What The Pandemic Exposes About Russian Dependence On Oil
Lockdowns, travel restrictions and the shift toward remote working have combined to cut global demand for oil. Moscow hopes it's all just a passing trend. But is that really the safest bet?
BERLIN — The coronavirus pandemic has given countries that rely on petroleum exports a taste of what may be to come, as people are starting to use less and less oil. According to the International Energy Agency, national lockdowns meant that demand for oil dropped by almost a third in April — more sharply than ever before. That affected all oil-producing countries, but particularly Russia, which is heavily dependent on oil exports.
Predictions from oil giant BP spell more bad news for the Kremlin. According to BP's 2020 edition of the World Energy Outlook report, global demand for oil will not rebound when the pandemic is over. The most optimistic scenario would see daily demand fall by almost half, to 55 million barrels, whereas the most extreme scenario would see it fall by two thirds, to 30 million barrels.
But even conservative estimates show there would be a modest reduction in demand by 2050 due to the increase of renewable energy sources. BP's predictions have made the industry sit up and listen — not least because the British energy giant owns a fifth of the state oil giant Rosneft.
The coronavirus lockdown saw the price of Brent oil — a significant oil market based around the North Sea in Europe — plummet from $70 per barrel to well under $20. Between January and July, Russia — the second largest oil producer in the world — earned 37.7% less from oil exports than the previous year. Exports of natural gas dropped even further, by 51.4%. But experts say that the oil situation is more drastic, as its importance for the country's economy is around four times greater.
What, me worry?
Russia is able to cope with low oil prices for a while, as it has low state debt and almost $600 billion in international gold and currency reserves. But it can only hold out if there is hope that the situation will improve. For now, there is none. According to BP, one of the reasons is the rise of electric cars, along with increased use of bio-kerosene in the aviation industry and a steep rise in renewable energies — even in developing countries.
In the meantime, nations are becoming even more ambitious with their goals around reducing emissions: when BP published its report, the EU hadn't yet revealed plans to revise its original aim — of cutting emissions by 40% between 1990 and 2030 — upward to 55%. This is another blow for a country like Russia, which has always been overly dependent on oil and gas exports.
Russia's economic dependence on oil hasn't lessened in the past few decades, as some people claim. It actually increased.
But the Russian government will not admit this. They are avoiding overly optimistic estimates, but say there is no doubt that demand for oil and gas will bounce back. According to their Ministry of Energy, it will be back at pre-lockdown levels in two to three years. As for renewable energies taking up a larger proportion of global demand, this will only come into play towards the end of the 2020s, or the beginning of the 2030s, says Vasily Tanurkov, director of the Accounting and Corporate Regulatory Authority.
Numbers don't lie
Environmental concerns are only one factor driving the shift away from oil. Lifestyle changes as a result of coronavirus are another. It seems likely that the trend for homeworking and reduced international travel will be with us for the long term, and demand for fuel will therefore stay low. Igor Nikolayev, director of Moscow's Institute for Strategic Analysis, says the situation is serious for all oil-producing countries, but especially for Russia.
"Russia's economic dependence on oil hasn't lessened in the past few decades, as some people claim. It actually increased," he says. Nikolayev points to new data from the Russian State Statistics Service Rosstat, published in February, highlighting changes to industrial production, which represents around 30% of Russia's economic output, a far higher proportion than in the West.
In 2010, the extraction of mineral resources made up 34.1% of Russia's industrial production, and this rose to 38.9% in 2018. Nevertheless, just two weeks ago, Vladimir Putin declared that the country had overcome its critical dependence on oil. But as Nikolayev argues, the numbers — including a sudden budget deficit of 5% this year — tell a different story. "Russia is still dependent on oil," he says.
While Saudi Arabia has been working to diversify its economy through its Vision 2030 framework, Russia is sticking its head in the sand. Of course Saudi Arabia has a more significant motivation, as its economy is even more dependent on oil than Russia's, but the problem in Russia is just as significant, says Roland Götz, an expert on the Russian economy at the Free University of Berlin.
A fuel attendant working at a Gazprom petrol station in Moscow — Photo: Alexander Shcherbak/TASS/ZUMA
"Diversifying the Russian economy is a slow, difficult process, and sometimes it seems to be going backwards," he says. Unlike their Western counterparts, the oil companies are reluctant to diversify their offering, choosing instead to "take as much out of the ground as possible, for as long as they can," Götz explains.
The oil problem isn't on the political agenda, according to Moscow-based economist and financial manager Andrey Movchan. "The current establishment in the Kremlin are all over 60 and they can't imagine how a country can be run without being centralized and dependent on oil," he says. "And because oil will still be around for another 20 years, they can safely assume that they'll continue to profit from it."
That is clearly how Putin sees it, along with interventionist hard-liners such as Igor Sechin, the head of the oil giant Rosneft, who is often called "the Russian Darth Vader." Up to now, Roland Götz explains, exploiting natural resources has provided a financial basis for Putin to pursue the country's ambitions on the international stage. "Putin loves the oil companies," he says.
For Movchan, the problem is more long-term, as at some point the existing Russian oil fields in West Siberia will dry up and more expensive oil works will need to be established. That will mean a need for higher oil prices, and thus begs the question of how Russia will survive in its post-oil era. There have been dozens of plans, "but none was suitable, because they were asking the wrong question in the first place," says Movchan.
Russia has an ace up its sleeve.
"Do the United States or Switzerland have a plan for this? A big country with the financial, personal and natural resources of Russia need only create the right conditions for people to flourish in the private sector," says Movchan. Then investment would naturally follow.
Of course, the current climate is not conducive to this. Götz believes the challenge is even greater for Russia because China is fast overtaking it and threatening to snap up market share in the consumer goods industry and household tech. "China is its biggest competitor," he says. "China is a growing problem for Russia."
But Russia does have an ace up its sleeve: the global appetite for high-tech items. "Russia has a strong tradition in tech and science," says Götz. "We shouldn't underestimate this potential." Rocket technology, computers, artificial intelligence, machines and military technology are all areas where Russia has a lot of potential, and the state is also paying attention to them.
Agriculture is another area that has been growing rapidly since mutual sanctions with the West came into force in 2014. For some food products, Russia has become self-sufficient, while for others, such as wheat, it has even become a major exporter.
Some experts also think that climate change could actually help, as it may mean that colder regions become more suitable for agriculture. The Russians are certainly hoping so.
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