Russia and Global Energy Security (Economic and Legal Aspects)

Vladimir S. Belykh, Professor, Doctor of Law, Honoured Worker of Science of the RF, Head of the Entrepreneurial Law Department, Head of the Eurasian Scientifi c and Research Сentre for Comparative and International Entrepreneurial Law, Ural State Law University, Yekaterinburg, Russia

The article focuses on energy safety, its internal and external challenges. Energy safety of Russia is viewed as the state of protection of its major national interests from internal and external challenges. The article suggests some conclusions and recommendations. In particular, the issue of transit supply of energy resources is rather topical nowadays. For Russia it is the supply of gas through Ukraine. Consequently, from the viewpoint of its energy protection Russia has to fi nd direct routes of oil and gas supply.

Key words: energy safety, internal and external challenges, dependence on the import of energy resources, investments in the sphere of energy, environmental protection, political instability, energy law and energy legislation

1. National economic security of Russia means the protection of major economic interests of the country from internal and external challenges. Since it is the protection of the individual, the state, the society and its economy, national and economic security is determined via a system of qualitative and quantitative parameters.

Energy security is a constituent part of the national economic security of Russia, which to a big extent depends on a reliable energy supply to the users of all regions of the country. But what is energy security? Neither legislation nor legal writings give us its clear definition or uniform parameters. For example, there is a widespread definition under which energy security implies such conditions when the user has reliable access to the necessary resources and the supplier has reliable access to their users. In this case, what matters is not only the accessibility and continuity of the flow of energy carriers but also their stability and reasonable prices[1]. Energy security is more often considered in two dimensions: geological and political. The first one implies that security is based on the provision of resources and their continuous production. The second dimension attaches greater importance to political stability in the states-major suppliers/transiters of energy carriers. Since the European Union cannot influence geology, it is more likely to focus on the political dimension of energy security[2].

In our view, since energy security is an integral part of national economic security, it would be more reasonable to define energy security as a state of protection of major national economic interests of Russia from internal and external challenges. However, this definition does not show what kind of state and what degree of protection it implies.

2. Global energy security. In the opinion of experts from the International Energy Agency (IEA), energy security is a complex concept the purpose of which is to protect consumers from irregular supply of energy caused by emergency, terrorism, or insufficient investment in the infrastructures of energy markets. Recently, most attention has been paid to such key issues as international cooperation, optimal organization of markets and unification of conditions based on which consumers have access to world energy resources[3]. Thus, energy security is a complex concept. Such a viewpoint is worth considering, though the essence of energy security is to protect major economic interests of a particular country, continent, world economy (order) from internal and external challenges.

2.1. There are various types of internal and external challenges to energy security. After the summit in Saint-Petersburg on July 16, 2006, the G-8 leaders  formulated global energy challenges (read: threats): 1) the growing demand for energy resources (according to some estimates, by the year of 2030 the demand will have increased by more than 1.5 times; 80% of this demand will have been satisfied by fossil fuel, the resources of which are very limited); 2) the growing dependence of many countries on  imported energy carriers; 3) a need for huge investments in all energy chain links; 4) necessity to protect the environment and find a solution to climate change problems; 5) vulnerability of the vital energy infrastructure; 6) political instability; 7) natural disasters; 8) other challenges. Among the latter, we can refer to an increase in population. Thus, by the UN forecasts, the world population will have increased from 6.2 billion people (at the beginning of the XXI century) to 8 billion people by 2030 and to 10 billion people by 2050. 80% of that population will be living in developing countries. Consequently, the population of the Earth significantly influences the energy supply, but mostly the energy balance depends on the rate of industry growth. In particular, gigantic demands for energy were explained by intensive industry growth in European countries, US, China and Russia[4].

Now let us consider some of the mentioned global challenges. The first one is the growing dependence of many countries on imported energy carriers. So, in 2000, fifteen EU countries imported 49% of the consumed energy. This share is expected to increase to 62% by 2020. If the EU had 30 members, the dependence on the imported resources would be less, somewhat 36%. The 2000 EU Green Paper on energy predicts that this figure will have increased up to 51% by 2020. Among possible alternative sources of expanding import are the Gulf countries, Central Asia and, of course, Russia[5]. In this connection, there is a question: what is the share of Russia in the common volume of energy supply to the European countries?

Russia has a significant influence on the world energy space, and it is the largest energy exporter. The specific share of oil export in the common volume of Russian export in the first quarter of 2012 was 35.2%, while the export of fuel and energy goods was 48.3%. In 2013 Russia imported 237 million tons of oil for the total amount of 174 billion US dollars. Russia sent 88% of the export volume to the far foreign countries outside the former Soviet Union and 12% to the CIS countries. The average export price of oil was 100 US dollars per barrel[6]. To compare: the Middle East countries export 784.1 million tons of oil, while the USA exports 5.6 million tons.

There is another aspect of the problem: the RF fuel and energy complex (FEC) is more oriented to the external market. And it is understandable because the Russian budget receives 70% of all currency proceeds due to the selling of mineral raw production. Moreover, increased export to the Western countries can be considered as a kind of means of economic and political expansion of Russia. The Western countries are becoming increasingly dependent on the supply of gas and oil from Russia. The German poet Goethe wrote, “We are free to make the first step, but we are bound to make a second”.    

Therefore, to a certain extent, we share the position of the European Commission, which regards energy security as a provision of the necessary level of energy consumption at acceptable prices, which ,  in the conditions of extremely high import dependence, turns into the provision of reliable and stable supply of hydrocarbons at acceptable prices. At the same time, such an approach of importing countries implies the concentration of all risks on the part of suppliers, which is not only unfair, but in the end does not contribute to safe supplies. Energy security is a two-way street; it is a common aim for the consumer and the supplier. In fact, energy security should be seen as the elimination of the threat for the energy factor to become a potential obstacle for the economic growth of the country in the long run. Importing countries must have guarantees that energy resources will be supplied in the volume and on the conditions that can contribute to the necessary economic growth rates. Supplying countries must have a guarantee of demand and profit necessary for the expanded reproduction of the FEC, taking into account the fact that most of the received money can be withdrawn by the state and reallocated to develop those sectors of economy which are not connected with raw materials. Therefore, logically speaking, there must be a conception of fair distribution of profits and risks.

A second challenge is an extreme demand for huge investments in all energy chain links. Russia is not only the largest exporter of energy resources in the world, but it also has a big scientific and technical potential. At the same time, in the sphere of Russian economy, including the energy sector, there is a group of internal challenges connected with parameters of production factors. Such challenges to the RF economic security must be considered backbone. Let us name some of these factors.

Domestic production funds have a significant degree of physical and moral obsolescence. By specialists’ estimates, more than 70% of the production funds have a 10-year service life. Within this context, let us mention that the obsolescence of major funds in the fuel and energy complex is close to 80% provided that a significant share of the resources (means) received from the export remains in this complex.

Scientists predict that if we wish to restore and attract more investments in the physically and morally obsolescent major capital of the domestic industrial enterprises, we need approximately 500 billion US dollars. To this astronomically huge figure, we should add another 10-11% to create the regime of simple reproduction of the active part of the obsolescent funds[7]. We can hardly hope for mass foreign investments in the Russian economy. Foreign investments (taking into account the existing situation with investments) cannot be a decisive means of developing factors of production in Russia. One of the striking exceptions in this respect is, probably, the Nord Stream gas pipeline. The total sum of investments in this project amounts to approximately 7.4 billion Euros. The shareholders of this consortium will invest 30% of the required resources, and 70% will be received from external sources on the conditions of the project financing.

Thus, for sustainable growth and expansion of the export potential, the economy of Russia needs large-scale investments. “Foreign experience shows that there is an alternative within certain limits. If a country imports heavily, it leads to a decrease in investments. Investments go…where goods cannot”[8]. If only we could know where investments go? And why cannot the goods go there?

Undoubtedly, for its economic development, Russia needs not only foreign but domestic investments as well. It is well known that internal funds of enterprises and funds of the state still remain the major source of financial investments in the real sector of economy.

For comparison: to provide adequate energy supply in the global scale, it is necessary to invest over one trillion US dollars in all links of the energy chain by 2030; the most part of this sum should go to meet the needs of developing countries[9].

A third challenge is the need to protect the environment and solve climate change problems. Climate change is the most important reason why the EU has to follow the strategy of energy reduction and seek for a reasonable balance between its economic development and the environment protection. Energy policy plays a key role in the fulfillment of the Kyoto Protocol, in accordance with which Europe had to reduce gas emissions by 8% from 1990 till 2010. Europe contributed only 14% to the full annual emission of CO2, which is less than the emission of Asia (25%) or of Northern America (29%)[10]. The Kyoto Protocol may become the first step to reducing gas emissions. The future energy policy should take into account the corresponding long-term goals which will contribute to the sustainable development of all EU countries.

A fourth challenge is political instability which becomes more and more contoured in the contemporary world. Thus, the accession of the Crimea and Sevastopol to Russia caused a burst of hysteria and a severe chain reaction on the part of the US and European leaders. Russia has faced various sanctions, including economic ones. George Soros, a famous billionaire and head of the fund, says that the most severe sanction against Russia may be the supply of oil from the strategic reserves of the USA, which may cause a sharp drop in prices. In its turn, Russia needs to sell oil at the price not less than 100 US dollars per barrel to balance its budget[11]. By the way, we already faced such a situation (for example, during the times of a conflict between Abkhazia and Georgia, when there were similar calls for sanctions).

The confrontation between Russia, on the one hand, and the USA and the West, on the other hand, is a dispute not so much about who is the first and the strongest. This confrontation conceals, first of all, economic interests in product markets and mineral resources. For example, if Russia loses Syria as its ally, it will have to concede many of its positions in the Middle East, including a substantial market of products. Mass media mentioned that there are plans to build some pipelines on the territory of Syria which will supply natural gas from Qatar to Europe. And this will mean that the South Stream which Russia has been working on for a long time will be useless and the Nord Stream will not be so important for Europe.

2.2. At a current meeting with representatives of big business, the RF President V.Putin paid their attention to the necessity to build new enterprises refining oil and oil products, and other energy resources to reach a new (more qualitative) level of the export of major types of raw materials. At present, the scheme of the export model is quite simple: exporting raw materials, selling them and getting currency proceeds. This is a strange situation: if Vladimir Putin had not paid their attention to this fact, some big business representatives probably would not know what to do. Though in my view, there is no any secret: one thing is to extract oil or gas and transport that through pipelines (even taking into account all the costs) and another thing is to build oil refining enterprises and supply the ready-made products to the West (for example, petrol, reduced fuel, oils, etc.).

Conclusions and recommendations: 1. Energy law is a dynamically developing complex (inter-branch) legal institute. In the foreseeable future, it is likely to receive the status of an integrated branch of law. 2. Energy legislation must be developed through the consolidation and codification of existing legal acts. Russia and Western countries must adopt the energy code or a consolidated law; it is a necessary condition for the convergence of relations in the energy sphere. 3. Alongside with the Energy strategies, it is necessary to prepare and adopt a concept of energy legislation development in Russia and Western countries. The RF Chamber of Commerce and Industry adopted the concept of the RF legislation development from 2008 till 2011, which has a chapter on the FEC regulation. 4. Legal community has to closely cooperate with the representatives of the RF Chamber of Commerce and Industry and the Russian Union of Manufacturers and Entrepreneurs in matters of the FEC regulation, including the development of federal law drafts. 5. Russia is a major supplier of energy resources to the EU (and not only), and it cannot be immediately replaced in this capacity. Therefore, claims made by the Western countries and the USA to punish Russia for the accession of Crimea and Sevastopol look rhetorical. They are bluffing! They are dependent on Russia! It is funny that the American Republican Senator John McCain said that Russia interferes with the internal affairs of its adjoining countries, using its energy resources[12]. But why not! 6. After all claims and threats to Russia, including reduced supply of energy resources to the West, Russia has chosen an alternative to supply oil and gas to Asia and, first of all, to China. 7. To maintain energy security, it is necessary not only to elaborate basic principles but, which is most important, to follow them. One of the principles is sustainable supply of energy carriers at reasonable prices and on the long-term basis. 8. Transit supply of energy resources is the most urgent question in the contemporary conditions. For Russia, this is the supply of gas through Ukraine. Consequently, from the viewpoint of energy security, it is necessary to create direct routes of transit supplies of oil and gas. 9. Alternative sources of energy are a good thing. However, they are unlikely to replace the classical energy resources, such as oil and gas, in the near future. 10. The problem of energy saving and efficiency is of primary importance in the contemporary conditions of ensuring energy security.

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