Business & Economics:
RUSSIA LOOKS EAST AND WEST FOR ENERGY FORTUNE
Sergei Blagov: 5/30/02

Flush from its acceptance as a junior partner into the NATO military alliance, Russia is reviewing long-term energy strategy in order to compete with both Western and Eastern oil suppliers. Yet the government will be hard-pressed to manage both the international arena and the slow liberalization of the domestic energy sector at the same time.

On May 28, the Russian government tentatively approved a strategy through 2020 to "position itself" as a leader in the world’s energy markets, information agency RIA Novosti quoted Energy Minister Igor Yusufov as saying. The blueprint comes one day after Russia’s provisional welcome into NATO. The energy sector is the country’s economic backbone, providing roughly 20 percent of gross domestic product and nearly half of all federal budget and hard currency revenues. Russia is eager to expand its economy in line with its energy sector, and is approaching the idea of structural reform cautiously. Also on May 28, Prime Minister Mikhail Kasyanov advocated liberalization of the energy sector, but insisted on preserving state regulatory control. Yusufov told RIA Novosti that the state plans to keep subsidizing energy prices to military, educational and healthcare institutions, which account for about 20 percent of the domestic gas market. Other consumers will pay unregulated market prices, he said. While that adjustment may bring Russian energy companies the capital they need for global ventures, it will test the public’s willingness to enter a free market.

Persistent energy subsidies have impeded Russia’s efforts to win the "market economy" status that would facilitate its international trade. On the eve of the Russia-European Union summit in Moscow on May 29, Loyola de Palacio, the European Commission’s vice president for energy and transport issues, said Russia and the European Union complement each other in the energy sphere yet she called for further liberalization of the Russian energy sector. Russia and 40 other countries signed the Energy Charter Treaty, accepting ground rules for transit, investment and market liberalization, in 1994. However, the Duma has yet to ratify the treaty. On May 28, Russia’s Economic Development and Trade Minister German Gref said that Russia’s energy market could be fully private, at the earliest, between 2012 and 2017.

Pressure on Russia to develop energy markets consistent with international trade law may intensify now that the West has invested its military capital with Russia’s. European Commission President Romano Prodi promised on May 29 that the European Union would recognize Russia as a market economy, raising the prospect that Russia could compete in European markets under international rules. In this context, the liberalization of energy prices may lose urgency. The Duma has called for liberalization plans by October 1. However, actual legislation will probably take much longer to materialize.

In the meantime, Russian energy companies look set to target customers to the east. Russia’s hydrocarbon exports are "well represented" in Europe, Deputy Energy Minister Ivan Matlashov told RIA Novosti on May 28, while "a step towards the East" has become necessary. Matlashov advocated granting government support to pipeline and deep-water port projects in Russia’s Far Eastern and Southern regions. Russia has invoked such projects since the mid-1990s, pursuing the growing East Asian market. Russia and China are expected to finalize the construction of a 2,400-kilometer oil pipeline in 2003. The countries signed a deal in 2001 to build the pipeline from South Siberia to northern China; Deputy Prime Minister Viktor Khristenko has said the line will go into operation by 2005. Meanwhile, Russia’s natural gas giant Gazprom has announced plans to build a system of Asian gas pipelines, including routes from the Tomsk region to northern China, from the Irkutsk region through Mongolia to central China, and from Sakhalin to Japan. However, these plans remain on the drawing board.

In the meantime, Russia faces intensifying competition in the Caspian Sea. Iran and the three former Soviet republics that border the sea depend on Russian pipelines for export of their natural resources. Turkmenistan, which is believed to hold the fourth largest natural gas reserves, has been keen to reduce its reliance on Russia by considering construction of new gas export pipelines to or through Iran and Afghanistan. Turkmen President Saparmurat Niyazov was likely to broach the plan at a May 30 meeting with Afghanistan’s interim leader Hamid Karzai and Pakistani President Pervez Musharraf. Turkmenistan has invited Moscow-based gas trader Itera to take part in a proposed gas pipeline, Itera announced on May 28. All three of these countries face real questions about stability; nonetheless, the pitch of the discussions may concern Russian officials. A May 26 editorial in RIA Novosti disparaged "terms like ‘our pipeline’ and ‘your pipeline’" in Caspian discussions.

Such calls for cooperation appear vital to Russia’s energy strategy. At their May 24 summit in Moscow, United States President George W. Bush and Russian President Vladimir Putin signed a joint declaration on cooperating in the energy sector. Bush called on American businesses to take the lead in developing energy resources of Russia and the Caspian. The declaration also creates a working group that is expected to meet in Texas later this year and establish procedures for increased sales of Russian oil to the United States. Through measures like these, Russia is now well positioned to exploit continued instability in the Middle East, luring western customers even as it ventures eastward. As long as its own citizens absorb the end of subsidies, Russia may manage to make itself into a force for stability in world hydrocarbon markets.

Editor’s Note: Sergei Blagov is a Moscow-based specialist in CIS political affairs.