Russia and Energy Security

Transcription

1 Russia and Energy Security The Aftermath of the Russian Presidential Elections: 38th Annual Outreach Conference in Slavic, East European, and Eurasian Studies Barry W. Ickes The Pennsylvania State University April 28, 2012 CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

2 Energy Security Is Russia s energy policy driven by imperatives of energy security? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

3 Energy Security Is Russia s energy policy driven by imperatives of energy security? Confusion about meaning CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

4 Energy Security Is Russia s energy policy driven by imperatives of energy security? Confusion about meaning Yergin: CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

5 Energy Security Is Russia s energy policy driven by imperatives of energy security? Confusion about meaning Yergin: "Although in the developed world the usual definition of energy security is simply the availability of suffi cient supplies at affordable prices, different countries interpret what that concept means for them differently." CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

6 Energy Security Is Russia s energy policy driven by imperatives of energy security? Confusion about meaning Yergin: "Although in the developed world the usual definition of energy security is simply the availability of suffi cient supplies at affordable prices, different countries interpret what that concept means for them differently." Exporters need security of demand because the revenues are so central to their treasuries; Russia wants state control over production and pipelines; China and India need to adjust to global markets; Japan needs to offset its own lack of domestic supplies; Europe seeks to manage its dependence on imported natural gas. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

7 Energy Security Is Russia s energy policy driven by imperatives of energy security? Confusion about meaning Yergin: "Although in the developed world the usual definition of energy security is simply the availability of suffi cient supplies at affordable prices, different countries interpret what that concept means for them differently." Exporters need security of demand because the revenues are so central to their treasuries; Russia wants state control over production and pipelines; China and India need to adjust to global markets; Japan needs to offset its own lack of domestic supplies; Europe seeks to manage its dependence on imported natural gas. True, but what do these countries understand by "energy security" CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

8 Energy Security Is Russia s energy policy driven by imperatives of energy security? Confusion about meaning Yergin: "Although in the developed world the usual definition of energy security is simply the availability of suffi cient supplies at affordable prices, different countries interpret what that concept means for them differently." Exporters need security of demand because the revenues are so central to their treasuries; Russia wants state control over production and pipelines; China and India need to adjust to global markets; Japan needs to offset its own lack of domestic supplies; Europe seeks to manage its dependence on imported natural gas. True, but what do these countries understand by "energy security" Is there any meaning to it aside from war? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

9 Energy Security More meaningful to talk about price volatility CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

10 Energy Security More meaningful to talk about price volatility Dvir-Rogoff Three Epochs CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

11 Energy Security More meaningful to talk about price volatility Dvir-Rogoff Three Epochs Sample Statistics of Oil Prices Price (2009$) Mean Std. Deviation Annual Price Changes Mean 39.0% 14.2% 22.1% 19.0% Std. Deviation 27.5% 13.7% 22.8% 19.6% CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

12 Energy Security More meaningful to talk about price volatility Dvir-Rogoff Three Epochs Sample Statistics of Oil Prices Price (2009$) Mean Std. Deviation Annual Price Changes Mean 39.0% 14.2% 22.1% 19.0% Std. Deviation 27.5% 13.7% 22.8% 19.6% We are unlikely to transit back to low volatility regime CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

13 Real Oil Price CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

14 Real Oil Price Volatility CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

15 Resource rents Crucial to think about resource rents market value less actual cost CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

16 Resource rents Crucial to think about resource rents market value less actual cost Resource rents in Russia are huge and drive the economy CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

17 Resource rents Crucial to think about resource rents market value less actual cost Resource rents in Russia are huge and drive the economy They are much bigger than export income, oil profits, or any other measure CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

18 Resource rents Crucial to think about resource rents market value less actual cost Resource rents in Russia are huge and drive the economy They are much bigger than export income, oil profits, or any other measure Control over the distribution of rents is the central problem of Russian Political Economy CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

19 Resource rents Crucial to think about resource rents market value less actual cost Resource rents in Russia are huge and drive the economy They are much bigger than export income, oil profits, or any other measure Control over the distribution of rents is the central problem of Russian Political Economy Future of oil and gas rents driven by the volatility of oil prices CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

20 Dependence on Rents Billions of 2011 dollars $600 $500 $400 $300 $200 $ $0 Figure: Russian Oil and Gas Rents Since 1950 (Oil rents in black, natural gas rents in blue) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

21 Components of Rents CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

22 Resource Rents and Political Economy CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

23 Importance of Resource rents CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

24 Implications for Russia Implication: What Russia must worry about is the size of current and especially future rents CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

25 Implications for Russia Implication: What Russia must worry about is the size of current and especially future rents Future rents depend on future prices and future output levels CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

26 Implications for Russia Implication: What Russia must worry about is the size of current and especially future rents Future rents depend on future prices and future output levels Especially fear of collapse of prices CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

27 Implications for Russia Implication: What Russia must worry about is the size of current and especially future rents Future rents depend on future prices and future output levels Especially fear of collapse of prices echo of past experience CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

28 Implications for Russia Implication: What Russia must worry about is the size of current and especially future rents Future rents depend on future prices and future output levels Especially fear of collapse of prices echo of past experience there is also a need to secure supply channels for gas by avoiding transit states (return to later) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

29 Implications for Russia Implication: What Russia must worry about is the size of current and especially future rents Future rents depend on future prices and future output levels Especially fear of collapse of prices echo of past experience there is also a need to secure supply channels for gas by avoiding transit states (return to later) Russia frames this as a security issue especially by alleging that its adversaries, US and NATO, can manipulate world oil prices. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

30 Russian Fear: Price Manipulation Russian Security Council Secretary Nikolai Patrushev, January 11, 2012 on oil price manipulation: CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

31 Russian Fear: Price Manipulation Russian Security Council Secretary Nikolai Patrushev, January 11, 2012 on oil price manipulation: The U.S. is persistently seeking to sustain its economic, political and military domination in the world.... There are well-known statements of American politicians about the need to put Russia s energy, water and other resources under U.S. control.... The manipulation of hydrocarbon prices may in certain conditions be a powerful economic weapon... Saudi Arabia made oil prices fall to weaken the USSR. The fall of prices was not the only reason, but it was an important one, why the Soviet state collapsed. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

32 Russian Fear: Price Manipulation Russian Security Council Secretary Nikolai Patrushev, January 11, 2012 on oil price manipulation: The U.S. is persistently seeking to sustain its economic, political and military domination in the world.... There are well-known statements of American politicians about the need to put Russia s energy, water and other resources under U.S. control.... The manipulation of hydrocarbon prices may in certain conditions be a powerful economic weapon... Saudi Arabia made oil prices fall to weaken the USSR. The fall of prices was not the only reason, but it was an important one, why the Soviet state collapsed. What if the US could manipulate prices this way? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

33 Russian Fear: Price Manipulation Russian Security Council Secretary Nikolai Patrushev, January 11, 2012 on oil price manipulation: The U.S. is persistently seeking to sustain its economic, political and military domination in the world.... There are well-known statements of American politicians about the need to put Russia s energy, water and other resources under U.S. control.... The manipulation of hydrocarbon prices may in certain conditions be a powerful economic weapon... Saudi Arabia made oil prices fall to weaken the USSR. The fall of prices was not the only reason, but it was an important one, why the Soviet state collapsed. What if the US could manipulate prices this way? This is a macroeconomic issue but too much focus on budget CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

34 Russian Fear: Price Manipulation Russian Security Council Secretary Nikolai Patrushev, January 11, 2012 on oil price manipulation: The U.S. is persistently seeking to sustain its economic, political and military domination in the world.... There are well-known statements of American politicians about the need to put Russia s energy, water and other resources under U.S. control.... The manipulation of hydrocarbon prices may in certain conditions be a powerful economic weapon... Saudi Arabia made oil prices fall to weaken the USSR. The fall of prices was not the only reason, but it was an important one, why the Soviet state collapsed. What if the US could manipulate prices this way? This is a macroeconomic issue but too much focus on budget Key issue is the rent not the budget CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

35 Stabilization Fund and the Iceberg Russian Oil & Gas Rents Real (2007) USD blns/yr $450 $400 Stabilization Fund $350 $300 $250 $200 $150 $100 $50 $ CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

36 Stabilization Fund, Stocks and Flows CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

37 The Real Problem The real problem for Russia is a sustained decline in rents. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

38 The Real Problem The real problem for Russia is a sustained decline in rents. Long-term price decline CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

39 The Real Problem The real problem for Russia is a sustained decline in rents. Long-term price decline Decline in future output CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

40 The Real Problem The real problem for Russia is a sustained decline in rents. Long-term price decline Decline in future output No macro policies can deal with these issues. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

41 The Real Problem The real problem for Russia is a sustained decline in rents. Long-term price decline Decline in future output No macro policies can deal with these issues. self-insurance is costly and can cope with only transitory shocks CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

42 The Real Problem The real problem for Russia is a sustained decline in rents. Long-term price decline Decline in future output No macro policies can deal with these issues. self-insurance is costly and can cope with only transitory shocks Investment needs for long-term supply are great, and risky given price volatility CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

43 The Real Problem The real problem for Russia is a sustained decline in rents. Long-term price decline Decline in future output No macro policies can deal with these issues. self-insurance is costly and can cope with only transitory shocks Investment needs for long-term supply are great, and risky given price volatility Solution is risk sharing CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

44 Russia s Future Oil Output without Investment CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

45 Russian Gas Domestic Gas Production declining. Yamal and East Siberia requires huge investments CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

46 Russian Gas Domestic Gas Production declining. Yamal and East Siberia requires huge investments Russia has to invest in Nordstream and South Stream to assure European markets and counter their efforts to diversify supply CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

47 Russian Gas Domestic Gas Production declining. Yamal and East Siberia requires huge investments Russia has to invest in Nordstream and South Stream to assure European markets and counter their efforts to diversify supply Long-term gas contracts tied to oil prices transmitted volatility. But gas prices are coming under more pressure due to alternative supplies. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

48 Russian Gas Domestic Gas Production declining. Yamal and East Siberia requires huge investments Russia has to invest in Nordstream and South Stream to assure European markets and counter their efforts to diversify supply Long-term gas contracts tied to oil prices transmitted volatility. But gas prices are coming under more pressure due to alternative supplies. Russia needs serious investment in gas industry to maintain this key rent source CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

49 Russian Energy Security Russia has a big problem because its economy is so dependent on this one resource, whch is characterized by price uncertainty. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

50 Russian Energy Security Russia has a big problem because its economy is so dependent on this one resource, whch is characterized by price uncertainty. Its problem is amplified because it is a HC producer subject to the behavior of the LC producers CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

51 Russian Energy Security Russia has a big problem because its economy is so dependent on this one resource, whch is characterized by price uncertainty. Its problem is amplified because it is a HC producer subject to the behavior of the LC producers Requires big infrastructure investment to open up East Siberia CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

52 Russian Energy Security Russia has a big problem because its economy is so dependent on this one resource, whch is characterized by price uncertainty. Its problem is amplified because it is a HC producer subject to the behavior of the LC producers Requires big infrastructure investment to open up East Siberia This is a big problem, but it could in theory be solved to give Russia the most effi cient investment path CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

53 Russian Energy Security Russia has a big problem because its economy is so dependent on this one resource, whch is characterized by price uncertainty. Its problem is amplified because it is a HC producer subject to the behavior of the LC producers Requires big infrastructure investment to open up East Siberia This is a big problem, but it could in theory be solved to give Russia the most effi cient investment path The real problem is that Russia has on top of its effi ciency issues some major (real or imagined) security concerns that shape its behavior as well. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

54 Modernization Diffi culties It is fashionable to talk of diversification of the Russian economy away from oil and gas, CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

55 Modernization Diffi culties It is fashionable to talk of diversification of the Russian economy away from oil and gas, but this is the least likely outcome for the country s economic future. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

56 Modernization Diffi culties It is fashionable to talk of diversification of the Russian economy away from oil and gas, but this is the least likely outcome for the country s economic future. Economic success will require a continued focus on resource industries. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

57 Modernization Diffi culties It is fashionable to talk of diversification of the Russian economy away from oil and gas, but this is the least likely outcome for the country s economic future. Economic success will require a continued focus on resource industries. Russia could obtain higher growth if the oil and gas sectors were truly modern freed from the obligation to share rents through the rent distribution chains. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

58 Modernization Diffi culties It is fashionable to talk of diversification of the Russian economy away from oil and gas, but this is the least likely outcome for the country s economic future. Economic success will require a continued focus on resource industries. Russia could obtain higher growth if the oil and gas sectors were truly modern freed from the obligation to share rents through the rent distribution chains. Current efforts for modernization and diversification, by contrast, do not challenge the rent distribution system. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

59 Modernization Diffi culties It is fashionable to talk of diversification of the Russian economy away from oil and gas, but this is the least likely outcome for the country s economic future. Economic success will require a continued focus on resource industries. Russia could obtain higher growth if the oil and gas sectors were truly modern freed from the obligation to share rents through the rent distribution chains. Current efforts for modernization and diversification, by contrast, do not challenge the rent distribution system. The kinds of investment envisioned in those efforts will preserve and reinforce the rent distribution chains. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

60 Medvedev Portfolio Allocation Problem Toy Model CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

61 Medvedev Portfolio Allocation Problem Toy Model Suppose Medvedev chooses α (0, 1), the manufacturing share to solve max U(W (1 + αr man + (1 α)r oil )f (r man, r oil )dr man dr oil α RxR CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

62 Medvedev Portfolio Allocation Problem Toy Model Suppose Medvedev chooses α (0, 1), the manufacturing share to solve max U(W (1 + αr man + (1 α)r oil )f (r man, r oil )dr man dr oil α RxR letting utility be CRRA we can normalize W = 1,so that: CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

63 Medvedev Portfolio Allocation Problem Toy Model Suppose Medvedev chooses α (0, 1), the manufacturing share to solve max U(W (1 + αr man + (1 α)r oil )f (r man, r oil )dr man dr oil α RxR letting utility be CRRA we can normalize W = 1,so that: U(x) = x 1 σ 1 σ x 0 CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

64 Medvedev Portfolio Allocation Problem Toy Model Suppose Medvedev chooses α (0, 1), the manufacturing share to solve max U(W (1 + αr man + (1 α)r oil )f (r man, r oil )dr man dr oil α RxR letting utility be CRRA we can normalize W = 1,so that: U(x) = x 1 σ 1 σ x 0 Need expected returns and volatilities to compute optimal portfolio CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

65 Medvedev Portfolio Allocation Problem What is the optimal investment strategy? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

66 Medvedev Portfolio Allocation Problem What is the optimal investment strategy? Use US value added data (BEA annual, ) for manufacturing, oil and service sectors CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

67 Medvedev Portfolio Allocation Problem What is the optimal investment strategy? Use US value added data (BEA annual, ) for manufacturing, oil and service sectors rates of returns and covariances CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

68 Medvedev Portfolio Allocation Problem What is the optimal investment strategy? Use US value added data (BEA annual, ) for manufacturing, oil and service sectors rates of returns and covariances rates of return highest in o, lowest in m. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

69 Medvedev Portfolio Allocation Problem What is the optimal investment strategy? Use US value added data (BEA annual, ) for manufacturing, oil and service sectors rates of returns and covariances rates of return highest in o, lowest in m. services least risky, oil most risky CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

70 Optimal Portfolio Shares Optimal portfolio shares for data Rate of Risk Aversion αm α O αs CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

71 Optimal Portfolio Shares Optimal portfolio shares for data Rate of Risk Aversion αm α O αs Need enormous increase in returns to manufacturing to get positive αm CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

72 Optimal Portfolio Shares Optimal portfolio shares for data Rate of Risk Aversion α M α O α S Need enormous increase in returns to manufacturing to get positive α M Skip M move directly to S, but even this requires high risk aversion CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

73 Should Russia Have Diversified? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

74 Which BRIC Would You Invest In? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

75 A Model An international real business cycles model with CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

76 A Model An international real business cycles model with exogenous shocks to the price of energy CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

77 A Model An international real business cycles model with exogenous shocks to the price of energy two countries, two tradable intermediate goods: CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

78 A Model An international real business cycles model with exogenous shocks to the price of energy two countries, two tradable intermediate goods: Energy Manufacturing Home export import Foreign import export CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

79 A Model An international real business cycles model with exogenous shocks to the price of energy two countries, two tradable intermediate goods: Regimes: Energy Manufacturing Home export import Foreign import export CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

80 A Model An international real business cycles model with exogenous shocks to the price of energy two countries, two tradable intermediate goods: Regimes: Financial autarky Energy Manufacturing Home export import Foreign import export CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

81 A Model An international real business cycles model with exogenous shocks to the price of energy two countries, two tradable intermediate goods: Regimes: Financial autarky Bond economy Energy Manufacturing Home export import Foreign import export CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

82 A Model An international real business cycles model with exogenous shocks to the price of energy two countries, two tradable intermediate goods: Regimes: Financial autarky Bond economy Portfolio investment (FPI) Energy Manufacturing Home export import Foreign import export CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

83 A Model An international real business cycles model with exogenous shocks to the price of energy two countries, two tradable intermediate goods: Regimes: Energy Manufacturing Home export import Foreign import export Financial autarky Bond economy Portfolio investment (FPI) Long-term equity investments (FDI) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

84 Model Log energy prices follow an AR(1) process: log p et = ρ log p e,t 1 + u t u t N(0, σ 2 u) ρ (0, 1) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

85 Model Log energy prices follow an AR(1) process: Non-tradable final good: log p et = ρ log p e,t 1 + u t u t N(0, σ 2 u) ( Yft H = γ 1 (ymt) H γ 2 1 γ 2 ρ (0, 1) ) γ2 + (1 γ 1 )(yet H ) γ 2 1 γ 2 1 γ 2 CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

86 Model Log energy prices follow an AR(1) process: Non-tradable final good: log p et = ρ log p e,t 1 + u t u t N(0, σ 2 u) ( Yft H = γ 1 (ymt) H γ 2 1 γ 2 ρ (0, 1) ) γ2 + (1 γ 1 )(yet H ) γ 2 1 γ 2 1 γ 2 Final good is both consumption and investment good CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

87 Model Home has a fixed manufacturing capital (K H m), foreign has fixed energy reserves, (K F e ) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

88 Model Home has a fixed manufacturing capital (K H m), foreign has fixed energy reserves, (K F e ) Production of intermediate goods Yet H = A H e (Ket 1 H )α Yet F = A F m(k F e ) α Ymt H = A H m(k H m) α Ymt F = A F m(kmt 1 F )α CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

89 Model Home has a fixed manufacturing capital (K H m), foreign has fixed energy reserves, (K F e ) Production of intermediate goods Yet H = A H e (Ket 1 H )α Yet F = A F m(k F e ) α Ymt H = A H m(k H m) α Ymt F = A F m(kmt 1 F )α Intermediates are used as input and exported: Y i st = y i st + x i st CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

90 Model Households own the capital, make savings and consumption decision to maximize E 0 β t (ct H ) 1 ν t=0 1 ν subject to the budget constraint p ft (ct H + Iet H + δ m K H m + ψ b 2 b2 Ht + ψ a 2 +b Ht + F i=h m aht si psi at s=e = R H mtk H m + R H et K H et 1 + F i=h F i=h m aht 1(p si at si + dt si ) + R bt 1 b Ht 1 s=e m s=e (a si Ht a si H ) 2 ) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

91 Model In equilibrium CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

92 Model In equilibrium Households and firms maximize, CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

93 Model In equilibrium Households and firms maximize, Markets clear, b Ht + b Ft = 0 aft si Ht = 1, s {m, e}, i {H, F } CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

94 Model In equilibrium Households and firms maximize, Markets clear, b Ht + b Ft = 0 aft si Ht = 1, s {m, e}, i {H, F } Countries have balance of payments xmt i + p et xet i F = b it R bt 1 b it 1 + j=h m pat sj (asj it asj it 1 ) s=e CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

95 Model Four Financial regimes: CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

96 Model Four Financial regimes: 1 Autarky: ψ a, ψ b, a si j = a sj i = 0, i = j CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

97 Model Four Financial regimes: 1 Autarky: 2 Bond economy: ψ a, ψ b, a si j ψ a, ψ b finite, a si j = a sj i = 0, i = j = a sj i = 0, i = j CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

98 Model Four Financial regimes: 1 Autarky: 2 Bond economy: ψ a, ψ b, a si j ψ a, ψ b finite, a si j 3 Portfolio investment (FPI) ψ a finite, ψ b finite, a si j = a sj i = 0, i = j = a sj i = 0, i = j = a sj i = 0, i = j CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

99 Model Four Financial regimes: 1 Autarky: 2 Bond economy: ψ a, ψ b, a si j ψ a, ψ b finite, a si j 3 Portfolio investment (FPI) ψ a finite, ψ b finite, a si j 4 Long-term equity investment (FDI): = a sj i = 0, i = j = a sj i = 0, i = j = a sj i = 0, i = j ψ a finite, ψ b finite, a si j > 0, a sj i > 0 CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

100 Computation Solve the model using a second-order approximation to policy functions and laws of motion CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

101 Computation Solve the model using a second-order approximation to policy functions and laws of motion Express first-order conditions as Ef (y, y, x, x, u; σ) = 0 where u is the shock, x is vector of endogenous state variables, y is endogenous choice variables, σ captures uncertainty. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

102 Computation Solve the model using a second-order approximation to policy functions and laws of motion Express first-order conditions as Ef (y, y, x, x, u; σ) = 0 where u is the shock, x is vector of endogenous state variables, y is endogenous choice variables, σ captures uncertainty. Solve for the coeffi cients of the Taylor expansion of the policy functions y = g(x, u, σ) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

103 Computation Solve the model using a second-order approximation to policy functions and laws of motion Express first-order conditions as Ef (y, y, x, x, u; σ) = 0 where u is the shock, x is vector of endogenous state variables, y is endogenous choice variables, σ captures uncertainty. Solve for the coeffi cients of the Taylor expansion of the policy functions y = g(x, u, σ) and law of motion x = h(x, σ) + σu CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

104 Computation Solve the model using a second-order approximation to policy functions and laws of motion Express first-order conditions as Ef (y, y, x, x, u; σ) = 0 where u is the shock, x is vector of endogenous state variables, y is endogenous choice variables, σ captures uncertainty. Solve for the coeffi cients of the Taylor expansion of the policy functions y = g(x, u, σ) and law of motion x = h(x, σ) + σu around the deterministic steady state (σ = 0). CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

105 Calibration Parameters Set Without Solving the Model Parameter Definition Value β discount factor 0.96 ρ persistence of oil shocks 0.95 σ u std deviation of oil price shocks 0.05 γ 1 input share of manufacturing 0.9 γ 2 elasticity of substitution (m&e) 0.1 α returns to capital.36 δ m depreciation of manufacturing capital.05 δ e depletion of energy reserves.03 ν risk aversion 2 CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

106 Calibration Normalize A H m = A F e = 1 CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

107 Calibration Normalize A H m = A F e = 1 4 remaining parameters: (A H e, A F m, K H m, K F e ) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

108 Calibration Normalize A H m = A F e = 1 4 remaining parameters: (A H e, A F m, K H m, K F e ) Minimize the distance to 4 targets: CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

109 Calibration Normalize A H m = A F e = 1 4 remaining parameters: (A H e, A F m, K H m, K F e ) Minimize the distance to 4 targets: Data and Model Moments Target Data Model Relative GDP (per capita) Home Share of Energy VA Exported Home Manufacturing VA/Energy VA Foreign Manufacturing VA/Energy VA CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

110 Calibration Normalize A H m = A F e = 1 4 remaining parameters: (A H e, A F m, K H m, K F e ) Minimize the distance to 4 targets: Data and Model Moments Target Data Model Relative GDP (per capita) Home Share of Energy VA Exported Home Manufacturing VA/Energy VA Foreign Manufacturing VA/Energy VA for (A H e, A F m, K H m, K F e ) = (2, 6.85, 4.25, 0.85) CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

111 Results: A Sequence of Shocks CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

112 Results: Home Consumption CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

113 Results: Energy Supply CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

114 Results: Energy Supply Volatility With greater financial integration, energy production is more volatile CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

115 Results: Energy Supply Volatility With greater financial integration, energy production is more volatile Russia is assumed to be price taker and price shocks are exogenous CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

116 Results: Energy Supply Volatility With greater financial integration, energy production is more volatile Russia is assumed to be price taker and price shocks are exogenous exports rise when prices rise temporarily and they can invest earnings CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

117 Results: Energy Supply Volatility With greater financial integration, energy production is more volatile Russia is assumed to be price taker and price shocks are exogenous exports rise when prices rise temporarily and they can invest earnings Energy producer can respond to price shocks and still smooth consumption CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

118 Results: Energy Supply Volatility With greater financial integration, energy production is more volatile Russia is assumed to be price taker and price shocks are exogenous exports rise when prices rise temporarily and they can invest earnings Energy producer can respond to price shocks and still smooth consumption Consumption is smoother for both Home and Foreign CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

119 Implications Large effect of financial regimes on consumption and, hence, welfare - larger effect for Home since it is importing the intensively used input. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

120 Implications Large effect of financial regimes on consumption and, hence, welfare - larger effect for Home since it is importing the intensively used input. Oil output responds faster to price shocks in financially open regimes. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

121 Implications Large effect of financial regimes on consumption and, hence, welfare - larger effect for Home since it is importing the intensively used input. Oil output responds faster to price shocks in financially open regimes. If OPEC oil supply was not perfectly elastic, then Russian oil response would smooth world supply, and consuming countries would benefit even more CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

122 Implications Large effect of financial regimes on consumption and, hence, welfare - larger effect for Home since it is importing the intensively used input. Oil output responds faster to price shocks in financially open regimes. If OPEC oil supply was not perfectly elastic, then Russian oil response would smooth world supply, and consuming countries would benefit even more Conjecture: If we introduce lumpy investment process for energy high fixed costs then we expect financial integration has bigger effect on energy security CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

123 Implications Russia benefits from financial integration and international risk sharing CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

124 Implications Russia benefits from financial integration and international risk sharing ROW benefits from financial integration and international risk sharing CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

125 Implications Russia benefits from financial integration and international risk sharing ROW benefits from financial integration and international risk sharing Exchange of oil for a share of ROW return CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

126 Implications Russia benefits from financial integration and international risk sharing ROW benefits from financial integration and international risk sharing Exchange of oil for a share of ROW return Effi cient solution risk sharing CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

127 Implications Russia benefits from financial integration and international risk sharing ROW benefits from financial integration and international risk sharing Exchange of oil for a share of ROW return Effi cient solution risk sharing Russian foreign investment CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

128 Implications Russia benefits from financial integration and international risk sharing ROW benefits from financial integration and international risk sharing Exchange of oil for a share of ROW return Effi cient solution risk sharing Russian foreign investment Inward investment in production CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

129 Implications Russia benefits from financial integration and international risk sharing ROW benefits from financial integration and international risk sharing Exchange of oil for a share of ROW return Effi cient solution risk sharing Russian foreign investment Inward investment in production = one big question CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

130 Russia s Paradoxical Solution Russia chooses not to engage in such risk sharing. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

131 Russia s Paradoxical Solution Russia chooses not to engage in such risk sharing. Foreign investment is useful for technology but not risk sharing CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

132 Russia s Paradoxical Solution Russia chooses not to engage in such risk sharing. Foreign investment is useful for technology but not risk sharing Putin on Foreign Investment CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

133 Russia s Paradoxical Solution Russia chooses not to engage in such risk sharing. Foreign investment is useful for technology but not risk sharing Putin on Foreign Investment Russia needs high quality foreign investment for development and modernization so that our industry can obtain capital, advanced technologies, and effi cient systems for organization and management of production. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

134 Russia s Paradoxical Solution Russia chooses not to engage in such risk sharing. Foreign investment is useful for technology but not risk sharing Putin on Foreign Investment Russia needs high quality foreign investment for development and modernization so that our industry can obtain capital, advanced technologies, and effi cient systems for organization and management of production. no mention of risk sharing or capital CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

135 Russia s Paradoxical Solution Russia chooses not to engage in such risk sharing. Foreign investment is useful for technology but not risk sharing Putin on Foreign Investment Russia needs high quality foreign investment for development and modernization so that our industry can obtain capital, advanced technologies, and effi cient systems for organization and management of production. no mention of risk sharing or capital Russia chooses self insurance, manage the problem of its future oil on its own CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

136 Russia s Paradoxical Solution: Why? The effi cient solution is in Russia s own self-interest. Why does Russia not choose the risk-sharing solution? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

137 Russia s Paradoxical Solution: Why? The effi cient solution is in Russia s own self-interest. Why does Russia not choose the risk-sharing solution? Ignorance (they are not as smart as me)? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

138 Russia s Paradoxical Solution: Why? The effi cient solution is in Russia s own self-interest. Why does Russia not choose the risk-sharing solution? Ignorance (they are not as smart as me)? Effi cient solution has impacts for Putin s protection racket. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

139 Russia s Paradoxical Solution: Why? The effi cient solution is in Russia s own self-interest. Why does Russia not choose the risk-sharing solution? Ignorance (they are not as smart as me)? Effi cient solution has impacts for Putin s protection racket. RMS is core of Putin s power and oligarch stability CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

140 Russia s Paradoxical Solution: Why? The effi cient solution is in Russia s own self-interest. Why does Russia not choose the risk-sharing solution? Ignorance (they are not as smart as me)? Effi cient solution has impacts for Putin s protection racket. RMS is core of Putin s power and oligarch stability To induce foreign companies to commit to Russia on scale needed requires change of RMS challenge to Putin s system of control CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

141 Russia s Paradoxical Solution: Why? The effi cient solution is in Russia s own self-interest. Why does Russia not choose the risk-sharing solution? Ignorance (they are not as smart as me)? Effi cient solution has impacts for Putin s protection racket. RMS is core of Putin s power and oligarch stability To induce foreign companies to commit to Russia on scale needed requires change of RMS challenge to Putin s system of control Political control of oil rents is more important to leadership than effi cient solution CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

142 Russia s Paradoxical Solution: Why? The effi cient solution is in Russia s own self-interest. Why does Russia not choose the risk-sharing solution? Ignorance (they are not as smart as me)? Effi cient solution has impacts for Putin s protection racket. RMS is core of Putin s power and oligarch stability To induce foreign companies to commit to Russia on scale needed requires change of RMS challenge to Putin s system of control Political control of oil rents is more important to leadership than effi cient solution But this has costs since Russia must still secure future rents CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

143 Alternative Explanation Could it be a sovereignty issue? Maybe too economistic-focused? CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

144 Alternative Explanation Could it be a sovereignty issue? Maybe too economistic-focused? No. Lena Goldfields. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

145 Alternative Explanation Could it be a sovereignty issue? Maybe too economistic-focused? No. Lena Goldfields. Especially useful for extractive industries. Modern example is BP CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

146 Alternative Explanation Could it be a sovereignty issue? Maybe too economistic-focused? No. Lena Goldfields. Especially useful for extractive industries. Modern example is BP Petrostates could possibly be manipulated. Nationalize companies for employment. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

147 Alternative Explanation Could it be a sovereignty issue? Maybe too economistic-focused? No. Lena Goldfields. Especially useful for extractive industries. Modern example is BP Petrostates could possibly be manipulated. Nationalize companies for employment. Russia still has 10,000 nukes. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

148 Alternative Explanation Could it be a sovereignty issue? Maybe too economistic-focused? No. Lena Goldfields. Especially useful for extractive industries. Modern example is BP Petrostates could possibly be manipulated. Nationalize companies for employment. Russia still has 10,000 nukes. Russia ties for third as literature superpower. CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

149 Russia is not Nigeria CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

150 Russian Energy Security Insistence on self-insurance implies Russia must finance: CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

151 Russian Energy Security Insistence on self-insurance implies Russia must finance: stabilization fund CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

152 Russian Energy Security Insistence on self-insurance implies Russia must finance: stabilization fund infrastructure investment in new oil CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

153 Russian Energy Security Insistence on self-insurance implies Russia must finance: stabilization fund infrastructure investment in new oil pipeline investment to secure supply channels for gas CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

154 Russian Energy Security Insistence on self-insurance implies Russia must finance: stabilization fund infrastructure investment in new oil pipeline investment to secure supply channels for gas Foreign investment would relieve the constraint, but Putin avoids this solution CRIFES (The Pennsylvania State University) Energy Security April 28, / 47

155 Russian Energy Security Insistence on self-insurance implies Russia must finance: stabilization fund infrastructure investment in new oil pipeline investment to secure supply channels for gas Foreign investment would relieve the constraint, but Putin avoids this solution Battle over tax incentives, but clearly it has to come out of rent CRIFES (The Pennsylvania State University) Energy Security April 28, / 47