Abstract control of the existing pipeline distribution network


This paper analyzes how natural resources
have helped Russia economically and politically. Russia has

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Oil and natural gas have
brought Russia both economic and political gain. An increased demand for oil
and natural gas from Asia and Europe has created a new opportunity for greater
profits. However, Russia faces a challenge of falling oil prices and new
pipelines. After the rise in prices of natural gas and oil during the greater
part of this decade, Russia’s economy profited from petrodollars and increased
exports. Russia’s control of the existing pipeline distribution network allowed
the country to be in a position as a supplier for neighboring countries and
gain political power. Opportunities arise from both greater demands in the
increasingly profitable European markets as well as the emerging Asian
economies seeking to access Russia’s pipelines. However, the recent decline of
oil and gas prices threatens Russia’s future prosperity and Europe’s fears of
becoming dependent on Russian gas have created the idea of new pipelines that
avoids being dependent on Russia altogether.

Oil and natural gas
exports have been one of Russia’s staples for decades. However, during the
years leading up to the collapse of the Soviet Union, production fell sharply
(Drum, 2011). After the financial crisis and the collapse of the ruble, Russia
became one of the largest contenders on the world oil markets due to an
increase in both foreign and domestic investment. Improvements in pipeline
networks remnant of the USSR, infrastructure, and drilling technology from
foreign companies like Exxon Mobil and domestic firms like LUKOil and Yukos led
to economic growth fueled by exports (Krauss, 2012). Furthermore, the terrorist
attacks of September 11th, 2001, and the subsequent invasion of Iraq by the
United States sent the world price of crude oil soaring to historic levels
(Williams). This combination of increased export capacity and volume,
investments by domestic and foreign companies and record-setting world prices
fueled Russia’s economic expansion.

However, while oil is an
important part of the Russian economy, it faces problems with low labor
productivity, high production costs, and accessibility issues. Moreover, in the
long term Russia cannot compete with OPEC’s production capacity and reserves
(Gidadhubli 2003, 2030). Its true advantage lies in natural gas. Russia is the
world’s largest exporter of natural gas and its proven reserves far outrank any
other exporter (Hill 2002, 30). Key to this competitive advantage in natural
gas is Gazprom, the largest gas company in Russia. Essentially a government
owned and operated monopoly, over fifty percent of the shares are owned by the
government (Cooper 2009, 14). This, in turn, gives the Russian government the
power to set gas prices and establish long term contracts with foreign buyers,
making it the largest earner of hard currency for Russia(Pirog 2007, 6), so
called “petrodollars” (Hill 2002, 28). Gazprom is also the largest source of
revenue for the government, contributing approximately twenty four percent of
the budget (Woehrel 2009, 2). Thanks to this, the economy has seen enormous
growth in the past decade. Averaging 6.9% per year from 1999-2008, Russia’s
annual gross domestic product has grown over two and a half times faster than
the United States with GDP per capita valued at $11,785(Cooper 2009, 2) and a
balance of trade surplus of $180 billion in 2008 (TradingEconomics.com).

With the newfound
economic growth, Russia was able to leverage its position as supplier of gas
and oil to neighboring countries to gain political power. Straddling both the
Asian and European continents, Russia possesses the largest land area and spans
eleven time zones. The former soviet bloc country borders fourteen countries
(CIA Factbook) and because of this, has expansive oil and gas distribution
networks that run from the Caspian sea to North Russia, Asia to Europe.

Currently Russia’s Druzhba Pipeline, the largest in the country, runs from
south Russia where it collects from the Caspian Sea and the Ural Mountains,
through Ukraine and to central Europe and Germany. Other pipelines run similar
routes between the Caspian region, across the Black Sea, and to southern Europe
(Pirog 2007, 12-14). Thanks to Gazprom’s exclusive control of this network,
Russia has gained a significant amount of control over the supply of gas to
Europe and Central Asia.

In addition, Russian gas
accounts for over a quarter of domestic consumption for many major European
countries and is also the sole provider of gas to Belarus, Bulgaria, Estonia,
Finland, Georgia, Latvia, Lithuania, Moldova, and Slovakia. In 2004, over
ninety percent of Russia’s seven trillion cubic feet of gas exported went to
European countries (Gelb 2007, 1-3). This control of the flow and direction of
oil and gas to Europe and central Asia has amassed Russia a significant amount
of political power. Furthermore, Russia’s ability to dictate gas prices in the
form of long term contracts with other countries has given it a political
advantage in international relations. When pressed by the European Union on the
issue of exploiting these dependencies and encouraged to open up its pipelines
to foreigners by ratifying the 1994 Energy Charter Treaty, Russia blatantly
refused. Moreover, Russian control has required energy companies as well as
governments to establish strong ties with Russian leaders to ensure continued


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