Streetwise Professor

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?

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  1. Very true. When one ass-clown makes decisions for a whole country (be it Bush or Putin or Obama) – Good luck with that! There is risk in any new undertaking. You need independent agents making individual decisions to diversify this risk. The expectation of one big bet winning 100 dollars with probability half is same as the expectation of 100 independent bets each winning 1 dollar with probability one half. But I would always take the second bet 🙂

    Comment by Surya — January 19, 2009 @ 1:33 am

  2. Interesting to note where criticism is coming from nowadays. I don’t recall Tsygankov being much of a Putin-skeptic in the past.

    Or observe this, from Yuri Mamchur of Russia Blog, whose view on Russian developments has generally been positive:

    Comment by Tristan da Cunha — January 19, 2009 @ 9:40 am

  3. Yes. I was surprised by Tsygankov too. By my recollection he was always pretty Putin-friendly, and sympathetic to the Russia-is-back meme.

    The ProfessorComment by The Professor — January 19, 2009 @ 11:47 am

  4. Assumption No.1
    Taking at face value Tsygankov’s assertion that tying up world energy markets comes before diversification (as opposed to being pursued simultaneously).

    Comment by Da Russophile — January 19, 2009 @ 5:04 pm

  5. Professor, your comments are very striking and incredibly perspicacious to me. Russians have not come to terms with their past. The sovoks altered and erased it. Stalin is number one on the hit parade. It’s not just Pudding and the siloviki who have learned nothing and forgotten nothing. It’s also the Russian people – or at least the majority of them.

    Comment by elmer — January 22, 2009 @ 11:11 pm

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