Is Russia Reemerging as an Energy Empire?

Wilson Center Fellow Stacy Closson recently spent two years working at Swiss and German think tanks, looking at Russian energy policy in Europe. She said some Europeans believe Russia is reemerging as an empire, with the hydrocarbon market fueling its political expansion. But is Russia just doing business?

Some 85 percent of the EU-12 (newer inductees to the European Union from Central and East Europe) still rely on Russian gas imports but, Closson said, this figure is misleading. While 40 percent of all gas entering Europe is from Russia, only about 6 percent of it is used for primary energy consumption. In other words, some 94 percent of European energy consumption comes from non-Russian gas.

Closson argues that Russia is not an emerging energy empire. "People may think Russia is in control," said Closson, "but Russia depends on energy sales to Europe for more than 60 percent of its hard cash earnings, so there is a strong degree of interdependence. Actually, Russia has attempted to use energy as a policy tool since the 70s but has acted counterintuitively and not maximized profit or significantly influenced policy."

Today, Russia conducts its oil and gas trade via intermediary companies, co-owned by state-run Gazprom, consumer countries, and private entities, some of which are nontransparent. If a consumer country falls into debt, Closson said, the intermediary negotiates a deal, possibly a percentage of the debtor's pipeline or a refinery. Ukraine, for example, which has endured repeated energy cutoffs from Russia due to debt allegations, risks ceding industrial assets to an intermediary company.

Some Europeans accuse intermediary companies, with their multi-year fixed contracts and nontransparent finances, of trying to wield political leverage over decision-making in Europe, said Closson, who questions their future. Europe's fears of Russia's political motives conjure up Cold War flashbacks.

In fact, Closson highlighted some stark similarities between Soviet energy trade policies and today's Russia. In Soviet times, the CMEA (Council for Mutual Economic Assistance) facilitated a closed market of oil trade among the Eastern Bloc. Russia bartered oil for manufactured goods at subsidized prices, which the CMEA countries could resell to the West for cash. Now, gas is sold to Central and East European states through intermediary companies. "Nontransparent flows of cash now serve as the subsidy for those doing energy buying in consumer countries," she said.

In the Soviet era, as CMEA demand for oil grew in the 1980s, declining global oil prices and Russia's inability to meet the demand decreased Moscow's control over these countries. No longer dependent on Russia, countries felt empowered to test the Soviet Union, said Closson. This Cold War narrative is repeating itself as prices do not reflect energy markets and some European countries are diversifying their energy mixes, increasing renewable resources, and turning to spot markets for liquefied natural gas.

"Russia is overplaying its dominant market position," said Closson. Despite a global recession and Europe's preparedness for oil and gas cutoffs, Russia still insists on high-priced, long-term energy contracts. Closson said it's cheaper for Germany, for example, to buy gas elsewhere and just pay the fine for breaking its contract with Gazprom. Closson said, "We can expect more competition in Europe to come."