Source: Forbes
Guest-Post: Following Vladimir Putin‘s March election to the Russian presidency, observers watched for policy directions that could be gleaned from bureaucratic personnel appointments. Among the clearest strategic signals were not government appointments, but the installation of a longtime Putin ally Igor Sechin as the chief executive of Rosneft, the state oil giant. Yuval Weber, visiting researcher at the New Economic School and Carnegie Moscow Center, explains the realignment of senior positions in Russia’s new administration and assesses the implications of the ongoing TNK-BP struggle on Russian foreign policy.
The importance of Sechin’s appointment is central to Russian political economy and foreign policy during Putin’s third term and well into the future. Putin has publicly charged Sechin, who recently served as deputy prime minister with responsibility for energy, to build a world class Russian oil company. It should be comparable to the strength and reach of other oil majors, and increase Rosneft dividends.
As likely understood by Putin and Sechin, there are two basic ways to increase oil exports and earnings: finding and developing new fields, and taking over already producing oil assets.
The first path is more expensive for Russia given that its major untapped fields are in the remote and frozen Arctic circle. Nonetheless, during his previous ministerial turn, Sechin agreed a number of deals to permit international oil majors such as Exxon, Eni and Statoil access to the Russian Arctic – in partnership with Rosneft. Yet it will be years before that oil flows, given the technical difficulties of exploration in such conditions.
As for the second path, it did not take too long for the other shoe to drop. Two weeks after Sechin’s appointment to Rosneft, news broke that BP had received “unsolicited indications of interest” for its share of TNK-BP, its lucrative Russian joint venture with the Mikhail Fridman-led Alfa Access Renova group that had been the subject of a number of leadership struggles over the years. The BBC quoted its own business editor who only thinly veiled who might be behind the offer: “I understand that one of these approaches is from an unnamed Russian state business, which might offer cash and shares for the TNK-BP stake.” Reuters has also reported that Rosneft has hired away top TNK-BP executive Didier Casimiro.
While there is nothing wrong with Rosneft or any other company attempting to buy another business — and BP will sell if they maximize shareholder value — the question then became of why Rosneft would attempt to buy all or part of TNK-BP and how more powerful Rosneft would portend for Russian economics and foreign policy.
A way to think about how current economic conditions impact future foreign policy capacity is to assume all leaders wish to remain in office, either for themselves or for their party. In the course of maintaining power, a leader has to deal with three different types of actors: those inside his domestic political coalition, those outside this coalition and foreigners who may (or may not) seek concessions from the leader. That places the leader in a situation where he has to manage domestic politics and foreign policy simultaneously.
In this conception, the leader uses domestic politics to generate credibility on the international stage, and uses international developments to strengthen his hand at home. So the leader has an interest in controlling domestic politics to be able to deal with questions of grand strategy as well as addressing any foreign policy crises. Therefore, the best the leader can hope for in dealing with foreign states is having a free hand at home.
Thus, a possible explanation for Rosneft to buy all or part of TNK-BP is that the current leadership needs to hedge against medium-term softness in energy prices by increasing their overall earnings to include greater exports alongside whatever taxes and royalties TNK-BP’s exports already garner.
As noted by former Treasury Minister Alexei Kudrin, in 2007 the Russian budget balanced at $34 per barrel and in 2012 it is already $117. In case oil revenues do sag, the revenues coming into the system would decline at the same time that demands from the ruling political coalition – bureaucrats, security services, military and to a much lesser degree the poor and rural – are increasing.
The demands are increasing because the challenged election results and subsequent demonstrations revealed that Putin’s control of domestic politics is weaker than before and weaker than thought. The demands of members of the domestic coalition have increased because they can now foresee a situation where Putin isn’t there to protect and support them in the future. Their fear of the future (being dispossessed, going on trial from a vengeful future political class, losing their place in society, etc.) means they demand something more from Putin now to continue their support, and simultaneously Putin understands that reducing the support to the coalition could encourage the first defectors.
The necessity of maintaining the current system is not only to prevent regime change but to buttress future foreign policy capacity, which in turn relies on controlling domestic politics. TNK-BP is about getting the marginal sources of revenue to mollify supporters in the political coalition and at least make a superficial attempt at keeping campaign promises to stave off domestic discontent.
Secondly, to ensure the ability to meet the myriad foreign policy threats facing Russia. The first challenge is difficult enough, but failing the second would be disastrous. One only has to consider Russian public opinion about Brezhnev versus Gorbachev: the first may not be remembered fondly, but people recall improvement in living standards and a muscular foreign policy while the second is still intensely unpopular for losing the plot on both.
In increasing the earnings potential of Rosneft and turning it into an oil major (particularly if it is able to swap access to Russian acreage for exploration and production opportunities abroad), Vladimir Putin and Igor Sechin are maintaining the political system they benefit from, while in the same time ensuring the maximum future foreign policy latitude that system can possess. That may not be to the liking of the active and passive opponents of the system, but the policy preferences of those outside of the ruling political coalition matter far less in the leadership’s domestic and foreign strategies.