Russia on energy market – between China and the EU/NATO
Aleksander Olech, PhD
The position of the Russian Federation in the energy market is still strong, although it has weakened since 2014. This is caused mainly by its weakening position on the international energy market, where countries which feel threatened by Russia seek to diversify their sources. An example of such activities is certainly orienting towards obtaining energy from the U.S., the Middle East and North Africa. It seems that the Russian market is unstable and actions aimed at negatively affecting energy consumers and raising fuel prices are causing greater divisions between Russia and its partners. Further actions aimed at strengthening its position are presented by the Kremlin in the form of new strategic doctrines.
On May 13 2019, the President of the Russian Federation signed and made public Russia’s Energy Security Doctrine which replaced the previous non-public document of this type from 2012 (1). Since the adoption of the previous doctrine, significant changes have occurred in energy markets and in international politics, including: the development of the shale industry in the U.S. and the decline in raw material prices, the development of the LNG industry, the growing importance of renewable energy sources and climate policy, and international sanctions against the Russian Federation. The publication of the doctrine is a signal sent to NATO and the EU that Russia perceives their actions in the energy sphere as hostile towards the Federation.
Currently, after the invasion at the beginning of 2022, Russia's recession is obvious. It must be underlined that Russia’s economy has stagnated completely since 2014 (and has largely stagnated since 2009), and W. Putin has made it clear that he is incapable of delivering growth or improving the living standards of the population.
The central elements of Russian economy are gas and oil production and export. According to IEA, they constitute about 40% of industrial output and 10% of GDP. According to the Russian Ministry of Finance, almost 50% of federal government revenues derive from the energy sector (mainly oil and gas). This indicates that at least a quarter of the enlarged government revenues (federal, regional and local budgets plus major extra-budgetary funds) are dependent on proceeds from the energy sector. That means Russia’s economy depends heavily on the gas and oil sector.
Energy Strategy of the Russian Federation
It should be noted that on April 2, 2020, the Russian government adopted The Energy Strategy of the Russian Federation which will be valid until 2035. It is the third edition of the document in the last two decades and at the same time the most synthetic. The following versions, on the one hand, were intended to present the condition of the Russian energy sector and its main challenges, and on the other hand, were a political signal to foreign partners, encouraging them to develop energy cooperation with Russia. The latest energy strategy was approved with a six-year delay, which was influenced by both economic factors — dynamic changes in the energy markets — and political factors ⸺ Russia’s conflict with the West over the aggression against Ukraine, and the growing instability in the Middle East.
The new strategy articulates the internal and external challenges the domestic energy sector faces more clearly than the previous ones. The strategy recognizes that the most important challenge is the global economic slowdown; it was also emphasized that the problem is the increasing unpredictability and uncertainty of the situation in the energy markets. The document also indicates, for the first time, new factors which may seriously affect the supply and demand trends in the energy markets. For instance, when describing the main economic, political and social challenges for Russia’s prospects in the oil markets, the risks associated with the spread of the coronavirus were included in the document. Moreover, it points out that the Russian authorities assume the long-term nature of the sanctions policy pursued by the West after 2014.
Although the document premises very ambitious goals for the production and exports of energy resources, they are nevertheless based on questionable assumptions regarding general economic indicators in Russia and key export markets. The strategy forecasts that the average annual economic growth in Russia will amount to 2.3–3% in 2019–2035. This will be difficult to maintain, especially in the coming years, due to the economic implications of the COVID-19 pandemic. The situation in the EU and China, i.e. in Russia’s key raw material export markets, may also change drastically (2).
China as a partner or a threat?
Russia is increasing its exports to China, which, on one hand, is very important for the Federation, but on the other, creates a fear for Russia to become dependent on China. Transferring its dependence to China would undermine Russian energy security. This is likely the reason behind the importance of the new EU-Russia energy projects. Unfortunately, Russia ⸺ compared to other players ⸺ considers energy resources more as foreign policy instruments rather trade elements.
After the oil price slump in 2014, the Russian state budget came under pressure. The sanctions of 2016 and 2022 also had a significant impact, leading to a large-scale outflow of foreign investments from Russia, including investments in energy infrastructure modernization. This means that Russia must look for measures that can increase budget revenues. Admittedly, such sanctions are felt only in the short term. Russia is currently working on various programs to reduce the impact of sanctions by issuing debt bonds, and is also looking for more opportunities to operate in the Chinese market3. It must be acknowledged that Russia─China relations have not always been based on cooperation. As political management shows, Russia and China are looking for focal points at a time when both are politically isolated. The question is whether China is ready to continue supporting Russia, given China’s strong interest in the Arctic and the European market. This means that Russia─China relations depend on a third party ⸺ the West.
China is competing for access to Russia’s energy resources, but Russia’s strategy is to avoid dependence on a single export route. Russia’s rhetoric is directed at the partners’ misunderstanding of Russia’s goodwill and the search for non-existent imperial models. They insist that the EU is unpredictable and suspicious, thus undermining Russia’s reputation and desire to be part of the global energy market, disregarding Russia’s interests and creating discriminatory conditions for Russia compared to other suppliers.
Nowadays, Russia and China are perceived far more as allies rather than rivals. Such partnership is based on the cooperation of choice along with a solid calculation to forge an alliance against the U.S. influence. Both Russian and Chinese sides are aware of the attempts made by Western countries ⸺ above all the U.S. ⸺ to weaken this alliance. This was emphasised by Putin in an interview for NBC, when he accused the reporter of asking biased questions (3), and by the Foreign Minister of China, Wang Yi, in a meeting with Sergei Lavrov (4). Wang Yi stressed that the strategic partnership between the countries must be maintained. Both countries will strive to maintain this relationship, even if only in terms of marketing, as this creates an alliance against the U.S. Moreover, in June 2021, a declaration was made on extension of the 2001 Treaty of Friendship. The cooperation of the last 20 years between the countries was assessed positively (5).
The most significant disadvantage in such relations is that the Russian-Chinese alliance is not symmetrical when it comes to benefits. There is greater development potential in China which may dominate Russia over time. Moscow is a reliable energy resource for Beijing. In this relation, the Russians must accept that they are the weaker party. It is also worth pointing out that in 2020, non-energy exports (including metallic products, food, and machinery) from Russia to China amounted to USD 16.4 billion (6). Moscow is mainly interested in the military aspect and maintaining a strong influence in the former Soviet republics. In comparison, the People’s Republic of China focuses on the economic dimension, building its position through economic dependence, and providing security for its projects, such as the New Silk Road.
Since the invasion, Russian crude supplies to China have surged to record levels at about 2 million barrels per day, equivalent to 55 percent year-on-year growth for May. Crucially, Russia has bested Saudi Arabia as China’s top supplier. Moreover, India has been the main ally, massively increasing its purchases of Russian crude up to about 800,000 barrels per day in May. For the month, Russia supplied 18 percent of India’s imports vs. the 1 percent it regularly supplied pre-invasion. Russia has overtaken Saudi Arabia as India’s second-largest crude oil supplier because of its lack of export options (7). In fact, Russia’s energy strategy has been concentrating on Asia for over a decade, investing in new oil and gas pipelines, expanding railroad capacity, and boosting LNG transportation to supply the Chinese market, and since the invasion also the Indian.
Fossil fuel imports from Russia in the first 100 days of the invasion is also a crucial element of the Russian strategy. Russia earned EUR 93 billion in revenue from fossil fuel exports in the first 100 days of the war (February 24 to June 3). The EU imported 61% of this, worth approximately 57 billion EUR. The largest importers were China (EUR12.6bln), Germany (EUR12.1bln), Italy (EUR7.8bln), Netherlands (EUR7.8bln), Turkey (EUR6.7bln), Poland (EUR4.4bln), France (EUR4.3bln) and India (EUR3.4bln). The revenue comprises an estimated EUR46bln for crude oil, EUR24bln for pipeline gas, EUR13bln for oil products, EUR5.1bln for LNG and EUR4.8bln for coal (8).
Challenges for the EU and NATO countries
Minimizing Russia’s access to the energy market in the EU should become a priority for increasing the level of national security, including energy security. The perception by the Russian authorities of the danger of limiting energy revenues may be a signal that there is a possibility of intensifying attempts to keep these shares. This poses a threat to the countries which are particularly dependent on Russian energy resources.
Geographically, the EU is surrounded by three major gas suppliers ⸺ Algeria, Russia and Norway. About 40% of Europe’s natural gas supply come from Russia. But here we can see concerns about Russia’s ability to deliver sufficient quantity of gas to Europe in future because of, for instance, the crisis in Ukraine. As Reuters reports: “The U.S. government has held talks with several international energy companies on contingency plans for supplying natural gas to Europe if conflict between Russia and Ukraine disrupts Russian supplies” (9).
The answer to this should be further decisive steps towards the gradual elimination of Russia from domestic energy sectors in these countries. The activities of the Baltic states have produced significant results so far and should be continued and expanded. Particular emphasis needs to be put on the diversification of energy sources. This requires significant investments, so financial support from the European Union is crucial. In addition, regional cooperation should be broadened — energy infrastructure projects have been positive examples of this so far.
That is a real threat for Russia if we take into account Russia’s dependency on the exports of energy resources. The rough estimates suggest that Russia exports about half of its energy resources to Europe and consequently to the NATO countries on the continent. However, Russia states that energy is a priority area for cooperation between Russia and the EU, equally important for both sides.
Russia’s tactics are thoughtful. For example, Europe as a partner is very important to Russia, because Moscow exports more than half of its gas and fuel there. At the same time, Russia is taking advantage of the fact that some European countries are not members of the EU or there is no common EU energy strategy that allows countries to develop their energy sector independently of the rest of the EU (based on business and trade interests which threaten national/economic interests of some countries). At the same time, Russia prefers bilateral rather than multilateral partnerships which give more possibilities to manipulate energy supplies. In the new NATO 2022 Strategic Concept the threat of using energy resources by malicious actors, such as Russia, was also mentioned as critical challenge.
Europe has a greater influence over Russia than Russia has over Europe, despite the fact that dependence is reciprocal. However, there is no common EU and NATO position on energy strategy. Deep-rooted problems in energy relations stem from differing views on cooperation, and most EU countries are pursuing their own agendas and bilateral policies towards Russia. There is a lack of common ground and common values.
If we analyze Moscow’s activities in the supply of energy resources, there is a tendency for Russia to try to influence only the former USSR republics through energy supplies. This has been the case in the Baltic States, Moldova, Georgia, Ukraine, Belarus, and Armenia. It only means that Russia still considers these countries as its own territories and will use multiple tools to influence them. Moreover, Moscow has a major impact on the energy situation of, among others, Germany, Italy, and the United Kingdom. For this reason, the main role of the EU and NATO is to support and protect their members because Russia used and will use energy sources to build its power and influence.
It is crucial to focus on current NATO’s core task. As it was indicated in the Strategic Concept, one of the main goals is to enhance energy security of the Alliance and invest in a stable and reliable energy supply, suppliers and sources. It must be connected with the contribution to combating climate change by reducing greenhouse gas emissions, improving energy efficiency, investing in the transition to clean energy sources and leveraging green technologies, while ensuring military effectiveness and a credible deterrence and defence posture. In the geopolitical environment where Russia and China are influencing the energy sector it will be exceptionally difficult but is doable by the unity of all members of NATO. (10)
1) Указ Президента РФ от 13 мая 2019 г. N 216 “Об утверждении Доктрины энергетической безопасности Российской Федерации”, https://base.garant.ru/72240884/, accessed: 08.06.2022.
Russia’s Energy Security Doctrine approved, http://en.kremlin.ru/acts/news/60516, 08.03.2022.
R. Griffin, Putin Approves New Russian Energy Security Doctrine, https://www.spglobal.com/commodity-insights/en/market-insights/latest-news/oil/051419-putin-approves-new-russian-energy-security-doctrine, accessed: 08.06.2022.
2) S. Kardaś, Nowa strategia energetyczna Rosji — optymistyczne plany w niepewnych czasach, https://www.osw.waw.pl/pl/publikacje/komentarze-osw/2020-04-15/nowa-strategia-energetyczna-rosji-optymistyczne-plany-w, accessed: 20.06.2022.
3) Full Transcript of Exclusive Putin Interview with NBC News’ Keir Simmons, https://www.nbcnews.com/news/world/transcript-nbc-news-exclusive-interview-russia-s-vladimir-putin-n1270649, accessed: 02.07.2022.
4) Chinese FM Calls for Elevating Bilateral Relations with Russia, http://www.xinhuanet.com/english/2021-07/16/c_1310064854.htm, accessed: 02.07.2022.
5) Rosja i Chiny przedłużają traktat o przyjaźni, https://www.rp.pl/Dyplomacja/210629401-Rosja-i-Chiny-przedluzaja-traktat-o-przyjazni.html, accessed: 04.07.2022.
6) Non-Energy Exports of Russia in 2020, https://valdaiclub.com/multimedia/infographics/non-energy-exports-of-russia-in-2020/?fbclid=IwAR2oVgnSc1Sko8XvDwT5FqxRqvHKGjNmhV9ewEWdaXYHqxwiWql4UXB1sHQ, accessed: 05.07.2022.
7) The Diplomat, Asia Can’t Save Russia’s Energy Sector, https://thediplomat.com/2022/06/asia-cant-save-russias-energy-sector, accessed: 10.07. 2022.
8) CREA, Financing Putin’s war: Fossil fuel imports from Russia in the first 100 days of the invasion, https://energyandcleanair.org/publication/russian-fossil-exports-first-100-days, accessed: 15.06.2022.
9) Reuters, Exclusive: U.S. talks to energy firms on EU gas supply in case of Russia-Ukraine conflict, https://www.reuters.com/business/energy/exclusive-us-talks-energy-firms-over-eu-gas-supply-case-russia-ukraine-conflict-2022-01-15/, accessed: 22.06.2022.
10) NATO 2022 Strategic Concept, https://www.nato.int/nato_static_fl2014/assets/pdf/2022/6/pdf/290622-strategic-concept.pdf, accessed: 18.07.2022.