How Russia's Pipeline Politics Holds the EU Hostage

Russian Oil Tanks
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Photo by  Eonid Eremeychuk/Getty Images

Russia's economy is $4.2 trillion as measured by its 2018 gross domestic product. That's using purchasing power parity which compensates for government manipulation of exchange rates. That allows you to make more accurate comparisons of the economies of two countries. Russia's economy was the seventh largest in the world. It grew by 1.7% according to estimates by the International Monetary Fund.

Russia's GDP per capita was $29,032. The IMF ranks its standard of living as 56th in the world. It's better than Romania but worse than Greece, Hungary, or Poland.

Type of Economy

Russia has a mixed economy. It's come a long way since the 1991 breakup of the Soviet Union and its command economy.

Today, the government only owns the oil and gas industries. Gazprom is Russia’s state-owned gas company and owns the world's largest gas reserves. But the reserves are declining and prices have fallen. The state owns 69% of Rosneft. British Petroleum owns 20%, and the rest is publicly-traded. But Rosneft has severe financial problems. The other former state industries have been privatized. 

Most experts agree that Russia's economy is controlled by a small circle of powerful oligarchs. These wealthy insiders own or manage most important Russian businesses. Contrary to popular opinion, President Vladimir Putin doesn't control the oligarchy. Instead, he mediates their competing interests. This system started in the 1400s during the expansion of the Grand Duchy of Muscovy. It operated successfully through czars and communist regimes. 

Russia Is the Energy Supplier to Europe

Russia supplies 30% of Europe’s oil and 24% of its natural gas. It aggressively uses pipeline politics to get its way. Putin knows that the European Union hesitates to defend Ukraine because it can't afford to lose Russia's energy supply.

Would Putin actually do that? Absolutely. In 2006, he cut off gas supplies to Ukraine. Europe’s gas must flow through Ukraine. He held the gas hostage in a successful bid to charge higher prices.

Putin used energy revenues to diversify into other European businesses. So any sanctions on Russia's economy will hurt these companies too. 

He's also put pressure on foreign energy contractors to increase Russia’s share of their profits. In the past, Russia had:

  • Arbitrarily changed its agreements with Royal Dutch Shell and ExxonMobil.
  • Granted a license to the Russian-owned oil company, Rosneft, to operate in ExxonMobil’s area.
  • Revoked Shell’s license for a $20 billion Liquefied Natural Gas project at the Sakhalin-2 island.

On the other hand, the EU is concerned that Russia doesn't have the infrastructure to meet its future energy needs. To do that, Russia needs $738 billion in investments by 2020. 

Russia's Aggression in Ukraine Resulted in Recession

In 2014, Russia invaded Crimea to maintain access to the warm-water port when Ukraine attempted to join the European Union. Putin supported rebels who wanted to secede from the EU-friendly leadership. Rebels used Russian military equipment to shoot down a Malaysian Airlines commercial jet in July 2014. 

As a result, the United States and the EU imposed trade sanctions on Russia. It targeted the pocketbooks of the country's oligarchs. As a result, they sent $75 billion out of the country. That's 4% of the country's entire economic output.

In January 2015, Standard & Poor's cut Russia's credit rating to junk bond status, the first time in more than a decade. The International Monetary Fund warned that Russia would be in a recession. The country's economy contracted 2.8% in 2015 and 0.6% in 2016. It wasn't just the sanctions that did it. Russia's economy was crippled by low oil prices and a plummeting ruble

Russia Invaded Georgia

In 2008, Russia used its peace-keeping troops inside Georgia to capture the city of Gori and the state of Abkhazia. This was in response to Georgia's invasion of South Ossetia. It's another semi-autonomous state along Georgia's border with Russia. Abkhazia and South Ossetia wanted independence from Georgia.

Georgia is in a strategic location between Europe and Asia. It's an important transit point for gas, oil, and other goods. Russia attacked the area with a strategic oil pipeline owned by British Petroleum. 

Former Georgian President Mikheil Saakashvili courted U.S. alliances. Georgia and Ukraine are both members of the World Trade Organization. They threatened to block Russia's WTO nomination. Germany and other EU members blocked the U.S. attempts to grant Georgia and Ukraine a North Atlantic Treaty Organization membership.

Russia and U.S. Trade

In 2006, Russia and the United States signed a landmark trade agreement that helped its membership process. The agreement reduced tariffs on cars. It also increased foreign ownership of financial businesses. To do that, it protected intellectual property rights. Russia relaxed its insistence on inspection of all meat products.

Russia became a member of the WTO on August 22, 2012. It allowed Russian businesses greater access to foreign markets. It provided Russia with the opportunity to expand beyond energy. Foreign companies such as Shell, Boeing, and Ford could now profit from joint ventures. The most critical was the exploration of Russia’s natural gas resources.

On December 4, 2012, President Barack Obama approved Permanent Normal Trade Relations with Russia. That meant removing a Cold War-era trade restriction known as the Jackson-Vanik amendment. It linked U.S. trade benefits to the emigration policies of communist countries. Congress had already approved PNTR for Ukraine, which became a WTO member in 2008.