Russian oil and geopolitical realities

The West, a colloquialism that, loosely defined, simply means the transatlantic alliance between the US, Canada, and Europe, has not fared well in the new century. Fraught with divisions over Iraq and the proper use of American military power, the West has suffered from a lack of vision as much as substantive disagreements over policy. Recent Russian military action in the Caucasus might restore some sense of purpose and vision, but unfortunately, geopolitical realities and economics could present significant challenges to forging a coordinated policy to deal with the new security crisis.

Foremost, the integration of Russia’s oil and gas supply into the global economy gives the Russians outsized influence and leverage, as witnessed a few winters back when European gas supplies were disrupted due to a pricing squabble between Russia and Ukraine. Specifically, Europe’s dependence upon Russian oil and gas could present severe difficulties for the West as it attempts to find its footing to deal with Russian militarism.

The chart to the right tells a disturbing story concerning European oil imports, 48% of which derive from the former Soviet Union, with Russia being with the main source country. The picture vis-à-vis natural gas is not much better. Thirty-nine percent all European natural-gas imports come from the Russian Federation. Individual countries within the European Union are more dependent than others, but overall, this dependency upon Russian energy can create problems.

Russia’s integration into the global economy, however, is not a one-way street. Markets require sellers and buyers; Russia’s future growth depends upon continued foreign direct investment, foreign customers, and, at present, foreign financial markets. This reality create points of weakness that the West could exploit – if it puts forward a unified front. However, any punitive economic measures, e.g. divestment, seizure of assets, etc., would cost Europe, in real terms, far more than the United States and will make Europe far less willing to toe the line. In writing this, I am not suggesting that economic counter-measures are appropriate at this time; I’m merely suggesting that, should future Russian provocations make these necessary, they would have a disproportionate impact on Europe and possibly cause weak-kneed allies to buckle.

But the kind of energy dependency described above can also be a co-dependency. The chart to the right illustrates the destination of Russian exports, and as you can see, over 80% of all Russian oil exports are sent to Europe. In the case of natural gas, the figure is closer to 100%. In other words if the Europeans don’t buy Russian oil and gas, no one else is going to. Part of the reason is historical – nearly all of Russia’s oil and gas distribution infrastructure is pointed to the west; this is a relic of the Communist era when Russian supplies were routed to its customers in the Warsaw Pact. After the Cold War, it was relatively inexpensive to link up the old Communist infrastructure with Central and Western Europe. Although there are plans on the drawing board for increasing pipelines into China and (underwater) to Japan, these are a long way from being a reality, and in any event, the Chinese are moving aggressively to ink deals with former Soviet states that leave Russia quite out of the loop. Point being, Russia needs Europe as much as Europe needs Russia.

Still, Russia’s potential for economic disruption in Europe is immense. Europeans are at least aware of this and have been scouting around for more supply from North Africa and beyond, but as things are, the US must figure into its calculations Europe’s current predicament concerning Russian energy, much to its chagrin.