Geopolitics

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?

An oil pumpjack in the Republic of Tatarstan, Russia
Eduard Steiner

-Analysis-

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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Thousands of migrants in Del Rio, Texas, on the border between Mexico and the U.S.

Hannah Steinkopf-Frank, Bertrand Hauger and Anne-Sophie Goninet

👋 Сайн уу*

Welcome to Friday, where the new U.S.-UK-Australia security pact is under fire, Italy becomes the first country to make COVID-19 "green pass" mandatory for all workers, and Prince Philip's will is to be kept secret for 90 years. From Russia, we also look at the government censorship faced by brands that recently tried to promote multiculturalism and inclusiveness in their ads.

[*Sain uu - Mongolian]

🌎  7 THINGS TO KNOW RIGHT NOW

• U.S. facing multiple waves of migrants, refugees: The temporary camp, located between Mexico's Ciudad Acuña and Del Rio in Texas, is housing some 10,000 people, largely from Haiti. With few resources, they are forced to wait in squalid conditions and scorching temperatures amidst a surge of migrants attempting to cross into the U.S. Meanwhile, thousands of recently evacuated Afghan refugees wait in limbo at U.S. military bases, both domestic and abroad.

• COVID update: Italy is now the first European country to require vaccination for all public and private sector workers from Oct. 15. The Netherlands will also implement a "corona pass" in the following weeks for restaurants, bars and cultural spaces. When he gives an opening speech at the United Nations General Assembly next week, unvaccinated Brazilian President Jair Bolsonaro will defy New York City authorities, who are requiring jabs for all leaders and diplomats.

• U.S. and UK face global backlash over Australian deal: The U.S. is attempting to diffuse the backlash over the new security pact signed with Australia and the UK, which excludes the European Union. The move has angered France, prompting diplomats to cancel a gala to celebrate ties between the country and the U.S.

• Russian elections: Half of the 450 seats in Duma are will be determined in today's parliamentary race. Despite persistent protests led by imprisoned opposition leader Alexey Navalny, many international monitors and Western governments fear rigged voting will result in President Vladimir Putin's United Russia party maintaining its large majority.

• Somali president halts prime minister's authority: The decision by President Mohamed Abdullahi Mohamed marks the latest escalation in tensions with Prime Minister Mohamed Hussein Roble concerning a murder investigation. The move comes as the Horn of Africa country has fallen into a political crisis driven by militant violence and clashes between clans.

• Astronauts return to Earth after China's longest space mission: Three astronauts spent 90 days at the Tianhe module and arrived safely in the Gobi desert in Inner Mongolia. The Shenzhou-12 mission is the first of crewed missions China has planned for 2021-2022 as it completes its first permanent space station.

• Prince Philip's will to be kept secret for 90 years: A British court has ruled that the will of Prince Philip, the late husband of Britain's Queen Elizabeth who passed away in April at 99 years old, will remain private for at least 90 years to preserve the monarch's "dignity and standing."

🗞️  FRONT PAGE

With a memorable front-page photo, Argentine daily La Voz reports on the open fight between the country's president Alberto Fernández and vice-president Cristina Kirchner which is paralyzing the government. Kirchner published a letter criticizing the president's administration after several ministers resigned and the government suffered a major defeat in last week's midterm primary election.

#️⃣  BY THE NUMBERS

€150

An Italian investigation uncovered a series of offers on encrypted "dark web" websites offering to sell fake EU COVID vaccine travel documents. Italy's financial police say its units have seized control of 10 channels on the messaging service Telegram linked to anonymous accounts that were offering the vaccine certificates for up to €150. "Through the internet and through these channels, you can sell things everywhere in the world," finance police officer Gianluca Berruti told Euronews.

📰  STORY OF THE DAY

In Russia, brands advertising diversity are under attack

Russian sushi delivery Yobidoyobi removed an advertisement with a Black man and apologized for offending the Russian nation, while a grocery chain was attacked for featuring an LGBTQ couple, reports Moscow-based daily Kommersant.

❌ "On behalf of the entire company, we want to apologize for offending the public with our photos..." reads a recent statement by Russian sushi delivery Yobidoyobi after publishing an advertisement that included a photograph of a Black man. Shortly after, the company's co-founder, Konstantin Zimen, said people on social media were accusing Yobidoyobi of promoting multiculturalism. Another recent case involved grocery store chain VkusVill, which released advertising material featuring a lesbian couple. The company soon began to receive threats and quickly apologized and removed the text and apologized.

🏳️🌈 For the real life family featured in the ad, they have taken refuge in Spain, after their emails and cell phone numbers were leaked. "We were happy to express ourselves as a family because LGBTQ people are often alone and abandoned by their families in Russia," Mila, one of the daughters in the ad, explained in a recent interview with El Pais.

🇷🇺 It is already common in Russia to talk about "spiritual bonds," a common designation for the spiritual foundations that unite modern Russian society, harkening back to the Old Empire as the last Orthodox frontier. The expression has been mocked as an internet meme and is widely used in public rhetoric. For opponents, this meme is a reason for irony and ridicule. Patriots take spiritual bonds very seriously: The government has decided to focus on strengthening these links and the mission has become more important than protecting basic human rights.Russian sushi delivery Yobidoyobi removed an advertisement with a Black man and apologized for offending the Russian nation, while a grocery chain was attacked for featuring an LGBTQ couple, reports Moscow-based daily Kommersant.

➡️ Read more on Worldcrunch.com

📣 VERBATIM

"Ask the rich countries: Where are Africa's vaccines?"

— During an online conference, Dr. Ayoade Olatunbosun-Alakija, of the African Vaccine Delivery Alliance, implored the international community to do more to inoculate people against COVID-19 in Africa and other developing regions. The World Health Organization estimates that only 3.6% of people living in Africa have been fully vaccinated. The continent is home to 17% of the world population, but only 2% of the nearly six billion shots administered so far have been given in Africa, according to the W.H.O.

✍️ Newsletter by Hannah Steinkopf-Frank, Bertrand Hauger and Anne-Sophie Goninet

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