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Suitably Pacified, Rosneft to Invest in Chechen Oil Infrastructure

Foreign energy companies will be intrigued to learn that Russia’s turbulent Caucasian republic of Chechnya is now open for investment in its hydrocarbon industry.

Chechnya’s troubled relationship with Moscow began after Iran transferred Chechnya to the Russian empire under the Treaty of Gulistan following the 1804-1813 Russo-Persian War. An extensive guerrilla campaign followed, which lasted until Imam Shamil surrendered to the Russians in 1859.

Chechnya’s experience under Russian domination in the 20th century was not much better. On 23 February 1944, Stalin ordered Chechnya’s population deported en masse to Soviet Central Asia on suspicions of them being traitors and working with the Nazis, with up to one-third of the population perishing along the way. The deportees were only allowed to return home three years after the death of Stalin in 1953, with the Chechen republic being re-established in 1957.

Following the collapse of the USSR in December 1991 restive Chechnya subsequently fought two bitter wars against Russian domination, the first from 1994 to 1996, and the second from October 1999 until early 2009, with both conflicts marked by violence and atrocities committed on both sides. An estimated 70,000-80,000 Chechens, mostly civilians, died in the conflict and the capital Grozny was effectively destroyed. The war produced an environmental catastrophe as well, leaving an estimated one third of all arable land saturated by oil.

The question remains – why, in 1991, when Moscow freely let the Soviet Union disintegrate, was it so determined to retain Muslim Chechnya?

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The answer seems to be – oil.

Oil extraction in Chechnya dates back a century, with production growing in the 1960s to a record of 21 million tons in 1971. The quality of the Chechen oil was such that the atheist Soviet Union exported some of it to the Vatican, where it was used in lamps. After peaking in the 1980s, Chechen production stabilized at 4-5 million tons by the 1990s before its conflict with Moscow exploded.

Even more important for Moscow, control of Chechnya enabled Russia to control the flow of rising volumes of Azeri oil natural resources, as the critical Baku-Novorossiysk pipeline ran through Chechnya provided the sole exit access for post-Soviet Azeri “early oil” to Russia’s Black Sea Novorossiysk port, generating valuable hard currency transit revenues for Moscow.

Fast forward to 2013. Russia’s oil giant Rosneft has announced its intention to invest $132 million into geological surveying in Chechnya over the next year and its local subsidiary Grozneftegaz.

But the cash bonanza is not limited to Rosneft.

Chechnya’s Federal State Unitary Enterprise (FSUE) Chechenneftekhimprom is touting for foreign investment. On its website Chechenneftekhimprom states, “Finance Minister Eli Isayev of the Chechen Republic, in reply to a question about the priorities of fiscal policy in 2012, noted that "the key objective will be to raise the living standards of the Chechen population, the development of its economic potential by attracting investment."

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In a moment of candor the website continued, “The main challenge remains the Republic’s low investment attractiveness, which in the public mind, especially among Russian and foreign citizens,  who see Chechnya as an extremely dangerous and risky place not only to invest, but even risking one’s life. For example, the largest Russian rating agency ‘Expert’ evaluates the investment risks in the Chechen Republic as extreme, highlighting in particular its financial and criminal risks, and on the website of the Ministry of Economic Development of the Russian Federation our country a few months ago was characterized as unfavorable and dangerous for investment.”

Still, nothing ventured, nothing gained.

Oh, as a minor aside…

On 18 June the Russian Prosecutor General's Office announced that the Supreme Court of Chechnya has handed down guilty verdicts on five terrorists who planned to derail an oil train in Chechnya received sentences ranging from 9 to 16 years in a high security prison camp, telling journalists, "In June 2011, the conspirators, who planned to derail an oil train, made a barrel bomb that they placed under the rails in the Grozny District of the Chechen Republic" before being discovered by security guards.

By. John C.K. Daly of Oilprice.com




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