Oil and the Russian Economy

by LT Randy Hayes

NS4054: Energy Security

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About the Author

Philip Hanson is an associate fellow of the Russia and Eurasia program and professor emeritus at the Centre for Russian and East European Studies of the University of Birmingham, where he also served as director from 2001 to 2002.

He has worked mainly on the Soviet and Russian economies. He is interested in comparative economic systems and economics of transition.

ExpertiseComparative economic systemsTransformation and economic developmentRussia: macro-economic issues and policiesRegional economic issues in RussiaRussia-EU economic relations

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Authors Question?

• What is the role of oil and gas in the Russian economy, how sustainable present arrangements are, and what state policies on hydrocarbons sector, including “modernization” plans for the whole economy amount to.

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Role of Oil and Gas

• Rise of oil prices (2012) has (had) boosted the Russian Economy

• Oil is the key export of the energy sector • 2009: Russia largest producer of Oil, second in gas

• Accounts for 12.5 percent of world crude oil output

• Accounts for 17.6 percent of world gas output • Russia uses 75% of its gas production and 25% of its oil

production

• Gas leading fuel for power stations • Russia earns 4X the amount of $$ from oil then from gas

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Role of Oil and Gas

• 1999-2004

• Western companies move in on Russian oil expansion • Big Wig Companies: Yukos, Sibneft, TNK

• Boost extraction rates, rationalize business, secure acceleration of petroleum output.

• Growth was short lived• Mikhail Khodorkovskii (owner Yuko) arrested

• Assets obtained by government

• Higher rate of taxes• Investment opportunities from the west decreased

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Role of Oil and Gas

• Russian GDP sensitive to oil prices

• GDP decline throughout the world in 2009 greater for Russia than most states

• Drop in oil prices (2009) was seen throughout the world

• Investors• Aware of the property management risks with oil industry in Russia

(aka political interference) price of oil in Russia comes with greater price curves than other markets

• Difference in Prices

• Export oil prices higher than costs in country • Export taxes form wedge in price

• Exports in the hands of the state NOT the private sector

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Inefficient Domestic Use

“Russia has the potential to export more oil and gas if Russia were to keep same energy pricing”

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Russia’s Energy Power

• Influence is regional

• Oil and gas exports go to Europe

• “take or pay contracts”

• Long term contracts

• Developing contracts

• Oil companies running out of reserves.. Russia sitting on “gold mine”

• East Siberia Pacific pipeline completed (2010) • 600,000 brls to Chinese border

• China “determined to avoid having Russia as a supplier on a scale that would yield influence”

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Threats to Russia’s Power

• Liquefied Natural Gas

• Able to supply more markets than pipelines

• Europe developing liquefaction plants

• Russia slow to develop LNG (developed by foreign investment—western companies)

• Export at 3.6% of its total gas exports compared to 27.7% for the entire world

• Shale

• Third party shale suppliers export to Europe

• No interests in development within Russia

Can Russia continue to thrive economically while remaining so dependent on oil and gas exports?

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Russian Policies and Options

• High oil prices damage Russia in the long term—reducing incentive to reform

• Russian Liberal critics see Russia’s natural-resource dependence as damaging

• American critics: “ Russian political and economic system is addicted to the wasteful use of natural-resource rents.”

• Includes: extraction costs, subsidized energy domestic prices, corrupt side payments, and tax revenues inefficiencies

• Hanson: “a large, inefficient but highly prosperous hydrocarbons sector probably is not a helpful ingredient in Russia’s long-term development”

• Russia Policy: “The future will be like the present.”

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Long Term Plans

• 2009: Russian Government Approves Energy Strategy till 2030.

• Oil output growth is slow

• Coal is of less importance

• Gas output is greater

• 2.9% growth of energy sector with the introduction of nuclear capabilities over 22 years (2008-30)

• Consumption of fuels will rise (domestic)

• Crude oil, oil products, gas, coal, electricity expected to grow at .5% a year

• “modest” increase to Asia

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Long Term Plans (cont)

• Development of Eastern Siberia

• Expected costs $565-90bn USD • 4% of Russian GDP for 22 years

• Inward Foreign Direct Investment (IFDI)• Mergers, acquisitions– no capital just expertise • Reduce restrictions on hydrocarbons • Incentives for investmet

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Hanson: Why this wont work

• 1: Russia science is subpar

• Scientist are leaving the country

• Universities are not in top 200• 2: Russian economy makes a leap to high technically

• No Russian “Apple” companies

• Loss of exerts means minimal outputs• 3: Russian business environment

• 120/183 World Bank Rankings for “ease of business”

• Weakness of competition is bad influence on progress

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Conclusions

• Russia needs to unify oil production under “single national oil company” – Hanson

• Lack of regulation in Russian energy sector leaves how the energy production to MANY small companies disassociated from politics and Russian strategy

• Private investors are always under the influence of the state and are at fear of nationalization of oil companies

• Corruption within the energy sector of Russia puts the sector at great risk

• Requirements for technology and finance create pressures for more cooperative relations with international oil companies in the future