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Common Cents

The true price of dependency on Russian oil

Ralph Murphy

(9/2014) Dependence on exports of liquefied fuels, such as oil and natural gas, has made economic powers out of what would otherwise be third world economies given their relevant resources. This is clearly true of most Organization of the Petroleum Exporting Countries (OPEC), including Russia and to a lesser extent Brazil, which coexist in the BRICS alliance of nations to include India, China and South Africa. The oil wealth is a blessing to those nations, but with effective sanctions given misgivings quickly reminds them of their tenuous nature of material wealth.

Iran and Russia are cases in point in which both rely heavily on oil and gas exports, and both are being punished for international law and treaty violations. The Iranians failed to comply with International Atomic Energy Agency (IAEA) requirements as regards verification of enrichment levels in their nuclear power programs. The levels are feared to be of weapons grade or could quickly reach the standard, and the United Nations has imposed sanctions from 2007 to present in an effort to encourage compliance.

Russia is another matter. President Vladimir Putin said, while negotiating in Geneva last March, that his nation sent armed forces to Ukraine's Crimea in extralegal support of an ultimately successful movement to join the region with that nation. If Ukraine had acquiesced to the deployment, it would have been legal. The provisional government at the time was still waiting for May Presidential elections and could not coordinate an effective military action to reverse the invasion, and it was quickly absorbed into Russian territory.

Russia was euphoric at the success of the legal breach, but Ukraine with a population of almost 48 million, mostly Kiev looking ethnic nationals "picked themselves up" and fought back. A determined President Petro Poroshenko was elected and rallied international support for assistance in reversing the invaders who have also been proven to be providing materiel support such as tanks, armored personnel carriers, and even anti-aircraft systems as well as troops to minority separatists in East Ukraine near and on the Russians border. As of this writing they are attempting to join Russia as did Crimea. Russia provides over 25% of Europe's natural gas with 80% of that flowing through Ukraine pipelines. This provides Kiev considerable leverage over their belligerent neighbor, though they also purchase the gas, about $4 billion is being retained pending related negotiations.

In 2012 Russia was the world's number three oil producer at 10.4 million barrels a day, behind Saudi Arabia and the United States which provided consumers 11.7 and 11.1 million barrels respectively. Russia was second in natural gas production that year with 669.7 cubic meters. In 2013, over 30 percent of Russia's total economic activity stemmed from oil and gas production and reportedly paid 52% of the federal budget the previous year.

79% of Russia's crude oil went to Europe, 18% to Asian markets through Siberian sources. The Netherlands, Germany, and Italy among others were major importers and providers of hard currency. Gazprom sends 80% of its exports to Europe, and is now concerned about the bite of sanctions on the energy sector though the relationship is currently symbiotic. China is also a significant importer and in May signed a 30 year $400 billion contract with Gazprom to provide gas. The Russians may need it more than they realize as it appears Iran and Moscow are headed for divergent futures.

Iran still appears to export to the Far East, but the Organization of Exporting Nations (OPEC) oil provider went from fourth in world production at over 4.1 million barrels a day to under a million per estimates amid sanctions. It would be a timely source to replace Russia which is struggling with international sanctions and potentially even more threatening internal divisions.

In 1989 the Soviets recognized the communist economic system couldn't begin to compete with the west's market system and was collapsing of its own inertia. The rulers created a Soviet Ministry of Gas as part of perestroika, a type of restructuring introduced by then President Mikhail Gorbachev. When communism fell there in 1991, the concerns were vouchered out to citizens, opportunistic "oligarchs" who bought up that industry and other assets at below market value. Under President Boris Yeltsin, the practice was tolerated and the economy fell to over 30% below communist levels. Much like the nascent Latin American countries, the nation lacked social discipline and entrepreneurial savvy to efficiently produce.

The country was stagnant economically, but had invested enormous percentages of income in military capability, so it had to be taken seriously, especially the nuclear arsenal. Yeltsin was replaced by Vladimir Putin who took a stand against the oligarchs imprisoning Mikhail Khodorkhovsky, the nationís then richest man and owner of Yukos Oil Company. The imprisonment appeared staged, but was accompanied by an opening of the economy to western investment and market savvy. The old oligarchs were replaced with a new grouping, and the economy did stabilize with external oil demand and international marketing knowhow to the point of $2.015 trillion revenue in 2012. Something then went wrong politically.

The Russians successfully invaded and dismembered parts of the Georgian Republic during a brief war in 2008. They went largely unpunished by the international community and continued exports as if little had transpired. Moscow did appear to view the Commonwealth of Independent States (CIS) as its area of impunity of intervention, and subsequent to hosting a warm but sunny Sochi Winter Olympic Games this February, attacked Crimea and other areas of Ukraine following the collapse of a minority government Moscow supported.

Internal divisions appear to have followed and the old oligarchs returned, if not entirely in body, certainly in an undisciplined mentality and sanctions followed atrocities. Russia's presumed and at this writing all but proven role in downing a Malaysian jet killing 298 innocent civilians over East Ukraine was one case in point, but galvanized world opinion against the marauders. Who would be next? Access to foreign cash has been curtailed along with individuals sanctioned and now it's affecting the blanket economy. They're in recession, lacking the discipline to sustain business, and 150 million people residing on over an eighth of the world's land mass can't realistically expect to move forward as a coherent entity.

Anyway, OPEC, the US, African and Latin American sources among others, combined for over 74 million barrels of oil a day primarily used for transport and industrial affairs. An additional 4.186 trillion cubic meters of gas is used to meet residential and electricity concerns. Russia failed to diversify its economy, Iran is trying and may emerge as a replacement near term depending on the Shia leaders and international actions. The west doesn't need the belligerent Russians. They need us.

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.

Read past editions of Ralph Murphy's Common Cents