Streetwise Professor

March 25, 2010

A Rushed Post (on Russia)

Filed under: Economics,Energy,Financial crisis,Military,Politics,Russia — The Professor @ 9:48 pm

Work demands (go figure!) and some recent travel (some work-related, some not) have put a crimp on the blogging, and the reading to feed the blogging.  So, I only have time for a few quick hits on Russia.

First, the substance of Putin’s put down of Hillary, rather than just the atmospherics, is intriguing.  For one thing, Putin used an official forum with the cabinet member of the United States to make a special pleading for individual Russian oligarchs.  Tame ones, of course, who do Putin’s bidding.  (And, perhaps more.  Which makes me wonder whether it was a special pleading for . . . Vladimir Putin.)  So much for Putin, scourge of the oligarchs.  (No Ivan IV he, in this regard.)  For another thing, the whinge about the collapse in trade betrayed a certain desperation, as did the lament about the low level of direct US investment in Russia.  A leader convinced that his nation was in the midst of a robust recovery, particularly a prickly, nationalist one like Putin, would not be likely to engage in such a public whine.  But one who has deep concerns about the economic future, and who is known for his tendencies to blame his and his country’s miseries on anybody else, especially anybody else with the initials USA, would be.  Not exactly a “Russia off its knees” moment.  Intriguing indeed to wonder why.

And Vladimir, if you wonder about the plummeting of foreign direct investment in Russia, and you want somebody to blame: look in the mirror, and curse the vaunted power vertical.  Consider, too, this story about Conoco’s divestiture of half its stake in the Russian oil firm Lukoil:

But its apparent decision could reflect the shift in dominance of Russia’s energy sector towards state-backed companies such as Rosneft and Gazpromneft, the oil arm of Gazprom, the state-controlled gas group.

This has left Lukoil by the wayside since Conoco first bought into it in 2004, analysts said.

Chris Weafer, chief strategist at Uralsib investment bank in Moscow says: “When they bought into Lukoil it was a time when it was positioned as Russia’s premier oil company.

“At the time they expected they would be able to use that relationship to expand further into Russia.

“But today the rules of the oil game have changed in Russia; today you are not in it unless you are partnered with a state company”.

“The catalyst for the sale comes from their debt position but the reason they are selling is because the competitive position they had with this company when they acquired it no longer exists.”

Rosneft emerged as Russia’s foremost oil producer from the state break-up of Mikhail Khodorkovsky’s Yukos, the target of earlier failed efforts by Exxon Mobil and Chevron of the US to gain entry into Russia’s oil sector via tie-ups with a local company.

Rosneft, Gazpromneft and Kremlin-friendly Surgutneftegaz are now seen as frontrunners for new licences to develop big new fields, while companies with foreign participation are treated with suspicion by the government, analysts said. [You don’t say.  “Suspicion” would be a good day.  Some companies throw parties when they are get promoted to suspicion.]

And, relatedly, TNK-BP, where the “blatant” expropriation is apparently  that the company walks away with nothing, whereas the kinder, gentler, non-blatant Sechin appropriation is that the company gets its initial investment back.  Which is better than nothing, but is still theft because a good deal of the value of such a property is the value of the option to invest optimally in the future.  Look, Vladimir, when the upside is always at political risk, don’t be surprised if FDI lags.

Next!  Russia’s military “reform” is now widely recognized as an abject failure:

Although the interview Gen. Nikolay Markov, the chief of the General Staff, gave to “Rossiiskaya gazeta” attracted fare more attention, the press conference Krivenko gave together with Soldiers Mothers Committee of Moscow chief Tatyana Kuznetsova and VTsIOM sociologist Konstantin Abramov provided many more details.

Speaking first, Krivenko explicitly stated that “the failure of military reform in the form in which it has been conducted up to now is recognized by the leadership of the country.” The planned shift to a largely professional force has failed, and the draft, given the reduced length of service the government has allowed, is not working either.

Plans for contract service have failed so far “not as a result of financial causes but as a result of the incompetent administrative decisions of the Defense Ministry,” Krivenko continued, but plans to try to rescue the situation by boosting the salaries of professionals still further would bust the budget, particularly if the relative number of less-well-paid draftees continues to fall.

But their numbers appear bound to fall, at least in the next few years, given the small size of the cohort born in the troubled 1990s. If the number of soldiers is to be kept at 700,000 and if draftees are to serve only one year, then the military would have to draft 700,000 young people each year, a number far exceeding the number in the prime draft age groups.

One could address that, he says, but forcing people who avoided service earlier and who are still under 35 years of age to serve, “but for this would be necessary another kind of state, and one can imagine just what it would be like.” Such “a draconian variant” is something no one is now seriously considering.

Krivenko stressed that “the president and the government understand this. And they understand that ahead is a dead end,” one from which the country can escape either by spending more money on the military, increasing the length of service for those who are drafted, or cutting the size of the services still further.

Increasing the length of service is the easiest in some ways: after all, Moscow did it in the 1990s, boosting the requirement from 18 months to two years. But Krivenko argued that there are two reasons Moscow might not want to go in that direction. First, “the difference between one year and two” “is qualitatively different” than the earlier much-smaller increase.

And two, such an increase could exacerbate social and political tensions, possibly having an impact, he explicitly suggests, on who will occupy the position of Russian president after the 2012 election. Consequently, decisions on force structure are likely to become more not less political in the coming months.

Guess they’ll just have to wait for that huge baby boom generation to grow up.  Yeah, right.

Lastly, the something for nothing gang strikes again.  Ukraine is seeking a deal to give up partial control over its pipeline system, in exchange for getting gas at a discount from European prices.  Russia’s response?  Yeah, we like the control thing, but fuggedibout any quid pro quo:

Russia’s OAO Gazprom does not view participation in a joint venture to manage Ukraine’s gas pipelines as sufficient grounds to lower the price Ukraine pays for imports of Russian natural gas, Kommersant reported, citing officials with the knowledge of the matter.

The dynamics of the Russian-Ukraine relationship will be quite interesting to watch.  I’m guessing Russia overplays its hand, either out of habit, overconfidence, desperation, or a confidence of all three.

I have a couple more items, but they’ll have to wait.

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4 Comments »

  1. Do you even know the definition of “oligarchy”, it means rule of the few. Few who in the nineties were practically the state. The word oligarch does not apply to the tycoons of today. If I was you I would care about a succession of American leaders who are firmly in the pockets of Wall Street oligarchs. ;-)

    Comment by Leos Tomicek — March 26, 2010 @ 10:05 am

  2. Thank you for ongoing coverage of Russian affairs. Although Mr. Putin is indeed no Ivan IV, yet his behavior with Ms. Clinton is reminiscent of Ivan’s attempts to marry Elizabeth I of England out of fear for domestic opposition.

    As for the military reform, the quantity of the conscript pool (as well as its quality with 130,000 out of 700,000 conscripts having a criminal record) might be the real driving force behind Serdyukov’s plan to reduce army structure from division- to brigade-level. Maybe Kremlin politicians would finally realize that throwing money to the military might not be a solution to all of its woes.

    Comment by Denis — March 26, 2010 @ 11:01 am

  3. Although Mr. Putin is indeed no Ivan IV, yet his behavior with Ms. Clinton is reminiscent of Ivan’s attempts to marry Elizabeth I of England out of fear for domestic opposition.

    Thanks for this great joke to start my day. It’s appreciated! ;)

    Comment by Sublime Oblivion — March 26, 2010 @ 12:32 pm

  4. Some insight from Mr. Browder into what ever happened to that FDI thing:

    http://www.youtube.com/watch?v=84MsRuC-1l8

    Comment by Ivan — March 28, 2010 @ 8:55 am

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