Russian Oil and Gas Companies and Central and Eastern Europe

The collapse of the Warsaw Pact in 1989, and of the Soviet Union itself in 1991, heralded a major reduction in Russian influence in Central and Eastern Europe during the 1990s. Russia's armed forces and the Russian economy went into steep decline. In recent years, one key sector of the Russian economy, the Russian oil and gas sector, has shown signs of revival. The Russian energy sector occupies a central place in Russia's economy and political system. In 2000, the energy sector accounted for 16% of Russia's GDP, 29% of the gross value of industrial output, 45%-48% of Federal budget revenues, and 54% of foreign exchange earnings. Its vast financial resources also translate into great political power, although this power is mitigated by infighting among Russian elite groups. In the past few years, flush with cash from rising energy prices, Russian firms have tried to buy up energy companies in Central Europe, with mixed success. Officials and experts in Central Europe have expressed worries about the political motives of these investments. They have expressed concern that such Russian investment could have a negative impact on the sovereignty of these countries, particularly given the non-transparent way in which these companies have operated and their close links with the Russian government. Some claim that Russian leaders are pushing to control as much as possible while they still have substantial leverage, as opposed to 2004, when NATO and, especially, EU membership will change the political equation. They claim if Russian firms controlled key resources, they could form stronger political client networks within their countries, thereby compromising their sovereignty. However, some analysts point out that in some cases, the actions of Russian firms appear to be affected by conflicts within the Russian elite. Moreover, there are limits to Russian firms' ability to gain influence in the region. They often face strong resistance from local governments fearing Russian dominance and wanting to protect local companies. Public opinion in these countries strongly favors maintaining independence from Russia, including economic independence. One way that the United States can help counter the possible negative consequences of the activities of Russian energy firms is to raise the issue with Moscow and encourage the European Union, which is the main player on the issue, to do likewise. The United States and its allies could also encourage the participation of Western companies in the privatization of key firms in the region, which would foster transparency. The United States can help these countries by encouraging diversification of their energy supplies. U.S. investment in Russian energy firms could also be helpful. Investment could both give the United States a greater interest in the success of Russian energy firms and positively influence the behavior of those firms in Central and Eastern Europe. However, Administration officials have also expressed frustration with Russia's slowness to create conditions for foreign investment. This report will be updated as events warrant.