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Conflict Studies Research Centre

Occasional Brief No 59: June 1998

Oil and Gas Interests in the Russian Political Equation

Dr Mark Smith

Disclaimer: The views expressed are those of the author and not necessarily those of the UK Ministry of Defence.
 
 

    Russia is a major producer of oil and gas, and her gas and oil industries are therefore influential actors in both Russian internal politics and foreign policy. The political interests and activities of Russian gas and oil companies are manifest in three key areas:

1. Their role in shaping the contemporary political system.

2. The agreements reached with western oil and gas companies which desire to invest in Russia.

3. The interests of Russian oil and gas companies in exploration and production in foreign countries and the export of oil and gas to foreign countries.

The Role of Oil and Gas Companies in the Russian Political System

The Russian political system is a corporatist system dominated by the interests of big business and banks. Business elites merge with the state bureaucracy to form a network of competing clans,1 who vie with each other for power and influence at the apex of the Russian political system. Peter J. Stavrakis has described this process as follows:

...new and old nomenklatura cooperate to accumulate wealth, control diverse avenues of legitimate and illicit exchange, and exercise considerable political authority due to the collapse of the formal state's capacities. Communist-era political elites have used the reform process to create a new class of wealthy bankers and entrepreneurs closely linked to state power. Many of these...have incorporated the elements of the old KGB into their structure. The old coexists with the new in an interconnected web of influence and affiliation among elites straddling all the vital boundaries of the modern state - public and private, legal and criminal, personal and official - to create a working equivalent of state institutions.2

Russia's oil companies and Gazprom, which enjoys a virtual monopoly of the extraction and supply of gas in the Russian Federation, are an integral part of this corporatist system. As Russia is a major producer of oil and gas, these business interests enjoy enormous political and economic influence. Part of the state oil industry on the territory of the Russian Federation was originally broken up into three concerns, Lukoil, YUKOS and Surgutneftegaz prior to privatisation. Since then other companies have been created out of the state monopoly and privatised.

In January 1998, the oil companies YUKOS and Sibneft' merged to form YUKSI, making it one of the largest oil companies in the world. It is the largest in terms of the reserves it controls, and the third largest in terms of extraction, after Exxon and Shell. This merger strengthens considerably the position of Boris Berezovskiy, who has a controlling interest in YUKOS. It is speculated that YUKSI will develop a close relationship with MOST bank. The bank MENATEP already owned 85% of YUKOS. This group will also have considerable influence over the Russia media, as Berezovskiy has significant control of ORT and TV-6. Vladimir Gusinsky of MOST has control of NTV. It is possible that Lukoil will be forming an alliance with ONEKSIM bank. Lukoil's reserves, stated in 1997 to be 14.27 billion barrels, are larger than those of Shell and Exxon and are the largest reserves in the world. Shell's stand at 8.56 billion barrels.

A separate Soviet gas industry was created in 1943. In 1989 the Ministry of the Oil Industry, Ministry of the Gas Industry and Ministry of Petroleum Refining were merged into a single industry, the Ministry of the Oil and Gas Industry of the USSR. A separate Soviet gas industry was again created in the early 1990s, before the break up of the USSR. In September 1990 the Gazprom board discussed transforming Gazprom into a joint-stock company. In 1991-92 talks were held between Russia, Ukraine and Belarus over creating a tripartite joint-stock company with all three states holding shares. However by June 1992 this was abandoned and Gazprom in Russia became a state company. In November 1992 Gazprom became a joint-stock company, and it was to be partly privatized as a single unit. This contrasted with the Soviet oil monopoly which was initially broken up into three separate companies before privatisation. Gazprom was privatised in 1994, with the state holding 40% of all shares. 15% were to be sold to workers and management at preferential prices. The leadership of Gazprom was able to keep control over privatisation by ensuring that sales of shares took place at closed auctions, which meant that the company could determine who attended the auctions. This ensure that the existing leadership of Gazprom, which was closely linked to the government, was able to retain control.3

Gazprom, which accounts for more than 95% of Russian gas production, is one of largest companies in the world. As Russia's natural gas reserves are the largest in the world, Gazprom is a significant economic force in Russia.

The economic strength of these firms and groups of firms gives them an enormous political significance, due to their control of the media, and their capacity to finance the electoral campaign of any would-be presidential candidate. Russian oil companies and Gazprom are therefore an integral part of the party of power, the political class that forms Russia's ruling elite.

The Interest of Western Oil Companies in the Russian Energy Sector

Western investment in the Russian energy sector has been constrained by the Duma's reluctance to approve Production Sharing Agreements (PSAs). Nationalist deputies in the Duma have been hostile due to the belief that PSAs would allow western companies to exploit Russian natural resources. However in November 1997, Yel'tsin issued a decree allowing western companies up to 100% ownership of Russian oil companies. Previously western companies had been confined to a ceiling of 15% ownership. Whether this will encourage significant foreign investment remains to be seen.4

However, despite an uncertain investment climate, western companies have had some involvement in the Russian energy sector. There is interest in the Russian energy sector in attracting western capital and technology. Shell signed an agreement forming what has been termed a "strategic alliance" with Gazprom in November 1997. It was also reported in November 1997 that Shell, BP and Texaco are interested in buying Rosneft', which was tendered for privatisation in 1998. Various other western companies are also active in Russia. If a more favourable investment climate emerges, more strategic alliances may develop between Russian companies and their western counterparts. Indeed, Lukoil has created a strategic alliance with Atlantic Richfield, the first alliance between a Russian oil company and a western company.5 Whilst reformers remain in power in Russia, western oil and gas companies are likely to be involved in the Russian energy sector.

The Interests of Russian Oil and Gas Companies Outside the Former Soviet Union

The emergence of private oil and gas companies in the Russian Federation since 1991 has meant that some of these companies have developed significant overseas interests, and this has had an impact on Russian foreign policy. Furthermore, this impact is likely to increase in importance. Just as US foreign policy towards regions such as the Middle East has often had to take into account the interests of US oil companies, it is increasingly likely that Russian foreign policy will have to take into account the interests of Russian oil and gas companies.6 Indeed these companies may significantly shape Russian foreign policy towards some regions.

The statement made in May 1997 by the then first deputy prime minister Boris Nemtsov that "Gazprom is the pride of Russia, it is Russia's face abroad, and the government should assist in its further development",7 makes clear the Russian government's interest in supporting the overseas activities of Gazprom. This was further underlined by comments made by the chairman of Gazprom, Rem Vyakhirev, in June 1997. He stated that as Russia controls 38% of the world gas reserves, then Gazprom is the reason why the world has to deal with Russia. He went on to state that the power and the efficiency of the Russian gas sector in many ways define the country's place in the world, "that is why Gazprom has been, is and, in the foreseeable future, will be the bulwark of the Russian state."8

Gazprom's international interests have expanded considerably since the end of the USSR. Gazprom is a major supplier of gas to Eastern Europe and Germany. In July 1997 Vyakhirev said that Gazprom already controlled one-third of the European gas market. 88% of all gas imported into Europe in 1997 came from Gazprom.9 When the Yamal-Western Europe pipeline is completed early in the 21st century, Gazprom's importance as a supplier of gas to Europe will grow. Gazprom is also involved in building a pipeline through Finland to Sweden, and from Siberia through Mongolia and China to South Korea. Gazprom also has a 10% share in the consortium to build a pipeline from Turkmenistan through Afghanistan to Pakistan. This projected pipeline may also be extended to India.

Turkey is one of Gazprom's most important customers. In 1995, Turkey imported 5.7 billion cubic metres of Russian gas, the lion's share of Turkish gas consumption, which then stood at 8.6 billion cubic metres.10 A major agreement to expand the supply of Russian gas to Turkey was signed in December 1997. Russia will begin delivering 30 billion cubic metres of natural gas a year in 2000. This agreement will be in force for 25 years. It will include 16 billion cubic metres through the Blue Stream pipeline that will be laid along the bottom of the Black Sea from Dzhubga to Samsun. Gas is currently being piped to Turkey from Russia via a pipeline that runs through Bulgaria. Gazprom also signed agreements with Armenia and Georgia in late 1997 that will include piping gas to Turkey. This agreement will give Gazprom a significant presence in Turkey, and gas supplies will become an important part of the Russo-Turkish relationship.

There is interest in Israel in purchasing Russian natural gas from Gazprom, and talks were held in Israel in July 1997 between Gazprom and the Israeli government on this. The Israeli minister for infrastructure, Ariel Sharon, said that Israel wishes to start buying Russian gas in 2000.11 The gas will be piped to southern Turkey and then possibly by pipeline under the Mediterranean. However, Israeli suspicions that Moscow is helping develop Iran's ballistic missile capability could sabotage the deal.

Gazprom is also interested in developing the Iranian gasfields in southern Pars. It has entered into a consortium with Total and Petronas to do so. This has led to friction with the USA, which has attempted to persuade the Russian government to pressurise Gazprom not to become involved in Iran. However the Russian leadership refused, and has instead affirmed its support for Gazprom involvement in the southern Pars project. This is a clear case of support by the Russian state for Gazprom. In November 1997, Boris Nemtsov said that the Russian government would protect Gazprom against any pressure from the USA over Iran.12 Vyakhirev also said that Gazprom is interested in other Iranian projects, along with projects in China.

Lukoil has the most significant international interests of any Russian oil company. In March 1997 Lukoil, as part of a consortium with Zarubezhneft and Mashinoimport signed an agreement with the Iraqi government to develop the Qurna-2 oilfields when UN sanctions are eventually lifted. Zarubezhneft and Rosneft will also form a joint drilling venture with Iraq.13 In February 1998, the President of Lukoil, Vagit Alekperov, held talks with the Turkish energy minister about piping oil through Turkey.14 Ankara also wishes to interest Lukoil in participating in the construction of the Baku-Ceyhan pipeline.

Alekperov said in December 1997 that Lukoil could take part in buying up privatised refineries in Eastern Europe. In 1998 it bought part of the privatised oil refinery in Ploesti, Romania. Lukoil is also developing a network of filling stations in Poland and intends to expand these networks elsewhere into Eastern Europe. Rosneft has also expressed interest in purchasing refineries in Eastern Europe.

In December 1997, Zarubezhneft signed an agreement with the Iranian National Oil Company to help develop several oil and gas fields and to restore the Sorush oilfields destroyed in the Iran-Iraq war.15 Zarubezhneft will also develop oil resources in Vietnam.

It is possible that greater cooperation may develop between Russia and Saudi Arabia over oil. In May 1997 the first Saudi deputy minister of oil and mineral resources, Prince Abd al-Aziz Bin Salman visited Moscow to discuss cooperation in extracting and distributing hydrocarbon resources and interaction in the world oil market.16 In October 1997 the Russian minister for states of emergency, Sergey Shoygu, headed a Russian delegation to Libya to discuss broadening bilateral business ties in the oil and gas sectors.17

Conclusion

Gazprom and Russian oil companies have emerged as major corporate interests in the strongly corporatist Russian political system, where they have formed significant alliances with Russian banks. They have emerging international interests, in the supply of gas and oil to foreign customers and also in developing oil and gas resources overseas. For this reason, they are likely to form an influential lobby in the formulation of Russian foreign policy. The Russian foreign policy machine has not so far developed a close relationship with these actors because of a failure to appreciate their importance for Russia.18 However, given the importance of the energy sector for the Russian economy, and the importance of this sector in the internal political system, this is likely to change, and Russia's foreign policy towards several regions, particularly the Middle East, could be strongly influenced by the interests of her oil and gas companies.

E n d n o t e s

1 Thomas Graham, 'The new Russian regime', Nezavisimaya Gazeta, 26 November 1995.

2 Peter J. Stavrakis, Shadow Politics: The Russian State in the 21st Century, Strategic Studies Institute, US Army War College, December 8, 1997, pp.11-12.

3 See Valery Kruchkov and Arild Moe The New Russian Corporatism? A case study of Gazprom, London, Royal Institute of International Affairs, 1996, for an account of the privatisation and development of the Russian gas industry in the post-Soviet era.

4 See 'Russia champs at the drill bit', The Economist, 15 November 1997, p.95-96.

5 John Thornhill, 'A lust for black gold', Financial Times, 27 April 1998. This is a profile of Vagit Alekperov, head of Lukoil.

6 For a history of how US foreign policy has often interacted with of that of oil companies see Daniel Yergin, The Prize: the epic quest for oil, money and power, London, Simon and Shuster, 1991.

7 Petroleum Report, May 9-16, 1997, p.3.

8 Petroleum Report, June 13-20, 1997, p.3.

9 'Russia and the West: Still most awkward partners', The Economist, 9 May 1998, p.27.

10 Martin Quinlan, 'Turkey: Plans for massive gas use', Petroleum Economist, May 1997, p.40.

11 Summary of World Broadcasts (SWB) 10 June 1997 SU/2941/B/9.

12 Petroleum Report, 7 November 1997, p.17.

13 Rustam Narzikulov, 'Russia's victory in Iraq', Nezavisimaya Gazeta, 26 March 1997.

14 SWB, 21 February 1998, SU/3157, B/8.

15 Petroleum Report, January 16-22 1998, p.8.

16 SWB, 31 May 1997, SU/2933, B/7.

17 SWB, 23 October 1997, SU/3057, B/15.

18 See Rustam Narzikulov, 'Oil, gas and Russia's foreign policy', Nezavisimaya Gazeta, 29 October 1997; Irina Kobrinskaya, 'Gazprom will not replace the MFA', Moskovskiye Novosti, 5-12 October 1997, p.5; Sanobar Shermatova, 'The 'gas policy' of the premier', Moskovskiye Novosti, 25 January-1 February 1998, p.16, for a discussion of the interrelationships between Russia's oil and gas sectors and foreign policy.