Streetwise Professor

August 26, 2009

Нет денги, большая проблема

Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:46 pm

I asked a Russian friend how the financial and economic crisis had affected the regional art center in the Urals where she works.  She said that she and her colleagues were coping with typical Russian resignation, and had made “нет дениг, нет проблем” (“No money, no problem”) their motto.

The “нет дениг” part may fit the country as a whole, but the “нет проблем” part doesn’t, quite.  The    Sayano- Shushenskaya dam disaster is widely considered to be a harbinger of potential problems.  The direct economic consequences are severe, reducing Russian electrical generating capacity by 2 percent; this in fact understates the impact because the dam was an inframarginal (i.e., relatively cheap) source of power.  The costs of repair are very high. Estimates run to $1.25 billion, but being estimates, being early, and being Russia, it is likely that the final bill will be much higher than that.  (Just ask the Indians about how the estimates for the repair bill to the Admiral Gorshkov compared to the actual cost.)  That in itself represents about 3 percent of total Russian infrastructure spending in 2008.

But as bad as the direct cost of repairing this one dam is, the prospect that Russia is just waiting for many additional shoes to drop is even worse.  And all at a time when there is no slack whatsoever in the budget; the state investment funds are being depleted rapidly, the budget deficits are forecast to be at the very upper limit that the country can run without risking grave risks to the currency, and Russia plans to return to the debt markets soon to cover its existing shortfalls.  Nor can the country rely on foreign investors to step into the breach.  The combination of poor economic prospects and a history of mistreatment has exacted its toll.

Even the big cash cows are running dry.  Case in point: Gazprom.

Gazprom’s profits were battered by plunging gas sales to the European Union and Ukraine in the first three months of the year, it has reported in its latest  resultsunder international accounting standards.

A 62 per cent drop in profits to Rbs110bn (about $3.5bn, at today’s exchange rate), reflects steep falls in gas export volumes, which were down 31 per cent to the EU, and 61 per cent to the former Soviet Union countries, including Ukraine. The economic downturn, which has hit demand for gas, particularly from industrial users, in Europe and around the world, was part of the reason; supply disruptions caused by the interruption of flows to Ukraine during the pricing dispute in January were another.

. . . .

The company’s debts are continuing to rise. Borrowings were up 17 per cent by the end of March from the end of 2008 to Rbs1,191bn (about $38bn at today’s exchange rate), mostly because of the fall in the value of the ruble, which pushed up the ruble value of Gazprom’s foreign currency debts. Since then, it has made significant further expenditures, including $4.1bn buying a 20 per cent stake in its oil subsidiary Gazprom Neft from Eni of Italy, and $1.67bn buying 55 per cent of London-listed Sibir Energy.

Amazingly, some, like Sanford Bernstein analyst Oswald Clint are trying to gussy up this corpse:

Capital expenditures have been cut 15% in 2009, the 2008 proposed dividend was cut 86%, and capex hungry projects in the Yamal peninsula have been delayed. Combined, we now expect much improved balance sheet flexibility, and expect the company to generate positive free cashflow this year, which provides plenty of scope to re-grow the dividend. With added tailwinds of favorable government moves to boost domestic pricing tariffs by 15% in 2010, 2011 and 2012, the company is also likely to start generating profit for the first time from  292Bcm of gas sales (50% of total) sold in the domestic market.

So.  Let me get this.  The company is in such deep financial straits that it all but eliminates its dividend, sharply reduces its capital expenditure, and delays its big investments in new production.  And this is good news because this creates “balance sheet flexibility”?  I guess.  But flexibility to do what?

Talk about looking on the bright side.  “Other than that, how was the play, Mrs. Lincoln?”  “Well, there’s now one less mouth to feed.”

Even There’s-a-Pony-in-There-Somewhere Clint recognizes that Gazprom’s production, which fell sharply in 2009, will not reach 2008 levels until “late in the next decade.”  Which means 8-10 years.  And with the sharp drop in capital expenditure, the delays at Yamal, and the accelerating declines in its mature western Siberian giant fields,  that may be very optimistic.  Which means that, even given additional domestic revenue, the company’s prospects for generating the kind of positive cash flow that will not be able to (a) keep certain people living in the style to which they have become accustomed, and (b) more importantly, it will not be able to generate revenues for the Russian state to address its already pressing fiscal problems, let alone provide funds to shore up a collapsing infrastructure.

And in the aftermath of  Sayano- Shushenskaya even the higher domestic revenues may be in doubt.  Putin and Medvedev have already pledged that the state will prevent power prices from rising excessively due to the loss of capacity.  Which means that the on-again, off-again electricity tariff reforms are probably off again for a long time.  Moreover, given that the loss of hydro capacity will increase the demands placed on gas fired power plants, the imperative to keep power prices low will surely induce the power plant operators to pressure the government to keep gas prices low.  Furthermore, it is likely that the government will attempt to palliate consumers who end up paying higher electricity prices with the sop of lower gas prices, and will therefore delay full implementation of the scheduled gas price increases.

In brief, Russia faces a yawning capital gap.  The country has lived, after a fashion, on the Soviet inheritance, from huge hydro stations to massive gas fields.  “Deferred maintenance” became a modus operandi.  The  Sayano-Shushenskaya disaster is just a vivid illustration of the consequences of this.  It makes me wonder what the true rate of Russian growth in recent years would be, if the true depreciation/consumption of capital were taken into account.  The country has consumed much of its seed corn.

The country’s major source of cash–the energy business–has lived off the Soviet inheritance as well, so Russia can’t look to that for succor; indeed, that sector needs a massive infusion of capital too.  Foreign investors won’t step up.  Compared to other countries, Russia invested relative little as fraction of its GDP even during the seven fat years.

So, no money: big problems.

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  1. Нет денег, большая проблема.

    Comment by Sublime Oblivion — August 26, 2009 @ 9:07 pm

  2. There’s actually quite a simple solution, which is to monetise energy through the issue of units redeemable in (say) electricity, gas, and other carbon-based fuels.

    The Chinese are already in a long term crude oil deal with Russia, but that deal has no chance of surviving when the dollar falls – which it will. Neither they nor the Japanese would have any difficulty at all in investing in “unitised” energy as an alternative to dollar assets.

    The current energy markets are totally dysfunctional, and a new approach urgently needed.I think that the natural gas market is wide open for a new “energy clearing union” architecture.

    Comment by Chris Cook — August 27, 2009 @ 3:00 am

  3. “Нет денег, большая проблема.”

    Is that SUBLIME DURAK’S way of saying “I’m sorry, I was wrong”? If so, the fellow needs to man up and be more direct. Though perhaps its the best we can expect from the Russophile rabble.

    This is totally devastating stuff, SWP, you are really on a roll. First romanticism and now this! I think a book should be in the offing.

    Comment by La Russophobe — August 27, 2009 @ 10:26 am

  4. LR–no, S/O was pointing out a spelling mistake. I forgot the soft sound between the “L” and “B” in “bolshaya.” (Since corrected.)

    Thanks for the kind words re being on a roll. I’ll try to keep it going’-)

    The ProfessorComment by The Professor — August 27, 2009 @ 12:07 pm

  5. Well, the sentence still looks and sounds unnatural 🙂 Literal translations hardly ever work. My version:

    Денег нет, и это серьёзная проблема.

    Don’t take this little critique too seriously, Professor – you must be an actual active speaker, listener and reader to feel things like that. In any language.

    Comment by LL — August 27, 2009 @ 12:27 pm

  6. SWP: Yeah I know I’m just teasing the baboon.

    LL: You seem to be quite a stupid dumbass. SWP was QUOTING SOMEBODY, cretin. Learn to read.

    Comment by La Russophobe — August 27, 2009 @ 4:07 pm

  7. […] James at Robert Amerstdam was nice enough to link to нет дениг, нет проблем and say some nice things about it: Craig Pirrong has a stinging piece [stinging? moi?] over […]

    Pingback by Streetwise Professor » No Money, Big Problem: A Follow Up — August 27, 2009 @ 7:44 pm

  8. +++You seem to be quite a stupid dumbass+++

    I love you too, Kim. All kidding aside.

    Comment by LL — August 27, 2009 @ 8:08 pm

  9. SWP: Yeah I know I’m just teasing the baboon.

    Did you also torture kittens in your childhood?

    Comment by Sublime Oblivion — August 27, 2009 @ 8:32 pm

  10. Wow, La Russophobe–it’s one thing for you to abuse people on your own blog. Being that it’s yours, that’s technically your right, however repulsive it may be. But to do it on someone else’s blog–well, that’s low, even for you.

    Comment by Natalie — August 27, 2009 @ 10:03 pm

  11. NATALIE: It’s not actually. I do it on lots of blogs all the time, have been doing so for years. You need to keep up with the times! In fact, it’s how I got started in blogging. Meanwhile, do you realize your own hypocrisy? You dare to lecture me about how I should behave on a blog that is not yours? What hubris! And full of personal abuse, exactly what you accuse me of. Look in a mirror!

    LL: Right back at you, darling.

    SUBLIME DURAK: No, I tortured Soviet communists like all patriotic Americans. Now, it’s the turn of the neo-Soviets. Are you likening yourself to a kitten by the way? If so, I’d urge you to lay off that crack pipe honey, you’re overdoing it.

    Comment by La Russophobe — August 28, 2009 @ 7:30 am

  12. Hey Professor, in the interests of fairness, are you going to publish the city hosting the IP address La Russophobe posts on here from like you did about me?

    Comment by Steve J. Nelson — August 28, 2009 @ 8:56 pm

  13. Random question for Steve: what happened to your blog? When I clicked on the link to it, I got some “blog not found” error.

    Comment by Natalie — August 29, 2009 @ 12:07 am

  14. SWP: You were right about the catastrophic effects the crisis would have on the Russian economy and how it would end up collapsing before our eyes along with the government as a whole, all due to collapsing oil prices, so I guess it only makes sense to trust this equally insightful analysis of yours. RUSSIA IZ DOOOMT!!!

    Teehee. Sorry, I just popped in to see if you had yet manned up regarding all your predictions gone wrong, and perhaps changed your attitude a little, but it seems you’re still spewing out the same baseless doomsday drivel as per usual and cheerleading every bad thing that happens in Russia with your fingers crossed. It’s unfortunate. You see it’s one thing to make a mistake and move on, it’s quite another to make the same mistake over and over and over again, to keep making new mistakes in the same fashion while everyone still remembers your old ones.

    I have a question: Who do you write articles like these for? Surely you don’t spend all that time pandering to retards like La Russophobe and all their sockpuppets..?

    Comment by Bob From Canada — August 30, 2009 @ 10:51 pm

  15. Oh yeah, thanks for reminding me, Bob, that I predicted Russia would start recovering from recession in H2 this year. Seems to be on track. 😉

    Comment by Sublime Oblivion — August 31, 2009 @ 4:09 pm

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