Lecture IV: Domestic Politics and the Russian Energy Sector

David Dusseault

Eurasia Energy Group

Aleksanteri Institute

Project Preliminaries

• Identified overlap in current research projects;

• Nature of Russian federalism;

• Structuration of Russian energy sector;

• Focus: actor agency within the Russian federal institutional framework; and

• Case study: Russian energy sector.

Chechnya & Yamal Cases

Changes in the Russian Oil Industry

Source: Russian Analytical Digest 01/06

State Influence in Numbers

Source: Russian Analytical Digest 08/06

Early 1990’s Russian Federalism

• Crisis of centre elite legitimisation;

• Decline of centralised administrative control;

• Rise of regional elite administrative “independence”; therefore

• Increased difficulty in maintaining consensus amongst elites at all levels of the Federal system.

Chechnya & Rosneft

• Northern Slopes of the Caucasus;

• Southern Federal Okrug;

• Shares borders with Dagestan, Ingushetia, Georgia;

• De-facto independent from and at war with Moscow 1991-2002;

• Grozneftegaz & Baku-Novorossiisk pipeline major industrial assets in republic.

Point of Departure: Grozneftegaz

• Resurrected Chechen Oil Company (2000);

• Majority owned by Rosneft 51% & minority interest Chechen Republican govt.;

• Extraction licensing unclear (2000);

• Production figures: 750t tonnes (2001) to 2.2m tonnes (2005)

• 150t tonnes stolen (2003); and

• Profit row over Rosneft earnings (17-25b RR 2006): transfers to Chechen budget 30m RR (total Chechen budget 19b RR).

Historical Background: Grozny the Second Jewel in the Crown

• Production centred on 3 fields Starogroznenskoye, Novogroznenskoye and Voznesenskoye;

• 1917: 21.8 percent of total Russian oil production;

• 1932: 35.7 percent of USSR’s total oil production;

• Post WWII Shift in production from Grozny to the Volga-Urals and in the 1960’s, West Siberia;

• Chechen based hydrocarbon production becomes specialised: Union-wide aviation fuel, lubricants and paraffin; and

• Grozny becomes the heart regional hydrocarbon supply, processing and transit infrastructure.

The Lead up to Perestroika: Growth in the USSR’s Oil Industry

• 1987: 596.5m tonnes including gas condensate;

• 1951 to 1987: production in RFSSR increased 26 times = 90 % USSR production;

• Industry suffered from over-investment, poor oil field practices and outdated technology;

• USSR production was concentrated in Russia 11.5 million out of 12.5mbd in 1988; and

• By 1993, production collapsed to 7mbd.

Dance with the Devil: Dudayev, Maskhadov & Black Gold

• Priority to consolidate power;

• Fractured elite structure, lack of viable economic and political platform;

• Multitude of elite groups, field commanders as political entrepreneurs;

• Open ended bargaining game: president becomes hostage to rival elite groups; and

• Oil fills the institutional gap: profiteering; collapse of social & economic fabric.

Kadyrov(s) & Alkhanov: New Pipers, Same Old Tune?

• Elite consolidation: fewer gatekeepers;

• Rent seeking shifts to federal level;

• Ownership of licenses, control of stock packages & budgetary transfers are points of contention; and

• Republican regime & Moscow maybe hostage to unrealistic expectations for oil based economic, political, and social development.

Gazprom and Yamal-Nenets AOk

• With Khanti- Mansii AOk, forms part of Tyumen Oblast, Ural Federal Okrug;

• GRP 279,355.6M RR;

• Gas & oil extraction, electricity generation; and

• Major FDI: 2.5B Dresdner Bank loan to Gazprom (1997).

Source for slides 14-19 Russian Analytical Digest 01/06

Politics and Business: Mutual Dependence?

• 80% Gazprom’s total extraction from YNAOk;

• 90% tax revenues for regional budget;

• 60% from subsidiaries / 10% Sibneft;

• Gazprom represented in local administration; and

• 28.8% of the seats of the regional parliament.

The Beginning of a Beautiful Relationship

• Forged during regional-federal restructuring process;

• 1993 rocky relations with regional authorities;

• 1996 Gov. Neelov appointed to Gazprom Board; and

• 1996 Elections Neelov wins comfortably;

Economics of Regional Political Power

• 1997 economic relations flourish;

• Annual agreements based on barter;

• Gazprom supplied the region with gas;

• Wrote off against corporate taxes at wholesale rates, not market price;

• Region sold gas back to Itera at preferential rates; and

• Total back tax 11B RR or 500M USD.

Rent Transfer: Who Benefits?

• Gazprom’s regional assets were registered in Moscow;

• Taxes no longer were accrued by the local authorities; and

• Local managers took decisions based on priorities determined at corporate headquarters, not regionally.

Regional Backlash: A Messy Divorce

• Neelov fails to be re-elected to the board (1999);

• Takes advantage of a federal loophole & invites “indies” to develop regional resources;

• Benefits (licenses & tax breaks) afforded to Novatek; subsequently

• “Indies” increase market presence: 2-13%.

Gazprom on the Rebound

• Corporate strategy changes to acquisitions of regional companies;

• Sibneft bought in 2005;

• Gazprom regains the upper hand;

• Regional tax revenues from Gazprom assets increase to 70%;

• Neelov sought re-election & made concessions to Moscow & Gazprom.

Conclusions: Causes for Concern

• Unresolved legal issues regarding the control over resources between federal & regional authorities;

• Resulting institutional fluidity encourages cynical economic

behaviour & discourages political consensus, but allows for flexibility & room to manoeuvre in negotiating process;

• Actor agency resembles a nested game amongst elites at various levels of the federal structure; and

• Results may have measurable consequences in terms of Russia’s future capacity to “rationalise” the organisation of its energy sector.