How Russia's energy superpower status can bring supersecurity and superstability. Interview with Leonid Grigoriev
The concept of Russia as an energy superpower, which arose relatively recently as an ideological reading of the current global political situation following the unprecedented growth in hydrocarbon prices over the past decade, and the corresponding strengthening of Russia's position, is continuing to attract attention from analysts, whose evaluations frequently alter depending on which of two components – economic or political – is emphasised. Specifically, the gas conflict with Ukraine, as well as the sharp statements made by Alexei Miller at a meeting with EU ambassadors on possible negative consequences of any attempts to limit Gazprom's activities on the European market, have both been met with alarm internationally. Western observers, for whom talk of Russia as an 'energy superpower' recalls the Cold War USSR, have not been fully appeased by the call of the head of Gazprom not to politicise the issue of gas deliveries “which in fact are exclusively an economic matter”, or the subsequent official statement made by a representative of the company that it does not plan to cut gas deliveries to Europe. At the request of IA REGNUM, Leonid Grigoriev, president of the 'Institute of Energy and Finance' Fund' and deacon of the Management Facility of Moscow's International University, shares his vision of Russia's new role in the global economy and global politics.
REGNUM: Leonid Markovich, the long search for a national conception has finally given rise to the definition of Russia's mission as that of an 'energy superpower', but this concept is interpreted in different ways...
It is true that no distinct definition exists for this new term. But it is obvious that the term 'energy superpower' should not be understood as merely the latest derivative of a well-known political term. The meaning of this concept must be cleared up if we are to avoid its being automatically imbued with qualities associated with the Cold War era.
In the political sense, the concept of a 'superpower' is usually associated with certain forms of behaviour: "A powerful and influential nation, especially a nuclear power that dominates its allies or client states in an international power bloc" (The American Heritage(tm) Dictionary of the English Language, Fourth Edition Copyright (C) 2004. Published by Houghton Mifflin Company). This goes some way toward explaining the term politically, and it is clear that since the 1990s only the USA fits this definition.
A kind of classification of countries for which energy plays an important role could be envisaged. First, countries which both produce and consume large amounts of energy. This mostly refers to the USA. Secondly, countries which consume energy very effectively. These are certain small developed European countries. Thirdly, net exporter countries, those which produce large amounts of energy but consume relatively little, exporting large amounts and having a significant influence on global markets. Fourthly, another type of country could be envisaged – a reserve player, which regulates the global balance of supply and demand through its extraction and supplies. At one time, this role de facto belonged to Saudi Arabia. In my view, Russia represents an enormous global stabilisation reserve (together with Alaska and several other territories) – a reserve of forest, water, oil and gas, and so on. Of course, the investments and expenses involved in extraction are growing, but there is a whole ream of space from the oil of the White Sea to that of Alaska that has yet to be properly prospected. In this sense we are a super-reserve!
Our country does not consume so much as others, and is not as effective as others in its consumption (energy expenditure per unit of GDP is rather high); we are not producers of high-quality energy equipment, except in certain areas (equipment for hydro and atomic plants); we perform research in the field of hydrogen energy, but overall we are not a world leader in this regard. But there are only two countries in the world – Russia and the USA (particularly with Canada and Mexico), that simultaneously have large reserves of coal, gas, oil, atomic energy, hydro plants, and resources for new energy types – wind, tidal power etc. However, the USA, for all its large resources and large-scale energy-resource production, is still a net importer of energy, while we are a net exporter.
REGNUM: How does the concept of an 'energy power' differ from that of a 'resource fringe'?
In the 20th century, the Soviet Union undertook several attempts at industrialisation, which were more successful militarily than for society. Subsequently, after a torturous and, in my view, none too successful 15-year transition period, Russia finds itself in its old position, as its internationally recognised goods primarily consist of raw materials and semi-manufactures (particularly energy-enriched ones). It could be said today that a significant part of Russia's North-Western region is a resource fringe for Finland; part of the Far East is a resource fringe for China and Korea, and that Taimyr and its gas deposits are a resource fringe for Europe. But in fact, Russia as a whole supplies the whole world, and, of course, the famous 'Russian disease' is one of outflow of goods, revenues and educated people. Russia today represents something of a global reserve for the whole world. With its large size and natural wealth, Russia is source of all resources for all countries.
Clearly, most net exporter countries are those that have historically been resource-led countries. In the 19th and 20th century a resource fringe was considered to be a country producing and exporting usually one single product, or sometimes more than one. Perhaps rubber, cotton, coffee, and so on. This applies to former colonies – Australia, Canada and others. The meaning of the 'resource fringe' concept is one of dependence – such a country is bound to a monoculture – to one, two or three products. And today several South American, African and Middle Eastern countries are classic examples of resource fringes, and they include several countries which have become wealthy while retaining rich resource fringe status. They earn large revenues and live well; however, they do not produce anything except their export goods, and their well-being depends on demand for these goods. In the event of, say, a change in technology or an industrial crisis, resulting in a slump in demand for these goods, prices will fall, and export revenues with them. Currency, budget and debt problems arise for these countries, which result in social discontent and even in resolutions. History is full of these revolutions, which have taken place in many countries, and the underlying reasons for these historical upheavals have been coffee, rubber, and more recently, oil.
Russia occupies, and has always occupied, a unique position in this regard. We started off as a resource fringe for Europe. In the Middle Ages, old Rus imported manufactured products and weapons, and exported furs, hemp and other natural goods. Venice was partially built on poles made of Russian larch. The globalism of the 15th and 16th centuries was based on mutual interdependency between countries. It should be remembered that the first embargo that our country encountered was concluded in the time of Ivan III (1440-1505). The Polish and Swedish kings came to the conclusion that Muscovy was beginning to grow and create problems, and that it should be kept from acquiring high technology (weapons). That time, the conclusion of sanctions against Russia resulted in the Livonian War, and in the long term – the founding of Saint Petersburg, Russia's window on Europe, by Peter the Great. And the Napoleonic era showed that Russia and half of Europe were resource fringes for England, with Bonaparte's Continental Blockade, and that the European countries themselves could not live without English goods.
The developed countries received a signal of the mutual nature of dependency not long ago; however, in my view the timing was wrong, and even now they are yet to fully comprehend it.
In the 1990s, when Russia's internal consumption fell and fixed-price supplies to our Warsaw Pact allies decreased, the global market received an injection of additional amounts of oil. This happened even despite an overall decrease in extraction. At the same time a large number of energy-intensive goods were also cleared out onto the global market – goods produced using Soviet-era capital investments which had been privatised almost for nothing, and for which no-one would pay anything. In the USSR these goods had been consumed by the defence industry, and now aluminium exports, for example, make up 90% of our entire aluminium production. The appearance on the market of several million tonnes of aluminium meant other countries did not have to create energy capacity for bauxite processing, which represented colossal savings in investment and colossal savings in energy.
The early 90s' dividends for the global economy in the energy sphere, which did not so much come from the breakup of the Soviet Union as from the destruction of the Soviet closed shop and the end of the Cold War, came not only in the form of decreased defence expenses (although this now seems to be is a thing of the past), but also in price decreases for a range of goods. The appearance of a huge amount of energy goods on the global market helped support low oil prices. From 1986 to 2000 the average price per barrel was 19 dollars. Just compare it – from 8 dollars in August 1998 to 70 dollars today. All this facilitated the economic growth of the 1990s, which was some of the fastest growth in history until the Asian crisis of 1998.
Imagine how prices would look today on the global market had Russia continued the Soviet tradition of allocating metals, oil, wood and other resources for military needs. It could be said that it was as if the global economy had just found the Soviet Union's purse lying in the road, and this should be remembered when analysing the reasons for the growth of the global economy.
REGNUM: The close attention currently directed toward Russia in the developed countries consuming its energy resources is clearly a more complex phenomenon than parent states' displeasure at the behaviour of a resource fringe. It is not for nothing that several politicians, in discussing hydrocarbon supplies, have directly raised the spectre of the Cold War. The unique phenomenon described internally under the antinomian definition of 'energy superpower' status, with which our partners have to deal, is unfamiliar and uncomfortable for them. Isn't this the reason for the irritation expressed with regard to Russia?
Prior to the 1980s, when we began supplying gas to Europe, the USSR and its allies were more or less isolated, and trade took place on a rather small scale, but the rapid growth in the global economy over the past quarter-century, the restructuring from oil use to gas, the almost universal suspension of atomic energy development in the 20 years following Chernobyl – all of this has changed the requirements of modern global civilisation. Given these conditions, Russia has become the number one hydrocarbon exporter. In this sense we are one of the world's key countries for energy-resource supplies. Therefore for the first time in history, Europe and the developed world as a whole have become dependent on Russia – this is the way it has turned out.
Suppose Russia were an entirely democratic power in accordance with European standards, and did not set itself any global tasks in energy policy, such as those with which it has now frightened everyone. Would this really make things any easier? In any case many of Russia's actions would be similar: the Northern European gas pipeline would still be fitted out; an oil pipeline to China would still be constructed, simply because China is experiencing particular growth in demand for energy resources. Would companies in a purely democratic Russian state really not be attempting to purchase refineries in Eastern Europe or the USA?
Of course, the external expansion of Russian companies that have grown up over the post-Soviet period irritates our competitors and neighbours. Russia is coming out of a serious economic crisis and decline in refining to emerge onto the global market, primarily with raw materials, and in connection, its large raw-materials companies are attempting to return to certain markets. The problem is that a significant part of what is happening now would have happened under any type of government, regardless of democracy, and would have irritated our competitors in any case. Under the current conditions every country may attempt to diversify energy sources, although this is usually very expensive, but without a technological revolution Russia's share in global consumption or supply of energy resources, for example, cannot be cut – this is simply not realistic now.
A net exporter of large amounts of energy, with the status of a great power and nuclear weapons, is naturally going to be a powerful player in the global arena, attracting heightened attention and causing apprehension. Then add in the explosion in prices and the large financial resources at Russia's disposal, for the first time in its history. Note the fact that it is now – when oil prices are high – that the West has become nervous with regard to Russia.
Developed countries have always depended on sources of raw materials. To give a classic example, take the the British navy's transition from coal to fuel oil during the First World War, which gave its vessels the advantage in speed and range, but also had the effect of tying Britain to the oil producers of the Persian Gulf and Baku. This is the source of Winston Churchill's famous maxim “diversification,diversification, diversification!” (with regard to oil sources).
The Marxist theory that the basis of imperialism in the early 20th century was the battle for sales markets was an exaggeration. The purchasing ability of the colonies was not large at the time, certainly not enough for large-scale sales activities to take place. But resource supplies are a far more serious matter! However, the main sources of raw materials at the time were, as a rule, less developed countries, without powerful armies or atomic bombs. Therefore the scramble for colonies in the late 19th and early 20th century was one between the great European powers, with some US participation.
The current situation is completely different. Since the end of the Cold War the world has become far calmer. But other problems have appeared, and a reconfiguration of power is taking place worldwide. The specific factor for Russia is that while it is currently a supplier of energy resources, it is also a great military power and lays claim to an important role in global politics. Therefore it is one thing to discuss the issue of raw material sources in less developed countries, but another to discuss this issue in relation to countries pursuing their own internal policies. It is time to move away from discussion of 'resource fringes' and to switch to modern topics of globalisation and interdependence.
REGNUM: We are currently seeing yet another country announce its claims ro energy power status. We are talking about Iran.
Quite right. Suppose we believe that Iran really has no intentions to make bombs. But imagine a country that has built 20 nuclear plants. It can begin to desalinate water, to irrigate the desert, to build roads, to raise quality of life... Nuclear power allows energy to be received without burning oil and gas, which would allow Iran to build up its economy based on hydrocarbon exports; with its own gas and its own electricity it could even develop chemical production, etc. Having achieved energy independence, Iran will feel like the champion of the world even without any bomb. And all this on the basis of a Muslim theocratic democracy. Development will put Iran in a situation of interdependence with the rest of the world.
Yes, Iran could end up as one of the great energy powers, ie, a country which supplies itself, resolves its own problems, and exports large amounts of energy resources. It is a shame that it is going down the road of confrontation. But if Iran is able to find a sensible way out of the current conflict with the developed world, which does not want to see it get the bomb, and if then, with its oil and huge amounts of gas, it is able to create an atomic energy infrastructure as well, it will become a country capable of supplying half the world. Incidentally, Iran is Russia's only serious potential competitor on the European gas market.
The main feature of the current situation is that the conflict with Iran is preventing entry of Iranian gas onto European markets as a competitor to Russian supplies. European prices cannot be brought down in any other way. Some surprising changes are taking place there now. Previously the most expensive gas was that supplied to Spain – the only country in Europe to be based to a large degree on liquid gas – while the other countries demanded cheap pipeline gas from Norway and Russia, but pipeline gas is now more expensive than liquid. And I have great doubts that Iran will want to sell its gas to Europe particularly cheaply.
REGNUM: Is Russia's current political position with regard to Iran motivated by its consciousness of itself as a current energy power and of Iran as a country laying claim to this status?
In my view, although we do have some commercial interests, the main thing that is important to us is economic stability. Russia has absolutely no need for another source of conflict on its southern frontiers. Suppose, for example, the Azeris, who form a significant part of the population of Northern Iran, were to flood into Azerbaijan as refugees... Also, If Iran does develop, for us this will be a potential market for provision of various technologies and so on.
From the viewpoint of the developed great powers, of course it is far more pleasant to deal with countries where there is political stability, and where oil and gas are extracted by private companies from the same great powers. This would represent double control, providing assurance both of access to resources and with regard to companies' policy. This motivation is understandable, and leading consumers should indeed be provided with maximum peace of mind. But the situation is such that it is countries where state-owned companies operate in this sphere that control most of the world's hydrocarbon reserves. Russia is the scene of a struggle, as well as a search for compromises and coexistence, between two ownership structures in the energy field – state-owned and private.
The global economy is changing, and even more substantial changes will follow. This will take place because China, India and Brazil are changing, Russia is changing, even Iran is changing. Brazil is already self-sufficient, while India and China continue to require massive oil and gas imports. The foundations are being laid for long-term competition for imports between North America, China and Europe, primarily with regard to gas supplies from other regions, and given this configuration, Russia and its energy component will be a colossally important factor.
REGNUM: But won't it then work out that in raising the banner of Russia as an energy superpower, we will be completely forgetting what we have been saying for the past few years – that we should develop high technologies, move away from oil and gas, and so on?
Hydrocarbons are sufficient for the long term, but they will be expensive. In about thirty years' time we should see serious technological breakthroughs in the field of energy. There is a window of opportunity for modernising the country using resource revenues, but it will not remain open forever. Every county is following its own path toward implementation of high technologies. We could have tried to preserve our high-technology potential during the transition period by creating conditions for this, but this was not done. We immediately switched to resources, and for a decade made no attempts to create new, potentially profitable companies. And now Russia differs from other exporters in two ways. Firstly, it is a great power and, as an exporter country, has a power of veto on the UN Security Council with regard to any resolutions relating to Iran. Secondly (and in this we are far closer to developed countries), Russia boasts highly educated human capital (although it is true that this is mainly exported) and shares cultural roots with key developed countries. Although these common cultural roots have not spawned identical types of democracy, the great mass of Russia's educated population would in any case like to live in a European country. The lower education levels are, the easier it is to live in what used to be called 'Asian' (backward) conditions, but the higher they are the more our people want to live in Europe.
The problem is that should the institutions for market development created at the start of the 1990s prove inadequate, we will be facing a second transitional period. First we switched from moderately developed socialism to a new, strange, New Russian form of capitalism, which was not to everyone's taste, both internally and externally. Now the question arises of how to switch to normal capitalism, with democracy, high efficiency and so on. But for this we will need a differently structured economy. No-one could seriously think that a a relatively poor country with a high share of oil production will easily and quickly become a democratic country, like a European country without oil but with a high share of refining production. It is obvious that these things are connected. Oil does not require large numbers of highly educated people. Therefore the choice is simple – we either let our ability to produce human capital slip and retreat to the position held by all resource powers, or we use energy exports as a source of resources for doing what was not done in the first transition period, specifically to switch to European-style capitalism over the lifetime of the next generation (a long period, there is no way this can happen in three years before the next elections!), which will involve a wider middle class, more equal distribution of wealth and income, a more sustainable basis for democracy, and a different economic structure with more developed industrial and service segments, as is characteristic of a post-industrial society. Such a period can be financed either through these segments' own earnings from competition with similar companies operating under far superior legal conditions and with large resources, although this is unlikely, or otherwise we will have to reallocate a share of export resources toward modernisation of the economy and state.
REGNUM: Does this mean that in stating that Russia will be an energy superpower, we should add a disclaimer explaining why we plan to become one, as this status is, in essence, a transitional one?
I think that as regards this political slogan of the day, the people who put it forward understand that this is a short-term goal. But with regard to long-term modernisation of the country, in order to turn it into a normal European market-based democracy (and not in order to please someone abroad, but for ourselves, because this is normal for us), we will need to work for a generation on what was not done in the past fifteen years. We must look for ways of reinvesting resource income into the national economy in such a way as to change the structure of society and the nature of our political, social and public institutions, as well as the structure of the economy.
And then, in this context, the phrase 'energy superpower' denotes a new era, using the superincomes received for the country's development. Along the way Russia must ensure stability, peace of mind and predictability of energy policy for the rest of the world. We must not attempt to regulate energy markets, but should also avoid creating inflated expectations that we will supply the entire world independently of our national interests. We are in a state of deep interdependence with the rest of the world, and have a chance to develop. We need to find means of reinvesting income from resource exports in modernisation – this will be the criterion for the success of our energy policy.
In my view, excessive emphasis on being a superpower may flatter certain people within the country, but this is not our goal objectively speaking. In recent years the world has begun to show some discord – multiple small-scale conflicts, countries and groups are recalling past offences, wishing to separate from one another, and everyone is nervous. In these circumstances, commercial conflicts become inseparable from politics. Russia needs stability and the opportunity to dedicate the next 15-20 years to democratisation, modernisation, and resolution of critical national problems. This is why Russia, as a great power, must aim for supersecurity and superstability, specifically on the energy markets.