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Russian Energy Diplomacy

Chapter · June 2016

DOI: 10.1007/978-3-642-40871-7_120-1

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Pami Aalto
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Russian Energy diplomacy
In G. Tiess, T. Majumder and P. Cameron (eds.) (2016) Encyclopedia of Mineral and Energy Policy, pp. 1-5. Berlin:
Springer. (doi: 10.1007/978-3-642-40871-7_120-1).

Pami Aalto, University of Tampere, Finland

Definition

Energy diplomacy refers to the practices and norms by which political institutions and large energy
companies cooperate to promote energy trade. In significant energy producer countries such as Russia,
political institutions and the main energy companies cooperate among themselves to secure the demand
for exports of energy commodities such as oil, oil products, natural gas, coal and uranium. In energy
importer countries, political institutions and large energy companies cooperate to secure the supply of
energy imports. In the European Union, such cooperation also involves Union level institutions. Hence,
energy exporters and importers practice energy diplomacy to support energy trade and investments.
Energy diplomacy comprises meetings, negotiations and agreements to build a political framework for
energy trade. The goal is to find a balance between the supply and demand of energy.

Because energy diplomacy is about the extension of diplomatic practices into energy trade, it comprises a
mixture of public and private actors and interests, many of which can be interlinked. The energy diplomacy
of Russia is a prominent example of such linkages. Russia is the only great power where vital foreign policy
interests co-exist with strong energy business interests, in particular vis-à-vis Europe, the former Soviet
Union area and East Asia. No other great power is as important energy exporter as Russia, which is the
world’s largest gas exporter, second in oil exports and third for coal exports. No other major energy
exporter possesses similar foreign policy interests as Russia does owing to its superpower legacy and varied
neighbourhood.

The principal actors of energy diplomacy are the political institutions and energy companies. They can
decide to delegate some smaller and narrower tasks to institutions acting as agents. Formal rules and
norms underpin the activities of both principal actors and agent institutions. In the case of Russia, these
actors are not always in agreement with each other. As a result, experts assess the performance of Russian
energy diplomacy in varying ways depending on which instances they look at.

The principal actors of Russian energy diplomacy

In Russia, the president is the strategic leader of energy diplomacy. This is especially true of the three terms
of President Vladimir Putin (2000-2008, 2012—), who possesses deep knowledge of the energy industry
[Lough, 2011: 1]. The large Presidential Administration and the Government support the President. The
Prime Minister coordinates the more specific work of several line ministries. The regional administrations
of Russia’s various energy rich regions have an interest in the economic, social and environmental
consequences of the development of natural resources in their territory [Tkachenko, 2007: 170-76].

The Russian president oversees the strategic operations of energy companies working on energy
exploration, production, transport and trade. Because energy is a strategic sector of policy in Russia, the
energy companies have to follow the strategic objectives of political institutions. The state retains the rights
to issue licences for the exploration, development, trade and export of all subsoil resources. Of the main
energy companies Rosneft is 70% and Gazprom 50% state owned. Zarubezneft is fully state-owned,
Bashneft was re-nationalised in 2014, while Lukoil, Novatek and Surgutneftegas are mostly privately

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owned. Alongside accommodating the state’s interests all these companies need to be profitable enough in
order to produce income to the state and other shareholders.

The strategic coordination of energy diplomacy in Russia is challenging because federal institutions , the
regions and companies possess conflicting interests [Tkachenko, 2007; Filimonova, 2013]. Russian oil
companies operate on globalised free markets, but rely on the services of the state-owned monopolist oil
pipeline transit company Transneft, the Russian railways and the state’s port infrastructure. Gazprom has a
monopoly in pipeline based gas export. Novatek and Rosneft will challenge it when their exports of
liquefied natural gas by tankers will start from the Yamal peninsula in 2017 and Sakhalin in 2018. Russian
electricity companies work in principle in liberalised markets while Inter RAO holds an import-export
monopoly. Rosatom seeks to export Russian nuclear power technology and materials.

The political institutions need to understand the diverse interests, operating environments and business
models of Russia’s energy companies. This is necessary in order to help the companies to gain profits from
energy exports and eventually, to tax these profits to support the state budget. This fiscal interest of the
state is highly significant as energy exports make up roughly half of the state budget and over two thirds of
the value of foreign trade. These interests have to be balanced with the state’s interests in political
influence in the countries in which Russian companies supply and invest.

The agent institutions of Russian energy diplomacy

To promote the interests of Russian energy companies Russian political institutions mostly rely on bilateral
energy diplomacy. The bilateral agent institutions include the energy dialogues with the EU, Norway, USA
and China, and less institutionalised summits and negotiations with individual countries in all continents.

The most developed agent institution is the EU-Russia Energy Dialogue. The parties have agreed on an early
warning mechanism to caution ahead of any disruptions in supplies or demand and on respective mutual
coordination. They prepare scenarios for mutual energy trade in all market segments. Even though this
institution has helped to de-politicise EU-Russia energy trade, it has not been able to contain the several
energy trade disruptions since 2006 [Romanova, 2014]. Neither could this institution help much to delimit
the negative effects from the sanctions the EU set for long-term credit, and exports of off-shore and Arctic
oil drilling technologies to Russia in 2014 in response to Russia’s annexation of the Crimea from Ukraine.

In multilateral energy diplomacy, Russia participates in the great power institutions G8 and G20, and in the
Gas Exporting Countries Forum (GECF). Russia’s main objective in these institutions is to advance the
interests of energy producers in the security of demand. This is in order to balance the consumer countries’
overwhelming concern with the security of supplies [Lesage, van de Graaf and Westphal, 2010: 108-9]. The
G8 summit held in St. Petersburg in 2006 was a notable result of Russia’s energy diplomacy in terms of the
commitment made to the ‘interdependence’ between the interests of producer, consumer and transit
states, and to ‘better risk-sharing between all stakeholders in energy supply chain’ [G8, 2006]. The GECF’s
Moscow declaration in 2013 also emphasised Russian interests in the ‘absolute and permanent sovereignty’
over resources, and Gazprom’s preference for long-term gas supply contracts to recover its investments ,
and ‘gas pricing based on oil/oil products indexation to ensure fair prices’ [GECF, 2013].

Russia is an observer in the oil exporters’ forum OPEC, a cartel seeking to control global oil prices and
markets. Russian experts also participate in ‘Track Two’ energy diplomacy meetings. Russian energy
companies also practice ‘soft diplomacy’ by sponsoring team sports such as football and ice hockey.

Formal rules and regulations in Russian energy diplomacy

In energy diplomacy, fewer multilateral agreements bind states than in many other sectors of policy. While
Russia is a member of the World Trade Organisation (WTO), the WTO’s regulation has only minor

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consequences for energy trade. Since 2009, Russia does not apply the provisions of the multilateral Energy
Charter Treaty, which it initially signed in 1994 but never ratified, and which regulates trade, investment,
transit and energy efficiency and has a dispute settlement mechanism. Consequently, alongside bilateral
supply agreements, declarations and memorandums of understanding with customer and partner
countries, we find mostly domestic rules and regulations underpinning Russia’s energy diplomacy.

The Concept of the Foreign Policy of the Russian Federation intends to strengthen the country’s ‘… strategic
partnership with major producers of energy resources while actively promoting dialogue with consumers
and transit countries’ [‘Concept…’, 2013]. The Energy Strategy of Russia until 2035 targets diversifying
Russia’s energy exports away from the main European markets to the Asia where 12 to 23 per cent of oil
exports and six to 31 per cent of natural gas exports are intended to go. Natural gas sales to China and the
need to further energy dialogues in Asia receive mention [‘Energeticheskaia…’, 2014: 21-22].

In testimony of Asia’s increasing stature in Russia’s energy diplomacy, in May 2014, Gazprom and the
Chinese company CNPC agreed a Sales and Purchase Agreement for mutual natural gas trade starting in
2017 and eventually reaching 38 billion cubic metres a year through Power of Siberia pipeline [Motomura,
2014]. Earlier in 2014, the European Commission challenged Russia’s bilateral agreements with several
transit states of the Gazprom-led South Stream natural gas pipeline project to South-East Europe, on
grounds of possible violations of EU competition law. In Autumn 2014 Russia cancelled the project. The
increasing regulation of EU energy markets, the at best mature demand in Europe, and political
reservations following the Russian-Ukrainian conflict, coupled with growing demand in Asia, are driving
Russian energy diplomacy towards the East to secure demand.

The differences in the formal rules and regulations Russian actors encounter in the EU markets and the
emerging markets of North East Asia can eventually erode as the latter are introducing more competition
into the energy sector [Aalto, 2014]. The development of multilateral energy diplomacy in this region, in
particular cooperation among energy buyers initiated by Japanese actors, will set new constraints on
Russia’s preference for bilateral energy diplomacy and agreements [Shadrina, 2014; Vivoda, 2014].

Assessment

Expert assessments of Russia’s energy diplomacy vary greatly [Aalto et al., 2014]. For some, Russia’s energy
diplomacy especially towards its largest customers in the EU is ‘strategic, focused and consistent’
[Dimitrova, 2010]. Some others note how the fears in particular in Eastern Europe in the mid-2000s of an
‘energy superpower’ Russia, failed to fully emerge when oil prices declined since then, as did the profits
and clout of Russia and its Russian energy companies. This was facilitated by the lack of an overall strategy
as to which Russian actors exactly should do what, where and when, despite the energy strategies
[Monaghan, 2007]. Some think Russian energy diplomacy is effective because of the direct involvement of
the President, even though examples abound of how Russian actors are still learning to balance the political
and economic or business interests [Lough, 2011: 4, 16]. During 2000-2010, in 31 instances Russian state
institutions used energy issues to promote political interests [Orttung and Øverland, 2011]. In Europe,
many efforts by the Russian political institutions to promote the investments of Russian oil companies
resulted in politicisation preventing the conclusion of deals [Poussenkova, 2012].

Any assessment of Russian energy diplomacy should differentiate between different markets. In the former
Soviet area, the political interests have been very pronounced. Close partner countries such as Belarus and
Armenia continued to enjoy discounted prices for natural gas while Ukraine lost its own preferred status in
the early 2000s. In each of the major markets, Russian energy diplomacy varies vis-à-vis particular countries
owing to the divide-and-rule policies whereby Russian actors seek to discourage cooperation among the
customers buying Russian energy commodities. Further, Russian energy diplomacy diverges from one

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segment of energy to another because of the different interests of the companies in charge and diverging
nature of the natural gas, oil and nuclear power business [Stulberg, 2008].

In the late 2010s, Russian energy diplomacy faces several challenges. These include the expected
emergence of new gas and/or oil exports from Australia, Canada and the United States. The market entry of
new sources of energy such as unconventional gas and oil as well as renewables on a larger scale will also
affect the prospects of Russian exporters in several markets. The increasing availability of liquefied natural
gas challenges Gazprom, Rosneft and Novatek, all of which are newcomers in this rapidly expanding
segment. The increased spot and short term market pricing for natural gas questions Gazprom’s preference
for oil-price linkages, long-term contracts and pipeline deliveries. Apart from these resource and market
specific challenges, fitting the political interests with business interests remains a persistently difficult
balancing act. This was evident in how the EU-Russia differences over the Ukrainian-Russian conflict of
2014 complicated the advancement of those interests vis-à-vis both Ukraine and the EU.

References

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