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. Last Updated: 07/27/2016

State Control Over Lock, Stock and Barrel

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The recent announcements that Russia intends to exclude companies or groups that are not majority Russian-owned from bidding for natural resource development licenses, together with the plan to prioritize the building of a $15 billion, 4,200-kilometer pipeline to Nakhodka on the Pacific, do not make great economic sense. But as mechanisms to further government control over the country's most important industry and to use that control to further its geopolitical ambitions, they make perfect sense.

Over the past year, the state has moved to restore greater direct and regulatory control over the oil and gas industry. Officials intend not only to use greater export volumes of oil and gas to encourage GDP growth, but also to push for fast-track integration into the global economy. More oil exports will also mean broader geopolitical gains, including a possible push for WTO entry by the end of this year and for more results from Russia's upcoming chairmanship of the G8 in 2006.

In practical terms, the government's apparent dithering over the reform plan authored by Economic Development and Trade Minister German Gref can be seen as part of a strategy shift away from supporting Gref's idealistic diversified growth plan toward a more focused -- and more pragmatic -- effort to increase budget revenues from oil and gas and to sustain these revenues by building future volume growth that might compensate for an inevitable cyclical decline in export prices. Higher export volumes also give Russia substantial bargaining power with energy consumer countries, leverage that President Vladimir Putin has already used successfully to deflect a whole range of potential criticisms. This would surely have otherwise marginalized Russia in the international community, if the supply of oil from OPEC countries were more secure.

Thus, the government will likely encourage and approve initiatives -- albeit based on majority Russian control -- that will lead to faster development of the country's untapped oil and gas resources. It will push the approval of the Nakhodka pipeline, followed by other new export routes, such as those to the United States via Murmansk. Yukos, in its attempt to defend itself against the actions of tax officials, produced a report that claimed the hydrocarbon reserves of Yuganskneftegaz are close to 90 billion barrels of oil equivalent, or in other words, nine times the most recent audit figure. While this claim understandably assumed the very best-case scenario, there is growing credible evidence to support the view that Russia's oil reserves are substantially higher than the 69.1 billion barrels cited by the BP Statistical Review. The fact is that a large part of Russia's territory has not been explored adequately or has not been explored using the most modern techniques. Using the total audited reserves claimed by the oil companies, Russia's total current reserves are closer to 110 billion barrels. Several audit agencies see 150 billion as a more realistic figure that will eventually be confirmed. This amount of reserves would be more than capable of sustaining the higher production and export volumes that the government envisages over the next six to eight years.

Without a doubt, Putin's government was fortunate to come to power just as the world was about to experience a paradigm shift in the sustainable average price of oil and right when the major consumer countries embarked on efforts to secure a better balance in future supplies. Oil and gas have proven a very reliable route to economic and geo-political health. Putin is a second-term president, but he heads a first-term power structure. The people behind this power structure cannot afford to lose much more public support, if their vision of a modern Russia is to be sustained beyond 2008. Changing a proven economic model, though based on risky high commodity prices, is clearly not an option for reasons of both domestic and international expediency. Hence, the main reform initiatives envisaged by Gref's plan, namely administrative reforms and growth incentives for small and medium-sized business, are destined to sit on the shelf for at least several more years.

The need to restore state control over this critical lynchpin of the economy and international policy goes a long way to explain such events as the Yukos/Group Menatep case and the government's desire to consolidate ownership and control over the energy sector under one holding, Gazprom. Of course, an unfavorable ruling by a Texas court may delay the creation of this national energy giant. However, it will not derail the goal of setting up Russia's rival to Saudi Arabia's Aramco, probably by the end of Putin's presidency.

A state industrial policy for developing the oil and gas industry is already emerging. It resembles a sort of macro central planning, and the Yukos case, along with the proposed Gazprom-Rosneft merger, was the mechanism to consolidate the state's direct control.

The proposal to restrict foreign participation in licenses for future oil projects is therefore not surprising. It will not slow down the expansion of Russia's oil industry. For the government, control is critical. But of equally critical importance is the need to involve international energy majors in new projects to import technology and project management expertise via these partnerships, as well as to cover a big chunk of the estimated $50 billion needed to develop Russia's planned oil and gas projects over the next 10 years. Foreign partners would furthermore help add the international sales infrastructure that Russian oil companies, other than BP-TNK, now lack. Hence Putin's eagerness to have Conoco acquire the government's stake in LUKoil when it was sold late last year and the likely future involvement of CNPC of China, ONGC of India and others in new oil projects.

Apart from developing internal production and export capacity, another important element of Putin's attempts to position Russia at the center of global energy will be greater efforts to forge alliances with Kazakhstan and other energy producers around the Caspian. Having effectively lost Azerbaijan to the West with the Baku-Ceyhan pipeline, Putin is unlikely to risk losing Kazakhstan with a similar route for the million-barrel pipeline that will feed off its giant Kashagan field. Already Russia, the United States, China, India and Iran are positioning to play this 21st-century version of the Great Game. The difference this time is that while Russia played the original Great Game with tsarist cavalry and spies, this new version will be played with pipelines and oil train wagons.

Oil, the "devil's blood" to those who have suffered in the battle for its control, has the potential to become the foundation of a solid and stable economic future for Russia. Yet history shows that all too often, oil can also be abused in political games. One has only to think of Indonesia under General Suharto, where high oil revenues not only slowed the process of economic diversification, but also led to a sharp increase in corruption at the highest levels of government. Prioritizing a 4,200-kilometer pipeline, limiting the access of foreign oil companies and the Yukos affair are not encouraging signs to those hoping for economic liberalism and a free economy. To the government, it seems that these are the pragmatic steps necessary not only to sustain GDP growth, but to achieve its political goals.

Christopher Weafer, chief analyst at Alfa Bank, contributed this comment to The Moscow Times.