Russian Oil and Gas: Past Effects and Future Outlook

How have the oil and natural gas industries helped Russia economically and politically and what are some of the challenges and opportunities that the energy industry presents to Russia? The significance of this question and its subsequent answer are critical in understanding the current economic and political situations facing the country, as well as the future of the Asian and European continents. Oil and natural gas have brought Russia both economic and political gain, and while increased demand from Asia and Europe present an opportunity for greater profits, Russia faces the challenges of falling world prices and new pipelines that would not be under its control. Following the soaring prices of natural gas and oil during the greater part of this decade, Russia's economy surged as an influx of petrodollars and increased exports enriched the country. Furthermore, Russia's control of the existing pipeline distribution network allowed the country to leverage its position as a supplier to neighboring countries and gain political power. Opportunities arise from both greater demand in the increasingly lucrative European markets as well as emerging Asian economies seeking to access Russia's pipelines. However, the recent collapse of oil and gas prices threatens Russia's future prosperity and Europe's fears of becoming overly dependent on Russian gas prompt the idea of new pipelines that circumvent Russia altogether.

Oil and natural gas exports have been a staple of the Russian economy for decades. However, during the years leading up to and following the collapse of the Soviet Union, production fell sharply (Cooper 2009, 15). The administration of Boris Yeltsin saw real GDP fall by thirty percent and inflation rise to thousands of percent (Cooper 2009, 2). However, following years of financial crisis and the collapse of the ruble, Russia became a formidable contender on the world oil markets due to an increase in investments, both foreign and domestic. Improvements in pipeline networks remnant of the USSR, infrastructure, and drilling technology from foreign companies like Exxon Mobil and domestic firms like LUKOil and Yukos led to economic growth fueled by exports (Hill 2002, 29). Furthermore, the terrorist attacks of September 11th, 2001, and the subsequent invasion of Iraq by the United States sent the world price of crude oil soaring to historic levels (Williams). This combination of increased export capacity and volume, investments by domestic and foreign companies and record-setting world prices fueled Russia's economic expansion.

However, while oil is an important part of the Russian economy, it faces problems with low labor productivity, high production costs, and accessibility issues. Moreover, in the long term Russia cannot compete with OPEC's production capacity and reserves (Gidadhubli 2003, 2030). Its true advantage lies in natural gas. Russia is the world's largest exporter of natural gas and its proven reserves far outrank any other exporter (Hill 2002, 30). Key to this competitive advantage in natural gas is Gazprom, the largest gas company in Russia. Essentially a government owned and operated monopoly, over fifty percent of the shares are owned by the government (Cooper 2009, 14). This, in turn, gives the Russian government the power to set gas prices and establish long term contracts with foreign buyers, making it the largest earner of hard currency for Russia(Pirog 2007, 6), so called “petrodollars” (Hill 2002, 28). Gazprom is also the largest source of revenue for the government, contributing approximately twenty four percent of the budget (Woehrel 2009, 2). Thanks to this, the economy has seen enormous growth in the past decade. Averaging 6.9% per year from 1999-2008, Russia's annual gross domestic product has grown over two and a half times faster than the United States with GDP per capita valued at $11,785(Cooper 2009, 2) and a balance of trade surplus of $180 billion in 2008 (

With the newfound economic growth, Russia was able to leverage its position as supplier of gas and oil to neighboring countries to gain political power. Straddling both the Asian and European continents, Russia possesses the largest land area and spans eleven time zones. The former soviet bloc country borders fourteen countries (CIA Factbook) and because of this, has expansive oil and gas distribution networks that run from the Caspian sea to North Russia, Asia to Europe. Currently Russia's Druzhba Pipeline, the largest in the country, runs from south Russia where it collects from the Caspian Sea and the Ural Mountains, through Ukraine and to central Europe and Germany. Other pipelines run similar routes between the Caspian region, across the Black Sea, and to southern Europe (Pirog 2007, 12-14). Thanks to Gazprom's exclusive control of this network, Russia has gained a significant amount of control over the supply of gas to Europe and Central Asia.

In addition, Russian gas accounts for over a quarter of domestic consumption for many major European countries and is also the sole provider of gas to Belarus, Bulgaria, Estonia, Finland, Georgia, Latvia, Lithuania, Moldova, and Slovakia. In 2004, over ninety percent of Russia's seven trillion cubic feet of gas exported went to European countries (Gelb 2007, 1-3). This control of the flow and direction of oil and gas to Europe and central Asia has amassed Russia a significant amount of political power. Furthermore, Russia's ability to dictate gas prices in the form of long term contracts with other countries has given it a political advantage in international relations. When pressed by the European Union on the issue of exploiting these dependencies and encouraged to open up its pipelines to foreigners by ratifying the 1994 Energy Charter Treaty, Russia blatantly refused. Moreover, Russian control has required energy companies as well as governments to establish strong ties with Russian leaders to ensure continued access

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