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Ehrstedt, Stefan & Vahtra, Peeter:
Russian energy investments in Europe
Electronic Publications of Pan-European Institute 4/2008

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Russia’s energy policy towards Europe is often portrayed in public as being dominated by Russia’s political motivations and aspirations. This view states that Russian energy investments in Europe have for the most part the purpose of gaining more political influence among the energy importing countries of Europe, particularly in the former Soviet sphere of influence. In our opinion, this perspective, though accurate, paints somewhat a one-sided picture of the motives behind Russian energy policy.

We would like to complement this picture by adding the often neglected economic factors as motivations for Russian energy policy. Like we have discussed in this report, Russian energy investments in Europe have also been influenced by economic goals such as enhancing Russia’s position in the energy value chain and choosing the best markets to sell the slowly diminishing Russian energy production. In other words, to improve profitability of the Russian energy industry. This is what companies, even state-controlled, are expected to do by default, regardless of their line of business or geographical location. We believe that by adding economic factors alongside with political we are able to build a more robust understanding of the driving forces behind Russia’s energy policy.

Furthermore, the weak success of Western energy companies in Russia’s energy sector and the increased state-control of the Russian energy assets have reflections on Russia’s energy investments in Europe. First, concentration of energy production in the hands of state-controlled companies certainly enhances Russia’s bargaining position against European energy importers. Second, increased state-control particularly in the Sakhalin-2 gas project with its LNG-capabilities allowing gas exports to other destinations besides Europe has advanced Russia’s geopolitical aims by diversifying export possibilities.

The future of Russian energy FDI in Europe is to be shaped by increasing state ownership and control of the country’s energy assets. As opposed to several other industries, the Russian energy investments abroad are unlikely to uphold the growth rates witnessed during the recent years. The strengthening state ownership in the energy industry foresees the development of the two state-controlled champions, Gazprom and Rosneft, into ever stronger global and regional energy majors, respectively. Under this scenario, it is likely that the Russian energy investments in Europe will be carried out by virtually one or two companies, with a clear-cut aim of acquiring and building infrastructure assets throughout the continent. The Russian-led energy infrastructure projects currently under development are vital for Gazprom and Rosneft to establish the long-sought downstream presence in Europe and add to strategic options for oil and gas deliveries.

However, this line of development foresees ever smaller number of Russian energy investments in Europe. Once completed, the Nord Stream and South Stream gas pipelines and adjacent acquisitions of national energy companies recently carried out by Gapzrom are likely to provide the company with export capacity and leverage for years to come. In upcoming years, the Russian gas behemoth will be forced to struggle with the mounting investment needs in domestic upstream in order to fulfill its domestic and international supply obligations. Similarly to Gazprom, the other few Russian energy giants will inevitably face the moment when they are forced to concentrate on developing the long-neglected domestic hydrocarbon fields instead of pushing for rapid international expansion. The recent signals from the Russian energy policy front foresee the arrival of that day sooner rather than later.

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