Modernisation of the Russian Energy Sector: Constraints on Utilising Arctic Offshore Oil Resources

EUROPE-ASIA STUDIES Vol. 68, No. 1, Janua y 2016, 38–63 Mode nisa ion o he Russian Ene gy Sec o : Cons ain s on U ilising A c ic O sho e Oil Resou ces PAMI AALTO Abs ac This essay examines he mode nisa ion o he Russian ene gy sec o as e ealed in he case o A c ic o sho e oil. The Russian ac o s in ol ed ha e a ious in e es s bu hei simul aneous ealisa ion is impeded by he s uc u al cons ain s wi hin he policy en i onmen o A c ic o sho e oil p ojec s. Russia’s o eign policy choices is-à- is Uk aine, leading o sanc ions a ge ing A c ic oil p ojec s, and global oil ma ke de elopmen s ampli y he cons ain s on he esou ce geog aphical, inancial, ins i u ional and ecological dimensions o he policy en i onmen o s uc u e. This delays A c ic o sho e oil p ojec s, and hampe s he oil indus y’s mode nisa ion and i s capaci y o gene a e income o Russia’s o e all mode nisa ion. MANY ANALYSTS SUGGEST THAT RUSSIA’S MODERNISATION mus be based on he en s acc uing om he coun y’s ene gy sec o (Gaddy & Ickes 2013, pp. 1–2; G igo ie 2013, p. 5; Malle 2013, p. 99). This is because o he dominance o he ene gy sec o in Russia’s economy. I is he mos compe i i e sec o and consequen ly bes posi ioned o gene a e he inancial esou ces o Russia’s o e all mode nisa ion. In u n, he ene gy sec o i sel mus be an in eg al pa o he coun y’s mode nisa ion, bea ing in mind ha Russia’s ene gy in ensi y is mo e han wice ha o No way and a hi d highe han Canada’s, bo h o which a e also indus ialised, la ge ene gy p oducing coun ies exposed o A c ic and sub-A c ic clima es (EIA 2014a).1 Ene gy expo s accoun o abou a hal o he Russian s a e budge and o wo hi ds o expo s. In 2013, oil made up 33% o he alue o Russia’s expo s, oil p oduc s 21% and na u al gas 14% 1No e, howe e , ha he e ec o he cold clima e is s onge in Russia han in Canada o No way (Gaddy & Ickes 2013, pp. 34–47). ISSN 0966-8136 p in ; ISSN 1465-3427 online/16/100038–26 h p://dx.doi.o g/10.1080/09668136.2015.1113509 © 2016 The Au ho (s). Published by Taylo and F ancis. This essay is pa o he Finnish–Japanese p ojec ‘Russia’s Final Ene gy F on ie —Sus ainabili y Challenges o he Russian Fa No h’ (Academy o Finland, Japanese Socie y o he P omo ion o Science, V-P. Tynkkynen/S. Taba a, 2014–2016), and is unded by he Cen e o Excellence on ‘Choices o Russian Mode nisa ion’ (Academy o Finland/Ki inen, 2012–2017) and he p ojec ‘Ene gy Policy in Eu opean In eg a ion’ (Academy o Finland/Aal o, 2011–2015). Fo ex ensi e assis ance in compiling and o ma ing he ma e ial I would like o hank Iida Jaakkola, Palla i Pal and Julia Simpanen, and o commen a y, Te y Cox, Ma kku Ki inen, And ei V. Belyi and And ey A. Konoplyanik. This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion- NonComme cial-NoDe i a i es License (h p://c ea i ecommons.o g/licenses/by-nc-nd/4.0/), which pe mi s non-comme cial e-use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed, and is no al e ed, ans o med, o buil upon in any way. OPEN ACCESS Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 MODERNISATION OF THE RUSSIAN ENERGY SECTOR 39 (EIA 2014b). Wi h high oil p ices du ing mos o he pas decade, he ene gy sec o has boos ed Russia’s s a e budge , inc eased he s a e’s edis ibu i e capaci ies, and inanced he ongoing ebuilding o he a med o ces, while i has also helped o imp o e he wel a e o mos Russian ci izens and o ein igo a e he na ional iden i y a e he u bulen and humilia ing 1990s. Alongside he ene gy sec o ’s salience and he widely ag eed bene i s i b ings, he consequen dependence on oil p ices implies isks. Mos ecen ly hese isks ma e ialised in win e and au umn 2014. Oil p ices ell below $50 pe ba el, only e u ning o $50–60 pe ba el by summe 2015 and we e expec ed o s ay low o he nex one o h ee yea s due o global o e supply in a si ua ion whe e Russia’s 2014 s a e budge was balanced a p ices o a ound $100 pe ba el. In addi ion, Russia’s ene gy sec o su e ed om he economic, inancial and poli ical sanc ions g adually imposed by he USA and he EU since sp ing 2014 due o Russia’s annexa ion o C imea and i s in ol emen in he ensuing wa in eas e n Uk aine. The sanc ions denied Russia access o c edi and o A c ic and o sho e ene gy echnology. Aus alia, Canada, Japan, No way, Swi ze land and Uk aine also joined he sanc ions egime. In his essay he in e linked p oblems o Russia’s mode nisa ion, in pa icula he in e nal mode nisa ion o i s ene gy sec o , and he consequences o low oil p ices combined wi h he sanc ions imposed on Russia, a e explo ed by means o a case s udy o Russian A c ic o sho e oil esou ces. Some o he majo mode nisa ion e o s unde aken by Russia a ge he ene gy sec o , associa ed indus ies and se ices. The consecu i e ene gy s a egies o Russia since he ea ly 2000s simul aneously s ess he po en ial o he A c ic, while in he highly complex o sho e oil p ojec s in his emo e and inhospi able egion inno a ions a e much needed in echnologies, business models and ins i u ions, and o cu b ecological isks. To add ess hese in e linked p oblems, he esea ch ques ion in his essay is: can Russian A c ic o sho e oil p ojec s con ibu e o he mode nisa ion o he ene gy sec o ? The in es iga ion p oceeds in he second sec ion o his essay, whe e assump ions guiding he analysis a e o med on he basis o he exis ing li e a u e. In he hi d sec ion Russia’s ene gy s a egies and A c ic s a egies a e examined in o de o sc u inise he assumed p o i gene a ion and iscal in e es s alongside he ene gy sec o ’s mode nisa ion needs as pe cei ed by Russian ac o s. These in e es s a e examined in he wide con ex o he o eign policy and social in e es s o he Russian s a e and i s oil egions. The analysis is pu sued by applying s uc u a ion heo y assuming mul iple ac o s and in e es s whose p ospec s o ealisa ion a e shaped by he s uc u es o which he ac o s o m pa and which hey help o co-cons i u e by hei ac ions (Aal o e al. 2012, 2014).2 In he ou h sec ion he empi ical analysis is conc e ised by ocusing on he choices made by Russian ac o s in A c ic o sho e oil p ojec s o ealise hei in e es s, and on how hese choices a e media ed by he cons aining and enabling quali ies o he s uc u es. The concluding discussion e-assesses he esea ch ques ion and he assump ions while also e alua ing he wide p ospec s and p oblems o Russian mode nisa ion as e ealed h ough he case s udy o A c ic o sho e oil. The analysis is based on p ima y and seconda y documen s, b ie s, news ma e ial and ea lie esea ch while also d awing on ieldwo k isi s in Sep embe 2014 o Mu mansk and A khangel’sk, wo ci ies in No hwes Russia s i ing o gain s onge posi ions in he se icing o he coun y’s A c ic ene gy p ojec s. The ime pe iod analysed uns om he publica ion 2See also Ki inen and Cox, in his collec ion. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 PAMI AALTO 40 o Russia’s i s ene gy s a egy in 2003 o he mos ecen d a s a egy o 2014. This pe iod also encompasses he de elopmen o Russia’s A c ic s a egy in wo i e a ions om 2008 o 2013 (Klimenko 2014, p. 3). This is a sho pe iod o A c ic ene gy p ojec s, which o en ake a leas wo decades o en e p oduc ion. Howe e , his pe iod ea u es se e al c ucial policy o mula ions and ac ual choices, pe mi ing some conclusions ega ding he capaci y o A c ic o sho e oil p ojec s o con ibu e o he mode nisa ion o Russia’s ene gy sec o and an assessmen o some wide implica ions ega ding Russian mode nisa ion. Russia’s mode nisa ion, he ene gy sec o and he A c ic The linkages be ween Russia’s mode nisa ion and esou ce dependence e oke some con o e sies in he exis ing deba e. Some economis s, p oceeding om he posi ion o he ene gy sec o as he mos compe i i e b anch o he Russian economy, sugges ha he capaci y o he sec o o gene a e e enue o se s he ulne abili y o luc ua ions in global oil p ices. In his iew, he eal p oblem is he use made o he en s gene a ed om he exploi a ion o ene gy esou ces. Pa icula ly misguided policies include ein es ing hese unds in he name o di e si ica ion in he de ence o manu ac u ing sec o s, which p omise less g ow h han he ene gy sec o (Gaddy & Ickes 2010, 2013, pp. 24, 98–9). Some o he economis s discuss he ex en o which he Russian economy shows signs o a ‘ esou ce cu se’ whe e concen a ing on his sec o yields less g ow h han in coun ies wi h simila income le els; o e en symp oms o a ‘Du ch disease’, whe eby he ene gy sec o ‘c owds ou ’ o he economic ac i i ies (Su ela 2012; Taba a 2012).3 The Eu opean Bank o Recons uc ion and De elopmen no es he di icul ies Russian ac o s ace in a oiding he isks o esou ce cu se and Du ch disease. Despi e some policy s a emen s in a ou o di e si ica ion since he mid-2000s, Russia’s ange o expo s since he 1990s has consis en ly na owed owa ds he ene gy sec o , while in he egions p oducing ene gy expo s he employmen s uc u e has specialised e en mo e in a ou o his sec o . Such de elopmen leads o inc easingly specialised capaci ies and skills no well connec ed o o he sec o s o he economy, causing u he pa h dependence (EBRD 2012). Beyond economics, some schola s sugges ha he ene gy sec o ’s dominan posi ion impedes he s a e’s wide mode nisa ion p ospec s in poli ical, social and cul u al e ms. This p oblem o igina es in he s a e’s signi ican s a egic in e es in ene gy since Vladimi Pu in’s ascen o powe in 1999. As a esul , s a e ins i u ions p o ec so e eign y and s i e o cen alise he coun y’s ins i u ions o ob ain a igh g ip o e ene gy p o inces (A e e 2013). Some sugges mo e speci ically ha he combina ion o he s a e’s con ol o e s a egic sec o s such as ene gy, and i s ailu e o educe co up ion in he legal sys em, o p o ec p ope y igh s and o e o m he poli ical sys em la gely unde mined he e o s o mode nise he economy ini ia ed du ing Dmi y Med ede ’s p esidency o 2008–2012 (Wilson 2015, p. 154). Some lamen ha he s a e con inues o pou esou ces in o he cos ly building o excess ene gy expo in as uc u e, p edominan ly on g ounds o poli ical in e es s (Bae 2013, p. 124). By edis ibu ing he ene gy en s o capi al in ensi e in as uc u e p ojec s se ing 3In he ‘Du ch disease’ indus ial ou pu dec eases and he domes ic cu ency s eng hens, while eal wages g ow oge he wi h he se ice sec o and public expendi u e. In his way, he whole economy g adually loses i s compe i i eness. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 MODERNISATION OF THE RUSSIAN ENERGY SECTOR 41 he in e es s o business coali ions, and o public sec o sala ies, pensions and bene i s o suppo o he g oups in socie y, he s a e seeks o de-poli icise he domes ic socie y (Sakwa 2014, pp. 56–7). In sho , Russia’s mode nisa ion and he ene gy sec o a e closely in e linked and a e a pa o complex economic and wide socie al s uc u es shaping he ange o policy op ions. This wide cons ella ion o mode nisa ion, he ene gy sec o and he ela ed s uc u es and choices, is examined he e in he mo e limi ed con ex o A c ic o sho e oil in o med by i e assump ions. The i s assump ion is ha he income gene a ed by he ene gy sec o is c ucial o he mode nisa ion o Russia, especially in he sho o middle e m pe spec i e (B adshaw 2012, p. 216). In 2012, he Russian s a e ins i u ions s a ed pos poning he a ge s announced by P esiden Med ede in 2009 o he di e si ica ion o he coun y’s economy away om he ene gy sec o (Malle 2013, p. 79). In o he wo ds, he capaci y o he ene gy sec o o gene a e income is so s ong ha he isks o edis ibu ing i poo ly, ulne abili y o luc ua ions o global oil p ices and o he isks ensuing om esou ce dependence a e wo h aking. Secondly, he income om he oil and oil p oduc segmen s ep esen s he ene gy sec o ’s key con ibu ion o Russia’s mode nisa ion in he same sho o middle e m pe spec i e. This is because o hei cu en high sha e o Russia’s ene gy p oceeds and he expec a ion o ela i ely high expo olumes being main ained un il he 2020s. Thi dly, in o de o main ain income, Russian ene gy ac o s mus exploi he A c ic oil esou ces, pa icula ly hose o sho e, and especially when mo ing owa ds he middle o long e m pe spec i e. Al hough oil ex ac ed om Russia’s con inen al shel is expec ed o co e only 5% o Russia’s p oduc ion by 2035,4 68% o Russia’s A c ic oil is expec ed o be ound o sho e (Zolo ukhin & Ga ilo 2011, p. 901). Toge he wi h oil om new onsho e A c ic and sub-A c ic ields i will be c ucial o compensa e o dwindling p oduc ion in wes e n Sibe ia, Bashko os an, Komi and Ta a s an (K yuko & Moe 2013, p. 36; Bobyle 2014, p. 20). Russian oil companies need cons an p oduc ion o main ain hei in es men p og ammes, ope a ions and ma ke posi ions, while he s a e needs hei con inued abili y o gene a e axable income in a capi al in ensi e business ha elies on p edic abili y and ope a es wi h e y long lead imes (Kon o o ich e al. 2010, p. 10). Fou hly, in o de o main ain income, Russian ene gy ac o s mus exploi A c ic o sho e oil esou ces especially wi h an eye o he anspo di e si ica ion and ma ke access ad an ages hey o e . To anspo A c ic o sho e oil, ene gy companies can load anke s di ec ly om he d illing pla o m, bypassing he T ansne -con olled pipeline ne wo k and a oiding ansi s a es. The Mu mansk egion’s po s on he ice- ee Ba en s Sea can se ice he o sho e pla o ms and hos s o age and e minals o loading la ge supe anke s. An icipa ing a mel ing sea ice cap as a esul o clima e change, anke s may well be able o use he No he n Sea Rou e o each he expanding Asian ma ke s. The p ospec s o widening ma i ime access would also acili a e he se icing o A c ic oil d illing pla o ms and o he in as uc u e in he Pecho a and Ka a Seas, which cu en ly emain icebound in win e . These p ospec s can be con as ed o he eas e n Sibe ian esou ces, which o e lowe ex ac ion cos s, bu which a e land-locked and depend on pipelines (K yuko & Moe 2013, p. 40). The emaining 4 ‘Ene ge icheskaya s a egiya Rossii na pe iod do 2035 goda (osno nye polozheniya)’ (he ea e ES 2035), 2014, a ailable a : h p://minene go.go . u/documen s/ az abo ka/17481.h ml, accessed 20 Oc obe 2014. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 PAMI AALTO 42 un apped wes e n Sibe ian esou ces, o hei pa , a e limi ed in olume (Zolo ukhin & Ga ilo 2011, p. 909). Fi hly, in o de o main ain income le els, Russian ene gy ac o s mus exploi A c ic o sho e oil esou ces wi h an eye o mode nising he coun y’s ene gy sec o o make i mo e inno a i e and compe i i e. In o he wo ds, he mul iple cons ain s on he complex A c ic o sho e oil p ojec s which will be analysed below will o ce Russian ac o s o go o majo compe i i eness-enhancing inno a ions in explo a ion, ex ac ion, p oduc ion, anspo and echnology de elopmen ; in es men ; he unc ioning o ins i u ions oge he wi h na ional and in e na ional coope a ion; and he managemen o ecological isks. In sho , i is assumed ha Russia’s mode nisa ion in he sho o middle e m depends la gely on he capaci y o he oil indus y o pu sue i s p o i in e es s and e en ually gene a e axable income o se e he s a e’s iscal in e es s. A c ic oil p ojec s suppo he p o i and iscal in e es s as hey help o main ain p oduc ion and p o ide incen i es o he ene gy sec o o mode nise. Thus A c ic oil p ojec s can suppo he ene gy sec o ’s esilience and i s long- e m ole is-à- is Russia’s o e all mode nisa ion. Wide mac oeconomic and socio- poli ical ques ions beyond hese assump ions, such as whe he he income gene a ed by means o A c ic oil p ojec s is edis ibu ed well, o whe he i suppo s socially, poli ically o ecologically desi able o ms o Russian mode nisa ion, a e b acke ed he e. The s uc u a ion o Russia’s choices in he A c ic The applica ion o s uc u a ion heo y helps o sys ema ise and en ich he g adually accumula ing body o knowledge on Russia’s A c ic oil p ojec s. This includes s udies conduc ed in di e en disciplines, o example on Russia’s A c ic esou ces (Kon o o ich e al. 2010; Zolo ukhin & Ga ilo 2011; K yuko & Moe 2013), on Russia’s e i o ial claims on g ounds o he Uni ed Na ions Con en ion on he Law o he Seas (UNCLOS) o access he o sho e esou ces (Dodds 2010; Koi u o a 2011), and on Russian in e es s is-à- is in e na ional coope a ion and he ole o ins i u ions in he u ilisa ion o he esou ces (K aska 2011; Hong 2012; Filimono a 2013; Keil 2013; Klimenko 2014), as well as he associa ed ecological isks (Lesikhina e al. 2007). Howe e , he e is a dea h o heo e ical models o help o sys ema ise exis ing knowledge on he esou ces, ins i u ions and ecology. Simul aneously he ole o inance and in es men has been only li le discussed. To o e a ool o b idge some o hese gaps, a mo e heo e ical s uc u a ion app oach is p oposed he e. This will also acili a e he compa ison o exis ing knowledge o o he s udies on Russian ene gy and mode nisa ion. Ou heo e ical model o he s uc u a ion o Russia’s A c ic oil p ojec s s a s om he in e es s o he ac o s in ol ed. The ac o s make choices on how o o mula e and u he hei in e es s, and how o comp ehend and assess he hie a chy o hose in e es s, wi h he help o cogni i e ames. In o he wo ds, ames se e as cogni i e il e s by which ac o s ex ac ele an in o ma ion o help hem make choices. The guiding hypo hesis is as ollows: Se e al in e es s d i e Russian ac o s in A c ic o sho e oil p ojec s and he Russian go e nmen , led by he p esiden , is he main s a egic ac o aligning hese in e es s wi h each o he ; as such an ac o , he go e nmen aces he majo ask o c ea ing and suppo ing he o ma ion o su icien ly appealing ames capable o aligning a leas some o he a ious in e es s in o de o enable he conce ed and well-coo dina ed de elopmen o A c ic o sho e oil. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 MODERNISATION OF THE RUSSIAN ENERGY SECTOR 43 In he ligh o he li e a u e on Russia’s mode nisa ion ci ed abo e, he Go e nmen is indeed aking his s a egic ole e y se iously, as wi nessed in i s g ip o e he economy, socie y and poli ical sys em. The Russian Go e nmen , howe e , is cons ained by he ac ha he o ma ion o in e es s and ames is con ingen upon he ac o s’ ele an s uc u al con ex s, which a e concep ualised as policy en i onmen s. These, in u n, a e modelled in e ms o ou s uc u al dimensions he Russian ac o s need o mas e , o o ake in o accoun o ealise hei in e es s. They include wha will be called he esou ce geog aphical, inancial, ins i u ional and ecological dimensions, which bo h cons ain and enable he choices made by he ac o s. In o he wo ds, ac o s mus make choices on wha hey wan on he basis o wha hey know abou hose s uc u al dimensions, while his knowledge is il e ed h ough he cogni i e ames hey u ilise. The ad an age o he model as hus summa ised is i s capaci y o b ing sys ema ically in o he analysis se e al ypes o ac o s and a wide ange o s uc u al ea u es endowing hem wi h esou ces and capabili ies. I helps us o analyse wha choices ac o s can ealis ically make and whe e hey a e mos cons ained (Aal o e al. 2012, 2014; see Figu e 1). This abili y o he s uc u a ion app oach o include ac o s, s uc u es and hei in e ac ion in he same model is c ucial gi en he complex and mul idimensional na u e o ene gy policy (B essand 2013, pp. 18–9). I is especially use ul in he A c ic con ex , whe e we ind se e al ypes o ac o s, le els o hei agg ega ion and di e se p oblems wi hin and ac oss ou ou dimensions (Aal o & Jaakkola 2015). We will nex analyse Russian in e es s and ames and hen p oceed o he s uc u al dimensions o he policy en i onmen . Ac o s S uc u al dimensions: enabling and con aining ac o s Russian Go e nmen & s a e ins i u ions Geog aphy and geology o A c ic o sho e oil esou ces Resou ce geog aphic Financial Ins i u ional Ecological Ene gy echnologies o he explo a ion, ex ac ion and p oduc ion o esou ces Main enance and anspo a ion in as uc u e Oil p ices and supply/demand balance in global ma ke s Ene gy diplomacy, in e na ional in e ac ion, ins i u ions and ensions Ene gy ansi ions: di e si ica ion away om ossil uels, shi owa ds enewables and ene gy e iciency Clima ic consequences o A c ic ossil uels Tempo al eedback En i onmen al isks o A c ic oil p ojec s In o mal ins i u ions incl. p ac ices, no ms and ules Fo mal s a e ins i u ions egula ing he ela ions among he Russian and o he in ol ed ac o s, incl. legisla ion, licensing & ag eemen s Taxa ion egime In as uc u e, p oduc ion, in es men /c edi and social in es men cos s In e es s and cogni i e ames o ac o s in he o mula ion o Russia’s A c ic ene gy policies Ene gy companies, sub-con ac o s & pa ne s In e na ional inancial ins i u ions Russian egional and local ac o s Ou pu s: he e- s uc u a ion o Russia’s ene gy policies in A c ic o sho e oil p ojec s FIGURE 1. THE STRUCTURATION OF RUSSIA’S ARCTIC OFFSHORE OIL PROJECTS. Sou ce: C ea ed by he au ho . Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 PAMI AALTO 44 Russian ac o s, in e es s and ames Mos s udies so a ejec any simple no ions o an ene gy supe powe ame p e ailing widely in Russia. This ame eme ged in he policy deba e du ing he 2000s. I ep esen ed ‘Russia’ as a monoli hic ac o wi h s ong in e es s in o eign policy in luence o enhance he coun y’s ela i e posi ion is-à- is neighbou s and in in e na ional ela ions in gene al by means o u ilising ene gy deli e ies and in as uc u e o poli ical le e age. The ame was s eng hened by peaking oil p ices and ising demand o oil and gas, which was edging ma ke powe in a ou o Russian ene gy companies, which in u n we e making eno mous p o i s helping he s a e o mee i s iscal in e es s and in es in he s eng hening s a e (Aal o e al. 2012, 2014).5 Se e al s udies s ess he poli ical conce ns such an ene gy supe powe ame c ea es among Russia’s ene gy cus ome s. In he 2000s, a leas i e e o s by Lukoil, a p i a e Russian oil company, o in es in in as uc u e o acqui e ene gy companies in Eu ope we e ejec ed on he g ounds o conce ns ha he company se ed he s a e’s o eign policy in e es s (Poussenko a 2012, pp. 193–95). Excessi ely ob ious pu sui o such in e es s h ough ene gy diplomacy isks des abilising p oduce –consume ela ionships. I p omp s cus ome s o di e si y hei impo s in o de o educe dependence on Russia (Godzimi ski 2013, pp. 181–84). Such a di e si ica ion shi has in ac esul ed om Russia’s nume ous ene gy ela ed con lic s wi h impo an ansi s a es Uk aine and Bela us since he mid-2000s (Balmaceda 2012). Russia’s capaci ies o ealise ambi ious o eign policy in e es s we e also hampe ed by he global inancial and economic c isis o 2008–2009, which educed he demand o Russian ene gy commodi ies in hei main Eu opean ma ke s. Since hen he ma ke s o Russian companies ha e igh ened wi h inc eased p oduc ion by OPEC coun ies and elsewhe e, o ce ul ma ke en y o new p oduc ion om No h Ame ica, as well as lique ied na u al gas (LNG), uncon en ional oil and uncon en ional gas (Aal o & Talus 2014; K opa che a 2014). In 2014, sinking global oil p ices comple ed he lis o se e e s uc u al cons ain s. In he u u e, on he oil p oduc s segmen , new e ine ies in he Middle Eas will s a compe ing wi h Russian ul a-ligh sulphu diesel (Smi h 2015, pp. 35–41). Wi hin his mo e challenging policy en i onmen Russian ac o s mus espond o new p essu es on se e al ma ke s and p oduc segmen s simul aneously. This cu s he p ospec s o one ene gy supe powe aming uni ing Russian ac o s. The inancial sanc ions o 2014 may esul in a g ea e sha e o he ene gy sec o ending up mo e closely linked o he s a e when s a e loans eplace US and EU based inance (Gaddy & Ickes 2014, p. 6). Al hough he sanc ions may empo a ily uni y Russian ac o s, hey will no acili a e he use o ene gy esou ces o se e poli ical in e es s. Russia’s esilience is-à- is sanc ions depends hea ily on con inued income om he exis ing oil ields while he de elopmen o A c ic ields is cons ained by he ban on expo s o A c ic and o sho e ene gy echnologies, as will be analysed in mo e de ail below. In his challenging en i onmen he s a e needs o choose be ween measu es associa ed wi h di e en o ms o mode nisa ion. These include he de elopmen alis model comp ising igh con ol o poli ical ins i u ions, ac i e indus ial policy and some p o ec ionism ep esen ed by P esiden Pu in, and he mo e compe i ion- o ien ed and inno a ion-o ien ed plu al model associa ed wi h P ime Minis e Dmi y Med ede (Sakwa 2014, pp. 39–44). The la e model did no , howe e , p og ess much 5See also Gold hau (2008), Ru land (2008). Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 MODERNISATION OF THE RUSSIAN ENERGY SECTOR 45 du ing Med ede ’s p esidency (Wilson 2015). Ne e heless, o any A c ic oil p ojec o se e any mode nisa ion aims, he main s a egic ac o , he Russian Go e nmen led by he p esiden , mus success ully no only iden i y and ank i s own in e es s bu also coo dina e hose o o he ac o s in ol ed (Tkachenko 2007; Aal o e al. 2012). Wha a e hese in e es s? The Russian Go e nmen a icula ed a ela i ely s able se o in e es s om 2003 o 2014. The 2003 ene gy s a egy made e e ences o he mode nisa ion o he ene gy sec o o suppo economic g ow h and social de elopmen , and o Russia’s ac i e ole as a pa icipan in global ene gy ma ke s (Minis y o Ene gy 2003, pp. 1, 12). The 2009 ene gy s a egy o he Russian Go e nmen up o 2030 aimed o ‘se up an inno a i e and e icien ene gy sec o ’ (Go e nmen o he Russian Fede a ion 2009, p. 15). I ei e a ed he in e es s o he 2003 s a egy: The objec i e o he ene gy policy o Russia is o maximise he e ec i e use o na u al ene gy esou ces and he po en ial o he ene gy sec o o sus ain economic g ow h, imp o e he quali y o li e o he popula ion and p omo e s eng hening o o eign economic posi ions o he coun y. (Go e nmen o he Russian Fede a ion 2009, p. 10) One c ucial mode nisa ion objec i e in he 2009 s a egy is o inc ease oil e ining, imp o e he quali y o oil p oduc s and o de elop oil ela ed chemical indus ies (Go e nmen o he Russian Fede a ion 2009, pp. 60–74). In he cu en d a ene gy s a egy un il 2035 he o e all aim is he ‘quali a i e enewal (mode nisa ion) o he ene gy sec o ’. Ene gy consump ion is o dec ease alongside Russia’s dependence on he sec o , which o i s pa should s imula e new ypes o in as uc u e by means o inno a ions.6 The ‘complex mode nisa ion’ o he ene gy sec o also p esupposes he de elopmen o domes ic ma ke s, e ec i eness, quali y o commodi ies, di e si ica ion o expo ma ke s, commodi ies and p oduc s, and imp o emen o compe i i e capaci ies, while i should also suppo social and ecological esponsibili y. In he o eign policy sphe e Russia ‘as a esponsible powe unde s ands o eign ene gy policy no only om he na ow poin o iew o expo e s, maximising sho - e m gains, bu as a means o esol ing bo h na ional and in e na ional p oblems’, p omo ing a global ene gy dialogue.7 F om 2003 o 2014 he in e es s pe aining o he ene gy sec o ’s mode nisa ion became mo e p onounced and de ailed in esponse o he shi s in he policy en i onmen s in Russia’s main ma ke s. Russia’s 2013 s a egy o de eloping he coun y’s A c ic zone ei e a es he in e es s in mode nising he ene gy sec o oge he wi h anspo in as uc u e, he a ional use o esou ces, socio-economic de elopmen and ‘ecological secu i y’, while i also ea u es wide o eign policy in e es s including in e na ional coope a ion and issues o mili a y secu i y. This b oad simila i y o in e es s a icula ed in he ene gy and A c ic s a egies is logical gi en ha Russia’s A c ic s a egy is in ended o se e he ealisa ion o na ional in e es s.8 Bo h he ene gy s a egies and A c ic s a egy name Russia’s A c ic con inen al shel , he Timan–Pecho a egion by he A c ic wa e s o he Pecho a Sea, eas e n Sibe ia and he Fa Eas , among he chie si es o new de elopmen (Go e nmen o he Russian Fede a ion 6ES 2035, p. 3; see also I ano (2014). 7ES 2035, pp. 8–9, 23. 8 ‘S a egiya az i iya A k icheskoi zoni Rossiiskoi Fede a sii’, Go e nmen o he Russian Fede a ion, 20 Feb ua y 2013, pp. 4–5, 19, a ailable a : h p://go e nmen . u/news/432, accessed 4 Oc obe 2013. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 PAMI AALTO 46 2009, pp. 67–9).9 The Go e nmen e ec i ely made Gazp om and Rosne p i ileged ac o s in he de elopmen o A c ic o sho e esou ces on he g ounds o he 2008 amendmen s o he Law on Subsoil Resou ces (Klimenko 2014, p. 4). The mode nisa ion o he ene gy sec o is no , howe e , an objec i e in and o i sel bu a he has ins umen al alue is-à- is he mo e gene al se o in e es s and ames o he Russian ac o s. This cons ella ion can be summa ised as ollows. The ene gy companies’ p o i in e es s a e closely linked o he Go e nmen ’s iscal in e es s. Toge he , he p o i and iscal in e es s a e pa o a wide business ame, which oday is he mos cen al ame agg ega ing Russian ac o s (Aal o e al. 2014). How does his ame wo k? The Go e nmen can imp o e he s a e’s iscal si ua ion by collec ing di idends as a sha eholde om he annual p o i s o he pa ly s a e-owned ene gy companies Gazp om and Rosne . I can also gene a e income om any u he sales o he sha e s ock o hese companies and om he a ious axes i collec s om hem (see below). Such an umb ella ole o he business ame in b inging he a ious Russian in e es s oge he is c ucial o gene a ing esou ces o he mode nisa ion o he ene gy sec o and he s a e as a whole. Fo his eason only a ew Russian ac o s ac ually ques ion i . Ye his ame compe es wi h o he o mula ions. Al hough he ene gy supe powe ame has e oded i no dissol ed, he Go e nmen e ains in e es s in o eign policy in luence. In he 2000s, al oge he in 31 ins ances in 20 di e en coun ies, Russian ac o s cu ene gy supplies o h ea ened o do so (O ung & Ø e land 2011). Russia also needs su icien income om he ene gy sec o in o de o con inue he mode nisa ion o he a med o ces (Godzimi ski 2013, pp. 181–87). I seeks o p o ec A c ic ene gy p ojec s by he c ea ion o a new A c ic mili a y o ce. The 2014 ‘c isis’ in ela ions wi h i s ene gy cus ome s in Eu ope has o ced Russia o s eng hen i s posi ions in Asian, and in pa icula Chinese ma ke s. I also seeks common ma ke s o ene gy ca ie s in he ‘Eu asian economic space’ as well as common egula ion.10 Hence, he new Russian geopoli ical ame seeks a balance be ween Eu ope, Asia and Eu asian in eg a ion. The Go e nmen has an endu ing in e es in u he ing social de elopmen wi h an eye o en dis ibu ion, balance be ween he cen e and he egions and o e all main enance o social o de (Dusseaul 2012). In i s A c ic s a egy, he Go e nmen seeks ‘complex socio-economic de elopmen ’, including imp o emen o he quali y o li e o he indigenous popula ion and social le el o economic ac i i ies in he A c ic, de elopmen o he esou ce base o he A c ic zone o he Russian Fede a ion by means o he u ilisa ion o o wa d-looking echnology, mode nisa ion and de elopmen o he in as uc u e o he A c ic anspo sys em.11 Russian egional ac o s, including hose in he A c ic, sha e he in e es in social de elopmen and compe e among hemsel es o access o en s. This social ame links he Russian s a e wi h he in e es s o oil egions and o he socie al ac o s. 9‘S a egiya az i iya A k icheskoi zoni Rossiiskoi Fede a sii’, Go e nmen o he Russian Fede a ion, 20 Feb ua y 2013, p. 8, a ailable a : h p://go e nmen . u/news/432, accessed 4 Oc obe 2013. See also ES 2035, p. 22. 10ES 2035, pp. 22–23. 11‘S a egiya az i iya A k icheskoi zoni Rossiiskoi Fede a sii’, Go e nmen o he Russian Fede a ion, 20 Feb ua y 2013, p. 8, a ailable a : h p://go e nmen . u/news/432, accessed 4 Oc obe 2013. See also ES 2035, p. 4. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 MODERNISATION OF THE RUSSIAN ENERGY SECTOR 53 An al e na i e sou ce o c edi would be loans om Asia’s eme ging powe s. Fo example, Rosne has an ag eemen wi h he Chinese CNPC on de eloping esou ces in he Ba en s and Pecho a seas (Filimono a 2013, p. 10); CNPC also con ols 20% o No a ek’s Yamal lique ied na u al gas p ojec . Acco ding o one analys , Eu opean unding would, howe e , be p e e ed o Chinese c edi s: [wi hd awal o Eu opean inancing] migh kill, well no kill, bu uin and damage many o he s uc u es in Russia. Fo indus ies o echnologies o equipmen , i ’s e y much abou inancing. I ’s eally hu ul o Russia and un o una ely we will see his again. I can jus ansmi he poin o iew o espec ed economis s in Russia, ha in case o Chinese unding i is like killing you sel in many ways … he Chinese, hey will ne e do some hing o ee, jus o good, as Eu ope can do. You canno compa e Eu ope and China in many aspec s. T us me i ’s he poin o iew o leading economis s. They a e saying we should be eally ca e ul wi h ha unding om China.24 The ene gy companies a e also expec ed o in es in social in as uc u e, such as schools, kinde ga ens and o he educa ional as well as spo s acili ies in he egions hos ing hei ene gy in as uc u e. These non-comme cial in es men s un coun e o he companies’ p o i in e es s and a e d i en by he s a e and he egion’s join social ame. These cos s con use he s a e’s esponsibili ies as a en income collec o and edis ibu o .25 Ye he cos s imposed on o he companies a e ela i ely mino in ela ion o hei o al in es men s in la ge-scale in as uc u e. Acknowledging he a ious ypes o cos s in he de elopmen o Russian A c ic o sho e oil, in July 2012, he Russian Go e nmen g an ed Gazp om Ne a 50% cu in he oil expo ax o P i azlomnoe oil simila o wha he new Eas Sibe ian ields enjoy (S aalesen 2012). In addi ion, A c ic p ojec s do no ha e o pay p ope y ax o mine al ex ac ion ax on he i s 257 million ba els. Toge he hese measu es educe he s a e’s ax e enue om he no mal 90% a e o 50%.26 F om 2016, new A c ic oil p ojec s will be exemp ed om he mine al expo ax and will pay only a 5% mine al ex ac ion ax (Heininen e al. 2013). Global oil p ices, including he supply and demand balance and oil u u es ma ke s, in he las ins ance de e mine whe he Russian companies can u he hei p o i in e es s by means o A c ic o sho e oil p ojec s. They can in luence he ex ac ion, p oduc ion and anspo cos s, which emain high. The Russian Go e nmen can adjus he axa ion egime and in luence he di idend policy o Gazp om and Rosne conside ing he ealisa ion o i s iscal and he social de elopmen in e es s. Global oil p ices, howe e , ep esen a s uc u al ea u e no easily con ollable by Russian ac o s. P i azlomnoe’s p oduc ion equi es p ices abo e be ween $80 and $90 o s ay comme cially p o i able (Klimenko 2014, p. 7). As i s oil is hea ie han he no mal U als blend, he i s deli e ies we e o e ed a a discoun (Pe e sen 2014). Wi h global o e supply and p ices consequen ly ho e ing be ween $50 and $60 pe ba el be ween au umn 2014 and summe 2015, he Russian business ame including he ealisa ion o he p o i and iscal in e es s was unde se ious p essu e o es uc u e, as was 24Anonymous in e iew wi h a business liaison o ice , Mu mansk, 24 Sep embe 2014. 25Anonymous in e iews wi h business ep esen a i es 1 & 2, Mu mansk, 24–25 Sep embe 2014. 26‘Oil Field Op ions in Russia’s A c ic Ci cle’, Ene gy Digi al, 15 No embe 2013, a ailable a : h p://www.ene gydigi al.com/u ili ies/2610/Oil- ield-op ions-in-Russia039s-A c ic-Ci cle, accessed 15 Ma ch 2015. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 PAMI AALTO 54 he social ame ha depends on he ealisa ion o he p o i and iscal in e es s. This causes ine i able delays in Russia’s A c ic oil p ojec s. The ins i u ional dimension The ins i u ional dimension includes he s uc u e o o mal ins i u ions egula ing he ela ions among he Russian and o he ac o s in ol ed, comp ising he legisla ion, licensing and ag eemen s pe aining o Russia’s A c ic oil. Impo an ly, his dimension also encompasses he s uc u e o in o mal ins i u ions— ules, p ac ices and no ms—which unde pins he way in which o mal ins i u ions egula e ela ions among ene gy companies and hei in e ac ion wi h local, egional and go e nmen al ac o s. In o mal ins i u ions a e pa icula ly in luen ial in Russia (Ledene a 2013). They equen ly nulli y he in ended e ec s o e o ms o o mal ins i u ions such as laws and adminis a i e sys ems. As a esul we iden i y a ious pa h- dependencies impeding policy changes and making inc emen al change likelie han apid mode nisa ion (No h 1991; G anbe g & Nikula 2006). Finally, he conduc o ene gy diplomacy is also pa o his dimension, e e ing o he s uc u e o in e na ional in e ac ion, ins i u ions and ensions (Aal o 2014, 2015).27 Rega ding o mal ins i u ions, he 2008 amendmen s o Russian subsoil legisla ion e ec i ely made Gazp om and Rosne p i ileged companies in A c ic o sho e p ojec s. They alone sa is ied he condi ions o i e yea s o expe ience in he de elopmen o esou ces in he Russian con inen al shel and o e 50% s a e owne ship. Fo eign companies canno ob ain new licences and ha e o consul he go e nmen upon acqui ing 10% o mo e o a Russian company wo king in a s a egic sec o such as o sho e oil. Howe e , nei he Gazp om no Rosne ul ils he equi emen s o geological p ospec ing se by he Minis y o Na u al Resou ces and Ecology. In pa icula Rosne , se iously a ec ed by he ecen ly eme ging inancial cons ain s desc ibed abo e, deems he equi emen s oo high. Bashne , Lukoil, Su gu ne egas and Za ubezne , which ope a es a small ield on Kolguye Island in he Ba en s Sea, oppose and lobby agains he p i ileging o Gazp om and Rosne in A c ic o sho e p ojec s. To p o ec hei in e es s Gazp om and Rosne ha e coope a ed in o sho e de elopmen since he es ablishmen o he JV Se e mo ne egas in 2002 whose sha es Gazp om acqui ed in 2005. Mos ecen ly, in 2012, hey concluded a coope a ion ag eemen on sha ing in as uc u e o o sho e ield de elopmen . Howe e , his coope a ion is comp omised by hei compe i ion in lique ied na u al gas de elopmen (Filimono a 2014, pp. 4–11). Fo each new ope a ion, Gazp om and Rosne ha e o nego ia e a ila e al o mal ag eemen wi h local and egional adminis a ions o ob ain pe mi s o acqui e and de elop he land necessa y o hei suppo ope a ions, such as po s, including se ice o explo a ion, main enance and expo essels, se ice o pla o ms, housing and social acili ies o wo ke s. In e u n hey de elop social and ecological in as uc u e, and con ibu e o compe ence de elopmen in he educa ional ins i u ions in Mu mansk and A khangel’sk. They also ha e o p esen hemsel es in public hea ings o seek he accep ance o local ins i u ions o hei p ojec s: ‘i he company en e s he ma ke he e, hey i s ha e o ge he ag eemen o he 27Impo an ly, e en hough hese h ee main ypes o ins i u ional s uc u es con ain elemen s o a social na u e, in ou s uc u a ion model hey a e analysed as pa o he wide s uc u al en i onmen he ac o s ace and which hey ha e o ‘ il e ’ wi h he help o cogni i e ames jus like any o he o he dimensions o s uc u e we analyse. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 MODERNISATION OF THE RUSSIAN ENERGY SECTOR 55 local popula ion, ou se lemen , and secondly hey ha e o do e e y hing possible o make li e be e , hey ha e a social esponsibili y owa ds he se lemen ’.28 S a oil and To al also ha e such ag eemen s on educa ional and social p ojec s suppo ing he social de elopmen in e es s o he egional ac o s.29 Coope a ion among he ene gy companies, and ede al and egional o mal ins i u ions elies on he in o mal ins i u ions, o p ac ices and no ms oge he accoun ing o he social ame ha so c ucially unde pins Russian A c ic o sho e oil p ojec s. The p e alence o he social ame could also be discussed in e ms o he ins i u ional p ac ices associa ed wi h de elopmen alism. The social and ecological in e es s o he egions depend on hei iscal in e es s in bene i ing om he p o i s he companies make and he income hei wo ke s b ing o he egional economy. De elopmen alis economics no wi hs anding, his se o in e es s compels he egions o compe e agains each o he . A he same ime, hey ha e a di ision o labou o so s. Mu mansk p o ides he main suppo o he Pecho a Sea ope a ions, while abou 100 companies in A khangel’sk wo k as sub-con ac o s on he p ojec s o he Yamal Peninsula o which hey a e close , in he a eas o supplying ca go, ships and machine building, as well as cons uc ion. Howe e , compe ence de elopmen is s ill incomple e despi e ou yea s o p epa a ion and lessons lea ned om he cancelled Sh okman condensa e p ojec in he Ba en s Sea.30 On he go e nmen al le el he ene gy companies depend on ede al s a egies and suppo o anspo in as uc u e. Fo example, he ede al anspo hub p ojec o he Mu mansk egion includes ailways and e minals o coal and oil.31 In a wo d, Gazp om and Rosne a e well awa e o he ames and in e es s o o he Russian ac o s. Toge he wi h he in e na ional companies, hey s i e o do hei sha e o he ealisa ion o he social ame which has become mo e angible in he ecen i e a ions o Russia’s ene gy and A c ic s a egies. Russia’s ene gy diplomacy has he di icul ask o add essing he unin ended consequences o he ealisa ion o Russia’s o eign policy in e es s in Uk aine. These cons ain s conce n bo h Russia’s na u al gas and oil indus ies in he A c ic and beyond and lead o Russia’s cus ome s and pa ne s econside ing hei dependencies on Russian supplies and coope a ion wi h Russian ac o s. The epe cussions a e no con ined o he a ailabili y o ad anced ene gy echnologies o inance bu also o he iabili y o Russia’s sys em o edis ibu ing ene gy en s, he ealisa ion o he social ame including he delica e balance be ween he companies’ p o i in e es s, he s a e’s iscal in e es s and he egions’ socio-economic in e es s and he sus ainabili y ame. The egional ac o s whose social in e es s Russian A c ic oil p ojec s se e, and who look o mo e o such impac , do no unequi ocally suppo all o eign policy in e es s exp essed by he Russian s a e ins i u ions, and which led o he sanc ions: LNG echnologies a e mos ly de eloped ab oad. Unde wa e ex ac ion complexes a e nei he used no de eloped in Russia. Such echnological di icul ies p e ail. Fo me as a businessman hese seem some o he mos complex issues. … Undoub edly he p e en ion o oil spills is an acu e ques ion in 28Anonymous in e iew wi h a egional adminis a ion o icial, Mu mansk, 24 Sep embe 2014. 29Anonymous in e iew wi h business ep esen a i e 2, Mu mansk, 24 Sep embe 2014. 30 Anonymous in e iew wi h egional adminis a ion o icial, Mu mansk, 24 Sep embe 2014; in e iew wi h business ep esen a i e 1, Mu mansk, 25 Sep embe 2014; anonymous in e iew wi h a business ep esen a i e, A khangel’sk, 27 Sep embe 2014. 31Anonymous in e iew wi h a egional adminis a ion o icial, Mu mansk, 24 Sep embe 2014. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 PAMI AALTO 56 he A c ic which mus be deal wi h join ly. And now, I hink, ou poli ical leade s should h ow away all poli ical ambi ions o he sake o he secu i y o he A c ic, i s na u e, people and i s ma ine li e. 32 The cons ain s on in e na ional in e ac ion ensuing om he Uk aine–Russia con lic , he associa ed sanc ions imposed on he Russian A c ic ene gy indus y and he egional ac o s he eby a ec ed, as well as he ensions o med, a e se e e and no easily amended by means o ene gy diplomacy on he pa o s a e ins i u ions. The only posi i e ea u e in his espec is he con inuing coope a ion wi hin he A c ic Council. In his si ua ion Russian s a e ins i u ions can ealise hei o eign policy in e es s in Uk aine bu a e mo e cons ained beyond i . The associa ed cons ain s o he ealisa ion o he p o i , iscal and social in e es s o Russian ac o s a e an unin ended ne consequence o Russia’s new unila e al o eign policy, and he ela ed mismanagemen among g ea powe s wi h an in e es in Uk aine. No single ac o in he Wes o in Russia ini ially sough his ou come. As such i is an example o a ailed diagnosis on he pa o he Russian Go e nmen o he s uc u e o which Russian ene gy diplomacy is pa . The ecological dimension The ecological dimension e e s he e o he en i onmen al isks o A c ic oil p ojec s, he associa ed clima e change e ec s, he long- e m ene gy ansi ions a ge ing di e si ica ion away om ossil uels, he p omo ion o ene gy e iciency and he de elopmen o enewable ene gy. In o he wo ds, se ious cons ain s eme ge on Russia’s A c ic o sho e oil p ojec s when iewed h ough he ecological dimension. This is he case e en hough hese p ojec s simul aneously di ec g ea e a en ion o he en i onmen al side-e ec s o he indus y, de elop ecological expe ise and a e e en ually in ended o gene a e income o he mode nisa ion o he Russian economy and ene gy indus y which migh make he coun y less dependen on ossil uel esou ces in he long un. The Russian legisla ion imposes se e al legal cons ain s on he oil indus y in o de o sa egua d he ecological in e es s o he s a e and egions. The companies in ol ed mus p esen a plan on how oil emo al would be conduc ed in he e en o a spill and a e esponsible o paying o he epai o en i onmen al damage. The cen e o Eme gencies and Elimina ion o Consequences o Na u al Disas e s (EMERCOM) o he Minis y o Ci il De ence is esponsible o he ac ual clean-up ope a ions. I uses olun ee s and u ilises he expe ise o scien i ic ins i u ions which ha e de eloped a da abase on how o use chemicals o emo e di e en ypes o oil, suppo ed by he c oss-bo de Kola c ic p og amme.33 Howe e , because he Minis y’s EMERCOM cen e in A khangel’sk is se e al hou s’ jou ney away om he Pecho a Sea oil ex ac ion and loading acili ies, he Minis y opened new cen es wi h asks in an i-oil spill ac i i y in Na yan-Ma in 2013 and in Mu mansk in 2015. Lukoil ins alled an eme gency esponse oil emo al sys em o p o ec i s o sho e pipelines and oil e minal nea Va andei (Mosee 2014a, 2014b). On he Gazp om P i azlomnoe pla o m, a ze o discha ge sys em is ins alled oge he wi h a se en seconds’ eme gency oil loading sys em in ended o p e en oil spills (Pe o a 2014). An an i-oil spill exe cise is held annually wi h No wegian o ganisa ions while u he lessons a e sough om he No wegian expe ience o p e en ion (Banko 2012). On he le el o he A c ic Council Membe S a es, he A c ic Ma ine 32Anonymous in e iew wi h a business ep esen a i e, A khangel’sk, 27 Sep embe 2014. 33Anonymous in e iew wi h business ep esen a i e 1, Mu mansk, 25 Sep embe 2014. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 MODERNISATION OF THE RUSSIAN ENERGY SECTOR 57 Oil Pollu ion P epa edness and Response Ag eemen o 2013 di ec s a en ion o in o ma ion exchange, mu ual assis ance, and calls o u he bila e al and mul ila e al ag eemen s. I lacks, howe e , any de ailed s anda ds ega ding equipmen , d illing echniques and sa e y measu es.34 In sho , Russian ac o s on se e al le els implemen measu es o p o ec ecological in e es s. Ne e heless, gi en he ha sh A c ic condi ions, which may p e en eme gency wo k, many indus y ad ise s ecommend u he measu es o p o ec he companies’ p o i in e es s om po en ially ha m ul en i onmen al side e ec s and se ious image losses (Eu asia G oup 2013, pp. 24–6). Rega ding ene gy ansi ions, he Russian s a egies ha e consis en ly called o mo e ene gy e iciency. The 2009 ene gy s a egy se a a ge o a 4.5% sha e o he p oduc ion and consump ion o enewable ene gy by 2020 (Go e nmen o he Russian Fede a ion 2009, pp. 110–11). Acco ding o he 2014 d a ene gy s a egy, by 2035, he ene gy in ensi y o he GDP will ha e dec eased by 50%, and CO2 emissions by 75% compa ed o he le el o 1990 (I ano 2014). This esembles he ossil uels income suppo ed ene gy ansi ion a emp ed o example in Denma k, al hough he a ge s a e mo e modes in Russia. Acco ding o he calcula ions made by he UNDP, Russia could educe i s ene gy consump ion by inc easing ene gy e iciency by 45% compa ed o he 2005 le els a a cos o $324–57 billion (UNDP 2010, p. 92). Fo his pu pose i could acqui e he necessa y in es men o $80–90 billion a yea om he expo o ossil uels which would o he wise ha e been sold on he domes ic ma ke s o lowe p o i s. This i uous cycle would se e se e al Russian in e es s simul aneously bu p esupposes a su icien ossil uel p oduc ion olume as well as su icien demand and high enough p ices on he expo ma ke s. Howe e , in he A c ic con ex , he e ec s o clima e change may also hampe he de elopmen o ene gy in as uc u e and inc ease he isks o en i onmen al damage, while he u ilisa ion o he egion’s esou ces will u he exace ba e clima e change (B adshaw 2012, pp. 226–28). O e all, he cons ain s on he de elopmen o Russia’s A c ic o sho e oil, including he dwindling global demand and p ices o 2014–2015, as well as he a ailabili y o in es men capi al and he ele an ene gy echnology owing o he sanc ions, ep esen a double-edged swo d. On he one hand, he sus ainabili y ame may be well se ed as mo e A c ic oil emains unexploi ed, while on he o he , some o he expe ise and equipmen in he a ea o en i onmen al p o ec ion in A c ic oil p ojec s emains una ailable. Simul aneously he ealisa ion o he Russian p o i , iscal and social in e es s is impeded. Discussion I was assumed in he second sec ion o his essay ha he de elopmen o A c ic o sho e oil would, oge he wi h A c ic onsho e and sub-A c ic oil ields, enhance he esou ce base o he Russian ene gy expo indus y and suppo i s income gene a ion capaci y in he middle o long e m pe spec i e. Fu he , i was assumed ha A c ic o sho e oil would acili a e he di e si ica ion o anspo ou es and ma ke s, and ul ima ely o i s own pa help he Russian ene gy indus y o mee he o e all mode nisa ion objec i es se o i in he coun y’s ene gy s a egies by i ue o he need o o e come he nume ous cons ain s in ol ed. The esea ch 34See, ‘A c ic Ma ine Oil Pollu ion P epa edness and Response Ag eemen ’, a icles 5–13, 15 May 2013, Ki una, Sweden, a ailable a : h p://www.a c ic-council.o g/epp /ag eemen -on-coope a ion-on-ma ine-oil- pollu ion-p epa edness-and- esponse-in- he-a c ic/, accessed 15 Ma ch 2015. Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 PAMI AALTO 58 ques ion conce ned he mode nisa ion o he ene gy indus y in he con ex o A c ic o sho e oil p ojec s while i was hypo hesised ha aligning he a ious in e es s o he Russian ac o s in ol ed is he majo s a egic ask o he Russian Go e nmen . The simul aneous ealisa ion o he Russian ene gy companies’ p o i in e es s, he iscal in e es s o he Go e nmen , and he social de elopmen and sus ainabili y in e es s o he s a e and he egions, depends on a ‘p ope diagnosis’ o he policy en i onmen including i s ou s uc u al dimensions. The di icul y is ha each o he ou dimensions examined in his essay comp ises cons ain s capable, e en on hei own, o se iously hampe ing he ealisa ion o he said se o in e es s. Tha Gazp om Ne shipped Russia’s i s A c ic o sho e oil om P i azlomnoe and sold i o he Eu opean ma ke s in sp ing 2014 means ha he Russian Go e nmen assessed he policy en i onmen ela i ely success ully, and managed o agg ega e he ac o s in ol ed and aligned hei in e es s. In o he wo ds, he Go e nmen managed o combine he business and social ames. Concomi an ly i enjoyed a ou able s uc u al condi ions beyond i s own con ol especially on he inancial dimension in he global oil ma ke s in e ms o high enough p ices and demand mee ing supply. Such was he si ua ion o he Russian ac o s qui e equen ly om a ound he mid-2000s despi e empo a y shocks such as he global inancial c isis in 2008–2009 and p oblems wi h ansi coun ies. By au umn 2014, he pu sui o Russia’s o eign policy in e es s in Uk aine had caused se e al unin ended consequences d as ically es uc u ing he policy en i onmen . The esul ing sanc ions imposed se e e cons ain s on he esou ce geog aphical dimension by hal ing he supplies o wes e n A c ic and deepwa e oil echnology, equipmen and expe ise. This ques ions he main enance o Gazp om’s exis ing A c ic o sho e p ojec and in pa icula Rosne ’s pu sui o new p ojec s. On he inancial dimension he eezing o c edi om he EU a ea and he USA o ced he ene gy companies o hal , downsize o delay many o hei A c ic ope a ions. They also became dependen on Russian c edi om he limi ed co e s o he Na ional Wel a e Fund and we e o ced o explo e he possibili ies o unding om coun ies like China and India. The Russian Go e nmen had o accep u he isks in addi ion o he bu den o he ax b eaks p e iously g an ed o he companies, while oil egions los some o he expec ed in es men s ha would ha e helped o ealise hei social in e es s. On he ins i u ional dimension he abili y o he Russian Go e nmen o main ain an in e na ional coali ion suppo ing he de elopmen o A c ic o sho e oil ields has e oded while i has o enhance coope a ion among domes ic ac o s including Gazp om and Rosne . On he ecological dimension some o he isks in on ie oil p ojec s in he Russian A c ic o sho e a e delayed while Wes e n coope a ion expedien o he p omo ion o en i onmen al echnologies in oil explo a ion and ex ac ion is impeded. A he same ime, s uc u al p ocesses beyond Russia’s con ol, mos ma kedly on he inancial dimension, became less a ou able o Russian ac o s as global oil ma ke p ices s a ed o dec ease apidly in au umn 2014 and he demand and ou look o expensi ely p oduced A c ic oil wo sened. This highligh s he isks o esou ce dependence is-à- is global ma ke s, especially when combined wi h a mis eading o he policy en i onmen and hence inadequa e domes ic policy planning. As a esul o he s uc u a ion p ocesses examined on he Russian domes ic and wide in e na ional le els, Russian ac o s led by P esiden Pu in can only choose a mo e de elopmen alis model o ac i e indus ial policy. This en ails de eloping a domes ic se ice indus y and ene gy echnologies as well as inc easing domes ic c edi . The es uc u ed policy will mos likely combine close s a e supe ision wi h some p o ec ionism Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 MODERNISATION OF THE RUSSIAN ENERGY SECTOR 59 and impo subs i u ion measu es. The ime lag in he eedback om he likely changing policies back o he policy en i onmen , howe e , is e y long and no en i ely unde he Russian Go e nmen ’s con ol. Some o hese new policy objec i es we e al eady implied in he d a ene gy s a egy o 2014 and in he mo e ague mode nisa ion objec i es se in ea lie s a egies. The implemen a ion o such new policies, i is ai o say, is s ill in i s in ancy gi en ha Russian indus ies can so a deli e p oduc s like conc e e s uc u es, pipes and na al suppo essels, bu no as ye such ad anced ene gy echnology as is equi ed. E en i he sanc ions we e li ed, we can expec Russian ac o s o p epa e o simila si ua ions in he u u e by p omo ing de elopmen alis policies. This could e en ually o e a di e en mode nisa ion pa h o he Russian s a e, indus y and socie y han ha seen du ing much o he pos -So ie e a, which has been p edominan ly cha ac e ised by he globalisa ion and o e all de elopmen o he Russian ene gy indus y wi h he suppo o Wes e n in es men , coope a ion and he exchange o bes p ac ices wi h leading companies in he A c ic and sub-A c ic a eas. In o he wo ds, he Russian Go e nmen p io i isa ion o he ealisa ion o i s o eign policy in e es s in Uk aine had se e al unin ended consequences: i comp omised he capaci y o he business ame o b ing he a ious Russian ac o s, hei pa ne s and ela ed in e es s oge he o de elop he coun y’s A c ic o sho e oil esou ces; i made he Russian ene gy indus y mo e elian on domes ic echnology, impo subs i u ion and unding, in addi ion o in es men om Asia; i delayed he de elopmen o he A c ic oil o sho e esou ces; i h ea ened ax income wi h p o i s delayed and u he ax b eaks possibly needed, and inc eased cos s a a ime when global oil p ices we e low. These unin ended consequences u he e ode he appeal o he business ame. Wi h his ou come, i is likely ha he Russian s a e will s uggle o gene a e he an icipa ed en s om A c ic o sho e oil o suppo he mode nisa ion o he coun y’s ene gy indus y as subs an ially as in ended. Howe e , he ou come may e en ually suppo he de elopmen o he Russian domes ic ene gy echnology indus y. Russia’s o ced de elopmen alis choice o 2014–2015 in some ways esembles he policies by which No h Eas Asian s a es agg essi ely de elop hei enewable ene gy sec o s (Den 2012), and he eby di e si y hei economies. Despi e he simila i ies in he de elopmen alis policy measu es, in he Russian case he equi alen e o is in es ed in he de elopmen o he ossil uel sec o wi hou much di e si ica ion o he indus y. Fo example, du ing he pe iod 2004–2013, he sha e o e ined oil in Russia’s oil p oduc ion inc eased om 42.5% o 53.1%, bu he dep h o oil e ining emained ai ly low a 71.4% (Bobyle 2014, p. 20). This means ha Russia con inues o expo oughly speaking hal c ude oil, including c ude oil om he A c ic o sho e, and hal ela i ely li le e ined oil p oduc s, none o which a e so a om he A c ic. Owing o he need o suppo he oil indus y’s ongoing p ojec s, and he ela ed domes ic banking sec o , combined wi h he a leas empo a y wi hd awal o Wes e n echnology, equipmen , expe ise and c edi , i is di icul o o esee a as - acked mode nisa ion o he Russian oil indus y in he sho o middle e m. In coun ies like No way, he de elopmen o o sho e and A c ic high echnology and expe ise ook se e al decades. I emains unclea whe he he in es men s needed o build a mode n domes ic clus e o knowledge in A c ic and o he ad anced ene gy echnologies will pay o o Russia. As o 2015, i seems ha Russian ac o s a e de e mined o choose ha pa h in he absence o he Downloaded by [Tampe e Uni e si y] a 02:26 25 Ap il 2016 PAMI AALTO 60 p e ious, mo e in e na ional al e na i e o he de elopmen o his sec o o he coun y’s economy. Some Russian obse e s acclaim his policy shi as being long o e due. Despi e he dilemmas implied in he de elopmen o Russia’s A c ic esou ces, he esea ch esul s o his essay sugges ha ene gy esou ces a e no he main p oblem in Russia’s mode nisa ion as some o he deba e on Russia’s economic di e si ica ion migh sugges . Ra he he p oblem is he ames Russian ac o s use o weigh he policy en i onmen h ough which he esou ce weal h can be ac ualised. Russian in e es s in o eign policy in luence in pa icula canno consis en ly be success ully combined wi h he business and social ames which a e also p io i ised in he Russian s a egies. Impo an ly, ames consis o cogni i ely il e ed socio-cul u al in e p e a ions and assump ions o he hie a chy and mu ual dependencies o in e es s. This means ha hey a e oo ed in nume ous in o mal ins i u ions and as such no easily malleable. In consequence, in apidly changing s uc u al condi ions such as hose analysed in his essay, g ossly sub-op imal policy choices become likely. 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