17.906 The Geopolitics and Geoeconomics of Global Energy, Spring 2007 Prof. Flynt Leverett Lecture 7: Resource Nationalism and Market Power (III) – Russia, the Post-Soviet Space, and Europe Resource Nationalism • 1st Kind o Nationalizing the oil company o Nationalizing foreign investments • 2nd kind o once country has nationalized, controls the way that marketing of resources will be used for political gain  Russia is prime example Russia • After US, Russia was the 2nd country to really push for Russian oil development • After fall of Soviet Union, there was huge question over how the industry was going to be structured • Former provinces raised big question over how thing were going to be goverened • Important Soviet states o Azerbaijan  West part of Caspian Sea  The most open to foreign investment o Kazakhstan  East part of Caspian Sea  Has largest gas reserves  Open to foreign investors  It’s nice! o Uzbekistan  Has some o Turkmenistan  Has 5th largest reserves of natural gas in the world  Not good for foreign investors (US and China) • National energy companies in all former Soviet nations o Not all very open to foreign investment  Both US and other countries (like China) • Story is very complicated but highly entertaining • How it evolved o Initial period of not quite a decade after SU was dissolved, oil industry might be restructured under market powers • 3 big players in Russian energy o Gazprom  State owned gas company  Huge reserves under control  Monopoly on export of natural gas from Russia  Controls the pipeline system for Russia o Rosneft  National oil company o Transneft  State owned  Controls oil pipelines in Russia Cite as: Flynt Leverett, course materials for 17.906 Reading Seminar in Social Science: The Geopolitics andGeoeconomics of Global Energy, Spring 2007. MIT OpenCourseWare (http://ocw.mit.edu), MassachusettsInstitute of Technology. Downloaded on [DD Month YYYY].o Initially looked like these guys would be shadowed by private companies during the emergence of the oligarchs in post-Soviet Russia  Oligarchs were playing a huge role in emerging private market o Companies that looked like they were going to play a role in post-Soviet energy  Yukos à Entered into discussions with ExxonMobile à One option was that ExxonMobile would buy Yukos  TNK  Sibneft  Novatek à Largest and recently created  Lukoil à Doing quite well à Growing internationally à Allowed to flourish o Also looked like there was going to be room for foreign investment  TNK and BP joined up à Was going to be a 50/50 split à Controls Kovytka • Largest gas field • In western Siberia • If Russians want to provide gas to eastern Asia, they must develop this field  Investment projects à Other fields in Siberia • All of this was playing out during the tenure of Boris Yeltzin o Internal in-cohesion o 1990s was not a good time for Russians  “The Lost Decade” o the post-Soviet Russian economy contracted o Life expectancy decreased during this time o Russia was economically weak  Low oil prices à Not earning significant revenues  Increasingly indebted o 1998  Ruble got caught up in east asian currency crisis  Government defaulted o US was able to push through a lot of policy in the area during this time since Russia was so weak  Kosovo  Increase in NATO states in the area o Yeltzin became alcoholic and began dementia during second term • In with Putin o Came onto the political scene when Yeltzin brought him in to the government out of nowhere  Former KGB from St. Petersburg o Resoundingly popular with the people  Could potentially try to alter the constitution to run for third term Cite as: Flynt Leverett, course materials for 17.906 Reading Seminar in Social Science: The Geopolitics andGeoeconomics of Global Energy, Spring 2007. MIT OpenCourseWare (http://ocw.mit.edu), MassachusettsInstitute of Technology. Downloaded on [DD Month YYYY].17.906 The Geopolitics and Geoeconomics of Global Energy Lecture 7 Prof. Flynt Leverett Page 2 70% approval rating o Resurgence of some authoritarian tendencies (to put it lightly)  Mostly focuses on controlling TV  Consolidation of political authority in the executive branch à Neutering of the government o Robust exercise of the first species of resource nationalism  Remarkably reassertion of state dominance in the energy sector  Tried the head of Yukos for money laundering à Had company taken away from him, split up assets and gave them to national energy companies  Message from Putin to energy companies à You can continue to operate but you have to abide by what the Kremlin says • Foreigners will not have an equal or greater stake in Russian energy companies • Yukos’ mistake was to consider allowing ExxonMobile to have a greater than 50% of the shares of the company à Gazprom and Rosneft have done IPOs in England! • Russian government is okay with that as long as they still have majority power o Putin is as close as a modern statesman comes to Don Corlioni  It’s not personal, it’s business • Efforts of US companies to get into the Russian oil market o Particularly in the fields called Sakhalin-I and Sakhalin-II o Shell  Got targeted by the government à Government wanted larger share of profits à Went after shell for environmental violations à Shell had to accept a major reduction in Sakhalin II  ExxonMobil à Now being targeted by Putin o Putin has said that there will be no more 50/50 splits with Russian oil companies  This means that Kovytka will not be developed anytime soon à A strategic asset that will not be developed until the government has sufficient control • Chinese companies have been trying for a decade now to get upstream access o The first delegation from China was kidnapped when they came to Russia! o TNK is going into a joint venture with SINOPEC  SINOPEC will only have 49% of equity in assets  SINOPEC basically gets screwed in order to get into the Russian upstream  SINOPEC will get some favorable financing from Chinese banks  Purchase price that SINOPEC is paying will be reimbursed with barrels of oil that are harvested from the oil fields  Bottom line is that Rosneft will have