The new RD Report, “Russian Energy Sector: Beyond Sanctions,” offers a detailed look at the current state of the Russian energy sector and includes an extensive overview of Russia's energy ambitions in both Europe and Asia.

Russian Prime Minister Dmitry Medvedev, second left, accompanied by Dmitry Pumpyansky, left, head of TMK, Russia's largest maker of steel pipes for the oil and gas industry, visits the Seversky Tube Works in the town of Polevskoy, outside Yekaterinburg, Urals, Russia, 2014. Photo: AP

2014 was full of geopolitical events that brought the current development strategy of Russia under question. U.S.-led economic sanctions against Russia over Ukraine, combined with falling oil prices and the sharp devaluation of the Russian ruble, highlighted Russia’s economic vulnerability caused by the nation’s overdependence on the energy sector.

Can Russia modernize its energy industry in such a way as to help the country boost its overall economic performance and maintain its leading position as one of the largest energy suppliers in the world? And will the current geopolitical confrontation in Ukraine affect Russia’s traditional energy ties with Europe?

The new RD Report, “Russian Energy Sector: Beyond Sanctions,” offers a detailed look at these questions, examining the current state of the Russian energy sector and providing an extensive overview of Russia's energy ambitions in both Europe and Asia.

The authors of the report are Natasha Udensiva of Columbia University, Marat Terterov and Ben McPherson of the Brussels Energy Club, and Ka-ho Yu of the China-based Energy Research Center. This report also contains commentary from the Russian Ministry of Energy explaining the Russian government’s position on some of the most pressing issues, thereby shedding some light on what to expect in 2015.

The first part of the report offers a detailed look at the current state of the Russian energy sector, touching upon the problems of modernization, global competition and the consequences of global economic pressure in the form of sanctions. Natasha Udensiva, a lecturer from Columbia University, writes that many of the problems already existed in the Russian energy sector even before sanctions. What the West did is only make them more evident and urgent, thus pushing the Russian government to deal with them more expediently.

“The primary problems facing the Russian energy sector are based on the changing global dynamics of supply and demand,” she writes. “In a situation when the global energy supply is increasing thanks to new technological innovations and the demand for energy is getting lower, Russia will inevitably find it harder to compete,” according to Udensiva. “Russia, despite its vibrant oil and gas industry and the tradition of high quality engineering education, has been unable to keep up. Instead, it relies on technologies developed by other countries,” Udensiva concludes.

This fundamental problem seems to be recognized by the Russian government: in July 2014 it approved a roadmap for innovation in the energy sector, in which all energy companies are to be engaged. According to the Russian Ministry of Energy, “The transformation of the fuel and energy complex into a high tech domestic industry will allow the country to manage independently (or at least under an equal partnership) such strategic tasks as the development of new regions and unfamiliar deposits (Arctic offshore projects, shale oil, etc.).”

The most important strategic goal for Russia will be to attain the best global standards for quality of supply in accordance with the needs of all consumer categories. If realized, this might significantly boost Russia’s consumer base, which is currently undergoing some radical changes.

Despite ongoing diplomatic tension between Russia and the West, Russia does not intend to depart from its traditional markets in Europe. Marat Terterov and Ben McPherson of the Brussels Energy Club point out the following: “Russia still needs as much of the EU market as it can get, and will continue to make moves to protect its market share in the face of diversification headwinds.” Moreover, Russia’s partners in the EU do not yet have any alternative options to Russian energy supplies, most importantly, due to the security situation in relevant Middle East and North Africa states. Hence, it seems likely that Russia will maintain its ties with Europe, notwithstanding the recent closure of the heavily-financed South Stream project.

At the same time, Russia will switch its focus to the Asian energy market. With the Sino-Russian gas deal as a start, Russia’s Asian strategy will have profound implications for both energy security and geopolitics. Ka-ho Yu, a researcher at the China Business Network Institute, believes that deeper energy cooperation with Asian countries will greatly help Russia to deal with current economic problems. He says: “Seeking cooperation with emerging Asian economies in the energy sector could be a way out for Russia to counter the impact of Western sanctions.” Starting with China, Russia might potentially extend its gas pipeline to South Korea, linking the three countries. Japan will not be far from joining the league for energy security, particularly in the post-Fukushima era. Thus, according to Yu, Chinese-Russian energy cooperation opportunities, if treated seriously, might prove most beneficial to both sides as well as be the key for Russia to “acquire maximum political and economic leverage in its eastward energy turn.”

Which Russian energy projects are affected by Western sanctions? What is the official government view on the current state of the Russian energy sector? What obstacles might get in the way of Russia’s ambitions in Asia? Subscribe and download the full version of the report to find out.