Lecture IV: Domestic Politics and the Russian Energy Sector

1
Lecture IV Domestic Politics and the Russian
Energy Sector

• David Dusseault
• Eurasia Energy Group
• Aleksanteri Institute

2
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.

3
Chechnya Yamal Cases
4
Changes in the Russian Oil Industry
Source Russian Analytical Digest 01/06
5
State Influence in Numbers
Source Russian Analytical Digest 08/06
6
Early 1990s 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.

7
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.

8
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).

9
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 USSRs total oil
  production
• Post WWII Shift in production from Grozny to the
  Volga-Urals and in the 1960s, 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.

10
The Lead up to Perestroika Growth in the USSRs
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  field practices and outdated technology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.

11
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.

12
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.

13
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
14
Politics and Business Mutual Dependence?

• 80 Gazproms 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.

15
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

16
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.

17
Rent Transfer Who Benefits?

• Gazproms 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.

18
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.

19
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.

20
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 Russias future capacity to rationalise the
  organisation of its energy sector.