Russian Petroleum: Partnerships and Influence

In a world in which the calculus of power is increasingly complex, the only element of power that clearly serves Russian interest is energy resources. While Putin has done much to restore his country’s military capacity, its raw materials have a greater utility in maintaining the stability of an essentially weak Russian state. Putin’s ability to exploit those resources for strategic gain will determine if or when the Russian empire is restored.

By Stephen R. Bowers l March 20, 2018

Over two decades after the USSR’s collapse, visitors to Russia still note the absence of consumer goods produced in Russia. Most consumer goods are imported from the West, while Russia’s economy can boast of only one important product – petroleum. Efforts to enhance the country’s non-energy sector have languished and Moscow’s dependence on petroleum has intensified.

Two aspects of the Russian petroleum industry as an instrument of Russian influence stand out. The first is the connection it provides with other counties, the petroleum producing Romania, for example. The second is Russia’s use of petroleum – with the state oil giant Rosneft as it most reliable tool – to build international influence. It has enabled Russia to counter important U.S. foreign policy measures, especially efforts to limit North Korea’s development of a nuclear capability.

Connectivity of Russian Petroleum Industry

While contemporary interest in energy questions focus on the Middle East, Romania has a long history in petroleum production and the first references to Romanian oil production were in 1517. By the 19th century, Romania had become one of the largest petroleum producers in Europe and Ploieşti was among the best-known centers.

As a grim tribute to the importance of this city, it became one of the Allies’ main Romanian targets during World War II. Known as Operation Tidal Wave, this attack was undertaken by the U.S. Army Air Forces and targeted nine in the Ploiești area in 1943. After the war, Romania’s industrialization led to the development of a more advanced petroleum production system. In order to achieve this status, the Petroleum & Gas University of Ploieşti was founded in 1948.

The Russian-Romanian partnership is significant. Today, the three most important functioning refineries in Ploesti are OMV Petrom, LUKOIL, and Rompetrol Rafinare, which runs KazMunayGas Vega in Ploesti as well as a second refinery, Petromidia, on the Black Sea. Russian ties with Romania help Russia develop “interconnectivity” in its petroleum industry, something long seen as a necessity.

In 2017, KazMunayGaz, a Kazakh state oil company, announced plans to replace the more expensive Urals crude oil with cheaper Mediterranean grades for its refineries in Romania. This is a compelling concern because the production costs for Russian petroleum are excessively high, almost twice as high as the per barrel production costs for Saudi Arabia.

Petroleum as an Instrument of International Influence

The strength and stability of Russia’s petroleum sector supports the nation’s strategic goals. By 2017, Russian petroleum was playing an important role in bolstering the prospects for the survival of an increasingly bellicose North Korean regime. The Russian government has been openly critical of U.S. efforts to impose economic sanctions against North Korea and has discretely enabled Russian firms to increase petroleum imports to North Korea.

One instrument for expanding petroleum sales to the Kim Jong Un regime has been Velmur Management Limited, one of a network of Russian front companies set up for this purpose. On 22 August 2017, the U.S. government filed a complaint against Velmur for helping launder U.S. dollars on behalf of sanctioned North Korean firms that were buying Russian petroleum products. Velmur was one of three firms facing legal action in 2017 for participating in financial transactions that violated the International Emergency Economic Powers Act as well as other federal conspiracy and money laundering statutes.

As a result of these Russian activities and in spite of increasingly severe sanctions, there has been a sharp fall in the price of gasoline and diesel oil in North Korea. Since the imposition of those sanctions, the price of diesel oil has declined by 60% and the price of gasoline has fallen by 25%. According to the Osaka-based Asia Press International (API) news agency, “massive amounts” of fuel are smuggled from Russia into the North Korean border province of Yanggang.

Because of Russian efforts to fill the gap caused by economic sanctions against North Korea, there has been a dramatic increase in tanker traffic between North Korean ports and Russia’s important Far Eastern port of Vladivostok. As a result of heavy demands on transportation facilities between Vladivostok and the North Korean port of Rajin, local officials started regular ferry service between the two ports. U.S. officials now admit that as long as the Kremlin gives tacit approval to this trade, there is no way to prevent these shipments of Russian petroleum products.

The collapse of the Soviet Union ushered in difficult times for Cuba. The USSR was the main supplier for Cuban energy requirements and the most important purchaser of Cuban sugar at inflated prices. A 2017 announcement of Moscow’s intention to provide Cuba with generous quantities of petroleum and diesel fuel indicated that Russia was once again going to prop up its Caribbean ally. While the Yeltsin administration was indifferent to the region, Putin has signaled his determination to build up Russia’s geopolitical influence with leftist regimes such as Cuba, Venezuela, Nicaragua, and Bolivia, all of which are adversaries of the United States.

The death of Hugo Chavez and the collapse of the Venezuelan economy placed Cuba, once the beneficiary of Venezuelan support, in a difficult situation so the renewal of Russian interest has been vital. Venezuela also benefits from this important policy initiative and Russia has replaced China as Venezuela’s financial prop.

According to Clifford Krauss writing in the New York Times, “Russia and Rosneft have provided Caracas with $10 billion in financial assistance” in the past three years. Without this support, the Venezuelan economy would face certain collapse. In return for this risky investment, Putin enjoys a strategic advantage in any confrontation with the U.S.

These measures are consistent with Russian interests and requirements. Probably most important is the fact that Russian commodities – oil, mining, and agriculture – have suffered greatly and, as a result, the once roaring Russian economy is now suffering. While Putin enjoys enthusiastic if not overwhelming public support, it is doubtful that he could maintain this standing in the face of a long-term economic downturn. In addition to helping meet the country’s economic needs, these petroleum ventures also support the Kremlin’s security requirements. Shortly before announcement of the Russian-Cuban petroleum deal, Russia’s Defense Minister Serguéi Shoigú indicated that Russia is considering creation of a network of bases in Cuba, Vietnam, Venezuela, Nicaragua, and Seychelles. In April 2017, Russian officials emphasized not only a need for new Russian bases but also pledged to help modernize the Cuban defense industry.

Russia has very skillfully employed companies such as Rosneft to expand the Kremlin’s influence in the Arab world. This region has emerged as Putin’s most attractive target for increasing Russia’s sphere of influence. While Morocco, which does not enjoy important oil or gas resources, has been especially susceptible to Russian initiatives, other nations, such as Iran, do not have companies like Rosneft with a worldwide reputation within the oil and gas sector. Russia has also used energy investments to facilitate construction of a nuclear power plant in Egypt. In a similar fashion, Rosneft has expanded Russian influence in Middle Eastern nations – Iraq and Libya, for example – threatened by domestic instability.

Petroleum and Russian Trade Vulnerabilities

According to a 2018 report, Russian products constitute approximately 1.8% of overall global exports. Raw materials, mostly oil and petroleum products, account for the largest portion of Russian exports. This economic disadvantage is especially pronounced with regard to EU-Russia trade which, between 2012, when Russia became a member of the World Trade Organization, and 2016, has dropped by 44%. As is the case globally, the main EU imports from Russia are raw materials such as oil (both crude and refined) and gas. In fact, in the years since its accession to the World Trade Organization, Russia has not been able to meet all its WTO commitments. As a result of the country’s import substitution policy, doubts about Moscow’s willingness to comply with World Trade Organization rules have increased.

While Russia sells raw materials, it is incapable of producing many manufactured goods essential for a thriving economy. As a result, Russia must import such products as cars, medicines, automobile parts, aircraft and computers. Because China, now Russia’s largest trading partner, has a large population but an inadequate quantity of raw materials, while Russia has a smaller population but an abundance of natural resources, the two nations have developed a strong trade relationship. China is not bothered by Russian activities against Ukraine or Georgia and has not joined international sanctions against Russia, thus creating a reliable and mutually advantageous partnership.

In a world in which the calculus of power is increasingly complex, the only element of power that clearly serves Russian interest is energy resources. While Putin has done much to restore his country’s military capacity, its raw materials have a greater utility in maintaining the stability of an essentially weak Russian state. Putin’s ability to exploit those resources for strategic gain will determine if or when the Russian empire is restored.

Stephen R. Bowers, Ph.D. is a professor of government in the Helms School of Government at Liberty University. Professor Bowers is also a contributor to SFPPR News & Analysis of the conservative-online-journalism center at the Washington-based Selous Foundation for Public Policy Research.