Featured Report: Shifting Political Economy of Russian Oil and Gas

The global energy landscape is undergoing major series of shifts. The confluence of economic, geopolitical, and environmental drivers may lead to changes in many countries around the world. In an effort to understand the how the energy landscape is shifting and its implications for major consumers and producers, the CSIS Energy and National Security Program is launching a new series of special reports to investigate the changing political economy of energy in certain key countries around the world.

The first paper, Shifting Political Economy of Russian Oil and Gas, written by Tatiana Mitrova from the Energy Research Institute at the Russian Academies of Sciences, examines the difficult position facing the Russian oil and gas sector.

Main takeaways:

• Russian authorities have been slow in recognizing new market conditions and they do not have a coherent strategy to tackle the new environment of low prices and weak export market demand, nor to find new drivers for domestic economic growth instead as an alternative or complement to the oil and gas sector, which is no longer able to perform this function well. Thus far the response has been tactically oriented improvisation rather than a new strategy for the longer term.

• Real market reform in the domestic oil and gas sectors appears unlikely, despite clear flaws in the current system.

• Long-awaited efforts to reform hydrocarbon taxation have stalled as the government leans on the oil and gas industry for additional revenue.

• Though Western sanctions on Russia’s oil and gas sector have not had an appreciable aggregate impact on production thus far, over time both technology and financial sanctions will contribute to the decline of Russian oil production (though not necessarily a dramatic one) and to only partial utilization of gas production potential.

• Weak oil and gas demand in Russia’s traditional European export market, together with increasing price competition, limits export revenues.

• Alternative strategic partnerships are being pursued, but are not yet delivering on their potential and cannot replace old investment and trade relationships for the foreseeable future.

• Still, low-cost production and near-term resiliency will enable Russia to keep oil and gas production and exports at high levels for a long time. Under most scenarios, Russian oil and gas production is likely to remain fairly steady across the medium to long term, with oil production likely to stagnate and gas production likely to grow somewhat.

• The Russian economy has proved resilient thus far, though previously high oil prices can no longer mask its structural weaknesses. Additional economic vulnerabilities exist, and muddling through will become more difficult the longer current market conditions persist.

Additionally, several Russia experts add their take on the geopolitical aspects surrounding the Russian energy sector. They include:

• Olya Oliker, “ Past a Sobering Prologue for Russian Economic Policy”

• Edward Chow, “The Power and Peril of Russian Oil”