foreign policy in a number of other European countries, including Greece, Austria, Hungary, the Czech Republic, Serbia and others to achieve economic and political influence and advance their foreign policy interests. Many European parties of both right and left admire President Putin and lean towards Russia, including Greek radical-left Syriza, France’s National Front, Hungary’s far-right Jobbik party, Austria’s Freedom Party, Czech Republic’s KSCM, Italy’s Northern

League and many left-wing politicians in German Bundestag. Far-right groups are seduced by the idea of Moscow as a counterweight to the EU, and by its law-and-order policies.

Moscow’s stance on the promotion on traditional moral values appeal to religious conservatives. The far left likes the talk of fighting American hegemony. Russia’s most surprising allies, however, are probably Europe’s Greens. They are opposed to shale-gas fracking and nuclear powers – as is Moscow, because according to some European energy experts, both promise to lessen Europe’s dependence on Russian fossil fuels. Former

NATO Secretary General Rasmussen has accused Russia of “sophisticated” manipulation

370 MGIMO University. International Energy Policy and Diplomacy Institute. Accessed February 25, 2018. http://english.mgimo.ru/International-energy-policy-and-diplomacy-institute

225 of information to hobble fracking in Europe, though without producing concrete evidence.371

Besides the major agents, such as Rosneft and Gazprom, the emergence of the trading company Gunvor founded in 2000 by Gennady Timchenko as a merchant of crude oil and oil products with headquarters in Geneva, Switzerland was another instrument to get the best price for the Russian “Urals blend.” In 2012, the Urals included much of the 5 million barrels a day or so of crude oil that Russia exports. The sellers are oil producers, including Rosneft, Gazprom Neft, and Surgutneftegaz. The buyers are European refineries and the refining arms of oil companies such as Royal Dutch Shell and Total. In among the buyers and sellers are the trading companies, such as Glencore, Gunvor, Trafigura, and

Vitol. In a very short period of time Gunvor became the world’s fourth biggest trader and handled roughly a third of Russia’s seaborne exports of crude oil.372 In March 2014, following the Crimean status referendum, the U.S. Treasury put Timchenko in the

Specially Designated Nationals List, a list of individuals sanctioned as “members of the

Russian leadership’s inner circle. On 19 March 2014 Timchenko sold his stake in Gunvor to his partner, Torbjörn Törnqvist who is the CEO of the Gunvor Group. The sale was made the day before Timchenko was included on the United States sanctions list. Nevertheless, Gunvor has grown from a small, virtually unknown company into the most important trader of Russian oil with the ownership of refineries in Belgium,

Netherlands, and Germany, the Ust-Luga oil products terminal in Saint Petersburg area,

371 “Briefing: What Russia Wants. From Cold War to Hot War,” The Economist, February 14, 2015, pp.19- 22. 372 “Gunvor: Riddles, Mysteries, and Enigmas.” The Economist. May 5, 2012. pp. 58-61.

226 and trading offices in Singapore, China, Bahamas, and other countries.373 Gennady

Timchenko is also a part-owner of Novatek, which is Russia’s second-largest gas producer.

Energy and energy security emerged as one of the top priorities in the EU-Russia relations after gas disputes between Russia and Ukraine during the years 2005-2006 and

2008-2009. Russia’s foreign energy policy in the European Union is influenced by the factors of global politics, economy, the dynamics of energy market as well as by the developments at regional and bilateral levels. The Kremlin’s intention is also to harmonize the integration processes within the Eurasian Economic Union and the European Union which according to President Putin is highly promising.374 Russia’s re-emergence with growing interests in the Middle East, North Africa, and Central Asia, is causing shivers in

Brussels and parts of Europe. So even though Europe is diversifying its energy sources and the European Commission is insisting that Gazprom plays by the EU’s competition rules, sanctions or not, Europe is too lucrative for Russia to ignore. And sanctions or not,

Russia’s underdeveloped gas fields are too lucrative for Europe’s energy companies to ignore and the last two years has seen how Russia’s gas and oil supply strategy boosted in

Europe.

OPEC, Oil Prices, and Russia’s Power Play in the Middle East

Political events of 2002-2006 connected with OPEC countries (unrest in Venezuela and Nigeria, the military operation in Iraq, West’s ongoing tensions with Iran, etc.) have significantly strengthened the impact of political factors on the situation in the world oil markets. The West aspired to diversify oil import and respectively promoted the

373 Gunvor Group. “Our History.” Accessed February 27, 2018. https://gunvorgroup.com/our-history/ 374 “Putin’s U.N. General Assembly Speech,” The Washington Post, September 28, 2015.

227 development of the ‘non-OPEC” part of the world oil-extracting industry, including Russia and the Caspian region.

Examining various aspects of the history of Russian cooperation with OPEC, it is evident that during the “Cold War’ global oil interests of OPEC and the former Soviet

Union quite often coincided in the price policy. At present OPEC recognizes that Russia with significant oil and gas reserves have an opportunity to influence the conjuncture of the world markets.

In the first half of the 90’s Russia turned to the West and OPEC was a little

“forgotten.” Then in the period of 1997-1998, the Ministry of Foreign Affairs, the Ministry of Energy, a number of other ministries and the heads of the largest oil companies studied and analyzed an issue of potential dialogue with OPEC. The decision was made to participate in the Ministerial OPEC Conferences as an observer. In 1998-2000, many influential representatives of the political and business elites in Russia and also of OPEC member states raised a question on the full-scale entry of Russia in OPEC. However, in one of his interviews in 2004, President Putin stated that “Russia will further implement the same balanced policy and cooperate with the OPEC. But we are not a member of this organization and I think we will not become one: we consider that Russia should be independent in formation of its own energy policy.”375 Abdalla Salem El Badri, former

Secretary General of OPEC (2007-2016), in his interview to the Forbes magazine also attaches a great importance to international cooperation and dialogue with Russia.376

375 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), pp. 169-171. 376 “OPEC: Current Solutions for Current Challenges,” Interview with Abdalla Salem El Badri, Secretary General of OPEC, Forbes, December 10, 2012, p. 183.

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The oil supply surge led by the U.S., especially by the end of 2014 and start of

2015, discussed in the U.S. Case Study Chapter of this research, slow growth of the world economy following the financial crisis of 2008-2009, and the supply-demand factors which finally caught up with the oil market in June 2014, finally made the market roll over. In

September 2014, the Third High-Level meeting of the OPEC-Russia Energy Dialogue took place in Vienna, two months before the 166th OPEC meeting in November 2014, when the price of a barrel of WTI had fallen from $108 per barrel to $74 per barrel, a 31.5 percent plunge. The members of OPEC stated that they would allow market forces to determine oil prices, and the decision of this meeting became known as a “battle for market share.”

Accordingly, in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30.0 million barrels per day, as was agreed in December

2011.377 On that announcement, oil prices shed another eight percent in one day.378 While

Saudi Arabia, Kuwait, and the United Arab Emirates have each stashed away hundreds of billions of dollars in savings to buffer the effects of lower prices, Iran, Algeria, and

Venezuela, for example, were struggling to finance their government budgets at the collapsed price levels. During the week of OPEC’s meeting, Igor Sechin, the CEO of

Rosneft, met with the former Saudi oil minister Ali Al-Naimi to discuss cutting the production, but no agreement was reached.379 Nevertheless, Russia and OPEC continued consultations and annual High-Level meetings of the OPEC-Russia Energy Dialogue led

377 OPEC: 166th OPEC Meeting Concludes. November 27, 2014. Accessed February 28, 2018. http://www.opec.org/opec_web/en/press_room/2938.htm 378 CATO Institute. Steve H. Hanke, “Commentary on the Price of Oil,” Accessed February 28, 2018. https://www.cato.org/publications/commentary/price-oil 379 Rosneft. “Igor Sechin Took Part at International Oil Conference,” November 25, 2014. Accessed February 28, 2018. https://rnanhk.rosneft.com/press/news/item/173683/

229 by Russian Energy Minister Alexander Novak and OPEC’s Secretary General in order to build a consensus on the cut of oil production.

Besides the efforts of Russia’s Ministry of Energy and Ministry of Foreign Affairs,

President Vladimir Putin played a key role in reaching an agreement with the OPEC countries to reduce oil production, achieving a settlement of the differences between Saudi

Arabia and Iran. Iran insisted on a significant increase in its output, and Saudi Arabia demanded that Tehran should abandon these plans. In September 2016, during the G-20 summit in China, President Putin held a meeting with the successor of the Crown Prince of

Saudi Arabia, Mohammed bin Salman and reached an agreement on cooperation between the two countries to eliminate the surplus of oil on the world market that caused a drop of the prices. The Kremlin came to the conclusion that Saudi Arabia will be ready to reduce the oil production only if Iran does not declare such an agreement as its diplomatic victory.

To convince the Iranian side to participate in the agreement, on the eve of the November

2016 OPEC meeting, Vladimir Putin held a telephone conversation with the Iranian

President Hassan Rouhani.380

On December 1, 2016, during the first OPEC and non-OPEC Ministerial meeting at the OPEC headquarters in Vienna, thirteen OPEC Member Countries and eleven non-

OPEC countries, including Russia committed to a sizable adjustment in crude oil production, known as the “Declaration of Cooperation,” to help correct a powerful market imbalance which had started in the summer of 2014 and had come to represent the longest down cycle in the industry’s history. These ongoing and interrelated efforts led to a decision that eleven non-OPEC producers agreed with OPEC Member Countries to a

380 TASS. “Putin sygral klyuchevuyu rol v dostizhenii soglasheniya OPEC,” December 1, 2016. [In Russian]. Accessed February 28, 2018. http://tass.ru/ekonomika/3833717

230 combined output reduction of around 600,000 barrels per day. This amount, added to the

1.2 million barrels per day output reduction already decided upon by OPEC at its 171st

November Meeting of the Conference, meant that, from the beginning of 2017, twenty- four of the world’s oil producers would implement joint reductions totaling nearly 1.8 million barrels per day, which would ease oversupply in the market.381

As for Iran, the agreement allows it not to cut, but, on the contrary, increase oil production by 90,000 barrels per day. Meanwhile, Iran's official representatives never made any public statements that the results of the OPEC summit are a victory for Tehran as it was agreed among President Putin, Crown Prince of Saudi Arabia Mohammed bin

Salman, and Iran’s President Hassan Rouhani.

As a result, in November 2017, the price of Brent at the ICE Exchange in London was $59.03. The last time the oil price of this grade was at $ 59 per barrel in March, 2015.

[See Figure 16] The successful reconciliation of the positions of Riyadh and Tehran demonstrates the growth of Russia's influence in the Middle East after the beginning of the

Russian military operation in Syria. Russian Minister of Energy Alexander Novak has already announced that Russia is ready to discuss the extension of agreements with OPEC after 2017. This agreement with OPEC is another model, how Russian governing elites, including President Putin, members of his cabinet, and heads of Russian energy companies view oil as indispensable resources in international politics and prioritize the integration of energy and foreign policy to increase the state revenues.

The new phase in the bilateral relations of the Kremlin with Saudi Arabia began with the visit of the Crown Prince Abdullah bin Abdul Aziz to Moscow in September

381 OPEC Bulletin. Special Edition. Declaration of Cooperation: First Anniversary. November 2017. (Vienna: OPEC, 2017), pp. 6-9.

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2003. Following the results of this visit a joint Russian-Saudi Declaration was adopted in which “the sides have agreed on necessity of coordination and cooperation of the oil policy aiming to achieve sustainability and predictability of the world oil market, preservation of an acceptable price corridor, and also meeting the needs of the energy importing countries.” Both sides also signed the intergovernmental cooperation agreement in the field of oil and gas, formalizing their “energy relations” which was an important aspect of the

Crown Prince Abdullah’s visit.382

In March 2004, Lukoil began its operations in the Kingdom of Saudi Arabia after the Company won a tender for exploration and development of the fields in the Rub al

Khali desert. Lukoil became the first Russian company to obtain access to the development of the country's mineral resources.383

On October 5 2017, Saudi Arabia’s King Salman with a huge delegation arrived in

Moscow. King Salman visit was met with great enthusiasm in Russia, as his arrival marked the first official visit of any Saudi monarch to Moscow and gave Moscow an opportunity to showcase its growing influence in the Middle East to the international community. The deals agreed between Moscow and Riyadh during King Salman’s trip encompassed a wide range of economic sectors. Russian president Vladimir Putin’s decision to sell Moscow’s prized S-400 air-defense system384 to Saudi Arabia was heralded as a new dawn in a bilateral relationship that has been severely strained ever since Moscow decided to intervene militarily on behalf of Syrian president Bashar al-Assad in September 2015.

382 Stanislav Zhiznin, Energy Diplomacy: Russia and the World (Moscow: East Brook, 2007), pp. 376-377. 383 Lukoil. “Saudi Arabia.” Accessed February 28, 2018. http://internationalservice.lukoil.com/en/Activities/SaudiArabia 384 The S-400 is Russia’s most advanced long-range mobile air defense missile system. It can carry three types of warheads designed to destroy targets including aircraft, as well as ballistic and cruise missiles. The system is able to track and engage up to 300 targets to an altitude of 27 kilometers at the same time.

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During King Salman’s visit Rosneft, Lukoil, and Tatneft expressed their readiness to work with Saudi Arabia’s national oil company Aramco. Rosneft and Aramco will look into joint investment assets in Saudi Arabia. The two countries are discussing unprecedented investments in each other’s oil industries. A Russian sovereign wealth fund is considering buying shares in the Aramco listing, Aramco is mulling a stake in a vast LNG project in the Russian Arctic.385

Samuel Ramani argues that as many western geopolitical analysts who covered

King Salman’s Russia trip focused principally on the transactional dimensions of the

Moscow-Riyadh partnership, like arms sales and cooperation on oil prices, the implications of improved Russia-Saudi Arabia relations for Moscow’s broader Middle East strategy were alarmingly overlooked. This neglect is short sighted, as Moscow’s burgeoning partnership with Saudi Arabia symbolizes a sweeping transformation of Russia’s diplomatic conduct in the Middle East and strategic objectives in a critically important region of the world.386

Putin’s policies and Russian influence in oil and gas in the Middle East and North

Africa has grown exponentially. Gazprom, Rosneft, Lukoil, and Novatek are actively involved with their businesses in these regions. The setup of a permanent naval base in

Syria and military capacity to support its allies, including Syrian President Assad, military training exercises in Egypt, and growing military technology cooperation with Turkey,

Saudi Arabia and others have already made Russia the new power player in the region.

Cyril Widdershoven argues that in the bigger picture, the growing naval presence of Russia

385 “OPEC and Russia: A Bigger Gig,” The Economist. February 24, 2018. p. 59. 386 Samuel Ramani, “Russia is Expanding its Great-Power Project in the Middle East,” The National Interest. No. 152. November – December 2017.

233 in the eastern Mediterranean is and will be a direct threat to offshore oil and gas operations in the region. With a naval base in Syria and full-scale battle groups in the eastern

Mediterranean, Moscow will be able to influence or even stifle the incipient energy cooperation between littoral states such as Egypt, Cyprus, Israel, and possibly Turkey.387

Full diplomatic, economic, and military cooperation between Russia and Turkey is again on the table. Welcoming Turkey with open arms, Putin is trying to bring the country into Russia’s camp. Russia has already agreed to deliver the S-400 to Turkey. The sale of the anti-aircraft systems to US allies – Turkey and Saudi Arabia – was criticized in

Washington but did not affect the outcome of the deals.

Turkey is also Gazprom’s second-biggest customer in the region after Germany. At the same time, Gazprom is waiting for the EU’s green light for Turk Stream which is under construction to be completed by the end of 2019, at least the part that would be built in the

EU. Half of the gas of Turk Stream is meant for Turkish clients, the other half is destined for Europe. Russia’s State Atomic Energy Corporation (Rosatom) is set to build a $20 billion nuclear power plant in southern Turkey, which some estimate to become operational by 2023.

Russia, Turkey, and Iran are also seeking deeper cooperation on Syria where, despite some clashing interests, the three are negotiating an end to the conflict.

Traditionally Russia has special relations with Iran. The significant interest demonstrated by Iran in energy cooperation with Russia is explained not only by economic, but also political reasons. Russia is considered in Tehran to be a power, capable of counterbalancing the United States and breaking foreign policy and economic isolation of

387 Energy Post. Cyril Widdershoven, “EU is Losing the Energy Battle with Russia,” November 23, 2016. Accessed February 28, 2018. www.energypost.eu/eu-losing-energy-battle-russia/

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Iran. Great importance is given to electric power development, nuclear power plant construction, cooperation in the settlement of Caspian problems, and the attraction of

Russian companies to participate in the development of oil-and-gas deposits of the country, including in the Iranian sector of the Persian Gulf.

Russia and Iran have long been working on oil-for-goods deals worth up to $20bn, since cash-strapped Iran has been under western sanctions over its nuclear program. Under these agreements Moscow would buy Iranian oil in exchange for Russian equipment and technology. Recently both countries have signed agreements to collaborate on “strategic” energy deals worth up to $30bn that will involve energy groups such as Rosneft and

Gazprom. Six provisional deals had been signed with Russian oil companies as part of a visit by President Putin to Tehran in November 2017. According to Rosneft’s CEO Igor

Sechin, whose international ventures often dovetail with Kremlin foreign policy, cooperation with Iran included “carrying out swap operations, supplying oil and oil products, training staff and modernizing oil refining.”388

While the energy cooperation with other Persian Gulf states is limited and the practical business in Iraq is impossible before the situation there becomes peaceful and stable, Russian energy companies are actively involved in North Africa, namely in Algeria,

Egypt, and Libya. Italy has already signaled that it wants Russia's help to stabilize Libya and bring an end to the migrant crisis. Libya represents an interesting opportunity for

Russia's foreign policy and geopolitical ambitions. The Kremlin, which is also eager to recover lost oil and infrastructure investments in this country, is taking advantage of the

388 Financial Times. “Russia and Iran Sign $30bn Energy Agreements,” November 1, 2017. Accessed March 1, 2018. https://www.ft.com/content/141e6662-bf11-11e7-9836-b25f8adaa111

235 political void left by the U.S. administration and is stretching its arms in the

Mediterranean.

The intellectual and political foundations for Vladimir Putin’s current policies in the Middle East has been laid by late foreign minister and prime-minister, Yevgeny

Primakov. Putin has adroitly refined and modified that framework where and when necessary, e.g. to confront the threat of terrorism in Syria and develop Russia’s capabilities all over the region. Kremlin and its energy agents promote their ability to interact with many state and non-state actors in the Middle East. Russia's multifaceted diplomatic relations and recent interventionist trend are superseded by longer-term economic, energy, and arms deals in the region.

Russia in Asia: Energy Politics

Russia’s special interest in the development of energy cooperation with countries of

Asia and Asia-Pacific region (APR) is based on the following factors. First, the region shows stable growth of demand for energy resources, a rapid development of market with great potential opportunities for the supply of Russian gas, oil, and oil products. Second, the region is one of the largest capital markets, whose capabilities can be used for developing the resource and raw materials potential of East Siberia and the Far East of

Russia by the means of implementing large international projects. Third, given the current confrontation between Russia and the U.S./NATO and the alienation between Russia and

Europe, the Asian dimension became one of the priorities for the Russian foreign policy.

However, in 2006, long before the crisis in a relationship with the West, Putin made a commitment to increase the Asian Russian energy exports in fifteen years from the three to

236 thirty percent. This means Russia would sell to Asia at least 60 million tons of oil and 65 billion cubic meters of gas per year.389

Russia also promotes economic cooperation with Asian countries within the international initiatives such as Shanghai Cooperation Organization and BRICS. Energy efficiency, energy security, and investments in the field of renewable energy issues have been always on the agenda of the BRICS group of countries.

Evaluating Russian interests in Asia, it is reasonable to outline the coincidence of

Russian and Chinese points of view as for forming a strong energy base for bilateral strategic, political, and economic cooperation. In addition, the rapidly developing energy market of China is of the great interest for Russian energy companies not only in supplying energy resources but also equipment, technologies, and services. Both countries also share a border running around 4,300 kilometers, which is one of the world’s longest international border.

The legal basis on energy cooperation between the two states is solid enough since the 1990s. In July 2000, Russia and China signed another inter-governmental Agreement on cooperation in the field of energy. Perspectives of cooperation in the energy sector are always in the agenda of top-level negotiations between Russia and China [See Table 6

Sino-Russian Energy Deals]

Partnership between Russia and China in the sphere of natural gas stepped up to a completely new level when, in 2013, after more than a decade of talks, Russia agreed to

389 The President of Russia. “Transcript of Meeting with Participants in the Third Meeting of the Valdai Discussion Club.” September 9, 2006. Accessed March 3, 2018. http://en.kremlin.ru/events/president/transcripts/23789

237 supply China with natural gas in a deal that could see China surpass Germany390 as the largest importer of Russian gas. Projected natural gas consumption in China is estimated by market participants at the level of 300-350 billion cubic meters a year by 2020, and at a level around 500 billion cubic meters a year by 2030.391 In the United States and

Russia, natural gas plays a much more central role in national energy supply than it does in

China. Some scholars argue that despite its modest role in the nation’s persistently coal- centric energy consumption structure, China’s natural gas supply and demand still offer an interesting demonstration of how energy needs fit into larger geostrategic overlays.392

The main partner of Gazprom on the Chinese market is China National Petroleum

Corporation (CNPC) — the largest state-owned oil and gas company in China and one of the leading integrated oil and gas production companies in the world. The agreement was reached in Moscow during Chinese President Xi Jinping’s first foreign trip as president. Then, for the time of President Putin’s visit to Shanghai, on May 21, 2014,

Gazprom and CNPC signed the Purchase and Sale Agreement to supply Russian gas via the eastern route. The deal is worth about $400 billion over 30 years and it is the biggest purchase and sale contract in the history of the global gas industry.393 The 30-years’ agreement implies delivering 38 billion cubic meters of natural gas annually to China from

Yakutia and Irkutsk gas production centers via the gas pipeline named “Power of Siberia.”

Gas supplies to China via “Power of Siberia” would commence on December 20, 2019,

390 In 2012-2013, Gazprom annually supplied to Germany 33 billion cubic meters of natural gas, to Turkey – 27 billion cubic meters. Source: Wall Street Journal, March 23-24, 2013. 391 Gazprom Export. “China.” Accessed March 1, 2018. http://www.gazpromexport.ru/en/partners/china/ 392 Andrew Erickson and Austin Strange, “China’s Resource Drive into the South China Sea,” Timothy Lehmann ed., The Geopolitics of Global Energy: The New Cost of Plenty (Boulder, CO – London: Lynne Rienner, 2017), p. 137. 393 “Putin Pivots to the East,” The Economist, May 24, 2014, p. 39.

238 strictly in accordance with the Supplementary Agreement to Gazprom and CNPC’s Sales and Purchase Agreement for Russian gas to be supplied via the eastern route.394

During the same visit of Xi Jinping, officials signed a raft of other energy deals, including a $270 billion agreement to double Russian oil supplies to China and hand

CNPC, a stake in Russian oil fields. This deal was one of the biggest in the history of global oil industry. Rosneft, which became the day before the signing ceremony the world’s largest listed oil producer, already supplied 15 million tons a year to China under a

2009 deal.

The oil deal also included some $60-70 billion in prepayment from Beijing and $2 billion loan for Rosneft from China’s state development bank under the new 25-year deal.395 Rosneft’s agreement to a partnership with CNPC to develop oil fields onshore and on Russia’s Arctic shelf was the first time Moscow has agreed to a substantial stake for

China in its strategic oil sector.

After Russia’s default in 1997, many western energy experts viewed the crisis in

Russia’s oil industry as systemic rather than simply as a symptom of the transitional difficulties. This approach was based primarily on the assumption that the majority of oil wells in the European part of the country and western Siberia have been in operation since the early 1970s, and in 1990s they were substantially depleted. According to western estimates, in the mid-1990s Russia would need an initial investment of $25 billion and annual injections of $6 to $7 billion if it is to re-attain former production levels. According

394 Gazprom Export. “Construction of Power of Siberia to be Completed on Time.” August 22, 2017. Accessed March 1, 2018. http://www.gazpromexport.ru/en/presscenter/information/2029/ 395 James Marson, “Russia, China Sign Gas Deal,” The Wall Street Journal, March 23-24, 2013; Radio Free Europe | Radio Liberty, Richard Solash, “Despite Wariness, China-Russia Relations Warming,” August 9, 2013. Accessed March 2, 2018. http://www.rferl.org/articleprintview/25070935.html

239 to these experts, the other serious obstacle is that the Russian oil and gas industry, traditionally oriented toward the country’s western market, lacks the necessary transport and refinery infrastructure in Eastern Siberia and Far Eastern Russia. Meanwhile, many experts considered the production cost of the new oilfields in Siberia far above any reasonable level. Given all these considerations, one could assume that Russia cannot be given serious consideration in terms of supplying China with oil in the near future.

Furthermore, Chinese investment in Russian oilfields was also very unlikely.

There was another equally, or according to these experts, perhaps even more important consideration that prevents China from being oriented – both financially and strategically – to the Russian energy base. This was an assumption that China is reluctant to add energy dependency to its already existing political and security linkages with

Russia.396

The Eastern Siberia–Pacific Ocean oil pipeline (ESPO), a pipeline system for exporting Russian crude oil to the Asia Pacific markets, including China, built and operated by Transneft illustrated the inaccuracy of these assumptions.397 An extension of the ESPO oil pipeline between Russia and China started operating on January 1, 2018, doubling the export volumes from 15 to 30 million tons annually, or almost 220 million barrels. Moreover, in 2015, Russia overtook Saudi Arabia for oil supplies to China.

396 See more in Brookings. Sergei Troush, “China’s Changing Oil Strategy and its Foreign Policy Implications,” September 1, 1999. Accessed March 2, 2018. https://www.brookings.edu/articles/chinas- changing-oil-strategy-and-its-foreign-policy-implications/; Dmitry Trenin, “Russia Reborn: Reimaging Moscow’s Foreign Policy,” Foreign Affairs 88, No. 6, 2009, pp. 64-78; Andrew Erickson and Austin Strange, “China’s Resource Drive into the South China Sea,” Timothy Lehmann ed., The Geopolitics of Global Energy: The New Cost of Plenty (Boulder, CO – London: Lynne Rienner Publishers, 2017), pp. 131- 150. 397 Transneft. “Eastern Siberia - Pacific Ocean Pipeline System Extension.” Accessed March 2, 2018. http://en.transneft.ru/about/projects/current/1204/;

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Rosneft and Gazprom’s abovementioned deals with the CNPC is also an evidence of growing “energy alliance” between Russia and China.

The greatest point of divergence in the Sino-Russian relationship is on Central

Asia. After China has poured massive amounts of money into its Silk Road Economic Belt infrastructure project and developed an oil pipeline with Kazakhstan and a gas pipeline with Turkmenistan, which have broken the monopoly of Russian ownership of Central

Asian pipelines, some scholars such as Stephen Blank and Stefan Hedlund claimed that the role of designated winner of the great game over energy resources in Central Asia clearly appears to be moving in the direction of Beijing rather than Moscow.398 However, the recent compliance with Russian interests, as discussed previously in this Chapter, has led to a huge increase in revenue for these poor states of Central Asia, and the continuation of selling gas to Gazprom is now in these states’ best interest. Ryan Mannes and Brandon

Valeriano argue that states in post-Soviet space that allow American energy investment as its primary external funding source will have a higher likelihood of Russian energy coercion than those states that allow Chinese energy investment.399 Moreover, Russian efforts to establish the Eurasian Economic Union have already limited Chinese economic domination of the region.

In the Foreign Policy Concept of Russia, it is highlighted that “Russia will continue developing comprehensive, equal, and trust-based partnership and strategic cooperation with the People’s Republic of China, and proactively step up cooperation in all areas.

398 Stephen Blank, “The Turkmenistan – China Pipeline: What are Its Implications?” Northeast Asia Energy Focus 7, no. 1, Spring 2010, pp. 25-35; Stefan Hedlund, Putin’s Energy Agenda; The Contradictions of Russia’s Resource Wealth, (Boulder, CO – London: Lynne Rienner Publishers, 2014), pp. 136-138. 399 Ryan Maness and Brandon Valeriano, Russia’s Coercive Diplomacy: Energy, Cyber, and Maritime Policy as New Sources of Power (New York: Palgrave Macmillan, 2015), p. 141.

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Russia views common principled approaches adopted by the two countries to addressing the key issues on the global agenda as one of the core elements of regional and global stability. Building on this foundation, Russia intends to promote foreign policy cooperation with China in various areas, including countering new challenges and threats, resolving urgent regional and global problems, cooperation in international organizations and multilateral associations.”400 President Putin described the relations with China as “very harmonious” and stated that Moscow has “plans for developing the so-called Trans-

Siberian Railroad, the Baikal Railroad, and it all corresponds well to the Chinese plans of reviving the Silk Road.”401 The development of the Sino-Russian bilateral relations might also present an opportunity for Moscow to find its place in what the Kremlin refers as

“wider Eurasia” in its foreign policy.

The Kremlin plays a vital role in maintaining the Russia-China-India trilateral format during which the nations reconcile on a mutually shared vision and responsibility for the future of the Eurasian continent. Russia perceives such meetings as vital steps for pushing forward its agenda of a multipolar world and challenging Western dominance. The

Kremlin also facilitated New Delhi’s membership in the Shanghai Cooperation

Organization. Moscow pushed forward India’s membership in order to dilute China’s potential dominance in the organization.

The year 2017 saw a breakthrough in bilateral relations for Moscow and New

Delhi. Both nations experienced impressive 22 percent growth in trade and boosted

400 The Ministry of Foreign Affairs of the Russian Federation. “Foreign Policy Concept of the Russian Federation.” November 30, 2016. Accessed March 3, 2018. http://www.mid.ru/en/foreign_policy/official_documents/- /asset_publisher/CptICkB6BZ29/content/id/2542248 401 ShowTime Documentary Films. The Full Transcripts of the Putin Interviews. Oliver Stone Interviews Vladimir Putin. (New York: Hot Books, 2017), p. 92.

242 cooperation in a number of spheres ranging from agriculture to energy. Earlier, Rosneft, closed a $12.9 billion purchase of India’s second largest private oil refiner, Essar Oil and its subsidiaries, which marked one of the biggest foreign investment in India. New Delhi likewise was the major guest country of the Saint Petersburg International Economic

Forum in 2017, Russia’s top national event for international cooperation, and hosted the pavilion titled “Make in India” along with Indian Prime-Minister Narendra Modi’s participation in a plenary session next to Putin.402

The acquisition by Rosneft places in its hands India’s largest network of private petrol pumps, the country’s second-largest refinery, a 1,000-MW power plant along with the Vadinar port and oil terminal. Rosneft aims to scale up Essar’s petrol pump network to

6,000 outlets in India from the current level of 2,700. It plans to make a total investment exceeding $30 billion to develop business in India.403 The Modi government did splendidly well in welcoming Rosneft’s entry into its energy market. Rosneft’s plans convey a big political message by the Kremlin.

Ties of Russia with Japan have been complicated by a long-lasting territorial dispute over the four Kuril Islands, as well as by Japan joining western sanctions, even if in the form of milder restrictions not preventing its companies from taking an active role in oil exploration and production in Russia. In December 2016, twenty-three energy-related documents were signed in the presence of President Vladimir Putin and Japan's Prime

Minister Shinzo Abe, during the first visit to Japan in eleven years by a Russian president.

402 Saint Petersburg International Economic Forum. Accessed March 3, 2018. https://www.forumspb.com/en/ 403 Rosneft. “Rosneft uspeshno zakryla strategicheskuyu sdelky po priobreteniyu Essar Oil,” August 21, 2017. [in Russian.] Accessed March 3, 2018. https://www.rosneft.ru/press/today/item/188185/

243

Rosneft signed agreements with three Japanese companies -- state-owned Japan

Oil, Gas and Metals National Corporation (Jogmec), Inpex, the country's largest oil and gas exploration and production company, and Marubeni -- on hydrocarbons exploration, development and production at a license block offshore Russia's Far Eastern Sakhalin

Island. The parties agreed to work in Sakhalin's southwestern offshore area between the island, just north of Japan, and mainland Russia. These documents also include Gazprom

Neft’s agreement with Yokogawa Electric, expanding LNG partnership of Japanese companies with Gazprom and Novatek, opening a credit line for Yamal LNG plant and setting up a mutual fund, among other agreements. Japan is also one of the top buyers of

Russia's ESPO and Sokol crude. 404

The growing interest of Japan and other Asian countries, including South Korea, to develop “energy relations” with Russia is connected with the policy on reducing the dependency on the countries of the Persian Gulf. The Russia-Republic of Korea Natural

Resources Cooperation Committee and the Russian – Korean Agreement on Cooperation in Gas Industry provide the framework of the “energy dialogue and business” between

Moscow and Seoul.405 In November 2006, President Putin after his meeting with former

Korean President Roh Moo-hyun, announced also about the possibility of the cooperation in the gas sphere not only in bilateral format with the Republic of Korea but also in a trilateral format (Russia – Republic of Korea and the DPRK). Given the support of Russia

404 S&P Global Platts. “Russia, Japan Deepen Ties with Agreements on Upstream, LNG Cooperation.” December 18, 2016. Accessed March 3, 2018. https://www.platts.com/latest-news/natural- gas/moscow/russia-japan-deepen-ties-with-agreements-on-upstream-27733406 405 Elena Shadrina, “Russia’s Oil and Gas for Northeast Asian Markets: Means and Ways vs Realities,” Journal of Self-Governance and Management Economics, 5(1), 2017, pp. 34-79.

244 to the DPRK’s regime, the implementation of big infrastructure projects in energy sector with both Koreas is another important aim for Russia’s foreign policy.406

In 2012 the Asia-Pacific Economic Cooperation summit took place in Vladivostok.

It was Russia's first time hosting the meeting of the organization, which includes 21 nations from the Asia-Pacific region, and this summit provided a unique chance to Russia to diversify its energy supplies in Asia.!Energy cooperation is also one of the important dimensions of regular Russia – ASEAN Summits and Ministerial meetings.407 The

Association of Southeast Asian Nations is set to have a significant impact on energy and commodities in the coming decades, as the region’s demand climbs due to favorable geography and demographics. S&P Global Platts Analytics expects Southeast Asia’s oil demand to rise by 1.2 million barrels per day to 5.9 million barrels per day by 2025.408

While China is a key factor in defining Northeast Asia energy security and the regions’ energy equation includes a powerful external actor such as the United States, Russia remains an important regional supplier of oil and gas. Rosneft has already completed with the Indonesian state-owned oil and gas company Pertamina, the establishment of the joint venture for the development of Tuban grass root refinery and petrochemical complex in

Tuban in the East Java province of Indonesia.409 This transaction is an important part of

Rosneft strategy targeting growth in Asia-Pacific market of refined products.

406 Liudmila Zakharova, “Economic Cooperation between Russia and North Korea: New Goals and New Approaches,” Journal of Eurasian Studies, Volume 7, Issue 2, July 2016, pp. 151-161. 407 The Ministry of Foreign Affairs of the Russian Federation. “Russia- ASEAN Summit.” Accessed March 3, 2018. http://www.mid.ru/en/summit-russia-asean 408 S&P Global Platts. “How Will Southeast Asia Meet Its Rising Crude Oil Demand?” November 2, 2017. Accessed March 3, 2018. https://www.platts.com/videos/2017/november/snapshot-southeast-asia-energy- deficit-110217 409 Rosneft. “Rosneft and Pertamina set up a Joint Venture for the development of Tuban Grass Root Refinery (TGRR) project.” November 28, 2017. Accessed March 3, 2018. https://www.rosneft.com/press/releases/item/188839/!!

245

Russia's aspirations to enhance energy ties with Asia date back to the 1990s. In the

2000s, the Asian vector in Russia's energy and foreign policy became more pronounced.

Recently, the importance of energy export diversification towards Asia is being particularly emphasized. According to President Putin, “Russia's reorientation toward the

Pacific Ocean and the dynamic development in all our eastern territories will not only open up new economic opportunities and new horizons, but also provide additional instruments for an active foreign policy.”410

This took place in the context of sundry factors (such as progress in the EU energy markets regulatory reforms that were imposed against Russian sectoral sanctions targeting vital forms of cooperation with the Western partners and the dramatic fall in the global oil prices) starting to reveal their negative impact on Russia's energy sector and economy at large. To speed up the realization of international projects in Northeastern Asia and to contribute to the development of the Russian Far East, during the past several years, the

Russian government has made large-scale financial investments into the extraction of natural resources and transportation in the Russian Far East and has announced immediate plans to construct several new oil and gas-processing plants in the Far Eastern part of the country. While certain results in geographical re-orientation of Russian energy flows can already be observed, Russia's prospects for authentic diversification depend on its ability to perform in increasingly competitive and permanently evolving energy markets.

410 The President of Russia. “Presidential Address, 2013. Presidential Address to the Federal Assembly.” December 13, 2013. Accessed March 3, 2018. http://eng.kremlin.ru/news/6402

246

Conclusion

Russia’s view of the modern world, as well as its goals and objectives are reflected in the Foreign Policy Concept adopted in 2016. It evaluates the global situation and analyses the processes in the world and different regions vital for the Russian national interests. On the basis of this concept the foreign strategy of the country has been found in full recognition of the fundamentally new geopolitical situation in the world.

Henry Kissinger argues that throughout history Russia has been a special case and none of the traditional principles of European diplomacy seemed to apply to it. Bordering on three different cultural spheres – Europe, Asia, and the Muslim world – Russia contained populations of each and, hence, was never a national state in the European sense.

Constantly changing shape as its rulers annexed contiguous territories, Russia was an empire out of scale in comparison with any of the European countries. Moreover, with every new conquest, the character of the state changed as it incorporated another brand- new, restive, non-Russian ethnic group. According to Kissinger, this was one of the reasons Russia felt obliged to maintain huge armies whose size was unrelated to any plausible threat to its external security.411

Post-communist Russia found itself within borders which reflect no historical precedent. Moreover, the collapse of the Soviet Union threw Russia into a decade of political and economic turmoil. The point of departure of this Case Study is that as Russia emerged from the “time of troubles,” Russian elites were permeated by an increasingly powerful drive to restore lost greatness. Pavel Baev claims that these elites are possessed by an indispensable great power of Russia that is “objectively destined to come out as an

411 Henry Kissinger, Diplomacy (New York – London: Simon & Schuster, 1994), p. 24.

247 independent player, a separate center of force not to be dissolved in any international amalgamations.”412

President Putin’s promise to restore the country’s dignity was well received by the general population of Russia. Putin’s political and economic reforms stabilized the Russian economy and Russian GDP growth outpaced many of the economic powers of the West until the collapse of the global economy in 2008. Stefan Hedlund argues that the spike in the price of oil that marked the Putin’s first term in office and the bonanza of hydrocarbon revenue added a new dimension to the ongoing games for power and profit.413 All of these events led to more confidence in the Russian foreign policy regime and one of its new contexts was found in Russia’s energy. Russian elites view oil and natural gas as indispensable resources in international politics, and hydrocarbons, energy security, export and import of energy resources, and global prices of hydrocarbons are independent variables of this study. As observed in this Chapter, these governing elites make an effort to integrate energy and foreign policy which is a dependent variable of the project.

The aspects of power inherent in Russian energy are threefold. First, the vast majority of Russian gas and oil activity is conducted by the state-owned Gazprom and

Rosneft. Second, the world’s largest gas transportation system belongs to Gazprom and oil pipelines within Russia are owned outright by another Russian state-owned company,

Transneft. Ownership of the other dozen or so pipelines connecting Russia to the Caspian, the Baltic region, and Europe itself are divided amongst the states (or state enterprises) across which the pipelines run. Third, long-term contracts lock in Russian exports to a

412 Pavel Baev, Russian Energy Policy and Military Power: Putin’s Quest for Greatness (London: Routledge, 2008), p. 119. 413 Stefan Hedlund, Putin’s Energy Agenda: The Contradictions of Russia’s Resource Wealth (Boulder – London: Lynne Rienner Publishers, 2014), p. 7.

248 guaranteed set of foreign importers. With all three components in place, the economic side of Russian energy presents serious monopolistic challenges from the Western perspective.

State companies like Gazprom, Transneft, and Rosneft are generally assumed to be highly influential agents of Kremlin’s energy and foreign policy. For Russia, these companies’ value extends beyond economic performance and serve state’s foreign policy and political goals.

Analyzing the peculiarities of mechanisms of the foreign energy policy, it is necessary to accentuate the coordinating role of the Russian Ministry of Foreign Affairs that fulfills diplomatic support to energy supply and business in relations with foreign countries and international organizations. These energy companies and institutions such as the Ministry of Foreign Affairs and the Ministry of Energy are intervening variables of this research.

In the multivectorial foreign policy where Russia seeks to affirm its interests in a wider area, primacy is given to the post-Soviet space. Russia’s foreign policy in the CIS and the Eurasian Economic Union regions is without any exception significantly influenced by energy.

Gazprom is trying to gain control over the gas transportation infrastructure that used to be part of the Soviet Union gas supply system. Simultaneously, it is making gas consumers in the former Soviet Republics pay European, rather than subsidized gas prices, while retaining discounts for loyal countries. The strategy of Russian energy companies is to control where possible the energy infrastructure in the post-Soviet space regardless whether these countries are importers, producers and exporters of energy resources or transit countries. Energy power gives Russia the leverage to dominate the region when its

249 rivals challenge Russian political and economic goals. Some scholars argue that Russia uses coercive diplomacy to achieve its foreign policy goals in this region.414 Currently

Russia controls the production and distribution of energy across almost the entirety of former Soviet space, and many regional countries are in compliance with Russia’s energy and foreign policy interests. Russia also uses CIS, the Collective Security Treaty, the

Eurasian Economic Union and other regional organizations to further its interests and foreign policy goals in the post-Soviet space.

The “gas wars” and further crisis in Ukraine brought Russian power politics back into the forefront of debate among policymakers and scholars. Eastern Ukraine remains the most dangerous conflict zone in Europe which affects the European security. The principle sources of this trouble have been the resumption of great power rivalry around the world, with Russia challenging the U.S. built and led post-Cold War order and the NATO expansion. Dmitri Trenin argues that the U.S. and European establishments deny legitimacy to the Russian authoritarian regime while the Kremlin sees Western democracy as corrupt and hypocritical.415 In 2007, long before the crisis in Ukraine, President Putin, in his well-known speech at the Munich Conference on Security Policy stated that NATO expansion does not have any relation with the modernization of the Alliance itself or with ensuring security in Europe. “On the contrary, it represents a serious provocation that reduces the level of mutual trust. And we have the right to ask: against whom this expansion is intended?” Putin also made clear that the unipolar world that has been

414 Ryan Maness and Brandon Valeriano, Russia’s Coercive Diplomacy: Energy, Cyber, and Maritime Policy as New Sources of Power (New York: Palgrave Macmillan, 2015); Amelia Hadfield, “Energy and Foreign Policy: EU – Russia Energy Dynamics,” in Steve Smith et al eds., Foreign Policy: Theories, Actors, Cases, (New York: Oxford University Press, 2008). 415 Dmitri Trenin, “European Security: From Managing Adversity to a New Equilibrium,” Carnegie Moscow Center, February 21, 2018. Accessed March 8, 2018. http://carnegie.ru/2018/02/22/european-security-from- managing-adversity-to-new-equilibrium-pub-75606

250 proposed after the Cold War is not only acceptable for Russia but also impossible in today’s world.416

U.S. – Russian energy relations have been discussed in the U.S. Case Study of this research and after the U.S. sanctions, including those in energy sector and against Russian energy companies imposed over crisis in Ukraine and alleged meddling in the 2016 elections, the bilateral ties between Moscow and Washington have deteriorated sharply.

The U.S. sanctions also limit the type of business energy companies can do with Russia.

Many European leaders and top executives of energy companies worry that the U.S. sanctions could impact their oil and gas firms and pipeline projects of the continent.

Nevertheless, the EU still remains a major oil and gas trading partner of Russia.

The EU is interested in a reliable supply of gas and oil with advantageous prices and settled transit regimes. Russia’s interest in the EU is to remain the major player in the important European gas and oil market. Susanne Nies claims that Russia uses the EU energy dependency as a tool for power politics where it pursues specific energy and political interests. The use of dependency is selective and has never concerned the EU as a whole.417 Russian interest is also to have reliable transit routes or direct infrastructure

(ideally controlled by Russian energy companies) and remain the only export route to

Europe for other exporters, including Central Asian republics. Russia is interested in completing the Nord Stream 2 and Turk Stream pipeline projects and supply more natural gas directly to its European customers bypassing transit routes via former Soviet and

Eastern European countries.

416 International Relations and Security Network. “Russian President Vladimir Putin’s Speech at the 2007 Munich Conference on Security Policy,” February 10, 2007. Accessed March 8, 2018. www.isn.ethz.ch 417 Susanne Nies, “The EU-Russia Energy Relationship: European, Russia, Common Interests?” Roger E. Kanet ed., Russian Foreign Policy in the 21st Century (New York: Palgrave Macmillan, 2011), p. 282.

251

The institutional aspect of the EU-Russia energy relationship includes three main elements. First, the EU-Russia Partnership and Cooperation Agreement of 1994 with its energy dimension to be still replaced by a new document. Second, the Energy Charter

Treaty, never ratified by Russia and even proposed by Moscow to be substituted. Third, the

EU-Russia Energy Dialogue, which remained only an exchange of views without resolving any energy security issues expected by the EU. This picture illustrates a high degree of distrust and deterioration of political relations between Brussels and Moscow.

Nevertheless, Russia and big European countries, including Germany, France, and Italy organize their energy relations bilaterally. The small EU members rely more on the

Union’s institutions. The EU’s difficulty in finding a “single voice” to deal with Russia on energy issues is testimony to Moscow’s diplomatic achievement.

Russian governing elites have shown considerable skill at integrating foreign policy and energy policy to leverage Russia’s advantage both as a holder of hydrocarbon resources and as a very important and capable producer. John Lough argues that President

Putin’s understanding of both areas of policy and their overlap has made him a difficult negotiating partner for European leaders. No Western leader has a level of knowledge of the international energy business comparable to Putin’s, based on his strong interest in

Gazprom and Rosneft.418

However, after the Ukrainian crisis, the situation in 2018 looks very different from that of 2014. The U.S. sanctions and pressures on Gazprom, Rosneft and other Russian energy companies in Europe created a new set of dilemmas for the Russian energy agents

418 John Lough, “Russia’s Energy Diplomacy,” Chatham House, May 2011. Accessed March 8, 2018. www.chathamhouse.org.uk; See also Tatiana Romanova and Elena Pavlova, “Towards Neoclassical Realist Thinking in Russia?” in Asle Toje and Barbara Kunz eds., Neoclassical Realism in European Politics (Manchester-New York: Manchester University Press, 2012), p. 240.

252 and the Ministry of Foreign Affairs how to reconcile commercial and political objectives set for them by the Kremlin. However, thanks to Moscow’s expanding influence in the

Caspian Basin and Central Asia and controlling the transport corridor, Russia is leaving

Europe to face the prospect of still greater dependence in the future.

Russia’s re-emergence as a major international player by taking military action in

Syria, expanded Russia’s regional influence in the Middle East and North Africa. Russia has relationships with many countries in the Middle East and apparently is the only one that can deal with everyone, including Israel, Iran, Syria, Turkey, Saudi Arabia and even

Hamas and Hezbollah. Rosneft provided more than $4 billion in loans and investments to the Kurdish oil and gas sectors from 2016 to 2017. Rosneft and the Kurdistan Regional

Government announced the start of joint implementation of an infrastructure project for the operation of the oil pipeline in the Kurdish Autonomous Region. According to Igor Sechin, the CEO of Rosneft, this agreement will contribute to achievement of Rosneft’s strategic objectives and will enable Rosneft to enhance the efficiency of oil transportation to the end customers including supplies to the company’s refineries in Germany.419

The agreement between Saudi Arabia and Russia to cut back on oil production has boosted oil prices and is now the foundation for a broader relationship. The dialogue and partnership with OPEC also strengthened Russia’s position in the Middle East. After these arrangements, the price of oil remained at the range of $60 for some time. It suits everybody, especially the producing countries - $65-70 is a good price from the $30 of a couple of years ago.

419 Rosneft. “Rosneft and Kurdistan Regional Government announce the entry of Rosneft into an infrastructure project in the Kurdistan Autonomous Region.” October 19, 2017. Accessed March 8, 2018. https://www.rosneft.com/press/releases/item/188147/

253

Energy is also a central component of Russia’s foreign policy in Asia. Gazprom and Rosneft achieved the breakthrough with China and concluded the biggest agreements with CNPC in the history of the global gas and oil industry – a thirty-year natural gas sales and purchase deal worth of $400 billion and $270 billion deal to double oil supplies to

China. Russia needs eastern outlets for its energy amid its geopolitical rivalry with the

West, while China seeks natural gas supplies over land that limits Western influence over imported LNG. Timothy Lehmann argues that Sino-Russian energy deals serve many geopolitical objects and illustrate the limits of the oil majors and their home governments with respect to the great powers still unbowed before the United States. Russia’s ability to use its “blue gold” to cement the Sino-Russian partnership exemplifies the truism in

Russia’s 2003 Energy Strategy. It stated: “the role of the country in the global energy markets largely determines its geopolitical influence.”420

Moscow plays a key role in maintaining the Russia-China-India trilateral format and develops bilateral relations with New Delhi. Rosneft, which recently sold to India's state-owned companies shares in two fields in Eastern Siberia, purchased Essar Oil, the second largest refinery in India. According to Igor Sechin, this deal creates unique opportunities for deliveries to Asia.421

Russia is expanding its energy cooperation with Japan and Republic of Korea and with other Asian consumers directly as well as via Asia-Pacific Economic Cooperation and

Russia-ASEAN summits. Asia is also one of the largest capital markets and the financial

420 Timothy Lehmann, “The Geopolitics of Global Energy,” Timothy Lehmann ed., The Geopolitics of Global Energy: The New Cost of Plenty (Boulder, CO – London: Lynne Rienner Publishers, 2017), p. 13. The Russian Government later tried to moderate this statement and insisted on purely commercial motives for global expansion. The new “Energy Strategy of Russia up to 2030,” adopted in 2009, diplomatically says, “The goal of Russian energy policy is to ensure … strengthening of its global economic positions.” 421 RBK. “Milliardi na Indiyu: pochemu Rosneft s partnerami priobreli Essar Oil,” October 15, 2016. [In Russian]. Accessed March 8, 2018. https://www.rbc.ru/business/15/10/2016/58024c079a794750d5d98fff

254 capabilities of the regional countries can be used for developing the resources of East

Siberia and the Far East of Russia in implementing large international energy projects.

Russian energy companies have been pushing deeply into politically sensitive countries like Cuba, Egypt, and Vietnam, as well as tumultuous places where American interests are at stake. Russia’s activities in Venezuela are just one example of how Moscow is leveraging its economic power to expand its influence in the Western Hemisphere. The

Kremlin is now a key player in the dramatic events unfolding in Venezuela. Amid an increasingly desperate economic and humanitarian situation and sharpening tensions between Caracas and Washington, Moscow is helping prop up the government of President

Nicolas Maduro. In exchange, Russia is acquiring valuable assets at knockdown prices.

Rosneft has stakes in five major oil projects and purchased two new offshore gas blocks in

2017. Venezuela owes to Rosneft $6 billion. In 2016, Rosneft took a 49.9 percent stake in

Citgo, the Venezuelan state oil company PDVSA’s refining subsidiary in the United

States, as collateral for a $1.5 billion loan to the PDVSA. The deal was sharply criticized by members of the U.S. Congress, who warned that an eventual Russian takeover of Citgo would threaten U.S. national security. Citgo operates about four percent of American refining capacity and has a sprawling network of pipelines and gas stations. Moreover,

Venezuela is now Rosneft’s second-largest source of crude, after Russia itself. The

Russian company resells about 225,000 barrels a day of Venezuelan oil, equivalent to 13 percent of Venezuela’s exports.422 Rosneft’s growing role in Venezuela’s energy sector illustrates how Russian political and business leaders blend commercial opportunities with

422 See more in R. Evan Ellis, The Influence of Extra-Hemispheric Actors on the Crisis in Venezuela, Testimony to the Subcommittee on Western Hemisphere Affairs, Foreign Affairs Committee, U.S. House of Representatives, September 13, 2017; Varvara Pertzova, “Threat to the U.S. Energy Security: Rosneft Received a Stake in the American Citgo,” Forbes, [In Russian]. May 2017.

255 important foreign policy objectives. Russian engagement in Latin America also includes arms sales in Brazil, Venezuela, Mexico, Peru, and Nicaragua.423

Russia is one of five countries bordering the Arctic Ocean and conducts extensive research in the Arctic region. In 2007, Russian expedition planted the country’s flag on the

North Pole’s sea floor which was the first to reach the seabed at the North Pole. In 2008, the five states with Arctic coasts – Canada, Denmark, Norway, Russia, and the United

States – issued the Ilulissat Declaration, in which they promised to settle their overlapping claims and expressed their support for the 1982 UN Convention on the Law of the Sea and the Arctic Council, the two international institutions most relevant to the region.424 The area inside the Arctic circle contains massive oil and gas deposits. Initial estimates suggest that the Arctic may be home to an estimated 22 percent of the world’s undiscovered conventional oil and gas deposits, according to the U.S. Geological Survey. Gazprom and

Rosneft have already started to extract hydrocarbons in the Arctic Seas and planning to invest many billions of dollars more to develop the Russian Arctic. However, the coming

Arctic boom will involve more than just mining and drilling. According to President Putin,

“the so-called flight assignments of both American ballistic missiles and Russian ballistic missiles are aimed at each other sites and these trajectories are right over the Arctic. And considering the deployment of the ABM system by Americans, including the Aegis systems ad their military vessels, and in North Sea, we are certainly contemplating ways to

423 Global Americans. R. Evan Ellis, “Russian Engagement in Latin America: An Update,” December 5, 2017. Accessed March 8, 2018. https://theglobalamericans.org/2017/12/russian-engagement-latin-america- update/ 424 Scott Borgerson, “The Coming Artcic Boom: As the Ice Melts, the Region Heats Up,” Foreign Affairs, Volume 92 (4), July/August 2013, pp. 76-89.

256 protect our territory. The Arctic is of great strategic importance because it helps us to secure our defense capabilities, which secure the country.”425

Russia is also concerned that in past three decades, Arctic sea ice has lost half its area and three quarters of its volume. Although climate change and global warming are not major public debates in the country, Russia supported the Kyoto Protocol on greenhouse gas emissions from the very beginning and signed it. Russia is one of the signatories of the

Paris climate agreement but is yet to ratify the document.

Western sanctions imposed after the crisis in Ukraine have isolated Russia from global markets to some extent, including the restrictions to borrow from Western banks that led to depreciation of the ruble and fall in real incomes and wages. Along with hazards, this crisis also presents certain opportunities for Russian political leadership to demonstrate its ability to diversify country’s economy. Derek Beach argues that sanctions can be also counter-productive. While they might be intended to weaken support for a regime, they often result in gaining popularity for the leader in the eyes of the people as he stands up against foreign pressure.426 Western sanctions consolidated Russian society and did not derail Russia from its chosen foreign policy path.

The implementation of structural reforms, building modern political and economic institutions, and fight corruption is another set of crucial actions that should be able to assist Russia to catch up to wealthier countries. The weak ruble and low commodity prices are good incentives to diversify as well. The weak currency helps exports overall,

425 ShowTime Documentary Films. The Full Transcripts of the Putin Interviews. Oliver Stone Interviews Vladimir Putin (New York: Hot Books, 2017), pp. 98-99. 426 Derek Beach, Analyzing Foreign Policy (New York: Palgrave Macmillan, 2012), pp. 195-196.

257 especially those that use local labor and materials.427 But these are just positive external factors. For diversification to work, the Russian government would need to direct investments towards export-oriented companies and industries since already adopted import-substitution policy could be effective in a short-term perspective.

Among other factors, the spectacular growth of state income generated by oil has helped Putin to keep a high level of popularity, enabling him and governing elites to secure the support of key interest groups and the majority of population. According to Thane

Gustafson, “the government taxes the lion's share of the profits of producers and transfers them to the rest of the economy through state-mandated investment programs and state- funded welfare, pensions, and subsidies.”428 However, the big question is how fast the country’s leadership would be able to diversify the economy through structural reforms, upgrade its political and economic institutions, and modernize its energy sector via innovations and technology.

Since Vladimir Putin returned to the presidency in 2012, Moscow has engaged in a broad campaign to expand its international reach. Russia’s presence is increasingly visible throughout the Europe, Middle East, Asia and in even in some parts of Latin America and

Africa. Russia’s energy diplomacy is frequently effective because of its persistence and the fact that governing elites, including president, the prime-minister, the foreign and

427 In 2016, Russia became the world leader in wheat sales for export, according to the report of the U.S. Department of Agriculture. Russia's exports are estimated at 24.5 million tons of wheat, Canada - 22.5 million tons, the United States - 21.09 million tons. As low oil prices hurt the ruble, making grain more alluring for overseas buyers, Russia grabbed more of the wheat-export market from major shippers like the U.S. More than 130 countries in the world import wheat from Russia. Some of the biggest buyers are situated a short distance away, in the Middle East and North Africa, including Egypt, Turkey, and Iran but demand comes from as far away as Mexico and Indonesia. Sources: U.S. Department of Agriculture, June 10, 2016; Bloomberg Businessweek, “How an Oil Giant (Russia) Came to Dominate Wheat,” November 13, 2017. 428 Thane Gustafson, “Putin’s Petroleum Problem: How Oil is Holding Russia Back and How It Could Save It”, Foreign Affairs, Vol. 91, No. 6, November/December 2012, p. 84.

258 energy ministers, and heads of energy companies are personally involved. The investment of time and effort at the highest level is rarely replicated by other foreign leaders. Russia did not return to expensive foreign policy as it was during the Soviet Union. On the contrary, Moscow has relied on relatively inexpensive diplomatic, energy, and financial tools to wield influence, and its foreign policy is guided by the objective to maximize its economic growth.

Edward Morse and Amy Myers Jaffe argue that unlike the members of OPEC,

Russia is not primarily an oil-resource-dependent country. It is a former and potential future superpower, with a nuclear arsenal and an ability to project force internationally in a way second only to the United States. With its growing industrial and agricultural base, it will also seek to balance its oil and natural gas objectives against those of other sectors of the economy – sectors that happen to benefit when oil prices are lower.429 Russia’s energy policy is part of a larger calculus that involves other dimensions of Russian foreign policy and national interests. Moscow has already opened up new exports routes beyond former

Soviet space and Europe and integrated its oil and gas export and energy infrastructure ownership components into a consistent framework of its foreign policy. Consequently,

Russia defines its own international interests in its own ways.

429 Edward Morse and Amy Myers Jaffe, “OPEC in Confrontation with Globalization,” Jan H. Kalicki and David L. Goldwyn eds., Energy and Security: Toward a New Foreign Policy Strategy (Washington D.C. – Baltimore: Woodrow Wilson Center Press, The Johns Hopkins University Press, 2005), p. 82.

259

Table 4.

Leading Russian Energy Companies

Return on Company Leadership Assets Revenues Profits Invested Industry Capital(R OIC)

PJSC Alexei Miller, $296840 m $107217 m $16696 m 7% Integrated oil Gazprom Chairman of the and gas Management Committee & Deputy Chairman of the Board

PJSC Igor Sechin, $193520 m $83601 m $3176 m Rosneft CEO & Deputy 2% Integrated oil Chairman, and gas Chairman of the Management Board

PJSC Nikolay Tokarev, $48542 m $14880 m $4085 m Oil and gas Transneft President & Chairman 10% transportation of the Management and storage Board

5% PJSC Vagit Alekperov, $87982 m $91708 m $3628 m Integrated oil Lukoil CEO & President and gas

-2% OJSC Vladimir $68804 m $17649 m $1090 m Integrated oil Surgutneft Bogdanov, CEO and gas egas

Source: S&P Global Platts | Top 250 Global Energy Company Rankings. Company data as of June 8, 2017 provided by S&P Global Market Intelligence. The Russian Federation owns the majority of stakes in Gazprom, Rosneft, and Transneft, whereas Lukoil and Surgutneftegas are private companies.

260

Figure 12.

The!Purchase!of!Natural!Gas!by!Ukriane!from!Russia

30 450 426

25.8 400 386 25 350

20 300

250 247 239 15 14.4 200 Complete rejection% 10 of%gas%supply 150

6.1 The%resumption%100 5 of%gas%supply% 50 0 0 0 0 2013 2014 2015 11.2015 2018 Volume!(bln!m3) Price!($!for!1,000!m3)

Source: 60 Minutes, Russian TV Channel Rossiya 1, January 17, 2018.

261

Figure 13.

Figure 14.

Sources: S&P Global Platts, Nord Stream 2, and Turk Stream.

262

Table 5.

TURKSTREAM

Project Description

The Turk Stream gas pipeline includes two proposed lines. The first is under construction Notable Dates: and will deliver gas from Russia to Turkey. Russia and Turkey signed an The second is a proposed expansion to deliver intergovernmental agreement in 2016. gas from Russia to Southern/Southeastern Europe, but the final destination or route is not determined yet.

European Parties Involved: Key Russian Investor: The Turkish government (and potentially Gazprom other European partners)

Project Status (as of October 2017): Construction on the first line (to Turkey) commenced in May 2017 and is scheduled to be completed in 2018. Possible routes for the Estimated Cost: second Southern Europe extension would 11.4 billion euros pass through Italy via Greece, or alternatively through Bulgaria, Hungary, and Serbia. The second extension is scheduled to be completed in 2019.

NORD STREAM 2

Project Description

The Nord Stream 2 gas pipeline will deliver gas from Russia to European customers via Notable Dates: Germany. Five European energy firms Gazprom and European energy firms signed a (ENGIE, OMV, Royal Dutch Shell, Uniper, financing agreement in 2017. and Wintershall) agreed to cover 50 percent of the investment, and Gazprom will cover the remaining 50 percent.

European Parties Involved: Key Russian Investor: Five European energy companies Gazprom

Project Status (as of October 2017): Estimated Cost: The project is scheduled to be completed by 9.5 billion euros 2019.

263

Figure 15.

RUSSIAN%GAS%EXPORTS%TO%EUROPEAN% COUNTRIES%2003%AND%2016%(BCM)

2003 2016 49.8 35 24.7 19.8 17.9 11.5 11.2 11 10.4 7.4 7.4 7.3 6.08 6 5.5 5.1 5.1 4.5 4.2 3.7 3.2 2.9 2.7 2.5 2.3 1.9 1.9 1.75 1.7 1.5 0.7 0.7 0.5 0.3 0.3 0.2 0.2 0.1 0 0 0 0 0 0

UK ITALY SERBIA FRANCE GREECE POLAND AUSTRIABELGIUM FINLAND IRELAND DENMARK GERMANY BULGARIA HUNGARY ROMANIA SLOVAKIASLOVENIA MACEDONIA NETHERLANDSSWITZERLAND CHECH!REPUBLIC

BOSNIA!&!HERZEGOVINA

Source: Gazprom.

264

Figure 16.

Dynamics%of%the%prices%for%Brent%crude%(2014%J Jan% 2018) (USD%per%barrel) 120 111.7 106.8

100

80 70.9 65.9

60 50 47.5

40 32.1

0 Jan_14 Jun_14 Jan_15 Mar_15 Jan_16 Jun_17 Jan_18

Source: 60 Minutes, Russian TV Channel Rosiya 1, January 17,2018.

265

Table 6. Sino-Russian Energy Deals (2003-2016)

2003 CNPC signs a framework agreement with Sakhalin Energy on exploration and development

2004 Gazprom and CNPC sign cooperation agreement 2005 CNPC signs agreement on long-term cooperation with Rosneft 2006 CNPC signs MoU with Gazprom, Rosneft and Transneft on supplying natural gas CNPC buys a $500 million stake in Rosneft CNPC signs strategic cooperation agreement with Lukoil CNPC and Rosneft establish the joint venture Vostok Energy 2007 Vostok Energy wins a bid for oil and gas exploration licenses in Irkutsk 2008 CNPC and Transneft sign agreement to build oil pipeline to China 2009 China, Rosneft and Transneft agree to supply 15 million tons annually for 20 years from East Siberia for $25 billion China signs framework agreement with Gazprom on natural gas supply and MoU with Rosneft 2010 Oil pipeline to China officially starts to operate 2013 Rosneft deal to supply oil to China, with $70 billion prepaid (total value $270 billion) CNPC buys 20 per cent of Novatek’s Yamal LNG project 2014 30-year Power of Siberia natural gas deal signed, worth $400 billion CNOOC gets contract for engineering at Novatek-led Yamal LNG project worth $1.6 billion 2016 Yamal LNG signs agreements with the Export-Import Bank of China and the China Development Bank on two 15-year loans for a total amount exceeding $12 billion

Sources: The Ministry of Foreign Affairs of the Russian Federation, Gazprom, Rosneft Indra Overland and Gulaikhan Kubayeva, “Did China Bankroll Russia’s Annexation of Crimea? The Role of Sino-Russian Energy Relations,” in Helge Blakkisrud and Elana Wilson Rowe eds., Russia's Turn to the East, (New York: Palgrave, 2017), pp. 95-118.

CHAPTER SIX

Conclusion

The role of energy in foreign policy becomes a significant and thought-provoking subject in the field of international politics. This research has been an attempt to solve a puzzle related to the causal relationship between energy and foreign policy with the cases of the United States and the Russian Federation. Both countries remain the world’s top producers of petroleum and natural gas hydrocarbons. The United States has been the world’s top producer of natural gas since 2009, when U.S. natural gas production surpassed that of Russia, and it has been the world’s top producer of petroleum hydrocarbons since 2013, when its production exceeded Saudi Arabia’s. For the United

States and Russia, total petroleum and natural gas hydrocarbon production in energy content terms is almost evenly split between petroleum and natural gas, while Saudi

Arabia's production heavily favors petroleum.430 Russia and the U.S. both act simultaneously as energy producers, exporters, importers, and consumers. Both of them have a capability to use energy as a tool to achieve their foreign policy ends.

This research argues that, if energy superpowers view oil and gas as indispensable resources in international politics, then the governing elites of these nations will make an effort to integrate their energy and foreign policy. This hypothesis has been tested and supported by a great amount of evidence throughout the case studies of the United States and Russia over the period from 2000 till the present time as well as with quantitative analysis. The philosophical position of neoclassical realism manages the

430 See more in U.S. Energy Information Administration. “United States Remains the World’s Top Producer of Petroleum and Natural Gas,” June 7, 2017. Accessed April 8, 2018. https://www.eia.gov/todayinenergy/detail.php?id=31532

266 267 integration of systemic and unit-level variables in a deductively consistent manner, developed the scope of this study. Because neoclassical realism stresses the role played by both independent (in this research – energy resources, energy security, export and import of energy, and global prices of hydrocarbons) and intervening (state institutions and energy companies) variables, it carries with it a distinct methodological preference – for theoretically informed narratives, supplemented by explicit counterfactual analysis, that trace the ways different factors combine to produce particular foreign policy

(dependent variable) and its outcome. Moreover, all specified independent, intervening, and dependent variables of this research are clearly linked in a direct causal chain to explain a complex empirical reality.

In the beginning of the twenty-first century, among all the top producers of oil and natural gas, the United States and Russia were the only countries that shaped their own distinctive approaches towards energy and energy security. President Putin’s arrival in the Kremlin and the emergence of the new governing elites in Russia brought focus on pragmatism in foreign policy and a conversion of oil and gas earnings into political dividends. The new Foreign Policy Concept and Energy Strategy documents set a foundation for the energy diplomacy and foreign economic interests of Russia in different regions, connected with the “energy” relationships. Meanwhile, George W. Bush, who assumed the presidency at a critical juncture in the evolution of U.S. energy policy, created the National Energy Policy Development Group with Vice-President Dick

Cheney as the chairman of this task force. The National Energy Policy developed by this group urged the president and administration to make energy and energy security a priority of the U.S. trade and foreign policy.

268

The last twenty years have seen massive changes in the world’s energy system and markets, with large impacts on energy security. These qualitative changes were primarily attributed to the introduction of new technologies to extract hard-to-recover hydrocarbon reserves and the expanded use of renewable sources of energy. Demand for energy supplies has been booming in the emerging economies, especially in Asia. States needed to diversify their presence on global markets to ensure their energy security.

Within the competitive nature of interstate relations, the scope and ambitions of the

United States’ and Russia’s foreign policy goals are determined by their placement in the international system and their relative material power resources. The establishments of both countries view oil and natural gas as indispensable resources in international politics and make an effort to integrate their energy and foreign policy.

In a neo-liberal capitalist system such as the United States, the interests of IOCs and the state overlap to a large degree. These companies include ExxonMobil, Chevron,

ConocoPhillips, oil service providers Schlumberger, Halliburton and others earn huge profits, preserve and always attempt to expand their market share. Political leaders, of course, have as a major goal strong economic growth and the required inflation, each linked to stable energy business. Oil companies, then, become an integral component of state energy policy, in a corporatist relationship. U.S. government consistently support the business of these companies worldwide for the sake of America’s and these companies’ economic gain. The coordination of energy-relevant policies and programs among the Departments of Energy, State, Defense, Commerce, Treasury and top management of IOCs when required, and the establishment of the Bureau of Energy

Resources at the Department of State by the Obama administration maximized the U.S.

269 diplomacy engagement with leading energy producers and consuming countries. These operational indicators also define how energy can be used to advance broader U.S. foreign policy and national security interests.

In the United States, approximately 97 percent of the holdings of oil stocks and oil companies belong to pension funds, asset management companies, mutual funds, individual retirement accounts, individual investors, and other institutional investors, and only 2.9 percent - to corporate management of oil companies.431 This set of investors demonstrates that many Americans gain when oil companies do well. Therefore, the U.S. government and Congress have an additional interest in maintaining the present open market oil commodity trading rules and support of U.S. energy companies.

In a state capitalist system, such as that of the Russian Federation, national energy companies, Rosneft, Gazprom, and Transneft act as the Kremlin’s agents, and they are a key part of the Russian international diplomacy. Private energy companies such as

Lukoil, Surgutneftegas and others also work in alliance with the Russian government if necessary. The entire energy industry of Russia remains firmly under the Kremlin’s control. The decision-making Russian elites established the required practice to coordinate the activities of energy companies with the Russian Ministry of Foreign

Affairs and Ministry of Energy in order to obtain the diplomatic support for Russian businesses abroad. Among operational indicators of the integration of energy and foreign policy is the establishment of the International Energy Policy and Diplomacy Institute within Foreign Ministry’s State University of International Relations to prepare

431 Robert Shapiro and Nam Pham, “The Financial Contribution of Oil and Natural Gas Investments to Public Employee Pension Plans in Seventeen States, Fiscal Years 2005-2013,” Sonecon, April 2015. Accessed April 9, 2018. http://www.whoownsbigoil.com/#/?section=whoowns-the-oil-companies-2

270 professionals in the fields of energy diplomacy, energy geopolitics, and international energy business.

In the past decade, Russia has increasingly moved back onto the world stage as an important actor. After a noticeable decline under the Yeltsin administration, the Putin era saw a resurgence of Russian power. One of the key components of this power is Russia’s ability to use its oil and gas reserves as foreign policy tools. In addition, Russia uses coercive diplomacy to achieve its foreign policy and national security goals in a regional hierarchy and beyond. The result of the 2018 Russian presidential elections proves that the popularity of Putin’s and his policies is genuine and authentic among the Russian people. He garnered 76.69 percent of the vote (more than 56 million people) on turnout of over 67 percent.432

In both countries, regardless of their differences, the government plays a direct and dominant role in energy policy, including the national policy on energy planning, establishment of regulatory institutions, fiscal policies related to energy products and services, legislation on commercial energy activities, and environmental issues. As national and international policy-making and business is intertwined, the state is not any more the only actor that influences political outcomes. The geopolitical role of a country is influenced by the scale and scope of the dependence it represents for the IOCs and

NOCs, which are the intervening variables of this research together with other internal and institutional factors. Resources affect national policy making by acting upon domestic actors, which in turn affect the domestic political system through associations,

432 Central Election Commission of the Russian Federation. “Results of the Election of President of the Russian Federation.” [In Russian.] Accessed April 9, 2018. http://old.cikrf.ru/analog/prezidentskiye- vybory-2018/itogi-golosovaniya/

271 state structure and, hence, business-to-business and business-to-government relations.

Despite the importance of these actors, I should emphasize that national governments still make the primary decisions regarding energy policy and continue set the rules within which these actors operate.

This manuscript attempts to analyze and explain the complex sources and dynamics of foreign policy of the United States and Russia by means of a theoretically informed framework and by means of empirically detailed case studies.

U.S. involvement into the world’s energy system has always operated on the major principle, that is to entrust the management to the leading U.S. energy companies and ensure their dominance over vital resource areas. U.S. diplomacy and American government agencies and institutions operating abroad provide IOCs with necessary assistance to ensure financial profits and advance U.S. interests. Washington always makes sure that Houston-based oil majors hold the cards in the energy world. U.S. government’s and IOCs decision to engage commercially in the energy business with countries such as Saudi Arabia, Venezuela, Equatorial Guinea and other regimes examined in the U.S. Case Study of this research, violates many well-known American principles for the sake of American gain.

During the Obama presidency, a combination of American innovation (hydraulic fracturing or ‘fracking”), finance, and enterprise opened up shale oil and gas, including to small oil and gas firms with low costs. The United States did not quite gain energy independence, the holy grail of policymakers ever since the oil shocks of the 1970s, but it is likely to depend on imports only from Canada and Mexico. U.S. shale revolution and the bill to end the oil export ban were the game changers in the world energy markets.

272

Today, Canada and Mexico are key energy trade partners with the United States. Energy flows among the countries for crude oil, natural gas, and electricity. In 2016, Canada was the largest source of U.S. crude oil imports supplying more crude oil to the United States than all members of the Organization of the Petroleum Exporting Countries combined.

Mexico was the fourth-largest source of U.S. crude oil imports in 2016, behind Canada,

Saudi Arabia, and Venezuela. Canada was also the top destination for U.S. crude oil exports in 2016, receiving 61 percent of all U.S. oil exports.433

From the onset of his presidency, Donald Trump has made it clear that only by using domestic reserves of fossil fuels, U.S. can achieve total “energy dominance” and avoid becoming beholden to foreign powers and so protect its sovereignty. The expansion of the fossil fuel industry and its exports remains a major component of American foreign and security policy. In the Trumpian view these reserves also boost the country’s geopolitical profile by encouraging foreign partners to rely ever more heavily on U.S. for their energy needs, rather than adversaries like Russia or Iran. However, Michael Klare claims that the policy of Trump and his administration of climate-change deniers will lead to unprecedented environmental disaster. These policies include the approval of the

Keystone XL and Dakota Access pipelines, the reversal of an Obama administration rule aimed at preventing methane leakage from natural gas production on federal lands, the rollback of Obama’s Clean Power Plan, which (if implemented) would require sharp

433 U.S. Energy Information Administration. “United States, Canada, and Mexico launch North American Energy Information website,” December 1, 2017. Accessed April 9, 2018. https://www.eia.gov/todayinenergy/detail.php?id=33952

273 cuts in coal usage, and the lifting of restrictions on coal mining on federal lands (long favored by the coal industry).434

Russia’s geographic location makes its energy resources readily available to important marketplaces willing and ready to pay – former Soviet Union space, Europe,

China, and East Asia. As Russia has a near monopoly on natural gas in the region, this type of energy has become the most important form of coercive power in its “near abroad.” Gazprom’s strategy also includes the acquisition of infrastructure and domestic energy companies in former Soviet republics, as in the cases of Belarus, Moldova,

Armenia, and some Central Asian republics. Russian political elites use energy resources in exchange for cash, political and economic stability, and dominance over these countries. The Kremlin employs energy with the variations of prices as a tool to punish or reward for political reasons as well as to resolve economic and financial issues in bilateral relations.

The priorities of the Russian energy companies in Europe, Asia, Africa, and even

Western Hemisphere vary depending on the region. They include the diversification of their presence on global markets, participation in different downstream projects which envisions foreign asset acquisition, gaining access to oil and gas field exploration in other countries, and security of Russian gas and oil transit with the diversification of pipeline systems, to transport them to international markets.

434 Energy Post. Michael Klare, “The militarization of U.S. energy policy: Donald Trump enlists fossil fuels in the struggle for global dominance,” February 19, 2018. Accessed April 10, 2018. http://energypost.eu/militarization-u-s-energy-policy-donald-trump-enlists-fossil-fuels-struggle-global- dominance/

274

The Asian dimension, especially energy cooperation with China, is becoming one of the priorities of the Russian energy business. Russian crude oil sells in Asia with a premium of two-three USD for a barrel while in Europe it is sold with a discount.

Nevertheless, Europe remains one of the main markets for the Russian energy companies.

The ongoing construction projects of the Nord Stream 2 and Turk Stream pipelines would also add to European energy security and assist to meet the European energy demand, especially in Germany, Central, Eastern, and South-Eastern Europe.

The global oil price decline in 2014 led to significant revenue shortfalls in many energy-exporting nations, including Russia. However, in late 2016 OPEC and non-OPEC producers, led by Saudi Arabia and Russia, agreed to curtail oil production by a combined 1.8 million barrels a day (or about two percent of global output) to push up prices. So far, the plan has not only worked, it has set the stage for partnership between

Russia’s president Putin and Saudi Prince Mohammad. Despite their lack of consensus over the Syrian war, and despite Russia’s long-standing friendship with Iran, they agreed to develop cooperation in technology, defense, agriculture, and long-term joint energy projects, especially involving Russian natural gas.

Putin’s success in restoring the primacy of the state over the energy industry and energy assets that were looted during the Yeltsin era brought tremendous revenues to the

Russian state. Russian fortunes in the energy sector have experienced a turnaround, which in turn has reinforced country’s political ambitions. Despite its struggling economy, Russia also rebuilt and modernized its military and is effectively projecting force along its periphery and beyond.

275

Today, the United States and Russia are adversaries with different approaches to key international issues, different systems of government and, in many respects, different values. President Obama came to the office with grand ambitions to “reset” relations with

Russia and diminish the role of nuclear weapons in international affairs. Graham Allison argues that when he stepped down eight years later, U.S.-Russia relations were at their lowest ebb since that nadir of the Cold War, and the possibility of the use of nuclear weapons had again become a topic of debate.435 The problems of Syria and Ukraine are the two biggest bones of contention between the United States and Russia. U.S. sanctions also impacted Russia’s economy, however, the Russian energy sector – the target of some of those sanctions – is doing well. The relationship between Moscow and Washington is spiraling down, and Katrina vanden Heuvel claims that rebuilding a working détente with

Russia will require skill and persistence. With Trump demonstrating that he has neither the temperament nor the capacity to sustain a coherent, balanced policy initiative, it is hard to see how U.S. and Russia can work together on areas of common interest, especially in today’s toxic media and political environment.436 Both countries bear a unique responsibility as the two nuclear superpowers and share a commitment to preventing of weapons of mass destruction. Both of them cannot afford to dismiss diplomacy out of their hands and undermine the security around the globe.

How energy and energy security can shape superpower nations’ foreign policy is the main scholarly contribution of this research. However, this subject has the following limitation: for energy superpowers, energy does not dominate to the extent that it dictates.

435 Graham Allison, “America and Russia: Permanent Confrontation?” A Symposium on U.S.-Russia Relations in the Age of Trump. The National Interest, 151, September/October 2017, p. 6. 436 Katrina vanden Heuvel. Ibid. p. 23.

276

Plenty of discrepancies between major powers will continue without energy being involved.

The examination of the impact of energy on foreign policy, including the analysis of government’s direct and dominant role in energy policy with the case studies of energy superpowers that have different political and economic systems is another scholarly contribution of this study. It can also expand the empirical focus of previous publications and address the gaps in terms of analysis and comparison of energy policies of the United

States and Russia.

This project investigates positional rivalry among powerful state and energy companies over the energy determinants of national economic power. These actors contest each other for autonomy and influence, and this research contributes on how effectively the powerful transnational oil majors or state-owned energy companies work and coordinate their business with national policies in different regions of the world.

Political and economic concerns about the supply and demand of energy resources and the determination of the various functions of energy as a foreign policy tool are also important contributions for the field of International Relations. The analysis and data of this research might lead to new projects since oil as a material factor can overturn patterns of international politics and its price became one of the main factors of instability in the world economy.

No international economic issue is more illustrative of the benefits and liabilities of globalization than energy in the twenty-first century; no economic issue is politicized as this one. Although it has always been recognized that natural resources are an important ingredient of national power, what has changed is that - petroleum and natural

277 gas are now the two strategic resources of the twenty-first century. Meanwhile, the great energy transition, a move away from fossil resources in favor of cleaner, non-depletable sources of energy is starting to unfold. Energy is a critical element of national security and diplomacy of energy superpowers. It also shapes national interests and international relations of the United States, Russia and other major producer states. How these states manage changes to their energy economy and foreign policy will be an important measure of their leaderships for many years to come.

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