Great Minds
Apropos my last post re Rosneft, yesterday’s London Times reports:
Mounting disquiet among Western investors surfaced in the City last month in a backlash against plans for a $10 billion ( £5.4 billion) flotation on the London Stock Exchange of Rosneft. Some Western institutions might be have been content that this Russian oil giant was created mainly through the controversial state seizure of the assets of Yukos, the energy group once controlled by Mikhail Khodorkovsky, the jailed oligarch. Others were not so sure.
F&C, a leading UK fund manager, delivered a bold denunciation of Russia’s dubious corporate governance regime. So long as this remained opaque and incomprehensible, investors ought to steer clear of the unacceptable risks posed by taking any stake in Rosneft, F&C said. George Soros, the billionaire investor, weighed in with a warning that the float would “raise serious ethical and energy security issues” and risked legitimising Moscow’s expropriation of key parts of Russia’s oil and gas industry.
As distasteful as it is to agree with George Soros, he’s right. (I prefer to think that he is actually agreeing with me–which he would also probably also find distasteful if he knew me from Adam’s Off Ox.) In any event, it is gratifying to note that there is increasing recognition that it is imprudent to plunk down good money in the Russian energy sector. Further, yesterday’s WSJ contained another article indicating that western investors are becoming somewhat chary of plunging into Russian equities due to concerns about transparency and buying a lemon.
Investor disquiet is playing out against a background of growing tension between the US, eastern Europe, and Russia. VP Cheney gave a blistering speech in Vilnius castigating the Russian use of energy as a weapon. Poland has expressed considerable unease at the Russian stance–and is clearly dismayed at German participation in a gas pipeline project that will bypass Poland, thereby ensuring German gas supplies while making Poland (and other EE countries) more vulnerable to Russian extortion. It brings to mind the words of the wise old Pole, Joseph Conrad, who in his perspicacious essay, Autocracy and War, wrote: “The common guilt of the two Empires [Germany and Russia] is defined precisely by their frontier line running through the Polish provinces.” Given the grim history of Poland since the early 17th century, it is not surprising that the Poles are nervous as cats when the Germans and Russians get together and pointedly leave the Poles out.
The western Europeans are also slowly coming to the realization that it is one thing to be an energy importer, but quite another to be an energy importer increasingly beholden to a state monopoly that is as much a political entity as an economic one. Gazprom is attempting to gain ownership and control of gas distribution networks in western Europe. This would put them in a position to impede entry of competitive sources of gas into western Europe, thereby enhancing Gazprom’s market power. Now of course this would also make Gazprom vulnerable to expropriation if it were to act too clumsily–those pipes in Italy and Germany are not going anywhere. It is a safe bet, however, that Gazprom investments in the EU are much less vulnerable to expropriation than western investments in Russia. The EU legal system would (rightly) make it difficult for European states to expropriate. Moreover, it is to be doubted whether any European government would have the stones to act in this way. Thus, the threat of future expropriation is not a credible response to any future attempt by Gazprom to squeeze the Europeans. To keep their strategic options open, Europe should be very leery about creeping Gazprom access and influence today–as they are unlikely to be able to resist it tomorrow. (It probably grates on them, but Ronald Reagan warned them of energy dependence on Russia in the 1980s!)
This said, it is worthwhile to remember something else that Conrad emphasized in Autocracy and War: Russia is never as strong as she looks. Right now, Putin has one card–energy–and he is playing it to the hilt. Sad to say for the many fine Russian people (friends and colleagues) that I know, Russia is painfully weak on every other dimension. It is living a demographic nightmare. Its birthrate is extremely low, and its death rate is astronomically high. Although the former may–emphasize may, as birth rates have remained low in many western European countries (e.g., Spain) despite robust growth–increase in response to the country’s emergence from the calamity of the 1990s, the latter problem appears intractible. The death rate among men in particular is beyond belief–and far outside historical experience for any developed country. The eastern part of the country–the heart of energy production–is depopulating rapidly. Overall, population is contracting at about .5 percent per year. Most economic growth is in the energy sector alone. Energy now accounts for 30 pct of GDP, and this fraction is growing. The rest of the economy is stagnating. The energy boom enriches the state and a few favored oligarchs, but has only limited benefits for the remainder of the populace. The Russian military is a hollow shell.
Putin is playing very aggressively right now, but his hand is not a strong one. Perhaps he can bluff his way to winning a big pot–the western Europeans are particularly likely victims of a bluff. But if they exhibit a modicum of backbone, and the US stands forthrightly by the eastern Europeans and facilitates the development of stronger energy ties with the central Asian republics, Putin and Russia risk another epic humiliation if they continue this strategy.
And another thing. Energy prices go both ways. Things now are similar to circumstances in the early 80s, when everyone predicted that energy prices would only rise. Within a very few years, they had collapsed. Fundamentals are different now, and I don’t forsee an imminent price collapse, but markets do correct. High prices induce entry. They may actually provide a welcome jolt of reality to nitwit Congressmen and parlimentarians and get them to remove self-imposed obstacles to enhancing energy supplies. With such an inelastically demanded commodity, every little bit can have an appreciable price effect. Betting everything on high and rising prices –as Russia is doing–is a sucker’s wager.
