Russia’s Growing Dependence on Oil, Potentially Scaring Away Foreign Investors
Russia’s Growing Dependence on Oil, Potentially Scaring Away Foreign Investors
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Russia’s Growing Dependence on Oil, Potentially Scaring Away Foreign Investors
Introduction
Russia is the world’s number one producer of natural gas and is sometimes referred to as the world’s energy superpower. Considering oil production, Russia shares the first position with Saudi Arabia, and accounted for 22% of world’s output of natural gas, while possessing 27% of proven reserves. Between 1998 and 2004, Russia accounted for 48% of the increase in global oil supply. 20% of European oil consumption was supplied from Russia, and at the same time, she controls Kazakhstan and Turkmenistan oil and gas exports, since their pipelines cross Russian territory (Krushelnycky, 2004).
Oil and gas are key to Russia’s comeback to prominence in the global scene, and it is believed that this energy wealth will enable her regain her super power status it enjoyed during the cold war era. The influx of petrodollars in the domestic front has consolidated a new authoritarian regime under Vladimir Putin. This vast reserves are unlikely to change the situation of European anxiety in the foreseeable future, coupled with unexplored fields may double the proportion of world’s proven reserves. Russia is continuing to build new oil pipelines to increase deliveries to Europe. Therefore, Russia’s overdependence on oil discourages foreign investment by scaring away investors.
European Dilemma
European countries have the dilemma of over depending on Russia for oil and gas supplies. Should European leaders embrace their dependence and strengthen their economic and political ties with Russia, or should they check out for alternative supplies? Most European leaders are very concerned about Russian oil supply disruptions, and price disputes. For example, price disputes with Ukraine and Belarus had temporary shutdowns of oil and gas supplies between 2006 and 2007, such as disruptions did not affect actual deliveries, but made the European consumers to be aware of their vulnerability of depending on a single supplier. European consumers are aware of Russia’s vast reserves, and some of them fear that Russia political instability makes her an unreliable partner, others think that she is too strong and will use the petrodollars to win political concessions from neighbouring countries and rebuild its military.
Europeans are also wary of Russia’s other investments in energy and metal conglomerates, as they have been aggressively acquiring production facilities and distribution networks all over Europe. Vladimir, (2006), states that, ‘the presence of Russia’s energy diplomacy is also being felt in other countries in Asia, especially China who is the world’s second largest consumer of oil. Clean environmental issues are making Russia’s natural gas an attractive substitute to domestic coal, and they will need to invest more in terms of building long pipelines to reach out for the Asian market, which will be an expensive venture. Doing this will make them avoid over depending on one customer, China, and go all the way to Japan and South Korea. This might solve the current problems with pipelines across Belarus and Ukraine.
Historically, Europeans have depended on Russian oil. However, Vladimir M., (2006), argues that, with growing concerns of climate change and worries of oil production peaking is increasing this anxiety. The change is political rather than economic, as European states embraced the idea that Russia is developing a market democracy, the political linkages that dogged Russia’s gas projects came down.
Leadership
In the early days, Russia raised a multibillion bastion in the efforts to liberate the economy that was shackled by the remains of Soviet era state control, corruption, and dependence on oil and natural resources exports. The Russian government has tried to modernize the economy, by attracting some of the world’s best scientists and most innovative high technology firms to put it at par with 21st century excellence. This is making Russia learn from other European states on how to support high technology centres with government funds to attract private investment. Though, the reminders of Russia’s dilapidated science cities known as naukograds gives Kremlin a poor record in building a modern economy revolving around technological innovations. President Dmitry Medvedev has invested immense political capital in the project in a bold move to improve visionary enterprise, particularly, the Skolkovo City, which is a resemblance of Silicon Valley. Russian lawmakers approved this [project two years ago, merging billions of state money with foreign capital, ideas, and business culture. The project focuses on energy, information technology, bio medicine, space, and nuclear technology. The project’s aim is to make half the people living in Skolkovo City to be foreigners, and they are to consist of scientists and engineers researching in science labs to create products for the global market. For example, vehicles using fossil fuels will be banned on Russian roads paving the way for electric vehicles within city limits. Homes and offices will be connected with high speed internet, which will make Russia drop its reputation as a country dipped in brain drain, cyber crooks, and economic decay (Jonathan, 2005).
Growth in Russia has been chequered since the fall of the Soviet Union in 1991, with regions that are agriculture dependent and outdated factories lagging behind those with oil and other resources. Much of Russia’s current growth comes from fossil fuels exports, and accounts for two thirds of the nation’s export with revenue from energy sales making about half of the federal government’s budget. Exports are predicted rise if they join the World Trade Organisation. Insufficient state owned enterprises still contribute roughly half of Russia’s GDP with oil and natural gas giving 25%. Risk of massive layoff and stiffer competition could force state run factories to close down as protective tariffs are phased out. Minimal opportunities in other sectors of the economy together with the realization among the young, that Russia’s politics and society are stifling, is encouraging a persistent brain drain which has grown from 7% four years ago to 22%. Widespread alcoholism, brain drain, and crippling health care system sap a lot of energy from the country’s economy. Endemic corruption is dragging the economy down, making it difficult for doing business, and thus scaring discouraging potential foreign investors.
Vladimir Putin is running for another term and Medvedev as the prime minister could change Russia’s business climate. This might translate to continuity in the current government policies and actors, thus a boost to investor confidence that should partially rescue her falling currency and weakening stock market. The falling oil prices and the persisting crisis in the Euro zone may minimize the positive effects, but at the very least high capital inflows and increased foreign development investment are expected. In the short run, this will be good news for MNCs doing business in Russia in the context of an unpredictable world economy.
There is general agreement that the Russian economy needs fundamental reforms away from its dependence on oil prices and high government spending. Maintenance of high oil prices will do well for Russia, but a fall would be a crisis of a chain reaction that would undermine the economy, thus depressing the GDP (Vladimir, 2006).
Russia is on an inexorable rise as an energy superpower, the vast reserves raise many economic questions for overall geological challenges. Most of the fields lie far apart, and some are offshore that substantially increases extraction costs and total overlays, making concluding contracts with foreign investors less lucrative, so high oil prices must be maintained in the long term to make these projects economically viable. A global recession or curtailment of oil demands in the USA, may give negative results both energy finances (Vladimir, 2006).
Problems associated with corporate governance of Russian energy since 2000, that is, the renationalisation of the oil sector makes development be in the hands of state owned oil and gas companies. These corporations are controlled by Kremlin, and they reward insider cronies to maintain populist price subsidies, that may compromise on efficiency and rational investment planning such as export revenue used to subsidize domestic customers leading to little incentives or opportunities for the corporate to invest in developing new fields, making gas output flat. Russia’s enormity of resource wealth may not match the capacity of the state’s bureaucracy for waste, corruption, and mismanagement.
According to Michael, (2001), ‘an energy led development strategy is associated with enormous political risk. Nations with heavy reliance on energy exports accounting for more than a third of export earnings experience lower economic growth, and least likely to undergo a democratic transition. Non democratic regimes are prone to political crises, and factional struggles to share resources disrupt development projects that scare foreign investors. The sub soil resources law will bar foreign investors from owning more than half of strategic fields. On the other hand, Russia may be able to beat the resource curse, since it has a diversified economy.
Under Putin, the Russian nation has regained its capacity to levy taxes on oil and gas, and had discipline with conservative fiscal and monetary policy has seen foreign debts paid from US $ 150 billion to US $ 50 billion, foreign currency reserves reached US $ 350 billion by 2007, and stabilization fund created in 2004 that is not accessible to current spending. Inflation has been low , and appreciation of the currency rose to 80% by 1999. The other non tradable sectors of the economy such as construction and services have been growing, estimates show that oil and gas accounted for half of growth, and non energy sectors for the other half since 1999. This optimistic interpretation of sustaining the economic boom could be correct (Vladimir, 2006)
No nation or company can exert decisive influence over the oil market; thus it is hard to use oil as a weapon since the global energy market is complex, fragmented, and competitive. Resource dependency implies slower long term economic growth, and greater political instability. Though, it is not a contradiction for Russia to be falling from a resource curse and dangerous energy superpower. Russia was a super power before 1991 and still maintains advanced technological capacity, USSR’s military capacity, substantial international arms trade, and a stockpile of nuclear weapons and delivery systems. Using oil as a tool of influence hurts international relations, that causes anxiety and driving nations to look for alliances and other steps to protect themselves from Russia’s pressure
Conclusion
The idea of Russia’s energy superpower consists more polemical than analytical content and exaggerates her ability to use oil and gas to influence her neighbours on the global arena is a contradiction. Energy can be used as a hard power if it is combined with other tools such as military capacity and diplomatic bargaining. Expectations and perceptions drive oil prices and not the demand and supply curve. Volatility reflects fears which are not physically real, but the fear relates to what might happen to supplies from Russia; would be a surge in demand in, China and India, followed by a deep depression leading to a sharp fall in oil consumption. Oil imports are good for the economy and boosts world peace and security. Therefore, real oil dependence requires energy isolationism, which is, creating barriers for free trade with other countries, which slows economic growth (Vladimir, 2006).
Dependency of foreign oil producers like Russia depends on her customers creates the fear of falling global demand slackening, thus falling oil prices and leads to less foreign exchange. Oil wealth has some political disadvantages of increased corruption, with more money Russia received from oil and gas exports, the less accountable the government becomes to the citizens. Russia faces the challenges of managing the consequences of oil and gas dependencies traded at the global markets, and begin an economy that relies less on energy exports. Russian liberalization and diversification is crucial to its continued prosperity.
References
Vladimir M., (2006). ‘Would Russia Cut Off Gas Supplies to Europe?’, Argumenty i Fakty, 17 May
Krushelnycky A, (2004). Rift Threatens Belarus Ties with Russia’, the Independent,
Jonathan S, (2005).The Future of Russian Gas and Gazprom. Oxford University Press,
Michael L, (2001), ‘Does Oil Hinder Democracy: The Political Economy of the Resource Curse’, World Politics, Vol. 51, No. 1 (1999), pp. 297–322
