Putin Expands State’s Role In Energy Policy

Michael Klare, Guest Blogger

Ever since he first assumed the presidency in 2000, Vladimir Putin has sought to bring Russian energy production under state control, reversing the effort made by his predecessor, Boris Yeltsin, to transfer state assets into private hands.  Putin made considerable progress in implementing this goal during his first two terms, when the Kremlin employed questionable tax litigation to seize the assets of privately-owned Yukos (then the largest oil company in Russia) and transferred them to state-controlled Rosneft, and has continued with renewed vigor after he regained the presidency in May.  Already, Putin’s quest has been rewarded by Rosneft’s acquisition of BP-TNK, Russia’s third-largest oil firm, bringing more than half of the country’s oil production under state control for the first time since the 1990s.  But while applauded by some in Moscow, this effort has caused increasing concern in Europe, which relies to a considerable degree on Russian oil and gas and so fears the implications of Putin’s growing sway over Russian energy policy.  The Kremlin’s growing control over energy policy also raises questions about the depth of Russia’s commitment, made at the November 2011 G-20 Summit in Cannes, to increase transparency in international energy markets – questions made all the more salient as Russia assumes the G-20 presidency in 2013.

Even before he assumed the presidency, Putin indicated that state control over oil and other natural resources was essential to the restoration of Russia’s status as a great power.  In the years immediately following the disintegration of the Soviet Union, when Russia’s power was at its lowest ebb, Putin – then a functionary in the St. Petersburg municipal government – began arguing against the selloff of state-owned oil and natural gas fields to private firms and wealthy individuals (the so-called oligarchs).  Such sales, he claimed, were depriving Russia of the resources it needed to fuel its comeback as a major world contender; only by renationalizing these assets could Russia acquire the wherewithal to command respect on the international stage.

Once in power, Putin moved with dispatch to implement this policy.  His most aggressive – and still controversial – move was to unleash the country’s tax authorities on Mikhail Khodorkovsky, then the CEO of Yukos and the richest man in Russia.  Arrested in 2003, Khodorkovsky was sentenced in 2005 to a nine-year prison sentence for tax evasion.  (Putin has denied any responsibility for the arrest or sentencing, but most observers believe he played a key role behind the scenes.)  Yukos was broken up, and its most valuable oil assets were transferred to Rosneft.  Putin scored another victory for state control in 2006, when Royal Dutch Shell was forced to sell its majority share in the Sakhalin-II oil and gas project to state-controlled Gazprom after the state environmental organization, Rosprirodnadzor, charged Shell with multiple environmental infractions.

Gazprom, too, had been largely privatized under Yeltsin, with the state retaining a minority share of 39.4 percent.  In 2005, however, Gazprom – by then dominated by Putin appointees – agreed to sell another 10.7 percent of its shares to the state, giving the Kremlin a majority share.  With control over the world’s largest supply of natural gas and a vast network of pipelines – many stretching into Western Europe – Gazprom is a leading source of income for the Russian state and also a major source of employment, with close to 400,000 employees.

Moscow’s ability to open or close the spigot on gas deliveries provides it with a powerful tool it can use to influence political developments in major client countries.  This was given a vivid demonstration in January 2006, when Gazprom cut off gas deliveries to Ukraine in what was described by Moscow as a dispute over prices, but was widely interpreted in Europe as an expression of Russian displeasure with the Ukrainian government’s Westward-leaning proclivities.

Gazprom’s use of the “energy weapon” to pressure Ukraine in 2006, along with several other former Soviet republics in succeeding years, produced significant dismay in Europe and led some European leaders to call for the “diversification” of Europe’s natural gas supplies, in particular through the construction of pipelines connection Europe to supplies in the Caspian Sea region, bypassing Russia.  One such endeavor, the Nabucco pipeline, has received strong support from the European Union and some EU member states. Not all EU members share this concern, and Gazprom has succeeding in extending its reach to Western Europe by establishing joint ventures with various European energy firms and building a new pipeline, Nord Stream, that connects Russia and Germany via the Baltic Sea.

Nonetheless, the Russian state’s growing power over energy is raising concern in Western Europe over perceived threats to the region’s energy independence and competitiveness. As a signal of this concern, the European Commission (the executive arm of the EU) has launched an anti-trust investigation of Gazprom’s operations in EU countries, claiming that Gazprom and its partners are suspected of having have engaged in “exclusionary” and “exploitative” monopolistic practices in violation of EU rules.

Putin countered the EC investigation by creating a category of “strategic” companies whose key financial data cannot be divulged to foreign regulators. This is troubling, as it suggests a determination to resist compliance with the legal and regulatory practices that all other companies operating in that arena are obliged to abide by. It is equally troubling in terms of Russia’s compliance with its G-20 commitments, particularly in the energy realm.  At the 2011 G-20 Summit in Cannes, Russia, along with other member countries, endorsed a final communiqué containing the words, “We commit to more transparent physical and financial energy markets.”  Various measures were also approved to facilitate the sharing of data on these markets.  However, by shielding Gazprom – and possibly other energy firms – from release of critical data, it appears that Russia is moving in the opposite direction.

For now, it appears unlikely that anything will impede the further centralization of power over the Russian energy industry in Mr. Putin’s hands.  He has made no secret of his belief that this is necessary for the continued health and vigor of the Russian economy and for the preservation of Russia’s status as a major world power.  Some analysts question whether this drive will prove self-defeating in the end – whether by inviting hostile action like the EC investigation or driving away participation by tech-savvy foreign firms – but Putin seems determined to proceed on this course.

Michael T. Klare is a professor of peace and world security studies at Hampshire College and the author, most recently, of The Race for What’s Left (Metropolitan Books).

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