#12 - JRL 2006-281 - JRL Home
Date: Thu, 14 Dec 2006
From: Vlad Ivanenko <ivanenko60@yahoo.com>
Subject: 280-11 On "Russia's habitual abuse of its energy muscle"

[Re: 280-11 On "Russia's habitual abuse of its energy muscle"]
My comment on Economist's piece on energy.
Vlad Ivanenko, PhD economics trade and energy consultant, Ottawa -------

The latest editorial at Economist (December 16-22) claims that "Russia's habitual abuse of its energy muscle is bad for its citizens, its neighbourhood and the world". It is commendable that Economist notices Russia's use of energy as a political tool but one expects economic rationale for this phenomenon to follow.

It is well known that Russia strives to secure a decent place in the global environment. It is less known but understandable from trade statistics that Russia sees itself as belonging to two international clusters: former post-Soviet countries (excluding the Baltic States and Trans-Caucasian republics) and the EU. However, due to a number of reasons - most of which are political - Russia experiences problems enhancing its status within both areas. It is exactly problems of deepening cooperation with trade partners that prompt Russia to resort to "energy weapon". To see this, let look at data.

In 2005, the EU-25 trade turnover with Russia stood on $ 117.8 billion in import and $ 69.5 billion in export. Russia posted lower numbers ­ $108.8 in export and $ 43.3 in import ­ with the difference reflecting, apparently, plain smuggling. Judging by the importance of trade for both sides, one cannot fail to observe that the relationship is highly asymmetric. While trade with Russia constitutes 8 and 5 percent of the EU global import and export, the EU share in Russian export and import reaches 45 and 44 percent respectively. Thus, it is logical to conclude that if two neighbors fail to reach a deal, it is the eastern side that suffers the most.

This observation underpins most of current European policy vis-à-vis Russia. But is it effective? The fact is that the range of traded products is very concentrated on the Russian side but highly diversified ­ on the other. If we consider the Russian share in European energy supplies ­ $ 89.9 billion in oil and gas paid to Russian companies in 2005 ­ this country accounts for 27 percent of total energy import by the EU. Thus, the bargaining outcome becomes less disadvantageous to a weaker side (Russia) if the latter places its bet on energy to balance EU dominance in practically anything else.

The situation is somewhat different with energy trade within the post-Soviet space. Two of its former republics - Ukraine and Belarus - essentially blackmail Russia threatening to interrupt the latter's export to its main energy market (the EU) if Russia does not pay back. The payback takes the form of lower-priced gas delivered to Ukrainian and Belorussian consumers and allowing oil processing plants in Belarus to export products free of Russian export duty on crude oil. The latter is costly to Russia. Using the agreement on "common state", Minsk pushes Moscow to transfer as much as $ 3.5 billion to Belorussian recipients of form of unpaid export duty. In this situation, Russian desire to stop blackmail in energy sphere is rational and expected. For fairness, one must add that Russia used the same tactic of pressing Central Asian producers to under-price their gas before. Now, the logic of greater competition with foreign buyers has prompted Russian Gazprom to offer a more competitive price. The growth in Kazakh, Turkmen and Uzbek gas has made strategic "hold-up" games suboptimal and we should expect energy confrontation to end up within the CIS soon.

Economist should pay more attention to economic logic and less to political judgments if it wants to stay true to its name and retain its high reputation.