Oil, Carrots, and Sticks: Russia's Energy Resources as a Foreign Policy Tool

Abstract

This paper will explore the growth of Russia’s energy leverage in recent years, a source of power which Russia has used both to reward its friends and punish its enemies. It will briefly trace the origins of this power in the integrated energy networks of the former USSR and Warsaw Pact. It will then examine recent cases of the use of ‘oil power.’ Both positive and negative linkage will be considered. Some states-such as Armenia, Belarus and the Ukraine under President Kuchma-have been favored with heavily subsidized energy. Others-such as Georgia, Moldova, the Baltic States and the Ukraine under President Yushchenko-have been targeted by supply disruptions and punitive price increases. Russia’s new ‘petro-power’ is of great importance today, and not just for its immediate neighbors: like other ‘petro-states,’ Russia is likely to gain ever more power as oil and gas become scarcer in the future.

Full text

Oil, carrots, and sticks: Russia’s energy resources as a foreign policy tool
Randall Newnham
Penn State University, United States
article info
Article history:
Received 11 September 2010
Accepted 14 February 2011
abstract
This paper will explore the growth of Russia’s energy leverage in recent years, a source of
power which Russia has used both to reward its friends and punish its enemies. It will briefly
trace the origins of this power in the integrated energy networks of the former USSR and
Warsaw Pact. It will then examine recent cases of the use of ‘oil power.’ Both positive and
negative linkage will be considered. Some states-such as Armenia, Belarus and the Ukraine
under President Kuchma-have been favored with heavily subsidized energy. Others-such as
Georgia, Moldova, the Baltic States and the Ukraine under President Yushchenko-have been
targeted by supply disruptions and punitive price increases. Russia’snew‘petro-power’ is of
great importance today, and not just for its immediate neighbors: like other ‘petro-states,’
Russia is likely to gain ever more power as oil and gas become scarcer in the future.
Copyright Ó 2011, Asia-Pacific Research Center, Hanyang University. Produced and
distributed by Elsevier Limited. All rights reserved.
1. Introduction and theory
In the past decade, Russia has increasingly moved back
onto the world stage as an important actor. After a notice-
able decline under Gorbachev and Yeltsin, the Putin era saw
a resurgence of Russian power. A key component of this
power is Russia’s ability to use its oil and gas reserves as
foreign policy tools.
1
If anything, the role of such policies
has only increased under the new Russian President,
Dimitri Medvedev. Before taking office he was the chair of
the state gas monopoly, Gazprom, a key instrument of
Moscow’s ‘petro-power.’
Recent examples of the role of this power have included
both ‘petro-carrots’ (using oil and gas to reward allies) and
‘petro-sticks’ (using resources to punish states which defy
the Kremlin). As this paper will show, states such as Georgia,
the Ukraine and the Baltic States have been punished with
supply interruptions and higher prices after their govern-
ments turned toward the West. Conversely, those who
remained friendly to the Kremlindsuch as Armenia,
Belorussia, Ukraine before 2005, and the tiny statelets of
Abkhazia, North Ossetia, and Trans-Dniestriadhave been
granted ample oil and gas at subsidized prices.
This paper will seek to analyze the nature and impor-
tance of Russia’s current oil and gas power. First, in this
section some relevant theories of economic linkage will be
discussed. Second, the paper will briefly trace the emer-
gence of Russia’s current oil and gas influence. Finally, we
will examine some concrete examples of recent Russian
‘petro-carrots’ and ‘petro-sticks.’ As we shall see, this form
of Russian influence is increasingly important today, as part
of the resurgence of ‘petro-states’ worldwide. Since oil and
gas seem likely to remain scarce and expensive in the long
run, the influence of these states will continue to grow. This
will cause increasing problems for all oil-importing states,
including our own.
Since the classic study by Hirschman (1945), theorists of
economic influence have pointed to several factors which
E-mail address: ren2@psu.edu.
1
For an overview of the literature on this issue, see Considine and Kerr
(2002), Morse and Richard (2002), Hill (2004), and Stern (2005).
Contents lists available at ScienceDirect
Journal of Eurasian Studies
journal homepage: www.elsevier.com/locate/euras
1879-3665/$ – see front matter CopyrightÓ 2011, Asia-Pacific Research Center , HanyangUniv ersity. Produced and distributed by Elsevier Limited. All rights reserved.
doi:10. 10 16/j.euras.2011 .03.004
Journal of Eurasian Studies 2 (2011) 134 –143

enable a state to successfully use its economic power
against others (see for example D’Anieri, 1999:48–56).
First, it is very helpful for the initiating state to have a larger
economy than the target state. This enables it to better
survive any economic conflict. By this basic measure, Russia
clearly has an advantage over its neighbors in the former
Soviet Union and Eastern Europe. Second, it is helpful if the
initiating state has a lower percentage of its trade with the
target than the target does with it. For example, Germany
has historically had only about 2% of its trade with Poland,
yet this has often accounted for 30–40% of Poland’s trade
volume (Newnham, 2006:7). Clearly, Germany could easily
impose a painful trade boycott on Poland, at very little cost
to itself. Here again, Russia is in a similar position with most
of its smaller, economically weak neighbors. Both of these
conditions force the target state into what Keohane and
Nye (1989) called “asymmetrical interdependence,” or
more simply, dependence.
Beyond these general criteria, though, are factors which
relate directly to Russia’s oil and gas power. First, oil and gas
are products for which a substitute is very difficult to fi nd.
This is true for all oil and gas importing states, such as the
U.S., but is especially true for Russia’s energy trading part-
ners. As we shall see, the former USSR deliberately linked
both its own republics and its satellite states into a web of oil
and gas dependency. All pipelines radiated out from Russia,
and the housing, industry, and transport of the former Soviet
bloc were built to run on Russian oil and gas. Oil, perhaps,
can to some extent be brought in by ship from other coun-
tries (although port facilities may be inadequate or, as in
Belarus, nonexistent). Gas, however, can generally only be
shipped by pipeline, and thus all of Russia’s neighbors have
essentially no other source.
2
Such a monopoly position gives
Russia huge market power over its customers.
However, while Russia’s oil and gas may be vital for its
partners, oil and gas revenue is vital for Russia. This
potentially allows some countervailing pressure for Rus-
sia’s customers, especially in times when oil and gas prices
are low. Then, Russia may need to sell as much as they need
to buy. As we shall see, this seemed to be the case in the
Yeltsin years, with oil prices often at $20 per barrel or less.
Partly as a result, the overall Russian economy was weak,
which enhanced the bargaining power of its partners.
Recently, however, with oil prices peaking at $147.27 per
barrel in July 2008, the balance of power shifted decisively.
With oil and gas this rare and valuable, Russia could easily
find other buyers. Its natural gas flowed throughout
Western Europe and could potentially reach other lucrative
markets, such as China and Japan. Its oil could be shipped
worldwide. Swimming in petro-profits, Russia could easily
afford to impose embargoes on any individual country it
chose to target. While the economic downturn of 2008–
20 09 has moderated oil prices temporarily, the underlying
situation remains.
In short, then, scholars of economic linkage can easily
see why countries such as Ukraine, Belarus, and Georgia
face such strong Russian ‘petro-power.’ This power rests on
Russia’s larger economy and its dominant position in the
region’s overall trade. It is greatly strengthened by the
nature of the products involved. Oil and gas remain rare,
valuable, and almost impossible to find a substitute for. We
next turn to two other questions: how did this situation
arise, and how has Russia tried to exploit it?
2. The growth of Russia’s energy influence
The roots of today’s Russian oil and gas infl uence date to
the country’s Soviet past. At that point, as we shall see, the
Kremlin consciously began an effort to make Russian
energy indispensable throughout both Eastern and
Western Europe. By the 1970s, Soviet energy influence was
a major headache for the West ( Klinghoffer, 1977). This
energy influence declined temporarily in the late 1980s and
1990s, due to low oil prices, the dislocations of the collapse
of the USSR, and the privatization of many oil companies.
However, Russia’s ample resources and extensive network
of pipelines ensured that its ‘petro-power’ was ready to re-
emerge under President Putin.
During the 1950s and 60s the Soviet Union deepened its
efforts to link itself to its Warsaw Pact allies economically.
Under the Council for Mutual Economic Assistance (CMEA
or COMECON), economic cooperation of all sorts was
designed to complement the Soviet Bloc’s military and
ideological ties. While the CMEA had begun under Stalin, in
1949, in those years the Bloc members felt economically
exploited.Khruschev, in contrast, hoped to build a ‘socialist
division of labor,’
in which the USSR and its allies would all
pr
ofit. At the same time, this web of mutual dependence
would make it very difficult for any state to leave the group.
A key part of this emerging ‘socialist division of labor’
was the USSR’s role as the dominant supplier of raw
materials and energy to the rest of the Bloc (Kramer, 1985;
Newnham, 1990). A pattern began then which continues
today: Russia deliberately gave its allies oil and gas at
highly subsidized pricesdbut only if they remained polit-
ically compliant (Marrese & Vanous, 1983). Loyal states
which experienced political problems, such as Poland
during the Solidarity period of 1980–81, were helped with
even more generous subsidies. Meanwhile, critics of the
Kremlindsuch as Romaniadwere forced to rely on the
much pricier world market for fuel.
3
The reliance of Eastern Europe (and the rest of the USSR)
on Russian oil and gas was only increased by these
subsidies. Huge energy-hungry industries were built up,
many of which (such as petrochemical plants) relied totally
2
Natural gas can be liquefied and sent by ship, but this requires
specialized facilities in both the sending and receiving state, and thus is
still a relatively rare method. Also, it is possible in theory for gas from
other states to be ‘swapped’ through Russia’s pipelines. Thus, for example,
in the relatively lax Yeltsin years Ukraine was allowed to purchase some
gas from Kazakhstan. The Kazakhs sent the gas to Russia, which then sent
the same amount on to Ukraine (Rutland, 1999: 166, 169; Becker, 1998). In
theory, this allowed Kiev to benefit from competitiondbut only because
Russia permitted the swap. It had no obligation to allow its pipelines to be
used in this way.
3
As Kramer notes (1985: 35), in 1979 Hungary received 97% of its
energy imports from the USSR, Bulgaria 92%, and East Germany 90%.
Romania, in contrast, received only 16% of its imports from the Kremlin,
having to buy the rest on the world market.
R. Newnham / Journal of Eurasian Studies 2 (2011) 134–143 135

on subsidized fuel. Average consumers, too, were accus-
tomed to profligate energy use. For example, many apart-
ments throughout the Soviet Bloc were built with no
individual thermostats and no gas meters, encouraging
waste. As we shall see, this legacy of dependence remains
a powerful source of leverage for the Kremlin today.
Soon another important part of today’s Russian energy
influence was formed: the idea that the new East European
pipelines would also allow large amounts of Soviet oil and
gas to be exported to the capitalist west (Jentleson, 1986).
This would earn Russia valuable hard currency, and would
also serve as an important political tool, perhaps allowing
Moscow to pry Western Europe away from American
influence. Even in the early 1960s, U.S. leaders feared that
the Druzhba [Friendship] oil pipeline, then under
construction from Russia to East Germany, would allow the
Soviets to gain influence in the West. Accordingly, the U.S.
pressed West Germany and other suppliers to halt ship-
ments of large diameter pipe and other equipment to
Russia (Newnham, 2002:132–136). The issue simmered for
decades, with another major confrontation erupting under
President Reagan, who pressed NATO to boycott the new
natural gas pipelines which Russia was building to Western
Europe (Jentleson, 1986). Nonetheless, the new links were
completed, and have only deepened over the years.
The stage was set, then, for Russia to be able to use its
energy power in two effective ways:first, by subsidizing its
allies, and second, by selling to its enemies at full world
market price, reaping rich profits. Either way, the Kremlin
gained power. In retrospect, high oil prices appear to have
been a major factor in the 1970s and early 1980s in
bolstering Moscow’s belief that it was winning the Cold
War. As Gaddy noted in 2004 (348):
[The present period] is not the first time that an oil
windfall has shaped thinking in Russia. In the early
1970s the combination of vast new Siberian oil reserves
coming on line and the price shocks due to the 1973
Arab-Israeli war provided what one historian has called
the “greatest economic boom the Soviet Union ever
experienced”[.] Abroad, the cash was earmarked for
expanded subsidies to Eastern Europe and arms deliv-
eries to new clients in more remote parts of the globe.
By the beginning of the next decade, it would be used to
pay for a costly war in Afghanistan.
Fortunately for the West, and for Russia’s downtrodden
East Bloc allies, the world market price for oil collapsed in
1986. Many experts, like the late economist and former
Russian Prime Minister Yegor Gaidar, have argued that this
played a major role in the rapid collapse of the USSR
(Gaidar, 2007). Falling oil and gas revenue made it hard for
Russia to afford the Cold War, helping to force a pullback
from Afghanistan and other Third World ventures. The
declining price of oil and gas forced Russia to prioritize its
shipments to the wealthy West, cutting subsidized exports
to Eastern Europe. This helped to destabilize the Soviet
Bloc. Meanwhile, at home, falling oil and gas revenue hurt
Russia’s economy, putting another nail in the coffin of the
Gorbachev government.
During the Yeltsin years, the slide in Russia’
s ‘petro-
pow
er’ continued. Several reasons can be cited for this. First,
oil prices remained very low. Second, partly as a result, the
overall Russian economy remained in free fall, increasing
the government’s desperation for hard currency exports.
Third, these economic dislocations only helped to drive
down oil and gas production, further reducing revenue.
Finally, the privatization of Russian resources helped ensure
that much of the limited ‘petro-power’ Russia retained
would be exercised by businessmen, not politicians.
With a few brief exceptionsdlike a price spike at the
time of the 1991 Gulf Wardthe world market price for oil
remained below $20 per barrel from 1986 to 2000 (EIA,
20 07b). The effect on Russia was dramatic. Such low pri-
ces further weakened the Russian economy, which was
already staggering from the dramatic effects of Gorbachev
and Yeltsin’s moves toward the free market. It has been
estimated that a $1 change in the world price of oil causes
Russia’s GDP to rise or fall about 0.35% (EIA, 2007a:1). Thus,
the fall in oil prices in the 1980sdalmost $30 per barrel–
cost Russia about 10% of its GDP, a heavy blow. In addition
to the falling oil price, output also plummeted. By the mid-
1990s, oil production stood at 6 million barrels per day,
about half of the Soviet-era peak (EIA, 2007a:2). Clearly,
such a fall left Russia with much less ‘petro-power.’
Overall, with the huge additional disruptions of the end
of Communism, the Russian economy shrank by about 40%
between 1991 and 1998. Not surprisingly, such a steep
economic slide left the Russian government unable to pay
its domestic expenses or its foreign debt. This steady
financial decline struck at Russia’s ‘petro-power’ in two
ways. First, Moscow’s desperate need for cash forced it to
adopt a policy of “export at all costs.” Even the modest
income from customers such as Ukraine, receiving heavily
subsidized oil and gas, was vital. Russian leaders worried
that these states could simply refuse to pay, or that they
could turn to alternate suppliersdespecially if the Kremlin
dared to raise prices. Russia’s market share had to be
defended. Even worse, Ukraine, Belarus, and the Baltic
States stood astride Russia’s lucrative export routes to the
West. A move to shut down the export pipelines could have
ruined Russia’s weak credit rating and sent the ruble,
already sliding daily, into a further tailspin. As the ruble
collapse of summer 1998 showed, this was a real threat.
Second, the desperate need to close yawning budget
gaps helped to force the Kremlin to privatize valuable state
assets quickly, at fire sale pricesdincluding oil and gas
fields.
As the Yeltsin years progressed, privatization steadily
eroded state influence in the oil and gas sectors. Most oil
resources were sold off, sometimes for pennies on the
dollar. For example, Russian businessman Roman Abra-
movich was able to buy the oil firm Sibneft for about $100
million in 1995dand sell it for over 130 times more ($13.1
billion) ten years later (Kramer, 2005). By the late 1990s,
oligarchs were able to gain control of oil fields without
making any real payments; under the so-called ‘loans for
shares’ program even short-term loans were enough to
strip assets from the bankrupt Russian state. While foreign
companies were not allowed to buy existing oil fields, they
were permitted to secure majority control of potentially
lucrative undeveloped fields.
By the end of the Yeltsin years the state retained control
over only about ten percent of Russia’s oil, hardly enough to
R. Newnham / Journal of Eurasian Studies 2 (2011) 134–143136

control export policies. Plans were underway for even the
last major state-owned oil company, Rosneft, to be sold to
private owners. In fact, it was spared in 1998 only because
private buyers rejected the cost to buy 75% of the firm, $2.1
billion, as far too high (Lane, 1999:35). Ironically, by 2006
Rosneft would be valued at about $80 billion, based on the
$10.4 billion it received when a mere 15% of its shares were
offered for sale (Kramer, 2006a).
In the gas sector the Kremlin’s role was stronger, but still
weakened. Most natural gas production remained under
Gazprom, the state-owned energy giant created just before
the fall of the USSR. However, large shares of the company
had been sold to domestic and foreign buyers, reducing the
state’s stake to about 38%. While the state retained influ-
ence, Gazprom’s decisions were increasingly based on
economic, not political calculations. Its usefulness as a tool
of state leverage was declining. In the last years of the
Yeltsin era, speculation was rampant that even Gazprom
would be fully privatized, which would have virtually
eliminated the Kremlin’s energy power.
In the latter years of Yeltsin’s rule many analysts
concluded that not only did the Kremlin not control the oil
and gas industrydin many ways, the industry controlled it.
The leading oligarchs played a large role in Yeltsin ’s narrow
reelection in 1996, gaining much influence. It seemed that
even in foreign policy energy corporations played “a large,
if not a dominant role” (Rutland, 1999:183). Fragmentation
of the Kremlin’s authority had reached a point where no
clear decision-making procedure could be discerned at all.
The contrast to today’s forceful Russian state was stark.
3. Russia’s ‘Petro-Power’ returns
Under President Putin Russia’s energy influence reached
unprecedented heights. Several factors combined to
produce this result. First, the world market for oil and gas
greatly favored Russia and other producers in 2000–2008.
These products became both valuable and rare, ideal
preconditions for the use of any form of economic linkage,
as noted in the theory section above. While prices have
moderated in the current worldwide recession, a return to
the era of ‘cheap oil’ as in the 1990s is unlikely. Second, the
Putin administration moved to take control of the country’s
oil and gas sector. This allowed Russia to harness its
potential economic power for state purposes, a crucial
condition which was largely lacking in the late Yeltsin
years. Third, Russia moved aggressively to increase its
control over oil and gas assets outside its borders, notably
the pipelines which carry its products to the world. In sum,
Russia is now much more free to use its oil and gas to either
impose
painful cost or offer lucrative benefits to states
which it seeks to influence.
A key factor in the rise of Russia’s ‘energy power’ was
the state of the world market in oil and gas during Putin’s
reign. Supplies were tight worldwide, meaning that Rus-
sia’s customers had few alternatives to buying from Mos-
cow. States could not easily evade Moscow’s energy
sanctions or impose counter-sanctions. For example, the EU
would have found it virtually impossible to boycott Russian
oil or gas to express its distaste with Putin ’s foreign policy
or his increasingly autocratic actions at home. Also, prices
soared to record highs after Putin became President in
20 00, with oil reaching almost $150 a barrel by mid-2008.
This turnaround from the Yeltsin years allowed Russia to
rake in massive profits from oil and gas sales. This in turn
allowed the Kremlin to pay off Russia’s foreign debts, which
loomed so high under Yeltsin that they prevented Russia
from fully using its petro-power, as was noted above. Today,
while the recession has cut into Russia’s financial reserves,
it remains far more solvent than in the 1990s. If a country
such as Belarus threatens to temporarily suspend Russian
oil or gas shipments through its pipelines, Russia can shrug
off the threat. It knows that it can afford a temporary drop
in revenue, unlike in the Yeltsin years.
The tightness in world markets allowed Moscow to
retain and expand its dominant market shares among its
energy customers–and also to reel in new customers, such
as China and Japan. For example, Belarus obtains essentially
all of its natural gas from Russiad99%. The Baltic States
depend on Moscow for about 89% of their gas supplies,
Georgia for 88%, and Ukraine for 69%. Even some Western
customers have similarly high levels of dependence, such
as Austria (72%) and Greece (85%) (EIA, 2007c:6).
These underlying conditionsdhigh prices, tight
supplies, large market sharesdall meet the preconditions
noted in the theory section for the use of economic power.
Yet another condition had been allowed to slip away in the
Yeltsin years: state control of resources. As noted above,
almost all of Russia’s oil reserves were privatized in the
Yeltsin years. Even mighty Gazprom was being considered
for privatization. Under Putin this laissez-faire approach
ended abruptly.
The prime example of this, of course, is the treatment of
Yukos, considered by many to have been the best-run
private oil firm in Russia. Mikhail Khodorkovsky, the
founder of Yukos, was apparently targeted because he
directly threatened Putin’s control of the energy industry
(Baker & Glasser, 2007: Chs. 14 and 17). Seemingly unaware
of the looming danger, he was moving confidently forward
in several areas which angered Putin. He was planning to
acquire another large Russian oil company, Sibneft, thus
taking a leading role in the oil sector. To finance such
expansion, he was considering selling a large stake in Yukos
to Western investors. And he was openly backing anti-Putin
political forces in Russia itself. The result is well known:
Khodorkovsky was arrested on what were widely regarded
as
bogus tax charges and eventually sentenced to eight
years in a Siberian prison. More seriously, his firm was
destroyed. The Russian government demanded higher and
higher payments for ‘back taxes,’ and Yukos went bankrupt
and was forced to sell its assets. In a farcical ‘auction’ held in
December 2004 the largest share of Yukos’ oil assets were
transferred to the state-owned Rosneft.
4
More quietly, the Kremlin then continued to consolidate
its role in the oil sector. In late 2005, state-owned Gazprom
purchased privately-owned Sibneft for $13.1 billion
4
Rosneft bought the assets through a front, “Baikal Finance Group,”
which it formally took over three days later. The price was vastly
understated–$9.35 billion for assets worth more than $60 billion (Meyers
and Kramer, 2007).
R. Newnham / Journal of Eurasian Studies 2 (2011) 134–143 137

(Kramer, 2005), eventually renaming its acquisition
‘Gazprom Neft’ [oil]. In this case, the sale was regarded as
essentially voluntary, with a fair market price being paid.
The owner, Roman Abramovich, was seen as having clev-
erly cashed out before the state raised pressure on him.
Yet tougher tactics remained possible, as the case of
a smaller firm, Russneft, clearly shows. In the summer of
20 07, its owner, the oligarch Mikhail Gutseriev, initially
refused pressure to sell. The government swiftly responsed
with questionable tax allegations, like those used against
Yukos. Gutseriev folded, selling to a Kremlin-approved
buyer, aluminum magnate Oleg Deripska. Then he made
the mistake of publicly denouncing the sale as unfair and
forced. A warrant was issued for his arrest, but he had
prudently left the country (Kramer, 2007).
Despite the growth of Rosneft and the creation of
Gazprom Neft, about 60% of Russia’s oil resources remain in
private hands (Hashim, 2007:11). However, the remaining
private firms have clearly understood Putin’s message. All
now back Putin and Medvedev in domestic politics and
eagerly follow their line in foreign policy questions. This is
the price of doing business in today’s Russia.
As noted above, part of the reason for Putin’s adminis-
tration to target Yukos was fear of the firm’s efforts to court
foreign investors. Clearly, Moscow could not control the
Russian oil sector if large, independent foreign firms either
owned Russian energy companies or ran oil fields directly.
Putin moved aggressively to try to squeeze foreign
companies out of their majority holdings in the energy
sector.
A prime example of Russia’s new energy xenophobia
was the treatment of thejoint venture known as Sakhalin-II,
controlled by Shell, which had been created in the more
flexible Yeltsin years. Huge political pressure was brought
to bear on Shell in late 2006 (Kramer, 2006c). A key
component of this was the assertion by the Russian envi-
ronmental agency that the project could damage the
environment. Given the dismal record of both Soviet and
Russian oil exploration in this areadwith their projects
falling far below Western environmental standardsdthis
claim was met with universal disbelief. Mysteriously, once
the company agreed to sell majority control of its project to
Gazprom at the end of 2006, the environmental objections
vanished.
To defend its ‘Petro-Power,’ Russia strives to keep as
many of its partners as possible in a state of energy
dependence, a dependence which can be manipulated as
Russia chooses. A key component of this strategy is the
control of pipelines and other energy facilities in neigh-
boring countries. Russia aims to control pipelines in Poland,
Belarus, Ukraine and the Baltic states which take Russian oil
and gas to other countries. If it cannot control these transit
routes, it will try to bypass them, for example with the new
Nord [North] Stream pipeline through the Baltic Sea,
running directly from Russia to Germany. At the same time
Moscow controls pipelines through its own territory which
carry oil and gas from the Caspian and Central Asian
countries, and works hard to ensure that these countries
cannot
find
alternative export routes.
One of the tactics Russia has used to control pipeline
routes is one mentioned abovedthe use of fabricated
‘environmental’ arguments. For example, a trans-Caspian
pipeline has been proposed, which could allow Central
Asian gas to reach the West via Azerbaijan and Georgia,
bypassing Russia. Not surprisingly, the Russian environ-
mental agency immediately denounced it as a looming
threat to marine life. Oddly enough, the much longer Nord
Stream trans-Baltic pipeline, which the Kremlin favors, was
quickly approved by the same agency as posing no threat to
the sea at all (Watchdog Okays, 2007).
4. ‘Petro-carrots’: oil and gas as economic incentives
In this section one side of Russia’s energy power will be
examineddits use as a form of ‘positive linkage,’ or incen-
tives. As we shall see, oil and gas allow Russia to ‘buy off’
foreign companies and individuals. More importantly, the
Kremlin can manipulate whole countries. As in the days of
the Warsaw Pact, loyal allies are rewarded with ample
amounts of subsidized energy, at great cost to Moscow.
Today, of course, the recipients are different, since most of
Central Europe has entered the EU and NATO and is no longer
allied to the Kremlin. Thus, as we shall see, major recipients
of petro-carrots have recently included the Ukraine (under
President Kuchma), Belarus, and several small secessionist
enclaves in Moldava and Georgia. While this aid has not
always succeeded (notably in Ukraine at the time of the
Orange Revolution), it has helped to keep pro-Kremlin
leaders in power in Belarus, Abkhazia, South Ossetia, and the
Trans-Dniestr region. This influence in what Moscow tell-
ingly calls the ‘near-abroad’ is highly important, since it
sustains Russia’s ambitions to remain a major power.
Russian generosity to the Ukraine under President
Leonid Kuchma was a clear case of using oil and gas pricing
to favor a client state. Kuchma, who led the Ukraine from
1994 to 2005, was quite friendly to Russia, signing a “Treaty
of Friendship, Cooperation and Partnership” with Moscow,
designating Russian as an official language, and siding with
Russia on many foreign policy issues.
Not surprisingly, these policies were rewarded by the
Kremlin with subsidized oil and gas sales. Throughout
Kuchma’s time in office, Moscow kept gas prices frozen at
about $50 per thousand cubic meters (TCM). In fact Kiev
paid far less than even that, because much of the supply
was simply given to Ukraine as ‘transit fees’ for gas being
sent on to Western Europe. Also, Ukraine was allowed to
fall far behind on even the limited payments it did owe,
piling up a large debt to Russia. The political nature of these
subsidies became only too clear after the pro-Western
‘Orange Revolution’ of 2004, when Kuchma was succeeded
by Viktor Yuschenko. As we shall see in the next section, oil
and gas ‘carrots
’ suddenl
y became ‘sticks’ in Moscow’s fight
against Yuschenko.
Another prime example of a country favored by Russian
oil and gas incentives is Belarus. Clearly, Russia was not
rewarding Belarus for political or economic reforms; under
the dictatorial President Lukashenko, Belarus has remained
a Soviet-era remnant in the region. Yet Lukashenko has
consistently backed Moscow in foreign policy, to the extent
of pursuing for years the hope of creating a new federation
with Russia. Thus the Kremlin has ensured the Belarus
would be favored with extremely cheap gas. In 2006,
R. Newnham / Journal of Eurasian Studies 2 (2011) 134–143138

Belarus paid only $47 per TCM, at the same time Russia was
demanding $230dalmost five times more–from the new
pro-Western Ukrainian government (Vinocur, 2006).
The country’s feeble, still largely state-run economy
even has difficulty paying for the extremely discounted gas
it receives. Until recently, Russia has been willing to over-
look this. During the Yeltsin era, for example, Belarus was
able to ‘pay’ its debts by such measures as giving up its
claims on joint Soviet-era assets in Russia (1993) and giving
up claims for “ damage caused by Soviet troops in Belarus”
(1996) (Lane, 1999: 168). Both of these claims were rather
far-fetched, since Belarus had seized Soviet facilities on its
own territory and damage from the Soviet-era military was
hardly Yeltsin’s responsibility alone.
Putin gradually increased the pressure on Belarus to
pay somewhat fairer prices for its energy, although the
country is still subsidized. As seen in Table 1 below, Russia
increased prices for its allies, such as Belarus and Armenia,
but raised prices for more hostile statesdsuch as Ukraine,
Georgia and Moldovadby far more. Thus a ‘price scissors’
was created, which allows Moscow to benefit in two ways.
First, it greatly increases its overall revenue, as all
customers pay more. Second, the price differential allows
it to punish its enemies and reward its friends at the same
time. It is hard for Belarus to complain about having to pay
$100 per TCM for its gas when Georgia is paying more
than twice as much.
The massive price differentials and generous treatment
of Belarussian debts have been instrumental in keeping the
country afloat economically, and thus in keeping
Lukashenko in power. The policy must therefore be scored
as a significant success for Moscow. The West has long tried
to sponsor opposition movements in Belarus, as in the 2006
presidential election when the ‘Zubr’ movement united
behind the pro-Western candidate, Alexander Milinkevich.
Yet Lukashenko’s claim to have created “stability”dthanks
in large part to low unemployment, subsidized food and
energydhelped ensure that his opponent’s support
remained limited. He would likely have won reelection
even without the paranoid police tactics and electoral
cheating which he used to ensure overwhelming victory.
Energy incentives helped to ensure that there would be no
‘Orange Revolution’ in Minsk.
In addition to the generous petro-subsidies offered to
compliant neighbors like Belarus, Moscow has also cleverly
used incentives to support several pro-Russian enclaves in
less compliant states. Moldova, for example, has long been
a
thorn in Moscow’s side, with its nationalistic policies
alienating the Russian minority there. In response, Russia
has supported the breakaway ‘Trans-Dniestr Republic,’ run
by Russian-speakers. Like Belarus, it has preserved the
symbols and style of the old USSR. Also like Belarus, this
tiny ‘republic’ has been unable to pay for even its subsi-
dized gasdyet Moscow has remained tolerant. By March
20 07 the ‘republic’ had accumulated $1.3 billion in debt to
Gazprom, which it announced it simply would not pay
(Solovyov, 2007). Yet the gas kept flowing.
Similarly, subsidized oil and gas has been provided to
two breakaway regions of Georgia, a state which (as we
shall see below) has been a major target of Russian oil and
gas sanctions. South Ossetia and Abkhazia, both backed by
Russian ‘peacekeeping troops,’ have carved out de facto
independence from Georgia, and their defiance allows
Moscow to increase military and political pressure on the
Georgian leadership (Maloney, 2007). Moscow has spent
lavishly to support them. For example, Gazprom plans to
spend about $600 million building new pipelines and gas
infrastructure in South Ossetia (Lowe, 2007), a region with
about 70,000 inhabitants. Clearly, this is a politically-
motivated investment. All of these enclavesdthe Trans-
Dniestr Republic, Abkhazia, and South Ossetiadare
impoverished, backward areas which could not survive
economically without Moscow’s help. The fact that all of
them remain in existence, 16 years after the collapse of the
USSR, must be credited in part to Moscow’s ‘petro-carrots.’
Another aspect of Russian oil and gas power is its
potential use in ‘bribing’ individuals and corporations. By
offering corporations shares in oil and gas fields, pipelines,
and other projects, Russia can win influential allies abroad.
In recent years Russia has been careful to keep majority
control of such projects in its hands. Yet with energy prices
sky-high, foreign firms seem willing to accept minority
stakesdas Shell did when it was forced to cede control of
the Sakhalin-II project.
Other Western companies have been just as vulnerable
to the lure of investing in Russia’s lucrative energy
sectordon Russia’s terms. Germany’s energy partnership
with Russia, for example, has deepened as German
companies
have signed on as minority shareholders in
a number of deals. One of the 11 members of the Board of
Directors of Gazprom itself is now Burckhard Bergmann,
head of the German gas firm E.ON Ruhrgas AG (www.
gazprom.com). His company and BASF each own
a minority stake in Nord Stream AG, the Gazprom-
controlled company which is to build a controversial
pipeline under the Baltic Sea to bring Russian gas to
Germany. Similarly, Gazprom recently signed a deal with
Eni, the Italian energy giant, to build a “South Stream”
pipeline, directed toward Italy and Austria (Dempsey,
20 07). The EU had been striving to control such deals,
uniting its members behind an ‘Energy Charter’ which
would regulate the West European market and limit
Russian dominance. Yet the lure of quick profit was too
tempting. Most companies are well aware that if they do
not accept Moscow’s terms, their competitors will. This
enhances Russian bargaining power.
Oil and gas profits can also be used to win over politically
important individuals. Saddam Hussein was widely repor-
ted to have used this tactic after the first Gulf War, when his
regime covertly gave oil export permits to individuals who
were helping Hussein politically and economically. Such
Table 1
Natural gas prices charged to Russian customers ($/TCM).
2005 2006 2007 2008
Armenia $56 $110 $110 $110
Belarus $46 $46 $110 $125
Georgia $63 $110 $235 $235
Moldova $80 $110 $170 $190
Ukraine $50 $95 $130 $160
R. Newnham / Journal of Eurasian Studies 2 (2011) 134–143 139

permits, allowing the export of steeply discounted oil, could
then be resold to oil dealers at a large profit.
Some have seen similar implications in Russia’s attempts
to involve prominent Westerners in running state-
controlled oil and gas companies. The most well-known
case is that of Gerhard Schröder, which has been very
controversial in Germany. The former German Chancellor
had long favored close ties with Russia, specifically pushing
hard for close energy ties. He played a key role in negotiating
the controversial Nord Stream project. Over a month after
his defeat in the September 2005 German election, in one of
his last acts in office as a lame duck, Schröder approved
a billion Euro German government loan guarantee for the
project. Within days of his departure from office, Schröder
was suddenly named Chairman of the Board of Nord Stream
AG, the joint Russian-German company which is to build
and operate the pipeline (Follath and Schepp, 2007). The
appointment led to widespread anger in Germany, where it
was seen as a scandalous conflict of interest, and the EU
launched an investigation into the loan guarantee deal
(Buck and Benoit, 2006; Vinocur, 2006).
In the wake of this success, President Putin reportedly
attempted to score another personnel coup in late 2005,
offering the chairmanship of the state-owned Rosneft oil
company to Donald Evans (Putin, 2005). Evans had left
office only months before as U.S. Secretary of Commerce.
He was well-known as one of President Bush’s personal
friends, having been close to him since they both lived in
Midland, Texas, and serving as chair of his 2000 presiden-
tial campaign committee. Clearly, Moscow hoped that by
hiring Evans Russia could influence the President. Perhaps
sensing that the job offer would embarrass Bush, Evans
eventually declined.
5. ‘Petro-sticks’: oil and gas as economic sanctions
In contrast to Russia’s generous treatment of its political
allies, those who oppose the Kremlin have faced economic
punishment. This has included punitive price hikes and
even oil and gas embargos. These tactics became obvious to
the world at the start of 2006, when Russia cut off gas
shipments to the Ukraine and Georgia. Ukraine faced
another punitive gas cutoff at the start of 2009. The Baltic
states have also been targeted. However, ‘petro-sticks’ have
also been used in many more subtle ways, as we shall see,
through measures such as punitive price increases and
demands for debt payment. While these pressure tactics
have not always brought immediate compliance with
Moscow’s wishes, they have had the dual effect of weak-
ening Russia’s opponents and setting an example pour
l’encouragement des autres.
The Ukrainian case is one of the most well-known
examples of Russian oil and gas sanctions. This is true not
only because the Ukraine is an important state in its own
right, but because cutting off Russian gas to that state can
have a major impact on broader world markets. The main
Russian gas pipeline to Western Europe runs through
Ukraine, meaning that Kiev can easily react to any Russian
supply cuts by reducing or stopping the flow to the rest of
Europe. Under President Yeltsin this threat was enough to
tie the Russians
’ hands,
forcing them to compromise
repeatedly with Kiev on gas supplies and pricing. As one
author put it, voicing the common view in the late 1990s,
any Russian threat to cut supplies was “not really credible,”
because Moscow needed the transit route as much as Kiev
needed Russian gas (Rutland, 1999:168). Under Putin, this
relatively benign policy endeddto the consternation of
both the Ukrainians and Western Europe.
In late 2004 the Ukraine was convulsed by the dramatic
dispute between presidential candidates Viktor Yanukovich
and Viktor Yuschenko. Yanukovich, the designated
successor of the incumbent president, Leonid Kuchma, was
considered friendly to Moscow, and the Kremlin made its
support for him clear (Yasmann, 2006). When Yanukovich
was proclaimed the winner in a fraud-tainted vote in
November 2004, Moscow rushed to accept his victory. The
subsequent “Orange Revolution” by supporters of the pro-
Western Yuschenko, which eventually succeeded in forcing
a new election, was roundly condemned by Moscow.
Yuschenko’s victory in the second contest in late December
seemed to push the Ukraine out of the Russian orbit. Even
worse, he succeeded due to a popular uprising backed by
the West. Such a “color revolution” (first seen in Serbia with
the overthrow of Milosevic, then later in Georgia,
Kirghizstan and Lebanon) seemed to Moscow to be
a possible model for an uprising against Putin himself. As
such, it could not be tolerated.
Accordingly, during the tense electoral campaign the
Kremlin and its surrogates openly brandished the ‘gas
weapon.’ As the leader of one pro-Moscow Ukrainian
organization said, “what else but gas could convince the
people of Ukraine that it’s better to be a friend of Russia
than the EU and NATO?” (Yasmann, 2006). It was made
clear that a vote for Yuschenko was a vote for winters with
no heat, shuttered factories, and economic collapse. After
Yuschenko’s fi nal victory at the end of 2004 these threats
began to be put into action.
Ukraine’s 2005 gas contract with Gazprom had already
been signed. But it soon became clear that after that
the country would face a harsh price increase. Gazprom
claimed, unconvincingly, that this was simply part of
a natural increase to reach world market prices (WMP)di.e.,
the prices paid by Western European states. Somehow,
though, this need to increase the gas price had never been
noticed under Kuchma, when prices held steady at about
$50 per TCM for many years. Now, suddenly, Moscow
demanded an almost five-fold increase to West European
levelsdabout $235 per TCM. In addition, Gazprom suddenly
demanded payment of Ukraine’s accumulated debt for gas
service. If successful, Gazprom’s demands would have
bankrupted Ukraine.
Matters came to a head at the end of 2005, when the
annual
gas contract expired and the two sides could not
reach a new agreement. To the world’s surprise, at the start
of 200 6 Gazprom quickly began to shut off the gas flow to
the Ukraine. Even some commentators on Russian state-
owned television were quite open in stating that “the gas
cutoff is retribution for the Orange Revolution” (Yasmann,
20 06). Moscow ignored Kiev’s threats to retaliate by
cutting the flow on to Western Europe. That region’s
supplies, too, fell greatly in the next two days, before
normal shipments were restored on January 3.
R. Newnham / Journal of Eurasian Studies 2 (2011) 134–143140

In the end, the Kremlin did not achieve a complete
victory. It was, however, able to force the Ukraine to agree
to double the price it paid for gas, to about $100 per TCM.
5
This imposed a massive economic drain on the Yuschenko
regime. The price also had the virtue of still being below the
WMP, which would allow the Kremlin to easily justify
future price increases. Yuschenko and the Ukraine were
thus effectively held hostage, never knowing when the next
economic blow would fall. And the price increase had
a political effect; with rising economic discontent,
President Yuschenko’s party did less well than expected in
the March 2006 parliamentary elections, stalling the
progress of his Orange Revolution (Myers and Kramer,
20 06).
Predictably, Russian meddling continued after 2006.
Every action of President Yuschenko was met with more
threats of gas supply cuts, price increases, or new debt
repayment demands. The pattern was the same in the fall
20 07 parliamentary elections in Ukraine, which brought
Yuschenko’s ally Julia Timoshenko into power as Prime
Minister. Again, the Kremlin tried to induce voters to favor
her opponent, Yanukovich, with thinly veiled economic
threats. When that failed, Gazprom again stepped in,
cutting Ukraine’s gas supplies in early 2008 in yet another
dispute over debt repaymentdwhich was widely seen as
punishment for Timoshenko’s victory (Harding, 2007).
Finally, at the start of 2009 Gazprom again cut off gas
shipments, again greatly reducing supplies sent to Western
Europe for several days.
As the victories of Yuschenko and Timoshenko show, the
Kremlin’s pressure tactics do not always appear to work
immediately. However, when Moscow is defied there is
a priceto pay; the Ukrainian economy hassuffered a real drain
thanks to Gazprom.As DavidBaldwinnotes in his classic work
Economic Statecraft, the success of sanctions cannot be
measured only by whether they immediately bring political
victory. One must also count the costs imposed as a success,
since they weaken the opponent (Baldwin, 1985:132–133).
Gazprom’s price increases also have the added virtue of
simultaneously strengthening the Kremlindquite directly,
since Gazprom is state-owned.
6
Additionally, the Ukraine’s
economic problems have imposed a political cost on
Yuschenko and his pro-Western allies, weakening both pol-
itical support and their ability to implement their campaign
promises. Every Ukrainian hryvnia sent to Moscow for gas is
one that cannot be spent on popular programs such as health,
education or public works.
Furthermore, as noted above, the Kremlin successfully
showed its resolve by ignoring Ukraine’s efforts to disrupt
gas flows to Western Europe. For years ‘transit states’ such
as Ukraine, Belarus, and Poland had felt immune from
Russian sanctions, believing that they could live without
Russian gas better than Russia could live without West
European hard currency from gas sales. But now rising oil
and gas prices had enabled Moscow to pay off its debts and
build up huge currency reserves, freeing it to use its
resource leverage more aggressively. This is an important
lesson for the future: when push comes to shove, the
Kremlin will cut Western Europe’s energy artery to achieve
its political goals. This lesson has struck home in Western
Europe, with leaders throughout the EU now following
every energy dispute between Russia and its neighbors
with obvious concern. The EU has been pushing Russia to
accept an “Energy Charter,” pledging to forswear politi-
cally-motivated embargoes, yet Moscow has steadfastly
refused.
7
In the future, Ukraine’s limited leverage as
a transit state looks likely to decline further, as Russia finds
alternative ways to reach its wealthy Western customers.
As noted in the previous section, the new Nordstream
pipeline will link Russia to Germany under the Baltic Sea
and the South Stream route will cross the Black Sea to
connect Russia directly to Bulgaria and thus to Southern
Europe.
If anything, the position of other lands targeted by
Russian ‘petro-sticks’ is even weaker than that of Ukraine.
The Baltic States and Georgia, for example, are quite small,
and thus cutting off their oil and gas costs Moscow almost
nothing. These states also have less control over the transit
of Russian oil and gas to other countries than does Kiev.
8
Accordingly, Russia has felt free to use its petro-power
against them rather openly.
The Georgian case is similar to that of the Ukraine in that
Russian sanctions were triggered by a ‘color revolution’dthe
‘Rose Revolution’ of November 2003, which overthrew
President Shevardnadze and led to his replacement in early
2004 byMikheil Saakashvili, supportedby the West. As in the
Ukrainian case, Russia soon began to threaten Georgia’s gas
supplies. In this case, though, the Kremlin seems to have
resorted to more direct measures than a gradual reduction in
gas pressure. On January 22, 2006, just days after the flow of
gas to Ukraine was resumed, both gas pipelines to Georgia
were suddenly severed by a series of carefully coordinated
bomb blasts. At the same time, the electric lines supplying
Georgiawere also cut (Chivers, 2006). To this day the Kremlin
denies any complicity in the affair, but many observers have
their doubts.
5
In fact, the deal was even more beneficial to Moscow: the higher price
was arrived at by mixing cheap gas from Central Asia, costing only about
$65 per TCM, with gas bought from Gazprom at full world price, about
$230 TCM (EIA, 2007c:6).
6
This is a notable contrast to most forms of economic sanctions, which
impose costs on both the target and the sender. For example, President
Carter’s grain embargo against the USSR, imposed after it invaded
Afghanistan in 1979, was very unpopular in the U.S. While it hurt Moscow
somewhat, it seemed to hurt struggling American farmers more. Thus the
embargo was hastily revoked by the incoming Reagan administration,
despite Reagan’s fierce anti-communism.
7
Historically speaking Russia’s position is very ironic. During the Cold
War the USSR was targeted by Western embargoes, such as multilateral
technology sanctions, which hurt it greatly. From the first days of the
Soviet state Moscow tried to persuade Western states to sign agreements
prohibiting embargoes. For example, an important factor in the Rapallo
agreement between Germany and Russia in the 1920s was Germany’s
agreement to renounce embargoes (Newnham, 2002:80). Now, it seems,
the shoe is on the other foot, and it is Western nations which must ask
Russia to renounce the economic weapon.
8
Georgia can cut off Russian gas shipments to Armenia, an ally of
Russia, which gives it some potential leverage. And some Russian oil is
shipped to the West through Baltic ports, although Russia has greatly
reduced this amount.
R. Newnham / Journal of Eurasian Studies 2 (2011) 134–143 141

Here again, while the Saakashvili government did not
immediately fall or begin to follow Moscow’s line, Georgia
paid a heavy price. Moscow was able to force Georgia to
agree to massive gas price hikes, from about $63 per TCM in
20 05 to $110 in 2006 (see Table 1). Finally, in 2007, Georgia
became the fi rst ex-Soviet state to pay full WMP for its
gasd$235 per TCM. When added to other Russian
sanctionsdsuch as refusing to buy Georgian wine and
produce on ‘health and safety’ grounds and expelling
thousands of Georgian guest workers as ‘illegal immi-
grants’dthe damage to Georgia’s economy has been
considerable. The weak economy has in turn put Saakashvili
on the defensive politically. In November, 2007, in the face of
widespread protests, he was forced to declare a temporary
state of emergency, which simultaneously weakened his
regime and undercut his democratic credentials. As noted
above, Georgia has been further weakened by Russia’s
generous subsidies to the breakaway regions of South
Ossetia and Abkhazia, which could not survive without
Russian support.
Another interesting case of Russian ‘petro-power’ is the
sanctions against the Baltic States, which have long angered
Moscow with their pro-Western orientation. Russia now
seems willing to use its resources to punish these states for
any kind of economic or political defiance, no matter how
small. In July 2006, for example, Russia shut down the oil
pipeline which supplied the Mazeikiai refinery in Lithuania.
This installation is crucial to the region, since it supplies the
rest of the Baltic states. It is also the largest source of
revenue for the Lithuanian government. Formally Russia
blamed an “oil leak” for the shutdown, a leak which it
claimed would somehow take up to two years to repair
(Kramer, 2006b). Interestingly, this technical problem
appeared only after Lithuania had agreed to sell the
refinery to a Polish company, PKN Orlen, rather than
accepting rival Russian offers. Fortunately Lithuania was
able to retool the refinery to run on oil delivered by sea.
However, shortly afterward the facility was hit by a major
fire, whose origin remains unexplained.
Political defiance, too, is now speedily answered by the
Kremlin. In May 2007 Estonia took a small but symbolic
step. It decided to move an old Soviet war memorial from
the center of its capital, Tallinn, to a more remote park. Both
Moscow and the local Russian minority saw this as a slap in
the face to the Red Army, whose troops had liberated
Estonia from the Nazis. Many Estonians clearly saw the
‘liberation’ more as a new enslavement. The dispute quickly
escalated, and Russia announced that oil shipments to
Estonia, normally delivered by rail, would unfortunately be
stoppeddallegedly due to “maintenance work”
(Halpin,
20
07). In the end, the embargo lasted only two weeks,
but was quite costly, since all freight shipments were
stopped, which affected coal and many other products as
well. Russia’s economic actions were accompanied by
attacks on Estonia’s embassy in Moscow and by a new
tacticda cyber-assault on a variety of Estonian websites.
The Baltic cases were a shock to the West. Unlike
Ukraine and Georgia, Estonia and Lithuania are members of
both NATO and the EU, so Russia’s economic sanctions
against them were a slap at both organizations. The thin fig
leaf of “technical problems” was convincing to no one.
In all, it is clear that in recent years Russia has begun to
use its ‘petro-power’ with new confidence. It openly
rewards its friends and punishes its enemies, with carefully
calibrated tactics which escalate from threats to price
increases to outright embargos. As shown in this section,
these tactics may not always ‘work’ immediately, in the
sense of bringing political compliance. But they always
inflict costs on Moscow’s opponents, both economically
and in increased political instability. And as Baldwin
reminds us, if economic sanctions “increase a target
country’s cost of noncompliance” they are having an
important effect (Baldwin, 1985:132).
6. Conclusion
As this paper has shown, Russia’s ‘petro-power’ has
become an increasingly clear threat to all the states which
buy Russian oil and gas. This is obviously especially true for
the small, poor, highly dependent states of what Russians
call the ‘near-abroad’dthe former Soviet states. As we have
seen, Russia has used its influence both to reward its friends
and punish its enemies, seeking to regain its influence over
the region. It has shown it can be successful, and even when
it is not it can impose high costs on those who dare to defy it.
Yet the impact of Russia’s actions extends far beyond
Russia’s immediate neighbors. For example, Western
Europe now has great cause for concern. Although it is less
dependent on Russia than the former Soviet states, Mos-
cow’s willingness to ruthlessly use its ‘petro-power’
has led
to
much worry among EU statesdand, as we have seen, to
increasing efforts to persuade Russia to sign an Energy
Charter restraining its influence. Other countries, such as
the U.S., also have reason to be concerned about Russia’s oil
wealth. While the U.S. does not depend directly on Russian
oil and gas, it has many allies that do. Russia also exerts
some influence on global prices, especially in today’s
unsettled, nervous ‘seller’s market.’ It has recently tried to
enhance this leverage by creating an organization of
natural gas exporters, modeled on OPEC. Any decision by
Moscow to limit production would immediately cause
world prices to jump.
Finally, the U.S. and others around the world are also
concerned about another facet of Russia’s ‘petro-power’:
the huge war chest of oil and gas revenue that Moscow has
accumulated. By early 2008 Russia held over $157 billion in
its ‘Stabilization Fund,’ one of a number of ‘sovereign
wealth funds’ which have emerged in recent years world-
wide (Kramer, 2008). Disturbingly, these sovereign wealth
funds are often held by countries which are undemocratic
and have limited commitment to free markets. Also, more
and more, countries with regional or worldwide geopolit-
ical ambitions control large wealth funds. For example,
Russia, Venezuela and Iran rank among the top wealth fund
holders (Truman, 2007:3). And this new wealth is clearly
based on oil and gas; of the 19 top fund states in 2007, at
least 13 had wealth based mainly on that source (Ibid., and
author’s calculations).
In short, the surging price of oil and gas has driven
a fundamental reallocation of global wealth. This can be
seen in the fact that oil exporting states had a collective
balance of payments surplus of $88 billion in 2002 and
R. Newnham / Journal of Eurasian Studies 2 (2011) 134–143142

$571 billion in 2006, an increase of almost five times in only
four years (Andersen, Fick, & Hansen, 2007:50). Despite the
current decline in oil prices, projections for the longer-term
future are even more sobering. A recent report projected
that sovereign wealth funds could expand from $2.5 trillion
in 2007 to $27.7 trillion in 2022 (Sesit, 2007). Thus, as the
world warily watches the rise of politically ambitious
‘petro-states’ like Russia, there is reason for concern. And
all countries, not just Estonia or Belarus, should be aware of
the cynic’s version of the golden rule: “He who has the gold
makes the rules.”
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