Special Report: Putin, oil, Sechin, Ukraine: delaying the energy transition?
Potential inflection point ahead in China-Russia Relations
Vladimir Putin is many things: survivalist, former KGB intelligence officer, nationalist – and, arguably, the world’s most powerful oil baron. This special edition of The Report discusses some strategic factors that could be shaping and possibly even motivating Putin’s next steps in Ukraine: oil, Igor Sechin, and the energy transition.
Putin’s aggressive behavior in Ukraine may very well be largely motivated by tactical on-the-ground (and mostly non-public) considerations, such as Crimean water reserves, military balances in the Donbas, Ukrainian domestic politics, etc. Putin’s behavior could also be motivated by strategic considerations, however: escalation in Ukraine could be an element in a wider plan. Indeed, in 2014 and 2016 Putin demonstrated an ability to conceal strategic objectives through a series of seemingly unrelated tactical maneuvers. Similarly, Putin may be considering a “Goldilocks” level of military escalation in Ukraine to unconventionally advance Russian energy interests and his own domestic political interests vis-à-vis Igor Sechin, head of Rosneft and the second most powerful man in Russia. Putin may seek enough escalation to derail the White House’s April 22nd climate change summit or its implementation, which could buy months, possibly years, of time (and tens or even hundreds of billions of dollars in revenue) for Russian hydrocarbon exports. At the same time, if Putin chooses to escalate in Ukraine he will likely seek to limit the conflict since the political/economic/military costs and risks could prove quite severe.
Will Putin escalate in Ukraine, particularly before the April 22nd climate summit? How will the PRC respond? Will it still attend the summit? Putin may have some dramatics in store for the next few weeks. Hold fast.
The Centrality of Oil in Russian Domestic and Foreign Policy
As Thane Gustafson wrote in 2012, “It is oil, then as now, that makes the weather in the Russian economy.” Energy exports accounted for over 60% of Russia’s total exports by value in 2019; the country is the world’s 2rd largest net oil exporter and its largest natural gas exporter. The Russian economy has become less dependent on hydrocarbons in recent years, but crude and crude products exports (such as gasoline, diesel, etc) still account for approximately 21% of Russian GDP, with natural gas exports contributing perhaps another 5-7%.
Oil (and gas) have been central to Putin’s rise and reign. Putin (or a ghostwriter, more likely) wrote his 1996 Economics PhD thesis on “Mineral and Raw Materials Resources and the Development Strategy for the Russian Economy.” Rising oil prices (in dollar and especially ruble terms) from 1999 to 2008 helped solidify Putin’s grip in the first days of his regime. In 2003, Putin imprisoned and ultimately exiled oil tycoon Mikhail Khodorkovsky, seeing off a potential political challenger. In September 2016, Putin inked a pact with Saudi Arabia, limiting oil production and boosting consumer gasoline prices on the eve of US Presidential elections, likely for the benefit of Donald Trump’s candidacy. Less than a month after the election of Donald Trump, OPEC and Russia announced their first joint oil cut since 2001, almost surely in anticipation of stronger US sanctions against Iran, a rival oil producer.
Oil remains central to Sistema. Igor Sechin, the CEO of the state oil company Rosneft, is widely regarded as the second-most powerful man in Russia. Sechin’s nickname is “Darth Vader”: he is feared (indeed hated) by much of the Russian elite. Nevertheless, Sechin enjoys extraordinarily strong siloviki ties: he is a former military intelligence officer; almost certainly worked with allies in the FSB, Russia’s most important domestic security service, to arrange the dramatic arrest of a rival Economy Minister in 2016; and is widely thought to have leaked details of Medvedev’s wealth to Navalny in 2017. I also strongly suspect that Sechin’s FSB clans helped provide important (but indirect) support to Navalny’s 2021 ‘Putin’s Palace’ expose.
The 60 year-old Sechin may be growing restless in his current role. US and European sanctions put in place after the Crimea annexation and Donbas intervention continue to limit Rosneft’s access to technology and harm its profits. Rosneft’s Urals crude grade will also likely face more competition from Iranian medium barrels if the JCPOA is reinstated in the near-term. Medium and long-term trends are even worse for Sechin: Russia’s permafrost may be melting, with potentially major impacts for Russian upstream crude production and pipelines; developed markets, particularly in Europe, are transitioning to renewables/electric vehicles and reducing their crude consumption; and Russia’s profitable oil reserves may run out in 19 years, according to the Federal Agency for Mineral Resources. Sechin not only may have ambitions for Putin’s job: he may believe that he faces a closing window of opportunity as the energy transition reduces Russia’s oil export earnings, Rosneft’s profits, and his own influence.
Putin’s plan to support hydrocarbon exports: a “Goldilocks” escalatory event in Ukraine to disrupt the climate summit?
Putin needs oil exports revenues to distribute social spending and keep elites such as Igor Sechin satisfied. He has few instruments to influence the shape of future world energy demand, however. Russia accounted for only 3.4% of total world oil consumption in 2019, and Putin’s ability to indirectly influence the pace of the energy transition took a sharp blow with Donald Trump’s defeat in the 2020 US Presidential election. Still, Putin may be able to leverage geopolitics to delay and curb the energy transition. Staging a major military provocation around April 22/23, the dates of the Leaders Summit on Climate, would almost surely politicize the summit and likely derail it. Putin might seek a “Goldilocks” level of escalation in Ukraine: enough escalation to provoke an outrage and derail the summit, but without risking a military defeat or, even worse, a direct military confrontation with NATO. Escalation in Ukraine would bring considerable risks, but it could buy months or even years of time for Russian energy exports, saving Russian oil companies tens or even hundreds of billions of dollars and potentially bolstering Putin’s political security.
Using a military escalation in Ukraine to advance Putin’s global energy interests might appear implausible at first glance, but Putin has a history of using indirect and unconventional methods to advance his and foreign and domestic goals. In 2014 he annexed Crimea to strengthen his domestic political standing; used the Syrian military campaign to stimulate refugee flows and destabilize constitutional democracies in Europe and North America ahead of 2016 referendums and elections; and supported Donald Trump’s candidacy, in part, to delay the energy transition in the world’s largest and most innovative economy, secure US sanctions against rival oil producer Iran, and protect Sistema from harsher penalties. Escalation in Ukraine might be only a single element in a wider plan.
The next few weeks could be an inflection point in China-Russia relations
If Putin escalates in Ukraine before April 22nd, will the PRC withdraw from the climate summit and tacitly support Moscow? If the PRC and other countries quietly withdraw from the summit, progress on climate goals would be delayed by months, potentially years. The next few weeks could provide important signals for the future of Sino-Russian relations, as well as the CCP’s approach to climate policy.
Wrecking summit and delaying the energy transition would clearly benefit Putin – but the CCP’s interests are more ambiguous. The PRC is the world’s largest greenhouse gas polluter, largest oil importer, largest coal producer and consumer – and also the world’s largest renewable player. Beijing’s climate posture is therefore somewhat ambivalent: it enjoys underscoring its renewables credentials to foreign and domestic audiences but also continues to build and finance coal plants and grow its carbon emissions. If the PRC seeks to derail the climate talks, it will strongly prefer that Putin take the blame, even if it might quietly support him.
If Putin seeks to derail the climate summit or its implementation, Beijing will face a defining choice. Attending the climate summit could enable the Chinese leadership to take a step back from its growing confrontation with the constitutional democracies. Alternatively, Beijing could side with Putin, further increasing the likelihood of bloc politics and a Cold War-type confrontation.
Context and readings:
President Biden Invites 40 World Leaders to Leaders Summit on Climate – The White House [March 26th]
Today, President Biden invited 40 world leaders to the Leaders Summit on Climate he will host on April 22 and 23. The virtual Leaders Summit will be live streamed for public viewing.
President Biden took action his first day in office to return the United States to the Paris Agreement. Days later, on January 27, he announced that he would soon convene a leaders summit to galvanize efforts by the major economies to tackle the climate crisis.
The Leaders Summit on Climate will underscore the urgency – and the economic benefits – of stronger climate action. It will be a key milestone on the road to the United Nations Climate Change Conference (COP26) this November in Glasgow.
In recent years, scientists have underscored the need to limit planetary warming to 1.5 degrees Celsius in order to stave off the worst impacts of climate change. A key goal of both the Leaders Summit and COP26 will be to catalyze efforts that keep that 1.5-degree goal within reach. The Summit will also highlight examples of how enhanced climate ambition will create good paying jobs, advance innovative technologies, and help vulnerable countries adapt to climate impacts.
By the time of the Summit, the United States will announce an ambitious 2030 emissions target as its new Nationally Determined Contribution under the Paris Agreement. In his invitation, the President urged leaders to use the Summit as an opportunity to outline how their countries also will contribute to stronger climate ambition.
The Summit will reconvene the U.S.-led Major Economies Forum on Energy and Climate, which brings together 17 countries responsible for approximately 80 percent of global emissions and global GDP. The President also invited the heads of other countries that are demonstrating strong climate leadership, are especially vulnerable to climate impacts, or are charting innovative pathways to a net-zero economy. A small number of business and civil society leaders will also participate in the Summit.
Comment: smart, balanced thread
The Guns of April – Brian Whitmore and Michael Kofman on The Power Vertical Podcast
Comment: Kofman, an expert on the Russian military, seems much more concerned than he was a week ago.
Putin’s state-of-the-nation address to focus on support measures, says Kremlin – TASS
Russian President Vladimir Putin’s address to the parliament, the Federal Assembly, on April 21 will be devoted to ironing out the crisis after COVID-19 and support measures, Kremlin Spokesman Dmitry Peskov said in an interview with Moscow. Kremlin. Putin program.
Comment: Subsidies right before the Duma elections. Reminder: Putin’s state-of-the-nation address will occur immediately before the climate summit on April 22nd.
Russia is out of control: The dangerous Mr. Sechin – Anders Aslund for The Atlantic Council
A quick look into the prior occasions when Sechin compromised his country’s economy for his personal dealings makes for grim reading. In December 2014, Sechin caused a major currency crisis due to the excessive international loans he had taken to purchase TNK-BP. Since nobody punished him, he repeated a slightly smaller disaster exactly two years later. Then, he caused another currency crisis because he “privatized” almost one-fifth of Rosneft with its own bonds. The actual beneficiaries of this privatization have never been revealed, while the shares are hidden in several layers of offshore companies in the Cayman Islands. Sechin has also been responsible for Russia’s disastrous support to Nicolás Maduro and his dictatorship, providing Venezuela with $8.5 billion of credits.
Sechin to stay at Rosneft's helm for five more years: Vedomosti – Reuters [May 13, 2020]
Comment: Sechin is almost universally regarded as an inept CEO. He is also too powerful to push to the side.
For the first time, former Economic Development Minister Alexey Ulyukayev has explained how he views the events that lead investigators to charge him with soliciting a $2-million bribe from Igor Sechin for greenlighting Rosneft’s acquisition of a stake in the oil company Bashneft. Ulyukayev categorically denies the allegations that he extorted money from Sechin, saying he didn’t know what was in the package Sechin gave him at Rosneft’s Moscow office in November 2016, moments before his arrest. Meduza compares Ulyukayev’s version of events to the story presented by the prosecution.
Ulyukayev’s Trial. Why Does Sechin Avoid the Court? – Russia Monitor at Warsaw Institute [2017]
Igor Sechin failed to show up as a witness at the bribery trial of a former Russian economy minister, Alexey Ulyukayev. Such a situation appeared for the fourth time. Sechin’s attitude makes the trial ridiculous, which increases Ulyukayev’s chances to get a favorable sentence.
Comment: Sechin didn’t face any consequences for skipping the trial.
Russian ex-minister Ulyukayev gets eight years for bribery – BBC [2017]
Ulyukayev, 61, was arrested in 2016, accused of trying to extort $2m from state oil firm Rosneft to approve its purchase of another oil firm. He was accused by the Rosneft boss, who is close to President Vladimir Putin. Rosneft boss Igor Sechin was asked to testify but did not turn up. It was a security service sting operation involving Mr Sechin last November that put Mr Ulyukayev in the dock.
The “Russification” of Alyaksandr Lukashenka’s authoritarian regime in Belarus continues apace. The Belarusian Defense Ministry announced this week that it is moving a tank battalion to its Western frontier near the Polish border, a move that comes in conjunction with a menacing build-up of Russian forces in Kaliningrad and near the Ukrainian border. Just days before that announcement, the Deputy Chief of the Belarusian General Staff Pavel Muraveiko said the massive Zapad-2021 joint military exercises with Russia in September will focus on fighting a “hybrid war” and will include offensive as well as defensive capabilities…
These military, diplomatic, and personnel moves all come in the context of a visible expansion of Russia’s economic, political, and military footprint in Belarus. This includes a record number of joint military exercises scheduled for this year, which enables Moscow to use the rotation of forces to establish a de facto permanent troop presence in the country; a campaign by Kremlin-connected oligarchs to snap up the crown jewels of the Belarusian economy; and an effort by Moscow to establish political parties and media outlets enabling Russia to dominate post-Lukashenka Belarus.
Moscow court arrests Ukrainian intelligence colonel for terrorism in absentia – TASS
Moscow’s Lefortovo Court arrested the head of Ukrainian Military Intelligence Kherson Division commander Oleg Akhmedov in absentia, court press service told TASS Friday.
"The court ruled to put Akhmedov O.A. into custody for two months since his apprehension or extradition to Russia. He was charged in absentia with [terror attack, carried out by a group of people under prior conspiracy]," the court said.
In April last year, Russian Federal Security Service (FSB) apprehended two people, suspected of espionage for Ukrainian military intelligence. The spy group included a Ukrainian citizen and a Russian Armed Forces servicewoman, who, according to investigation, handed over a state secret to the Ukrainian military intelligence in 2017-2018. Criminal cases were initiated against them over charges of espionage and treason.
During the investigation, one suspect reportedly disclosed that they created stashes with explosives and ammo in Crimea under the order of Colonel Oleg Akhmedov of the Kherson military intelligence division.
Comment: I don’t know what, if anything, TASS is trying to signal here, but Kherson oblast contains part of the North Crimean Canal and would figure into any attempt by Putin to seize the canal.
Until next time,
Joe Webster
The China-Russia Report is an independent, nonpartisan newsletter covering political, economic, and security affairs within and between China and Russia. All articles, comments, op-eds, etc represent only the personal opinion of the author(s) and do not necessarily represent the position(s) of The China-Russia Report.