PAGE Meets with a Delegation from the National Defense University

On Monday, January 31 Woodrow Wilson Center and the Program on America and the Global Economy (PAGE) hosted students and faculty from the National Defense University (NDU) for a discussion on the history of the Russian energy economy and its prospects for the coming years.  Attending from NDU were members of the army, navy, air force, reserve branches, and foreign countries including Macedonia, Japan, Mongolia, and Norway.  PAGE director Kent Hughes led a discussion focused on Russia and its role in the world energy market.  Hughes highlighted past fluctuations in Russia’s energy production, and addressed some of the challenges facing the country moving forward.

Once the “breadbasket of Europe,” the former Soviet Union boasted a large agricultural sector, but only a small energy industry leading up to World War II.  While the region’s energy riches helped drive the industrialization of the mid 20th century, Hughes noted that their economy remained “quite inefficient,” and bequeathed the lack of a “vibrant manufacturing industry” to  post-Soviet Russia.  The energy industry enabled growth, but also exposed the Russian economy to shifts in global energy prices.  The Soviet Union’s vulnerability to global prices was made clear when Saudi Arabian oil producers caused a price drop in the late 1980s.  The sharp drop in prices contributed to an economic malaise and helped push Gorbachev’s reforms that, in turn, helped lead to the collapse of the Soviet Union.

Russia’s energy industry at the moment is very strong.  Hughes suggested that it would be able to meet both domestic demand and its international trade obligations in the years ahead.  The recent Putin-era politics have focused on nationalizing energy providers and shoring up Russia’s role as petro-provider to Europe.  Increased production and the resultant surplus of hard currency helped spare Russia the worst of the recent economic crisis.  There are currently 3 new pipelines under construction connecting Western Europe to Russia—including the Nord Stream under the Baltic Sea, bypassing the potential complications posed by traffic through Eastern Europe.

Hughes then offered an outlook for Russia’s energy future, which faces serious internal challenges in the next 20 years.  With government-controlled companies like GAZPROM dominating the market, their success largely dictates the prospects of the entire Russian energy industry.  The discussion touched upon a contrast between Mexico’s PEMEX and Brazil’s Petrobas.  Where Mexico used PEMEX revenues to support over all government activities,   Brazil let Petrobas re-invest in corporate expansion and the development of advanced technologies.  Brazil’s energy economy has thrived as a result and Petrobas is now an emerging  leader in world energy production.  GAZPROM’s long-run future depends on whether it can follow elements of the Brazilian model.

The prospects for Russia’s place in the energy market will also be affected the by the success of its national producers and its relationships with consumers such as the United States, China and Europe.  The government hopes to double domestic coal and nuclear power sources from its current 16% level in order to free up more oil for export to India and China, which are expected to maintain a high level of demand.  While oil and gas importing nations do not purchase fossil fuels from one producer, the continued upswing in global energy demand will enable Russia to have a market for its exports for years to come.

Hughes argued that Putin-era politics in Russia have revived the notion that Russia ought to be a global power, and a strong energy output could help ensure a prominent place for Russia in the world economy.  Hughes noted, however, that possession of valuable natural resources does not ensure a strong economy.  In order to reinvigorate the Russian economy Hughes suggested that Russia re-invest in its world-class math and science education. In this vein, Russia is currently trying to construct a silicon valley-like area in Sholkovo.  Hughes noted that lowering barriers to innovation in the Russian economy will help attract high-end business and boost competitiveness.

Considering Russia’s future as a possible world petro-power, Hughes cited the general inefficiencies that still persist in the Russian economy: their agricultural sector, for example, represents 4.2% of GDP, but occupies over 10% of the labor force.  Also given its future demographic woes, Russia will face serious challenges in maintaining a robust and competitive economy in the years ahead.  Russia’s petro-dollars will ease the difficulties of the diminishing population, but with a renewed focus on manufacturing, education, and innovation the nation could emerge ever-more resilient and more prosperous in the years to come.

Posted by: John Coit

Kent Hughes: PAGE Director

Photo Credit: David Hawxhurst/Woodrow Wilson Center

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