Russia and the New World: Energy, Economy, and Putin’s Greatest Challenge Yet

Putin_at_the_ceremony_of_opening_the_gas_pipeline

Russia has once again clawed its way back into the global spotlight. In the last two years Russia successfully annexed Crimea with little pushback from the international community, after which separatists proceeded to claim large tracts of Eastern Ukraine. The effects of Western sanctions and an oil glut eventually ushered in a depreciation of the ruble, but Russia’s economy somewhat stabilized, and Putin moved on to the next strategic maneuver. The September 2015 Russian intervention on behalf of Syrian President Bashar al-Assad appeared wildly successful, and it left the Turks, the Saudis, and Western powers without an obvious response. Putin seemingly proved that Russia was still a great power, at least in its near-abroad. The wars in the Middle East, the conflict in Eastern Europe, the global economic setbacks and ongoing recovery—all were great power issues, and Putin was determined to see that Russia would play a role in each and every one.

Powering Russia’s steady reemergence to global prominence after the economic catastrophe of the 1990s–and truly powering Putin’s rise as a possible “President for life”—has been the former Soviet giant’s massive reserves of oil and natural gas. In 2013, Russia exported $174 billion worth of crude oil, and $73 billion worth of natural gas—most of it to Europe. The importance of oil and natural gas to the Russian economy cannot be overstated; non-fossil fuels accounted for only 9% of Russia’s energy consumption in 2012. Russia is the largest producer of crude oil in the world, the second largest producer of dry natural gas, and as of January 2015 had proven oil reserves of 80 billion barrels. The massive quantities of oil and natural gas pulled Russia back from the brink of economic collapse, and state control of the largest producers turned President Vladimir Putin into one of the most powerful men in the world. But the story of how state controlled energy giants such as Gazprom, Rosneft, and Lukoil allowed Putin’s Kremlin to wield the iron fist over the Russian polity is also the story of Putin’s greatest source of vulnerability. While Putin does not exactly have a cult of personality, his power is such that any and all state functions—including but not limited to economic performance—reflect upon his role as the leader of Russia.

Rosneft and Gazprom together control 80% of Russian gas fields, but the latter, in particular, has witnessed its productivity and influence wane over the past half-decade or so as inefficiency and competitors challenge its supremacy. From mid-2008 to 2014, Gazprom’s capitalization fell by an astonishing 86%, from $367 billion to $51 billion. Also in 2014, Gazprom reduced its gas production to 443.9 billion cubic meters, the lowest amount in its history. Gazprom’s decline does not necessarily signal a decline in the importance of state-controlled energy in Putin’s authority, but it may suggest a flaw in Putin’s power structure. Putin built his power on the back of Russia’s natural resources, and he used the energy firms to assert dominance over the oligarchs that rose to prominence in the 1990s. The trend of change and uncertainty that has come to permeate state-controlled energy companies across the world could complicate Putin’s formula for control. The authority that he exerts over private industry though, and the oligarchs in particular, largely limits the potential for formidable dissent.

The rising uncertainty in state-controlled energy is a function of a number of factors that have coalesced at the same time, including the greater investment in renewable energy, the competition for Arctic resources, the shale boom and expansion of American fuels more generally, and the present oil glut that coincides with the post-JCPOA Iranian oil resurgence. Nowhere has this change provoked a more radical reaction than in Saudi Arabia, where Saudi Prince Mohammed bin Salman is leading the Saudi Vision 2030 which proposes to wean the Kingdom from its dependence on oil. Russia’s recent attempts at economic diversification have focused on research and development, but they have proven unreliable. Moreover, the Russian government seems unwilling to transition away from a dependence on energy exports when energy has been so consistently profitable over the past two decades.

Putin has used his power to paper over perceived Russian vulnerabilities in the past. The 2008 invasion of Georgia quickly ended the discussion of admitting the formerly Soviet country to NATO. He fiercely cracked down on 2011 and 2012 protests against corruption in government elections. The annexation of Crimea and unofficial paramilitary operations in Eastern Ukraine were a response to the Maidan Revolution that ousted Ukrainian President Viktor Yanukovych, while the Syrian intervention protected the sovereignty of Assad’s government and disrupted NATO intentions. The later two instances, however, have created a backlash that has seriously hurt the Russian economy. Oil and gas account for 70% of Russian exports and 50% of government revenues, and the majority of those two figures arise from trade with Europe. Almost all gas exports go to Europe and Turkey. The annexation of Crimea, which was so successful in early 2014 threatened the future of Russian relations with Europe. It provoked sanctions from the US, UK, and others in Europe that will have a long-lasting negative impact on Russia’s energy sector, even if the immediate effect is less certain. According to the U.S. Energy Information Administration, “virtually all involvement in Arctic offshore and shale projects by Western companies has ceased following the sanctions.” Russia’s Arctic projects are long-term investments, and the sanctions may only prove to be medium-term setbacks, but Putin cannot afford to assume that oil prices will recover to a level sufficient to offset major expected sources of revenue.

Meanwhile, Putin’s response to international resistance remains varied and fascinating. In August 2014, Russia imposed a ban on food imports from countries that levied the Ukraine-related sanctions. The import ban served only to reflect poorly upon Putin and place the domestic pressure squarely on his shoulders. The original extent of the ban ended in the beginning of June 2016, when Russia lifted restrictions on produce used to make baby food, but the rest of the import ban is scheduled to last until 2018. His decision to intervene in Syria proved far more successful from a strategic perspective. It saved Assad from likely defeat, allowed the government forces to go on the offensive, and gave the Assad regime the advantage when the third round of peace talks began in early 2016. Putin grabbed the military initiative and gained control of the war-time narrative, but it has come at the expense of a faltering economy.

Russia’s military intervention was largely viewed through the context of Putin’s domestic predicament. Until September 2014 the price of crude oil was over $100 per barrel, but by January 2015 it had plummeted to under $50. Non-coincidentally, the value of Russian exports fell by $160 billion between 2014 and 2015. In December 2014, after the value of the ruble had fallen dramatically against the dollar, but before the oil price collapse, Putin announced that it would take two years for the Russian economy to recover. When the price of oil began to fall, that timeline appeared to increase exponentially. By the time Putin sent Russian troops to Syria, crude oil had stabilized somewhat in the range of $50 per barrel, but in the coming months oil truly fell of a cliff. Brent crude reached a low price of $28.94 in January 2016, while the ruble settled at over 70 ruble/USD. As a result, Russia lost $125 billion in revenue during 2015.

Despite the worsening economy, Putin’s Syrian adventure took priority. An IHS Jane’s estimate placed the cost of the intervention at $2.3 to $4 mil per day, although due to certain amounts of budgetary obfuscation this estimate was likely low. Harkening back to the Soviet war in Afghanistan, domestic concerns were trumped by the need to maintain Russian prestige on the international stage. The Russian economy contracted 3.7% during 2015 and is expected (by the World Bank) to contract by another 1.9% in 2016. In addition, the population of those living in poverty increased by 3.1 million over the course of 2015. Yet spending on defense and national security continues to rise—officially defense spending comprises $54.1 billion, or roughly 4.3% of GDP; however, estimates that include all defense and security expenditures have placed that figure at over 20% of Russia’s GDP. At the start of the Syrian intervention, it was reasonable to assume that Putin was using Russia’s military to consolidate his power and distract from domestic issues by wielding power beyond Russia’s borders, but the period 2014-2016 has cost Russia dearly, with so little to show outside of the “return” of Crimea.

The greatest threat to Putin’s leadership may stem from the fact that his reputation as a savior of Russian pride and individuality was driven, first and foremost, by his leadership at a time of economic revival. Protests will not cause his downfall, but the failure of the Russian state to provide for the Russian people rests with only one man, and Putin has chosen that responsibility. In December 1979 Russia thrust itself headfirst into international chaos to defend communism in Afghanistan, and the blowback helped bring down the Soviet Union. Putin’s forays into Ukraine and Syria will not bring him down, but they have compounded the negative effects of economic exhaustion, and the implications will be long felt. Russia’s recent failures are also those of Putin, and though his power and authority resonate throughout the world, the rising tide of economic unrest presents his greatest ever challenge. As Mikhail Khodorkovsky and others can attest, Putin is skilled at foisting blame on others, but responsibility for the current state of affairs is Putin’s alone.

Photo Credit: Gazprom

Eric D’Angelo recently graduated with an M.A. in International Relations and International Economics from Johns Hopkins University Paul H. Nitze School of Advanced International Studies. He is currently an intern at the research and risk analysis firm Sidar Global Advisors.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s