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Russia’s Broken Energy Model

David Clark, chair of the Russia Foundation, has a good piece in the Financial Times about Russia’s rejection of the Energy Charter Treaty (ECT), which will come into effect this coming Monday.  Although Clark makes some good points regarding some overly aggressive moves by the Russian government which may dampen demand, it is harder to say if investors will ever actually take a hint and move on to less risky countries – they shown no lack of appetite of risk so far, and keep coming back for more punishment.

If rejecting a major international treaty was intended as a demonstration of unilateral Russian power, it may instead backfire and expose the underlying fragility of Russia’s national revival. As Mr Medvedev himself acknowledged last month, in what was taken as an oblique criticism of his predecessor, the Russian economy remains dangerously lopsided in its dependence on energy export revenues. Without the record energy prices of the past decade, Russia would have remained mired in post-Soviet decline. Yet even if prices now rebound as the world economy recovers it is by no means certain that Russia will be able to pick up from where it left off. A combination of internal and external factors is rendering the Putin model unsustainable.

Within Russia itself, the failure of the cumbersome, state-centred energy sector to invest in new production is beginning to bite as existing fields reach exhaustion and replacements are not yet ready to be brought on stream. This problem is especially acute in the more strategically important gas sector. Russia possesses huge reserves of oil and gas, but according to the government’s own assessment needs investments to the tune of $2,000bn over the next 20 years in order to access them and sustain current production. The already heavily indebted state energy companies, Gazprom and Rosneft, cannot generate the required funds, nor do they have the technology needed to drill in the icy waters and permafrost of the Arctic north where the future of Russian energy production lies. For this they need foreign investment and know-how, and plenty of it.