In yesterday’s In the News entry I outlined the drive towards the rapid exploitation of shale gas reserves in the US and around the world. Other than the supposed ‘green’ credentials of this fuel source, one of the prime reasons for this push is a desire for energy security. This means avoiding becoming reliant on fossil fuel suppliers that are prone to geo-political instability.

In the News has reported consistently over the years on the issues that affect Middle East supplies of oil and gas. One area that has traditionally remained unexplored is instability in the countries of the former Soviet Union, particularly Russia and Ukraine. Geo-politics plays a key role in determining the reliability of supplies of fuels from these countries. One of the major factors in this is the emergence of the oligarchs and the changing power relations between them and the state.

I will track the development of these important players in the oil and gas industry in this blog next week. I hope to outline the main individuals, their relationship with the state and external business organisations, and the implications for us of their roles in the raw materials and energy companies of the former Soviet Union. It should build to be not only a record of the activities and associations of these powerful individuals, but it will also underscore the reasons why western countries in particular are keen to develop their own sources of energy.

The term ‘oligarch’ is derived from Greek and means ‘a few who rule’. As this issue of BRIC spotlight argues, the oligarchs of Russia and Ukraine can be regarded as these countries’ first capitalists. But they emerged as a result of the collapse of the Soviet Union (USSR), one of the world’s great political power blocs which had been in place for much of the last century. The break-up of the USSR took place under the leadership of Mikhail Gorbachev. He left little structure for the formation of a capitalist economy, so in the chaotic period following the disintegration of the Soviet economy, a few entrepreneurs began building considerable wealth from trading natural resources and foreign exchange.

In 1991 Boris Yeltsin became the first president of the Russian Federation. In the mid-90s he began to privatise state enterprises. Inevitably, perhaps, shares in these often hugely valuable businesses, controlling vast natural resources, fell into the hands of the entrepreneurs for a fraction of their value today. These individuals had important political connections which helped them secure companies, minerals and oil assets. But as the politics of Russia changed, so did the position of the favoured oligarchs.

Vladimir Putin’s rise to power marked the start of a crackdown on the oligarchs, with the state seizing the assets of some, such as Boris Berezovsky and Vladimir Gusinsky, who fled the country as a result. The removal of Michael Khodorkovsky from his position as head of Yukos, then Russia’s biggest oil company, his arrest for tax evasion and fraud and the subsequent sale of his firm, Yukos’ oil wealth to state-run Rosneft, was for many the most astonishing action of the Russian approach to corporate affairs.

Against this backdrop, national desires for energy security are perhaps more understandable. The Russian Federation is the world’s biggest producer of oil. Dependence on a supplying country with so little experience of capitalism under internationally-accepted standards of the rule of law may not be advisable. Seen in this light, decisions to develop hydraulic fracturing to release supplies of oil and gas trapped in shale, may seem logical. More to follow next week on the Russian oligarchs.