JOURNAL OF GOVERNANCE AND POLITICS


SCHOOL OF GOVERNANCE AND POLITICS MGIMO UNIVERSITY RUSSIA

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№2(5), 2019

Current Issues in Public Policy and Administration

Russia's Energy Resources as a Foreign Policy Tool: Strengths and Limitations

Mikhail Frolov,
School of Governance and Politics

Abstract: It is widely believed that energy resources due of their scarcity and uneven distribution can be used for not only economic, but also political purposes. The article analyses energy resources as a means to achieve political objectives of Russia on the international arena. The author identifies two general strategies of using energy resources as a political lever which are the carrots and sticks strategy and the strategy aimed at long-term economic benefits through interconnectedness. Whereas the implementation of these strategies may bring political benefits to an energy exporting country, the paper emphasizes the existing limitations of exploiting energy resources for foreign policy ends.

Keywords: energy resources, sticks and carrots strategy, energy exports, energy backlash

Introduction

Energy resources have long been used as a foreign policy tool. Countries that have vast energy recourses can rip benefits not only by gaining economic revenues from exporting oil and gas, but also pursue their political ends abroad by exploiting the energy dependence of other countries. The first case of using energy resources for achieving political objectives was identified in 1973 when OPEC introduced  the  oil  embargo  against countries-consumers that  supported  Israel in  the war  with the  Arab countries.[1]As energy resources are likely to remain scarce[2] and alternative energy sources are unlikely to come to the forefront in the long run, oil- and gas-producing countries will be able to use their energy resources to project their political power on energy importers. Russia has asserted itself as one of the major players on the energy market. In 2018 it was the second largest producer of natural gas and the third largest of oil[3]. According to the Ministry of Finance of Russia, in 2018 energy revenues from oil and gas exports amount to 10% of Russia’s GDP.[4]At the same time Russia’s energy resources may serve as a tool of conducting its foreign policy. However, along with its benefits, such instrument of projecting political power has certain limitations that require a thorough analysis carried out by Russian decision-makers to avoid possible political losses. The paper will identify different models of how energy resources serve to achieve political objectives of Russia. Based on the methodology of SWOT-analysis it will further assess the strengths and weaknesses of these models.

Main body

Russia applies different models of using energy resources as a foreign policy mechanism. In essence, they constitute a combination of economic and political factors mixed in different proportions with no one being able to fully substitute the other. We will call the first approach sticks and carrots strategy that is epitomized in the relations of Russia towards the post-soviet republics. Russia gives its allies oil and gas at subsidized prices. Thus, 2018 Belarus paid the lowest price of 127 $ per 1.000 m³[5] whereas the average price was 246,4 $ per 1.000 m³[6]. Given the fact that Belarus obtains essentially all of its gas from Russia – 99% – and Minsk’s gas dept to Moscow was approximately $550 million[7] it provides Russia with a powerful political leverage. During the 2006-2007 gas conflict with Belarus Russia warned to reduce supplies to Belarus because of its unpaid bills[8].

Another strategy is tailored to gain long-term economic benefits through interconnectedness. There is no doubt that the political component is also essential when applying this strategy, but its importance is secondary and limited as compared with the first model. By building pipelines Russia considerably fosters the interconnectedness between Russia and other countries. As for the EU, it ensures space for economic and political dialogue even against the background of the deterioration of the EU-Russian relations. Gas and oil exports to China have transformed from a safety net for Russia because of the cooling in relations with the West to an integral part of Russia’s energy exports and given the similar political posture of Russia and China on many international affairs issues the energy cooperation strengthens Chinese-Russian relations and helps Russian not to lose China as a “strategic partner”.

The examples provided in the previous paragraphs help identify strengths and opportunities energy recourses may have as a foreign policy tool. Firstly, in general, they allow for exercise of political influence on those who depend on gas and oil imports through manipulating prices or linking possible subsidies to political support of certain international issues. However, this influence is rather short-term since long pressure will drive the importers away from the exporting country and force it to find other partners for energy cooperation. This makes obvious that there should be a balance between “sticks” and “carrots” applied to energy resources importers as when energy resources are excessively used as a political tool it can serve for other importers as a sign of unreliability of the supplier and make them more reluctant to energy imports from that country. Secondly, long-term “energy penetration” results in interconnectedness which is viewed as “safety catch” and may foster partnership even when the general level of relations remains low.

At the same time, one can find several limitations of exploiting energy resources for political matters. Thus, carrots and sticks strategy sometimes resembles a double-edged sword. On the one hand, it may incentivize importers to make some political or economic concessions to the exporter. On the flip hand, Russia as a gas and oil exporting country may become a victim of its own policy. When feeling pressed an importing country may pursue a gas and oil diversification strategy that would be detrimental to the economy of an exporting country as is will face the reduction of revenues as well as of possibilities to exert further political influence on this country.  For instance, 2013 Belarus bought oil from Iran for the first time to replace the reduction of its supplies from Russia[9]. In addition, political loyalty may be manipulated by an importer that may claim that it will seek better ties with other countries when the gas and oil prices will increase.

Another drawback can be called energy backlash. One can assume that possible political influence of a country whose revenues are largely formed by energy exports depends on the oil and gas prices that are highly volatile. Moreover, Russia’s dependence on energy exports turns out to be a “sweet spot” for penalties or sanctions from those unsatisfied with the policy the Russian government is conducting. Thus, the Countering America's Adversaries Through Sanctions Act adopted in the US in 2017 imposes sanctions on “special Russian crude oil projects” as well as “development of pipelines in the Russian Federation”[10]. Finally, one can identify an inverse logic of dependence, by which an exporting country that builds pipelines may find itself more dependent on stable imports of its energy resources than those who import them as it is easier for them to diversify their gas and oil supply routes than for an exporter to find other buyers. Against the background that expensive pipelines built largely by a supplier are supposed to bring economic benefits only in the long run, an exporting county is highly interested in stable economic and political relations with the main importers in order not to incur economic losses or not to become subject to manipulation.

The results of the analysis are reflected in Table 1.

Table 1. SWOT-analysis of using energy resources for political purposes

Internal factors

Strong sides

Weak sides

  1. Short-term political lever over an energy importing county;
  2. The means of supporting the necessary level of relations with partners.
  1. The necessity to invest a lot of economic resources into expensive energy projects, e.g. pipelines, without an immediate return of investments;
  2. The emphasis on energy resources as a political tool may result in perceived unreliability of an exporting country.

External Factors

Opportunities

Treats

  1. The existing dependence on energy resources of importers drives them into the political orbit of energy suppliers;
  2. The interconnectedness between a supplier and an importer through the existing pipelines contributes to long-term economic benefits for a supplier and space for political dialogue in times of the deterioration of relations.
  1. The pursuant of diversification strategies by an importing country when pressed;
  2. Possible manipulation of political loyalty by an importing country;
  3. Energy sphere of a supplier as a “sweet spot” for penalties, e.g. sanctions;
  4. The dependence of political leverage of energy exporter on the number of suppliers and the energy resources prices;
  5. The dependence of a supplier on the stable demand.

Conclusion

There is no doubt that the use of energy resources as a foreign policy mechanism may bring about both political benefits and negative outcomes. Short-term political wins may be overweighed by losses through the inappropriate policy that may result in diversification strategies applied by importers, perceived unreliability of an exporting country as well as loyalty manipulation of importers. Energy resources can also serve as a lucrative political target for other countries which is proved by western sanctions against Russia’s energy sector. Against this background it is necessary to conduct an in-depth cost-benefit analysis before energy resources are employed for political ends.

References

  1. Belarus buys Iran crude oil to replace Russian barrels?//Neftegaz.ru. – 17.02.2017. – Mode of access: https://neftegaz.ru/en/news/politics/409135-belarus-buys-iran-crude-oil-to-replace-russian-barrels/
  2. Belarus' Gas Debt to Russia Stands at About $550Mln//Sputnik. – 28.01.2017. – Режим доступа: https://sputniknews.com/business/201701281050105315-belarus-russia-gas-dispute/
  3. Budget for citizens//Ministry of Finance of the Russian Federation. – 2017. – P.6. – Mode of access: https://www.minfin.ru/common/upload/library/2017/12/main/BDG_2018_FINAL.pdf
  4. Countering America's Adversaries Through Sanctions Act // U.S. Department of the Treasury. – 02.08.2017. – Mode of access: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/hr3364_pl115-44.pdf
  5. E. Kramer Andrew Russia Threatens Cut in Belarus Gas Supply // The New York Times. – 02.08.2007. – Mode of access: https://www.nytimes.com/2007/08/02/world/europe/02russia.html
  6. Giedrius Česnakas Energy resources as the tools of foreign policy: the case of Russia// Lithuanian Foreign Policy Review. –  2016. – vol. 35. –  P.9.
  7. Reserves-to-production (R/P) ratios// BP Statistical Review of World Energy. – 2019. – 68th edition. – P. 15. – Mode of access: https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2019-full-report.pdf
  8. Russia’s energy market in 2018// BP Statistical Review. – 2019. – Mode of access: https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2019-russia-insights.pdf
  9. Формулу цены на российский газ для Белоруссии объяснил эксперт// Рамблер. – 02.08.2019. – Режим доступа: https://news.rambler.ru/cis/42600320-formulu-tseny-na-rossiyskiy-gaz-dlya-belorussii-obyasnil-ekspert/
  10. Экспортная цена на газ "Газпрома" в 2018 г выросла на 23%. – Прайм. – 29.04.2019. – Режим доступа: https://1prime.ru/energy/20190429/829939562.html
 

[1] Giedrius Česnakas Energy resources as the tools of foreign policy: the case of Russia// Lithuanian Foreign Policy Review. –  2016. – vol. 35. – P. 9.

[2] Reserves-to-production (R/P) ratios// BP Statistical Review of World Energy. – 2019. – 68th edition. – P.15. – Mode of access: https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2019-full-report.pdf

[4] Budget for citizens//Ministry of Finance of the Russian Federation. – 2017. – P.6. – Mode of access: https://www.minfin.ru/common/upload/library/2017/12/main/BDG_2018_FINAL.pdf

[5] Формулу цены на российский газ для Белоруссии объяснил эксперт // Рамблер. – 02.08.2019. – Режим доступа: https://news.rambler.ru/cis/42600320-formulu-tseny-na-rossiyskiy-gaz-dlya-belorussii-obyasnil-ekspert/

[6] Экспортная цена на газ "Газпрома" в 2018 г выросла на 23%. – Прайм. – 29.04.2019. – Режим доступа: https://1prime.ru/energy/20190429/829939562.html

[7] Belarus' Gas Debt to Russia Stands at About $550Mln // Sputnik. – 28.01.2017. – Режим доступа: https://sputniknews.com/business/201701281050105315-belarus-russia-gas-dispute/

[8] E. Kramer Andrew Russia Threatens Cut in Belarus Gas Supply//The New York Times. – 02.08.2007. – Mode of access: https://www.nytimes.com/2007/08/02/world/europe/02russia.html

[9] Belarus buys Iran crude oil to replace Russian barrels? // Neftegaz.ru. – 17.02.2017. – Mode of access: https://neftegaz.ru/en/news/politics/409135-belarus-buys-iran-crude-oil-to-replace-russian-barrels/

[10] Countering America's Adversaries Through Sanctions Act // U.S. Department of the Treasury. – 02.08.2017. – Mode of access: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/hr3364_pl115-44.pdf