Construction Literary Magazine

Fall 2019

What the U.S. Shale Revolution Means for Russia

What the U.S. Shale Revolution Means for Russia

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You know the situation has gotten knotty when Matt Damon and Jon Krasinski co-write a script revolving around the controversial practice of hydraulic fracturing (or “fracking”). Thanks to the rapid application of this practice, in just under two years, the U.S. is set to rocket up to number one in the world production rankings in gas and oil by 2015 and 2017, respectively. The risk-seeking attitude of our small and medium-sized players have led the charge, experimenting with costly technology and taking advantage of lax regulation. For those readers more curious about the practice, check out the impressive documentary Gasland for the non-sanitized, anti-Hollywood version.

The return of the U.S. to its late 19th century natural resource roots is, in my opinion, by far the most overlooked story of the past couple years, with immense domestic and particularly foreign policy implications. A central tenet of our defense doctrine—securing energy independence—has nearly just taken care of itself. Expanded production has reduced the country’s imports of both oil and gas, while also driving down world prices by, in some cases, nearly 75 percent. Conspiracy theorist or not, it’s not difficult to see that past interventions into oil-producing regions that may have seemed urgent may take on less urgency in the future.

But, an even bigger question remains: how does the U.S.’s shale revolution affect the countries that have orchestrated their rise around a presumed endless stream of natural resource revenue? The culprits are numerous, but it seems Russia may be the most vulnerable to having its plans derailed.

Resource exports have fed Russia’s foreign policy might. Hundreds of miles of pipelines feed Europe’s gas needs (in fact, nearly 25 percent of them) every winter, while Russian state giants now hold sizable stakes in related utilities of 16 of 27 EU countries. Seemingly not a year would go by in the past decade when the pipeline taps into Belarus and Ukraine would get shut off over disputes about payments, theft, or worse; to resolve the conflicts, both states have been forced into making major concessions to Russia. This leverage of induced energy dependence has enabled Russia to take independent and often obstructionist policy stances (think Syria), fund muscle-flexing at home and abroad, and deflect criticism of its autocratic turn.

[pullquote_right]Russia’s dominant position and corresponding influence over wider Europe has become more precarious.[/pullquote_right]

Then quite suddenly, Ukraine discovered enormous shale reserves in its own backyard. The Ukrainians also seem to be less wary than the Russians about inviting in foreign behemoths, such as Royal Dutch Shell, which looks to break ground within the year. Predictably, the urgency of reducing their debt of billions USD to the Russians has forced the issue. Similarly, Poland, which currently imports all of its oil and two-thirds of its natural gas from Russia, is seemingly on the brink of a shale explosion themselves. As new supplies come online, Russia’s dominant position and corresponding influence over wider Europe has become more precarious.

Domestically, the consequences for Russia can seem just as fraught. Falling worldwide prices threaten to make the recent boom years a thing of the past. UCLA political scientist Daniel Treisman presents convincing analysis that prosperous economic conditions fueled by resource exports are key to explaining Putin’s popularity—he has been able to use the revenue to solidify his hold on power.{{1}} This commentator has written before about the importance of social spending for winning elections and placating dissent. Though observers bicker about the Russian economy’s ability to weather the storm, one thing is clear: the government is going to have a much harder time paying its massive bills. The natural gas industry itself provides hundreds of thousands of jobs and nearly 50 percent of the budget, leaving little doubt about the damage an economic downturn could wreak.

This isn’t to say that the Russians aren’t sitting on a motherload of shale gas themselves, estimated at between eight and 80 times the amount discovered in the U.S. Unsurprisingly, the government has been trying for years to get at these reserves, with varying success. During the Soviet Union, it tried detonating nuclear devices to unlock the treasure. Current attempts are as equally perplexing. The extraordinary advance of the U.S. mid-majors has been critically a function of their smaller size and flexibility. However, in “state capitalist” Russia, the plan to join the shale revolution must come from above. After all, the recent ravenous appetite for mergers by state-owned utility Gazprom, coupled by exclusive export rights, has demolished the playing field for smaller players. The government now is looking toward tax breaks and other incentives to jump start shale exploration, but with no guarantee that the problems plaguing the state sector (corruption, inefficiency, theft, etc.) won’t seep through into the new fields.

The final verdict? Anyway you look at it, the shale revolution will introduce a tangible measure of volatility into Russia’s otherwise stable growth spurt. Once again, Russians are forced into a game of technological catch-up with the West. The last time this happened was in the 1980s, and Gorbachev responded with perestroika and glasnost, which spelled the end of a former era and paved the way for incredible societal transformation. However, the current Russian leadership is not keen to repeat that strategy. What we might expect instead is a tampering down of the foreign policy chest-thumping in favor of an inward-focused combination of partial reform and societal crackdown. Less money means that Russia’s political elite must be paid off more efficiently, which could signal the beginning of real improvements in a much-maligned environment of corruption and legal impunity.

[[1]]Interestingly, his work has also shown that any Russian president would have enjoyed the same surge in popularity under the same economic boom and that Russia’s resource wealth by no means dooms the country towards autocracy.[[1]]