Eurasian Energy Blinking Red

March 1, 2007 Topic: EnergySecurity Region: RussiaCentral AsiaEurasia Tags: Energy Policy

Eurasian Energy Blinking Red

When it comes to future Eurasian energy supplies vis-a-vis anticipated global demand, experts converge behind this memorable sentiment: “Houston we have a problem.”

"Houston we have a problem", said J. Robinson West, founder and chairman of PFC Energy, at The Nixon Center Wednesday in summing up Russian energy policy and its likely impact on the country's ability to keep up with burgeoning demand for oil and gas. Indeed, that was the consensus sentiment at the event, in which Clifford Gaddy, senior fellow of the Brookings Institute, and Julia Nanay, senior director of Country Strategies for PFC Energy, were featured speakers. West moderated the discussion.

The energy-producing countries of Russia and Eurasia have all faced difficulties in arbitrating often conflicting national interests; corporate interests; and individuals' own personal interests, often driving corruption, said the speakers. And further complicating the picture, influential individuals often portray their narrow interests in terms of the nation's interests. Russia's "eastward thrust" towards eastern Siberia-through which it is pursuing costly development in its outlying eastern regions at the expense of more efficient production expansion to the west-is sometimes promoted in terms of Russian national interests, but in raising the country's overall production costs, it also provides broader opportunities for graft. As Gaddy put it, Russia's is "not a profit maximizing regime, it's a cost maximizing regime."

The panelists agreed that Russia's energy sector is stagnating due to a lack of investment in the energy infrastructure, since financial decisions are often not geared towards optimizing production. In addition to the problems with corruption and Russia's eastward thrust, Gaddy pointed to other obstacles to Russian production's expansion. Russia is facing the end of "old oil"-or the oil that was left over in wells abandoned by the Soviets-Gaddy said. And Russia's so-called "diversification campaign", under which Russia purports to develop other sectors by taxing oil and gas revenue, is also undermining capacity building. Through this "campaign", spending on military defense is often disingenuously billed as high tech investment.

Nanay highlighted the importance of Central Asian production, and pointed to Kazakhstan's success in building a pipeline to China, which has influenced Russia's "eastward thrust." On Kazakhstan's part, those pipelines were constructed as a means of diversifying its consumer-base and avoiding the cost of dealing with transit through Russia. The ties between Central Asia and other parts of Asia will continue to grow, she said. As these nations begin to supply Asia with gas, Western firms will need to become more involved in bolstering their capacity. The West, she says, is able to and should invest in these countries. Still, Nanay pointed out that Central Asia remains a "complex region with complex problems", given ongoing difficulties with corruption and challenges in dealing with Russia.

Russia's relationship with Central Asian countries, meanwhile, is crucial to its ability to be a responsible supplier to its western markets, as evidenced recently in Turkmenistan's supply bailouts of Russia, which have allowed it to supply its European markets. But Turkmenistan's supply contract with Russia is ending in a few years, and it may seek to negotiate a higher price for its bailout supplies. Gaddy pointed out that Russia is jockeying to secure its longer-term supply relationship with Turkmenistan through some "informal" means, such as bribes and the involvement of the FSB, Russia's security service.

Dimitri K. Simes, president of The Nixon Center, sees the Russian energy conundrum as an "energy policy shift" caused by the heightened role of the government in energy-resource management. Simes commented on the fissures between corporate interests and national interests within Russia. According to Simes, senior Kremlin officials-turned-corporate executives are pursuing their own financial interests, or "concrete interests", at the expense of Russia's larger national interests. Russia's supply fallout with Belarus was a result of incoherent policies that are compromising Russian national interests. That incoherence has compromised Russia's image as a stable energy supplier, especially since Russian President Vladimir Putin failed to discuss with German Chancellor Angela Merkel the easily anticipated effect that a disruption of supplies to Belarus would have on Europe, particularly Germany.

But Russia's future supply problems are not only on the production side. It also has a preponderant problem with wasteful subsidizes of domestic energy consumption. For Russia, the issue is not resource availability, but rather production and consumption inefficiency. Unfortunately, Russia has not yet faced up to the costs of its inefficient oil and gas production and consumption. As Simes put it, a combination of geopolitics, market prices and the need for investment could end Russia's "holiday" mentality.

James W. Riley is an apprentice editor at The National Interest.