Streetwise Professor

January 22, 2009

Frog Legs, Coming Up!

Filed under: Economics,Energy,Politics,Russia — The Professor @ 11:22 pm

It seems that the frog is now boiled.  Today Russia’s central bank dramatically widened the ruble trading band by 10 percent, in contrast to the gradual widenings of about .5 percent that it had permitted frequently over the past couple of months.  This comes on the heels of a week in which Russia spent an estimated $30 billion in defending the currency.

The ruble has shown a bit of strength recently.  I think this in part reflects a Parthian shot by the central bank that had engaged in a flurry of buying (i.e., selling dollars) to raise some doubt in the minds of speculators about the riskiness of betting against the currency.  It also reflects the periodic increase in the demand for rubles that business use to make VAT payments–making this a good time to permit a dirty float because technicals will support the currency for a bit.  

The overall market consensus is that Russia took this measure far too late, and thereby exacerbated the country’s economic difficulties, particularly in manufacturing.  That’s certainly been my view.   One Moscow economist opined:

“It’s inevitable that the ruble will move to the limit of the new band,” said Alexei Moiseyev, economist at Moscow brokerage Renaissance Capital. “This had to be done, but it should have been done faster,” he added.

Economists say the slow ruble decline channeled the government’s bailout funds into currency speculation and deprived companies of vital capital. “We’re paying for this with very bad figures for industrial production,” said Mr. Moiseyev. In December, industrial output plunged 10.3%, according to government figures reported by the Interfax news agency.

Companies across Russia have furloughed workers or cut jobs. More than a million Russians have lost their jobs since the early summer, Interfax reported Thursday, and government officials expect the unemployment rate to rise to 7.5% this year from 6.5% in November, the last month for which data are available.

The central bank apparently cried uncle because speculative pressures were threatening to overwhelm any attempts to support the currency, thereby blowing through the rest of the country’s already depleted reserves:

This month, the central bank sped up the ruble’s decline, but traders say the move only added to pressure on the currency as banks, companies and individuals scrambled to get out of rubles. Central-bank reserves dropped $30 billion in the past week alone.

“For the past two months, everyone was just speculating [against the ruble],” said Yevgeny Gavrilenkov, economist at Troika Dialog, a Moscow investment house. “They weren’t paying debts, barter was rising.”

Who benefited from this policy?  The slow motion devaluation helped the government politically.  It was also quite helpful to oligarchs who had borrowed in foreign currency.  Thus, the government was apparently willing to spend hundreds of billions to save political face and ease oligarchic pain.  Who paid the price?  Primarily, Russian manufacturers, and the people they employ.  

That choice tells you a great deal.

January 20, 2009

Cult of Personality

Filed under: Politics — The Professor @ 9:47 pm

The idolatrous euphoria over Obama has led me to wonder why the left/statists/”progressives” are so much more likely to fall under the thrall of personality cults than conservatives/libertarians.  One thought that comes to mind is that such folks do not believe in original sin, the fundamental corruption of men (and women); they believe in human perfectibility and the ability to achieve heaven here on earth through political means.  As a result, they believe that a human messiah is a real possibility; anxiously await his (or her) arrival; and are susceptible to projecting their heartfelt hopes and wishes onto those who (cynically?) appeal to those hopes.  

Dunno.  Just a guess.

Speaking of the Obama idolatry, and his conscious efforts to associate himself with secular saints, I got a laugh out of his retracing Lincoln’s path to his first inauguration from Philadelphia to Washington.  The re-enactment was lacking a few authentic touches.  Most notably, fearing assassination in fervently secessionist/pro-Southern Baltimore, Lincoln dodged the crowd in the Maryland city, leaving the train incognito a few stops before his scheduled arrival in the city’s main train station.  (Southern wags trafficked the story that Lincoln disguised himself as a Scotsman, in a quilt and ‘tam to make good his getaway.)  Didn’t read about Obama doing that;-) (Whoops–I guess I owe another royalty to that Russian advertising dude.)

Anyways, back to the main theme of this post–I find personality cults very creepy.  Very.  They betray a fundamental unseriousness and immaturity.  Moreover, they tend to have pernicious effects.  If the object of affection disappoints, as is almost inevitable, fury usually follows.  This fury is either directed at the fallen idol, or at those who are deemed to have thwarted him from achieving his/her noble mission.  In the current political and economic environment, I think that (a) failure to realize hopes and expectations is a given, and (b) the resulting fury will be great, and will be directed not so much at Obama, as at those who have the temerity to suggest that the messiah has no clothes.

And, that happy thought concluded, the theme music for this post.


Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:18 pm

The Russo-Ukranian Gas War of 2009 is supposedly–and I emphasize this qualifier–over.  The initial news judgment is that Russia–and Putin–came out the winners.  The AP argues, for instance, that:

Russian Prime Minister Vladimir Putin’s tough tactics seem to have paid off in talks to resume gas shipments through Ukraine to Europe, most importantly by doubling the price Ukraine pays for  gas.

Yuschenko criticized the deal, characterizing it as a defeat:

But Ukrainian President Viktor Yushchenko criticized as a “defeat” the deal clinched by his prime minister, his former ally turned rival, saying the price set for Russian gas was too high and offsetting transit rates for Ukraine too low.

But, as always seems to be the case when one says the words “Russia,” “Ukraine,” and “gas” in the same sentence, what really happened, and the implications of whatever happened, are very difficult to determine.  So there’s supposedly a 10 year deal in which Ukraine agrees to pay “European prices” for gas, and Russia agrees to pay “market” prices for transport–but neither term is defined.  (Also, supposedly the transit and gas deals are separate.)  Moreover, intermediaries are supposedly out.  But, given that, ahem, neither Russia nor Ukraine seems to treat contracts as sacrosanct,  with these vagaries, one would have to be very Pollyannish indeed to believe that the prospects for another war same bat time, same bat channel have gone away.  

But, as I say, the conventional wisdom is that Putin has won, and that this is a step towards bringing Ukraine back into the Russian orbit, and out of the Euro-American sphere, with Tymshenko playing shepherd (or would that be Quisling) from the Ukrainian side.  

Things are really too murky for me to judge–and in my view, for anyone to judge–whether that’s indeed the case.  

I will just present one significant data point that contradicts this interpretation.  If Russia is indeed the winner, Ukraine will indeed pay higher prices, and the prospects for a future war with all the adverse immediate economic and long run reputational consequences are greatly diminished, one would expect Gazprom’s stock price to have risen upon news of the settlement.  In fact the opposite has happened:

Note that Gazprom stock price peaked on 6 January, with an intraday high of almost $18.50.  The price has fallen since, even as it became apparent that some settlement along the lines of that just announced would be reached.  The price is now in the $13 range, after trading as low as about $12.50.  So the stock price has lost about 30 percent.  To put things into perspective, over the same period the RTS is down about 15 percent.  

So, if the masterful Gasputin has really engineered such a coup, one that in addition to pulling Ukraine into Russia’s orbit, also secures Gazprom’s economic interests, why has the company’s stock performed so badly?  The market certainly doesn’t seem to think that Gazprom/Russia have “won” (at least commercially) the latest gas war.

January 19, 2009

The Eastern Front, Then and Now

Filed under: Military,Politics,Russia — The Professor @ 10:10 pm

I’m currently reading Norman Stone’s The Eastern Front: 1914-1917, still the standard reference in English on the subject more than 30 years after its publication.  Although the book is of interest on purely historical grounds, it also resonates with current events.

One quote stands out in this regard: “Ancient truths of Russian administration were thereby illustrated [by the conflict between the general staff (Stavka) and the front line commanders]: centralisation brought inefficiency, decentralisation brought anarchy.”  Post-Soviet history in a nutshell, no?  Also something being re-enacted in front of our eyes with an inefficient, centralized Russia confronting a decentralized, anarchic Little Russia (i.e, the Ukraine.)  

Another fascinating parallel between the Tsarist era and the “modern” one is found in Stone’s analysis of the deficiencies with NCOs in the Tsarist military:

There was also a problem, perhaps more serious, with N.C.O.s.  As Dragomirov said, ‘this vital ink in the chain of command was missing’.  N.C.O.s were appointed ad hoc, shared the men’s facilities–there was no sergeants’ mess, certainly none of its ethos–and were usually among the first to go Bolshevik. . . . It was partly the blindness of the old regime that was responsible for this, for officers could not imagine that an N.C.O. could appear in less than ten years of service.  It was also a consequence of the social development of Russia, where the N.C.O.-type had not emerged to the same extent as in western countries. . . . [In western European countries] there was a smudgy copy of the officer-class, which did excellent service in turning a mass-army into a serviceable military unit.  IN Russia, this caste was much weaker: in 1903 there existed only 12,109 long serving soldiers in the army, in place of the 23,943 there should have been–two per company, where the Germans had twelve.

Russia lacked officers, and lacked still more N.C.O.s who could link them with the men.  

 The lack of a distinct, professional NCO cadre, with morale built on traditions and a self-conscious understanding of its role, is widely acknowledged as one of the major deficiencies of the modern Russian military.  Dedovshchina  is just one of the symptoms of the absence of professional NCOs.

I’ll mention just one more parallel, though there are many more.  The book goes into detail about the brutal infighting between the Minister of Defense, Sukhomlinov, and his acolytes on the one hand, and the old guard of military officers on the other.  Sukhomlinov was a reformer, and his proposals outraged the old soldiers.  The seething discontent throughout the officer corps at the proposed reforms of current Defense Minister Anatoliy Serdyukov is more than a little similar to the conflict between major elements of the officer corps and Sukhomlinov in the years running up to WWI, and the early period of the war.  

Serdyukov better hope that the past is not prologue as Sukhomlinov was eventually tried for treason.  

All in all, very interesting.  Depressing, but interesting.  Everything about WWI is pretty depressing, and the Eastern Front is no exception.  Indeed, the appalling casualties and abject incompetence of the high commands on both sides–especially the Russian and Austrian, but even the vaunted Ludendorff made more than a few blunders–if anything make reading about this theater even more dispiriting than studying the horrid Western Front.  And that’s saying something.

In parallel to Stone, I’m reading de Custine.  Many, many, many historical echoes there as well.  I’m pondering how to put them all in a post or two.  Should be quite provocative.

I can emphasize one thing that stands out in de Custine’s treatment of Nicholean Russia that definitely resonates today–the pervasive dishonesty that flourished in an autocratic system with no real checks and balances.  Much more to follow, hopefully–if life permits (teaching begins in earnest on Wednesday, and time may be at a premium.  Had to happen some time;-)


Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 9:38 pm

There are a variety of different ways to analyze the effect of the crash in energy prices on the Russian economy and political system.  One is to just focus on the basic macroeconomics and public finance; the effect of the decline on aggregate demand, income, the budget, the trade balance, the ruble, etc.  The results of such an analysis are not exactly comforting for Russia, but there is nothing in this analysis that has particularly dire implications for the country’s political stability, or that suggests that Russia’s difficulties will be all that different from those of other commodity intensive nations.

Another approach is more institutional and political-economic.  It focuses on the unique institutional features of Russia, and the salient role that energy plays in supporting this institutional structure.  It’s an analysis that I’ve favored, and advanced here at SWP.  In essence, I’ve argued that energy (and other natural resource) rents are the glue that holds the Russian “natural state” together.  I’ve analogized Russia to a cartel of violence specialists who cooperate to split rents rather than dissipate them in conflict.  But, I’ve also argued–and done so well before the recent collapse in energy prices–that a decline in these rents raises the likelihood that this (inherently unstable) equilibrium will collapse, thereby threatening Russia’s political stability.  

A recent post on the RFE Power Vertical blog argues that this may in fact be occurring in the here and now:

The political structure Putin built over the past decade was based on a vast system of patronage that, thanks to high oil and gas prices, allowed the Kremlin to purchase the loyalty of Russia’s sprawling bureaucracy and at least the tacit consent of a critical mass of the population.  

Here’s how Moscow-based political analyst Dmitry Oreshkin put it when I spoke to him about the emerging political crisis:

The vertical is not as strong as it seemed. It is based on buying the loyalty of officials with the help of oil funds. The bureaucratic class gives its loyalty to the center and the center closes its eyes to their corruption…When oil and gas prices were high and when the economy was growing, it worked well. Bureaucrats were afraid to show disloyalty to their bosses because if they were fired they would be outsiders. But when gas and oil prices are low and the economy falters, it is not possible to buy everybody’s loyalty.

Petrodollars, in short, were the lubricant that kept the system functioning. And now that these are drying up, the arrangement is breaking down with unpredictable consequences.  

A few trends, however, are already visible. Divisions in the elite — both within Moscow and between the center and the regions — are getting sharper. The most noticeable, of course, in the apparently worsening relations  between Putin and Medvedev, or at least between their respective teams. Here’s how Yevgeny Volk of the Heritagte Foundation’s Moscow office put it in an interview with RFE:

The Russian elite has never been united. There were always fierce battles for resources and there were always grievances. But when there are colossal resources from high oil and gas prices, these conflicts can be managed. But now, with the pie shrinking, the battle among the elite is becoming hotter and the conflicts are getting sharper. I don’t rule that there will be a conflict between Medvedev and Putin. Neither one of them wants to take personal responsibility for the worsening economic situation. This is especially important for Putin given his plans to return to power.

Moreover, as Oreshkin pointed out, the group of security service veterans close to Putin — people like First Deputy Prime Minister Igor Sechin and Security Council Secretary Nikolai Patrushev — have a very different notion of how to deal with the economic crisis than the economists like Finance Minister Aleksei Kudrin who are close to Medvedev:

The Putin group favors strengthening administrative pressure. The Medvedev group thinks the authorities need to do more than make threats and bang their fists on the table. They think there needs to be a better understanding of economic interests and rational economic behavior.

This is all getting very interesting very quickly. In our interview today, Volk said that a year ago the situation in Russia resembled that in the Soviet Union in the early-to-mid-1970s, when high oil prices fuelled an aggressive foreign policy abroad and facilitated a relatively stable political situation at home. Today, Volk says, the situation reminds him of the mid-to-late 1980s — and we all know what followed that.

Volk’s “Cocaine Blues” point is right on.  

Viewed from this perspective, the decline in energy prices is uniquely ominous for Russia because of the pivotal role that commodity rents play in maintaining the country’s political equilibrium.  

Post author Brian Whitmore promises that he is preparing a more detailed look at this issue.  That’s good to hear, because it’s an interesting one.  Indeed, I think the role of rents will be critical in determining Russia’s political path in the near to medium term.

January 18, 2009

Betting the Farm

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 9:43 pm

This piece by Andrei Tsygankov presents a persuasive appraisal of Russia’s long term “strategy,” such as it is:

The global economic crisis has prompted some observers to speculate that  Russia  has little choice but to abandon its international assertiveness in favor of re-engaging the West and diversifying its energy-dependent economy.  

The Russian leadership, however, has shown little inclination to principally revise its international strategy and its petro component. The Kremlin assumes that the alternative to its energy-based strategy is a decline relative to existing and rising powers, which will lead to the degeneration of Russia into a geographically truncated, under-populated and resource-depleted  nation that accepts political demands from others.  

. . . .

The government understands that the only way out of its progressive power differential situation is to fully exploit the comparative advantage of Russia’s energy reserves. Already in 1997, while working for the governor of St Petersburg, Vladimir Putin wrote in his doctoral thesis about the critical importance ofoil  and  gas  to preserve Russia’s great power status within the next 50 years. The Kremlin believes that building up the capacity to shape global energy markets is not a luxury, but a necessity.  

. . . .

The idea is to develop a capacity to shape world markets first and only then to become serious about diversifying its economy. Russia needs to attract sufficient investments for its energy projects. Then it wants to develop energy fields and build the northern and southern pipelines that are scheduled to become operational in 2011 and 2014, respectively. Only after generating sufficient resources for a great power recovery will the government diversify the economy. The intention has been to diversify by 2020 – perhaps too optimistic, even by pre-crisis standards.  

This strategy is about as realistic as planning to win at poker by filling inside straights–repeatedly.  It relies on things breaking just right.  It puts Russia’s fate in the hands of the most volatile, fickle, and tempestuous markets–the markets for energy.  It (as the article notes) depends upon assistance from nations and companies that Russia has stiffed or expropriated.  It is hostage to technological change–innovations that reduce the demand for energy undercut the strategy.  It is vulnerable to policy and regulatory changes, most notably climate change legislation designed to reduce dramatically energy consumption.  

In other words: Good luck with that.

Several thoughts come to mind.

First, such a strategy represents a damning–no, an extremely damning–assessment of Russia’s prospects by its own political leadership.  Anytime anybody out there wants to accuse me of Russophobia–hey, I’ve got nothing on Putin et al.  They are evidently so despairing of Russia’s ability to compete demographically, technologically, militarily, or economically in any area other than energy that they are essentially giving up in these areas without a fight, and wagering everything on everything breaking their way in energy.  

Second, this strategy has one, and only one, objective in mind–derzhavnost.  It is aimed solely at restoring the Glory Days, at making Russia a “great power” yet again.  It reminds me of nothing so much as Terry Malloy (Marlon Brado) in On the Waterfront: “You don’t understand! I coulda had class. I coulda been a contender. I coulda been somebody instead of a bum, which is what I am.”  There is evidently no thought of using Russia’s energy bounty to fund a modern economy or a civil society; of addressing its pressing demographic and health problems; of restoring its once formidable but now decrepit education system; or even of building some decent roads.  In other words: Russians don’t matter, but Russia does–as a state.  This attitude has a long legacy in Russia; sadly, it is a legacy of pain and poverty, and an attitude that is a failure even on its own terms, because Russia has never been an enduring great power.  The episodes of Russian importance on the world stage have been short lived, and ended  each and every time in chaos and destruction.  

Third, the centrality of energy to Russian geopolitical strategy means that attempts to make distinctions between “commercial” and “political” motivations behind the actions of state firms such as Gazprom are futile.  Commercial and geostrategic motivations are so intertwined that dichotomies between them are fallacious and misleading.  So, when anybody tries to argue that the dispute between Ukraine and Gazprom is purely commercial in nature, just a hard nosed confrontation over price, don’t believe them.  Sure, money matters, but in large part because money can be used to fund dreams of empire.  Moreover, when the geopolitical prize is large enough, Russia/Gazprom are willing to leave money on the table to advance its political objectives.  

In brief, this is a strategy of desperation of a clique of megalomaniacs.  They have 18th century ambitions, and intend to achieve them using mid-20th century (at best) economic tools.  It’s like watching a train wreck.  Worse–the latest in a long line of train wrecks.

I’ve said it before, and I’ll say it again.  Putin and the siloviki are the 21st century equivalents of the Bourbons.  They have learned nothing, and they have forgotten nothing.  If (pace Marx) history repeats itself first as tragedy, and then as farce–how does it repeat itself the fifth time?

The Ghost of Christmas Future?

Filed under: Economics,Politics — The Professor @ 4:06 pm

Whenever I read something about the UK’s descent into suffocating statism on the Adam Smith Institute website, or in my other reading, it reminds me of Scrooge witnessing the grim vision presented by the Ghost of Christmas Future in Dickens’s A Christmas Carol.  Unfortunately, rather than treating this, as Scrooge did, as a cautionary tale that demands a drastic change of heart and behavior, we in the US seem perfectly content to slouch along in Britain’s wake, moving inexorably to a dystopian future of political correctness, socialized medicine, intrusive bureaucracy, and a stifling of individual initiative.  The gargantuan economic “stimulus”–a wildly excessive response to a severe, but hardly unprecedented economic downturn–will likely become the Trojan Horse in which all sort of “progressive” (an oxymoron if there ever was one) nostrums will be smuggled into the citadel of American society.  Its baleful effects will far outlast the supposed crisis which it is purported to cure.

January 15, 2009

How Do You Know They’re Lying?

Filed under: Economics,Energy,Politics,Russia — The Professor @ 10:03 am

“When their lips are moving,” I can hear you say.   But really, that’s not what I was going to say.

What I was going to say is–“When they blame their troubles on nefarious Amerikanski plots.”

The “they”, of course, being the Russian powers that be.   Aleksandr Medvedev of Gazprom has ominously   suggested that the Ukrainians are acting under American orders in the ongoing gas standoff.   For “evidence” he pointed to an anodyne US-Ukraine Charter on Strategic Partnership in which the parties stated:

  • Recognizing the importance of a well functioning energy sector, the parties intend to work closely together on rehabilitating and modernizing the capacity of Ukraine’s gas transit infrastructure and diversify and secure Ukraine’s sources of nuclear fuel making Ukraine less dependent on foreign sources of nuclear fuel and nuclear fuel storage.
  • Following the Roadmap of Priorities for U.S.-Ukraine Cooperation, the United States and Ukraine intend to launch the work of the Bilateral Energy Security Working Group. Consistent with the U.S.-EU Summit Declaration of June 10, 2008, the United States and Ukraine intend to enhance a trilateral dialogue with the European Union on enhanced energy security.
  • Wow.   You can really see how suspicious this is.

    Medvedev also said something about how (I’m quoting from memory) “we don’t know all that’s in the agreement.”   Now, on the matter of secret protocols, of course I defer to the expertise of the political descendents of the signatories to the Molotov-Ribbentrop pact, but I mean, really.   This is just typical State Department fluff, sound and no fury signifying less than nothing.

    But the fact that Russia/Gazprom are apparently so desperate to feel compelled to play the VAC (“Vast American Conspiracy”) card says a whole helluva lot.

    It also undermines, in my mind anyways, any credibility that Gazprom has in this dispute.   The facts in this affair are extremely difficult to get, let alone interpret, and it is clear that the Ukrainians and their crazed domestic politics bear more than a little blame for what has transpired, and which is still transpiring.   But Gazprom/Russia is hardly an angel here.   Both sides have been ruthlessly opportunistic.   But Gazprom has tried hard to convince the world that it is being reasonable.   When it says silly things like the blame lies on the Potomoc rather than the Dneiper or the Moskva, though, it makes it pretty clear that all the reasonableness is just an act.

    So, in a way, Medvedev has done the world a favor by letting the mask slip to reveal the sovok face underneath.

    * Or should that be “eminentoes”?   Paging Dan Quayle!

    Like I Said

    Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 9:44 am

    The Russo-Ukrainian Winter War continues apace.   Professional and personal time demands preclude an extended original response at this time, so I’ll resort to the gambit employed by baseball broadcasters during rain delays–reruns of past games;-)

    Here’s a warning about Gazprom I penned (or would that be “pixeled”) in June, 2006.   This was originally published in World Energy Magazine:

    Just Say No–To Gazprom

    Churchill famously said that Russia “is a riddle, wrapped in a mystery, inside an enigma.” There is nothing mysterious, however, about recent Russian policy to leverage its primary strategic asset—energy—to regain its status as a world power even as it faces an existential demographic crisis.

    The Russian state’s vehicle in this endeavor is the monopoly gas provider Gazprom. Like ripples from a stone thrown in a pond, Gazprom’s influence is spreading from Russia, first to the “near abroad”—Ukraine, Armenia, Georgia, Belarus—next to the old Warsaw Pact countries, now to western Europe, and eventually, perhaps, to the US. Through murky deals and the specter of economic blackmail, the company has obtained control of pipelines in Belarus and Armenia. Georgia is under intense pressure to sell its gas trunkline. With German assistance, Gazprom is in the process of increasing Polish energy vulnerability by building a Baltic pipeline that will allow Russia to sell gas to Western Europe while cutting off Poland, thereby resurrecting unpleasant memories of past Russo-German collaboration at Polish expense.

    Gazprom is now obtaining positions in gas distribution networks in Western Europe. It mooted the possibility of buying the British gas distributor Centrica, which set off a controversy in the UK over the wisdom of such a transaction. Recently other Europeans have echoed these concerns. Gazprom and the Russian government have responded acidly to European criticism, calling the Europeans hypocritical in insisting that Russia open its upstream energy market to foreign investment while considering limitations on Gazprom investment in the European midstream.

    Europe would be well advised to evaluate Gazprom moves with intense skepticism, and to dismiss charges of hypocrisy. Appreciable control over the midstream would enhance Gazprom’s market power in the European market which it could use to impede or foreclose development of alternative supply sources, thereby allowing Gazprom to charge supracompetitive prices, especially as North Sea gas reserves decline. Insofar as hypocrisy is concerned, not all investment is created equal. Upstream investment in Russia does not raise the same serious competitive concerns as Gazprom ownership of significant slices of the European distribution network and control of most major pipeline routes from producing regions in Russia and Central Asia to consuming markets in Europe.

    This advice goes double given the geopolitical ramifications of Gazprom. No less an authority than Russian President Vladimir Putin laid out in his (perhaps partially plagiarized) PhD thesis a strategy to utilize vertically integrated state owned energy companies to restore Russia to its former power and influence. In this regard, it is useful to remember the oft-omitted second part of Churchill’s aphorism, namely that the key to understanding Russia is “Russian national [read state] interest.”

    Europe should therefore resist encroachment of Gazprom into the intra-European gas transportation network, encourage and finance development of pipelines from gas producing regions that are outside of Gazprom control, and proceed full speed with development of LNG infrastructure.

    Lest this be considered a jeremiad against Russians, nothing could be further from the truth. The interests of the Russian state and the Russian people have been antithetical for centuries, virtually without pause. Although Gazprom’s meteoric rise has enriched a few in Russia, and empowered and emboldened the state, this does not bode well for Russians at large. Petrostates are largely immune from pressures to liberalize their economies and facilitate the development of private property rights and civil society. Pace GM, what is good for Gazprom is not good for Russia.

    And the Russian strategy of putting all their strategic eggs in the energy basket is very risky too. Energy prices are high now, and the Russian economy is riding high with them. But energy prices go down too, and a poorly diversified Russia just recovering from a virtual economic collapse in the 1990s (exacerbated by low oil prices) is in no position to thrive given even a moderate correction in energy prices.

    So as the G8 Summit in St. Petersburg approaches, Europe, Japan, and the US would be well advised to push their host hard on liberalizing the Russian energy market and to resist pressures to extend Gazprom’s reach to the Atlantic.

    I think this stands up pretty well, even if I do say so myself;-)

    Of course, the Europeans have done nothing that I (and many others) recommended.   They fiddled while Rome froze, as it were.   As in most things that are important, they demonstrated that EU solidarity is a farce, as each nation cut its own self-serving deal with Gazprom, and eminentos* such as Schroeder and Berlusconi played monkey to Putin’s organ grinder.   (Whenever I see photos of the ludicrously grinning Schroeder next to Putin I can’t get the organ grinder image out of my mind.) If “Europe” (as an entity) wants to be taken seriously, perhaps Europeans should take vital things seriously, rather than merely being supercilious posers.

    My warnings of the dangers of Russia’s dependence on energy, its vulnerability to energy price declines, and the corrosive effect of energy dependence on its civil society have also been borne out.

    Just call me Cassandra;-)

    January 12, 2009

    A Revisionist Power

    Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 9:35 pm

    In today’s WSJ, Gary Kasparov opines that Russia as an incentive to sow chaos in the Middle East in order to pump up oil prices.   He emphasizes that relying on Russia to take a constructive role in constraining Iran’s nuclear program is particularly foolish.  I advanced the same hypotheses about a year ago here:

    Moreover, it should be noted that uncertainty and the potential for supply disruption can drive energy prices higher. This undermines Russia’s interest in promoting stability in major energy producing regions, such as the Gulf, Nigeria, or South America. Indeed, it may provide an incentive to sow instability in these regions. As a result, there is a reasonable basis for suspicion over the motives behind its policies regarding Iran, as well as other energy producing nations.

    To say the least, Russia’s acute dependence on energy, and its desperate need for higher energy prices makes it very tempting for Putin to stir the pot in the Middle East, rather than try to help resolve problems there.

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