13.10.2006
Russia’s «Energy Key» Strategy
№4 2006 October/ December

Commenting on
the results of the G8 summit in St. Petersburg, many analysts point
to Russia’s tactical successes, which include its winning PR
campaign, as well as its effectiveness in dialog with its G8
partners. Concerning the setbacks, the analysts mention, first of
all, the demonstrative refusal by the United States to sign an
agreement with Russia on its accession to the World Trade
Organization. However, Russia’s most acute strategic problems
concern its economic relations with the European Union.
Unfortunately, Russia has failed to take advantage of its G8
presidency to solve these problems.



For Russia, Europe is not just an
important, but dominant trading partner. Greater Europe accounts
for 75 percent of Russia’s foreign trade, and of this amount the EU
accounts for over 60 percent. Meanwhile, the Partnership and
Cooperation Agreement between Russia and the EU, which set the
frameworks for economic relations between the two partners, expires
in 2007. This event coincides with the enlargement of the EU up to
the borders of Russia and Belarus, and the obvious failure of
integration processes within the Commonwealth of Independent
States, which Russia is gradually losing as a possible market for
non-energy exports. The loss of CIS markets and the need to
conclude a new agreement with the EU causes Russia to ponder what
foreign-economic strategy it should choose to achieve high economic
growth rates.

THE “EUROPEAN CHOICE”
TRAP

Tendencies in the world economy
over the last decade show that global trade has been growing 50 to
100 percent faster than global GDP. At the same time, energy
consumption has been growing 50 percent slower than global GDP.
This means that if Russia wants to maintain growth rates at the
average world level or higher, it must increase its exports and
sell more high-value-added goods. However, if Russia fails to leave
the group of energy exporters, it will, like many of the OPEC
countries in the last 30 years, develop slower than the world’s
average; this is the objective reality of global energy
demand.

Presently, in the international
division of labor, Russia occupies the niche as an exporter of
energy, raw materials, and low-value-added goods. Meanwhile, the
unit GDP of power consumption in Europe has been decreasing, while
GDP itself has been growing at a very slow rate: in 2003-2005,
Europe ranked last among all regions of the world in terms of
growth rates, and analysts are pessimistic about the prospects for
reversing this trend.

As Russia pegs itself to the
European energy market, it dooms itself to very low growth rates.
In the last few years, Russia has been growing faster than Europe
due to growing oil prices. However, the effect of this factor is
coming to an end, and the contribution of energy industries to the
Russian GDP’s growth has been sharply decreasing. In 2005, the
direct contribution of hydrocarbon and energy production to
Russia’s economic growth was slightly over one-tenth of the entire
GDP growth rate, while in 2004 the contribution of exports to this
growth decreased from almost 90 percent to 42 percent.

EUROPE OR ASIA?

Russia will be able to maintain
high growth rates only if it increases the export of
high-value-added goods. Russia’s competitive advantages in this
sphere are in industries that support power generation and the
raw-material sectors. These industries include power and transport
machine building, and energy-intensive raw-material processing
industries, for example, the production of fertilizers and oil
products. Other potentially competitive areas include the defense,
aerospace and telecommunications industries. All of these sectors
have one common feature: their successful development requires
capacious external markets.

With the exception of the
raw-material processing industries, the competitiveness of Russia’s
high-value-added exports is not high and even has a tendency to
decrease. It is much easier for Russia to offer these goods on
rising markets where new consumers do not yet have stable suppliers
that have to be forced out of their niches. With global GDP growing
an average of 3 percent per year, the added value produced in the
world has been growing by about U.S. $2 trillion a year. According
to BP estimates based on purchasing power parity, in 2005, China
accounted for 32 percent of that growth and India accounted for
another 10 percent, and their shares will most likely grow. These
two countries are precisely the new markets, for which Russia can
compete.

European markets are more
problematic for Russia from the point of view of high-value-added
exports; in 2005, Europe accounted for only 7 percent of the global
growth in this market. Should Russia really attempt to adjust
itself to this 7 percent share? After all, companies with much
higher reputations, more sophisticated technologies and well-proven
marketing channels already occupy the European market; it would be
almost impossible or very difficult to compete with them.
Therefore, in the long term it may turn out to be a disadvantageous
strategy for Russia to continue to concentrate its exports solely
on Europe, which would doom it to the role of a European energy
appendage with growth rates slower than the world
average.

RUSSIA’S “ENERGY KEY” TO NEW
MARKETS

If Russia wants to develop
high-value-added exports, it has not been proven that Europe is a
promising vector. However, if Russia plans to offer its exports to
China, this must have an immediate effect on Russia’s negotiations
with the EU concerning a new format for Russia-EU trade agreements.
Europe is interested in Russian energy, but if we concentrate our
energy exports solely on Europe, we would do so without receiving
markets for our high-value-added exports in exchange. We may just
not find such markets in Europe. But if we want to receive
promising markets in China and India, we must understand that the
“energy key” is the easiest way to open them.

This reasoning suggests a new look
at the results of the G8 summit. The ongoing discussions in the
world about nuclear power engineering and energy security emphasize
Russia’s role as a guarantor of energy stability; however, this
does not solve our strategic problem: Where will Russia export its
energy and high-value-added exports? Russia’s present strategy with
the EU provides for Russian investments in the European energy
infrastructure and secures markets in the European energy sector
for Russia, without opening up European markets to Russian
high-value-added exports.

Given the acute shortage of time
for working out new approaches, there is a high probability that
within the framework of new agreements with the European Union,
Russia will duly follow European energy priorities and thus
diminish its chances to enter new markets for non-raw-material
exports and to maintain high economic growth
rates.