A Resource Recourse

July 16, 2007 Topic: EnergySecurity Region: RussiaEurasia Tags: Energy PolicySuperpower

A Resource Recourse

Russia, like other resource-rich countries, is changing the rules of the great energy game.


Speaking at the Nixon Center on July 13, Vladimir Averchev, the director of research in BP's Moscow office, observed that Russia's oil and gas industry once behaved much like a starving man presented with a feast. In the 1990s, Russian energy companies-hungry for profits-geared up for maximum production of natural gas.

Now, the Russian energy industry feels sated after years of rapid growth and state-sponsored consolidation. Sitting on huge energy reserves, the industry will only develop new gas fields when market conditions make it profitable to do so. A new era in Russia's natural resource sector has begun.


This strategic switch from "maximizing to satisfying" finds backers among Russia's political elite as they move onto a more stable economic path. Already deeply involved in Russia's energy sector, top level officials have felt the burden of the industry's previously uncontrolled growth. The Russian finance ministry, overwhelmed by the influx of money from energy sales, has been sending the incoming currency out of the country by purchasing U.S. Treasury bonds to hold down inflation. According to Averchev, the finance ministry's attitude is, "Why should we produce more, when it means we just have to buy more bonds?"

Like their counterparts in other resource-rich countries, Russian leaders now regard the "production-maximizing" strategy with suspicion, believing heavily resource-consumptive states pushed this agenda during the post-Soviet period. Obviously, higher production meant lower prices. By adopting the "when the price is right" approach to resource extraction Russian officials have been able to decrease other countries' negotiating leverage over Russia, Averchev said.

The Russian leadership further hopes to decrease dependence on energy exports by cultivating the domestic gas market and diversifying the enormous state-backed gas company-Gazprom's-range of operations. Some estimates suggest that in three to four years, the Russian energy market could become even more lucrative than that of India. The fact that domestic gas prices are set to equal export gas prices in 2011 makes the internal market much more attractive. And, the government hopes to head off any price-related drop in gas demand by spurring economic development and extending pipeline infrastructure to areas where gas is not yet available.

Should demand for Russian gas flag at home and abroad, Gazprom is unlikely to flag. It has expanded its interests in related industries and hedged against potential gas shortages by gaining a foothold in coal-based power generation.

To further shore up its security, Gazprom is trying to buy assets outside of Russia. These international purchases are in line with the Kremlin's policy of creating "national champion" companies capable of ensuring Russian participation in the international business arena. Averchev predicted that expanding Russian companies-Gazprom included-will eventually make their operations more transparent in order to meet international standards and become globally competitive. As he pointed out, these changes will occur "not as a matter of goodwill, but of business."

Gazprom's continuing growth has made the company "look increasingly assured", Averchev said. Yet many in Europe worry that Gazprom will not be able to fulfill its gas-delivery obligations. Although the origins of the company's production figures remain obscure, Gazprom has been extracting and delivering more gas, both in yearly and monthly terms. Averchev believes that Gazprom will uphold its contractual commitments, despite its unhurried attitude towards resource development. While Gazprom's production will continue to increase, he said, "Gazprom will not operate at capacity if it doesn't need to."

Gazprom's production strategy-aided by the state's consolidation of the energy industry-has created a "new strategic game" between Russia and energy-consuming countries, Averchev stated. He noted that several decades-long gas-delivery contracts with gas-consuming European countries have been re-negotiated, and the new terms are less favorable to the Europeans.

Whatever happens to Russia's energy sector post-Putin-its future is in no way "set"-such re-negotiations are likely to continue, he said. These developments will in no way be limited to Russia, as other resource-rich countries will attempt to gain more traction in the tug of war over raw materials. In fact, a new era of contention has already started, and-Averchev suggested-holds plenty of drama and excitement in store.

Marisa Morrison is an apprentice editor at The National Interest.