While Russia has been able to capitalize on its vast reserves of natural resources,
it has again reached a point of stagnation in its energy sector. State owned
energy companies dominate the industry and despite years of high-energy prices,
these state owned enterprises have begun to grow inefficient and lack to
capabilities to exploit new energy sources.[1]
This is attributable to the lack of competition these companies face, resulting
in reduced incentives to innovate and become more efficient. Gazprom, which
maintains a virtual monopoly on the nation’s natural gas industry, is a
wonderful example of this of the consequences of an inefficient marketplace.[2]
Moreover, during the past decade the
United States has begun to revolutionize the oil industry with the advent of
horizontal drilling and fracking along with other methods of drilling to create
fracture in shale rock. This has opened up vast reserves of natural gas and oil
that previously were commercial unviable. Production in the US has boomed and
oil output from North Dakota’s Bakken Basin has grown from one hundred thousand
barrels a day in 2007 to one million barrels per day in 2012.[3]
Recently the International Energy Agency (IEA) declared that the US would overtake
Russia as the biggest oil producer by next year. During the same five year
period that saw US oil output boom, Russian oil companies increased their
spending fourfold yet only experience growth of a mere 5%.[4]
Naturally, the increase in oil supplies over the last few years has resulted in
lower oil prices.
This change in the global energy
market has a profound impact on Russia’s economy, which relies on oil and gas
to account for 2/3rds of its exports, 50% of its federal budget and 20% of its
Gross Domestic Product.[5]
The impact of falling energy prices can be seen in the recent cuts to Russia’s
GDP growth. The nation that was growing at an astonishing 7-8% in the past
decade has seen its growth slashed to 1.8%. The World Bank has explained that
the cause for this downgrade relates to Russia’s high dependence on oil and gas
exports leaving the nation at the mercy of international commodity markets.[6]
Furthermore, the nation’s other sectors are generally non-competitive and
consumer spending has slowed down.[7]
Despite the seemingly dreary
outlook, Russia has a tremendous number of untapped resources both in the form of
its natural and human resources. Experts project the nation has not even begun
to tap into its vast oil reservoirs, which lay in the country’s oil shale.
Studies suggest that the Bazhenov formation located in central Siberia contains
the largest accumulations of shale on the planet.[8] Supposedly,
the formation contains five-time more recoverable oil than the Bakken
formation, although some speculate the play in Western Siberia to be an
astonishing eighty times greater.[9] The
ability to extract and deliver oil and natural gas from new sources would be a
cure for an energy sector that has been seeing shrinking output.
This is certainly not the only
untapped resource that Russia possesses but the costs associated with the
development and implementation of new drilling technologies as well as the cost
of building new transportation networks means that Russia will not be able to
afford such investment on their own. Yet at this very time Russian Minster of
Economic Development, Alexey Ulyukaev has stated, “investment in Russia is
shrinking”.[10]
This is partially attributable to the global economic slowdown and partially
because Russia has not been able to create investing rules that parallel
international norms.[11] The
Kremlin has decided that the solution to its capital inflow problems lies to
its east.
[1] Russia’s Wounded
Giant, The Economist, available at http://www.economist.com/news/business/21573975-worlds-biggest-gas-producer-ailing-it-should-be-broken-up-russias-wounded-giant
[2] Id
[3] Guy Chazan,
Russian Energy: Frozen Assets, The Financial Times (Sept. 25, 2013), available
at http://www.ft.com/intl/cms/s/0/17e0e3d0-25c6-11e3-aee8-00144feab7de.html#axzz2hsHj9jjZ
[4] Id.
[5] Holly Ellyatt,
Why Russia Must Reform its Energy Sector, available at http://www.cnbc.com/id/100834136
[7] Id.
[8] Supra note 3.
[9] Id.
[10]
[11] Id
Nice post, but I think you left out one important variable. The few Americans I know who have been involved with Russian business tell me that corruption and bureaucratic hurdles make it nearly impossible to invest in Russian industry. Unless the American firm has firm guarantees from someone high within the Kremlin (who will protect the investment from quasi-government raiders), there is a very good possibility that the investment will be stolen or misappropriated.
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