NESF / Comments : Fuel & Energy : More than the West

More than the West

Regulations that don't fit European logic can often make foreign investment in Russia difficult, but positive results are achieved by those who understand and accept them. What are the possible directions for the development of the Russian energy sector?

by KONSTANTIN SIMONOV

To an outside observer, Russia still is currently a mysterious country which doesn't fit the political and managerial standards adopted by the European Union. This gives rise to the continuous clichés reported on foreign mass media, such as "In Russia they have an authoritarian regime", "civilised business is not possible in Russia", "all rights and freedoms are trampled". This creates the image of people unreliable both in politics and business and unpredictable in their actions. The country's managing principles are seen as opaque.

In such a situation, a likely foreign investor can choose from two possible courses of action. The first one is to adopt a critical point of view, keep denouncing the authoritarian and corrupt Russian regime, declare that Russia cannot be understood by reason alone and maintain that you'd better have nothing to do with it.

The second course of action is to: acknowledge that cooperation with Russia may bring about important "dividends"; make one's entry into the existing political-economic system; accept the current state of affairs as a matter of fact; recognize that, in the age of globalization, everything is determined by the efficiency of the elites and not by the kind of regime; try to understand the philosophy of development of the State and the relationship between power and business.

Even more so since there is logic in the way events are developing in Russia, and there are also rules behind the decision-making process. Another matter is that these often differ from the standards of rationality of power in force in most European countries. For example, the deputy prime minister may be a more influential figure than his or her formal superior, and ministries may be prevented from making important decisions relating to their formal responsibilities.

Yes, State-controlled companies are very strong in Russia; people close to the President are the most influential politicians in the country; the role of the Parliament is not very significant and the judicial system is still in the process of being moulded. One can disagree with all this, but these are the rules of the game and, as it is said, when in Rome, do as the Romans do. Anyway, the more they speak of Russian authoritarianism in Europe, the stronger the Russian isolationists in favour of a particular direction for the country will become. I don't think that Europe would want to promote such attitudes.

Today's Russian political elite is no longer homogeneous and, in any case, all political groups understand that Russia's future is indissolubly bound to its gigantic hydrocarbon reserves. Also you cannot give a single interpretation of how this influences the development of the country. Some prefer to talk of a curse of natural resources, others of an opportunity for the country. In any case, the natural resources are there and it would be stupid to give up using this lever. Any Russian political group will use the raw material reserves as a matter of foreign policy, regardless of who succeeds Vladimir Putin in 2008. It is also clear that the «orange» counter-elite will never rise to power in the country. This means that the ideology of open doors to foreign companies will never have the upper hand again. It is unthinkable that foreigners may take control of major production projects in Russian territories, that they may get tax privileges and that the PSA regime may be restored. This will never happen, regardless of who holds office in the Kremlin. The Russian elite doesn’t want to govern a semi-colonial, second category country: it wants to lead one of the leading nations on the international scene, one that will participate in setting the world’s agenda.

This reasoning may seem a little snobbish, but it is part of the Russian elite’s self-awareness and will therefore have to be faced in the near future. In fact, one can gain from it with dignity. Getting a stake in the Russian upstream is very possible, because Russia has a great need of new technology, both to produce hydrocarbons and to refine and transport them. Furthermore, Russian companies are keen to win access to the end users’ market.

In this view, Russia is ready to be a friend of the West, a West which, for us, means the traditional outlet market, an adequate monetary capacity and a high level of development in energy technologies.

But the West often rejects Russia. The issue of energy security in Europe is artificially blown up, claiming Russia to be a threat to Europe. The possibility of alternative supplies to the European Union is continually discussed. All too often, European politicians paint pictures of an unnecessary Russia. It is too optimistic a view. The role of alternative sources of energy is knowingly blown up, as is the possibility of other suppliers, such as Central Asian or African countries, while the risks in cooperation with these counties are minimized.

A question begs to be asked: will the West profit from continually rejecting Russia’s advances? This is very doubtful. So let’s explain why. As pointed out before, Russia has no choice but to place its stakes on the supply of energy sources: this is its role in the world’s division of labour. In this respect, there is no real choice for the Russian elite. Whoever succeeds Putin will be betting on the energy sector.

But there is another question, too: who will be the main beneficiary of these recourses? New transport routes for energy are being built in Russia toward South East Asia. Considering the delay in the start of production at new fields, a question must be asked: is this about redirecting our hydrocarbon exports?

In this view, the extreme political pressure exerted by the EU is irritating. European politicians and intellectuals, in criticizing their fictitious «authoritarian Russia», are willingly or unwillingly pushing it to opt for the East. The East, mainly China, offers an interesting alternative: a significant share in the Chinese energy market and the markets of other South East Asian countries, stable supplies of hydrocarbons in the area, which may become the main source of energy security for the region. They are ready to allow Russia both into refining and sales. China is becoming ever more the energy alternative to Europe. And it is clear to everyone that close collaboration in the future could give birth to a powerful political alliance.

Thus Russia has two choices. Politically and in terms of energy: to place its stakes on China or integrate with Europe. In exchange for the construction of new pipelines to Europe and minority stakes in upstream projects, Russia intends to gain shares in European retail market, as well as in power generation. Furthermore, Russia and Europe would thus appear completely interdependent economically, which would affect the approval of all major political decisions.

Yet many European politicians prefer to reason from a position of strength. This attitude may cause the West to lose Russia, but the point of view of European energy companies offers a reason to be optimistic. They do cooperate with Russia and already cash the first «dividends» from doing so. Companies such as Eni are not afraid of Russia and are willing to work on our market. This means that there are economic and political forces in Europe which would like to see Russia as a partner or not promote the pro-Chinese choice part of the Russian elite is pushing for more and more actively.