Petroleum Power vs Ideology

Politics bedevils Russia's march to energy superpower status

By Sebastian Smith

Russia controls the world's biggest energy reserves and Europe and Asia have almost insatiable demands. But this month's Belarus oil transit crisis highlights crucial flaws in what could be a supply-demand match, analysts said.

Industry experts say the main problem bedevilling Russia -- the number two oil exporter after Saudi Arabia and unrivalled top natural gas producer -- is Moscow's prickly relationship with ex-Soviet neighbours controlling transit routes to the European Union.

"The problem is that Ukraine is the dominant country for gas export transit and Belarus for transit of oil," MDM bank analyst Andrei Gromadin said. "What's missing is infrastructure to bypass these problem states."

That meant that an otherwise minor New Year's trade dispute between Russia and Belarus rapidly flared into an international crisis, since the tiny ex-Soviet republic controls the pipeline for a third of Russia's oil exports, amounting to 12.5 percent of total EU consumption.

Another purely bilateral tussle over gas prices between Russia and Ukraine one year ago likewise led to shortfalls of natural gas throughout Europe. About 80 percent of Russia's gas exports to Europe run via Ukraine.

Russian politicians now talk up the need to bypass transit countries, while alarmed EU leaders are renewing calls to lessen dependency on Russia, which provides about a quarter of both gas and oil supplies to the 27-nation bloc.

But UFG bank analyst Stephen O'Sullivan said both sides would learn to live with current realities. "Russia has again reminded people in the EU that there is a risk to their oil and gas supply. But does this matter? No. I'm sceptical the European Union will respond in any coordinated manner, since they all have such disparate interests," he said.

Likewise, expensive and geographically complex bypass routes are never going fully to replace existing pipelines, he said, meaning that Russia and the European Union are locked in an unbreakable, if uncomfortable embrace.

"The EU seems to be terribly worried over its dependency, but if you look at Russia's dependency on the European market -- it's total. There is no other market like that for Russian oil and gas. So there is mutual dependency."

And although many in Russia look to Asian markets, particularly China, as a way of getting away from this dependency on Europe, work has only just begun on creating the necessary infrastructure in eastern Russia.

Masha Lipman, an analyst at the Mosow Carnegie Centre, said that regardless of technical issues, economic relations will always be held hostage to Russia's turbulent internal politics.

Separately to the incidents in Belarus and Ukraine, the Kremlin had already jangled Western investors' nerves with the controversial dismantlement of private oil giant Yukos and the more recent takeover of the foreign-run Sakhalin 2 gas and oil project by Gazprom.

In each of these cases, "the Russian side decided that any fallout, such as a drop in Western confidence, was worth it," Lipman said. "This means that internal priorities are currently more important to the Kremlin and this is going to continue.

"MDM's Gromadin noted that Western countries did business with the Soviet energy industry. Oil and gas can trump ideology. "Whatever kind of government you have in the Kremlin, they're always going to be a big energy exporter," he said.

Sebastian Smith is a writer with Agence France Presse based in Moscow.