Streetwise Professor

September 9, 2014

Igor Might Cash In, But Only Because the Future Is Bleak

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 7:44 pm

It looks like Igor may get his money:

Allocation of over $40 billion from Russia’s National Welfare Foundation for Rosneft oil giantcould be reasonable, as the investment will be repaid, Russian Prime Minister Dmitry Medvedev said in an interview to the Vedomosti newspaper, released Monday.

“This number only seems so impressive, but this is not [supposed to be repaid] within a year,” Medvedev said, answering a reporter’s question on whether Rosneft’s request for $40 billion is feasible.

“The company needs to keep up production, since Rosneft is a major contributor to the budget. In this regard, we have to help them by maintaining the investment level,” Medvedev explained, adding that the government is considering specific ways of aiding Rosneft.

Now, this is Medvedev speaking, so take it for what it’s worth. But it’s my impression that lately Dmitri’s designated role is ventriloquist’s dummy, and if you looked closely you can probably see Putin’s lips moving. This is at least a trial balloon, and perhaps it is laying the groundwork for an official announcement. It is sufficiently controversial within the Russian government that Putin probably does not want to act precipitously and is putting Medvedev out there to see if the proposal attracts too much fire.

This statement likely reflects a couple of realities. First, Sechin’s influence with Putin. The second is the effect of sanctions. Although the EU and US sanctions have not been as draconian as they might be, the FUD factor has worked. Western capital markets and banks are largely shut to Russian companies, especially those subject to sanctions (like Rosneft). Rosneft has maturing debt to refinance, and as Medvedev says, it needs to invest to maintain production.

Output dropped 1.3 percent in August, as the productivity of western Siberian fields continues to drop as they age.

In another indication of the stress that it is facing, Rosneft (and thus Putin/Russia) actually agreed to let China invest in Russian oil fields on terms never extended to a western firm. The Chinese can bring capital, but not the expertise and technology that Rosneft needs to develop the challenging resources on which has staked its future. And the Chinese usually drive a hard bargain. So even with state money, Rosneft will struggle to achieve anything like the lofty ambitions that Sechin has laid out.

The state money will buy some time for Rosneft. Presumably Putin and Sechin are hoping that the state money will get them through the sanctions, which they likely anticipate will fade away in the near-to-medium term. But the FUD factor will continue to limit Rosneft’s access to western capital and western technology. Yes, energy firms and banks will come back if and when sanctions go away, but on terms that will be far less favorable than had been available pre-Ukraine. Putin’s unpredictability has dramatically raised the political risks of investing in Russia, especially in the energy sector.  Future capital will come with strings, and will be reluctant to invest in long term projects that could fall victim to Putin’s next adventure.

In other words, if Putin indeed permits Rosneft to dip deeply into the National Welfare Fund, it will be an acknowledgement that Russia has burned its bridges with western finance and technology.

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  1. Do you think Putin is sick? As in terminally ill?
    He is certainly acting like a man suddenly in a big hurry with major projects he wants to complete before it all goes dark on him. Will this explain how a guy who has been generally very cautious is now acting with almost reckless abandon?

    Comment by SimpleSimon — September 10, 2014 @ 3:27 am

  2. @SimpleSimon. When I started SWP, I called Putin “a man in a hurry” and offered some explanations why. Two prominent ones were (a) Russia’s awful demographics which mean that the future is bleak, so go for the gusto in the present, and (b) the inherent political instability in an autocratic system. This instability tends to foreshorten rulers’ time horizons.

    That said, it is not outlandish to suggest that he might be physically ill. There are certainly rumors to this effect. I also think that he is acting with abandon because he perceives that there is little opposition from the West, and that this opportunity may close soon, so he is acting quickly to take advantage of this possibly transitory opportunity.

    The ProfessorComment by The Professor — September 10, 2014 @ 11:05 am

  3. The window that is closing is Gazprom’s market power in Europe. There is nothing on the horizon that could give the Kremlin gangsters comparable influence.

    Comment by Ivan — September 10, 2014 @ 12:04 pm

  4. the other issue with Gazprom is that if Putin doesn’t act quickly, someone, in say Poland will realize that they too can cut off gas supplies. The descent into a quasi autarky, along with the sabre rattling a la the new missile that finally seems to work under test conditions, makes Russia look like a really dangerous version of North Korea.

    Comment by Sotos — September 10, 2014 @ 1:49 pm

  5. @Ivan. The window is closing, but it will take a long time. The EU could close the window faster by pursuing the antitrust case vigorously, but they are so petrified by the short term pain that they refuse to act, thereby prolonging their dependence and hence Gazprom’s market power.

    The ProfessorComment by The Professor — September 10, 2014 @ 5:44 pm

  6. SimpleSimon and SWP

    There is no question that Ratface Boodimir Putler Khuylo is a psycho alcoholic. He is a product of the sovok system in which there was not truth or reality except for propaganda.

    Here’s his latest statement:

    “The crisis in Ukraine was caused by our western partners for the purpose of reaminating NATO”

    To the Russian soldiers who are taken to Ukraine to die, Putler feeds his propaganda that they are going to fight the vicious enemy – America.

    But they wind up in Ukraine and become “Cargo 200,” with heavily guarded secret funerals when they come back to Russia.

    Russian army wives have a special term for dead soldiers returning home from the front lines in zinc coffins: they are called “cargo 200” – a phrase that has echoed like a curse to a Russian ear since the days that a tide of zinc packages came in from Afghanistan during the Soviet war of 1980s. The secrecy around their husbands’ deployments “was like a trap created by a schizophrenic”, one of the Kostroma paratroopers’ wives says.

    One of the soldier contractors, who served in Ukraine, described “the longest August” of his life on the front, in a phone interview with Newsweek. What was the worst part? Wounded friends dying in Rostov hospitals; the men in zinc, the “200s” being sent home, and a high risk of becoming one. “When we were on the train to Rostov last month, I had no idea we were to go to Ukraine; we all believed they brought us to a base for the usual routine exercises. If I knew it was for war, I’d have quit back in Kostroma, as I have two little children at home,” the paratrooper of the 331st regiment of Russia’s 98th Guards Airborne Division, says.

    Who was Russia’s main enemy? That answer seemed instantly ready: “America.” In a few days on the front lines under constant fire, the Kostroma paratrooper “dried up down to the bones”, not from the lack of food but from the constant fear of death, he said, that he had never experienced before.

    Earlier that day, his regiment was brought back to the base in Rostov region, to wash in the banya, or Russian steam bath, and have one night of solid sleep. The soldiers had their first chance for a break from battle, for a quick chat with families since they crossed the Ukrainian border on August 18th. So as not to be identified as Russian regular forces, commanders ordered the paratroopers to change into the Western military surplus desert camouflage their wives had to buy for them, with their own money.

    The use of misleading uniforms to sneak into foreign territory for a secret operation does not surprise Russian military experts. One Moscow-based army analyst recalled the earlier “masquerades” or false flag operations under Soviet military doctrine, sending Soviet and Russian commandos dressed as locals in Afghanistan and in Chechnya: “Our forces conducted secret operations in the Middle East and in Africa this way. Putin’s strategy is not unique,” says the analyst who declined to be named.

    While the Russian leaders stuck to their denials, mobile phone chats and social media forums fill up with images of ­the country’s artillery and “Grad rocket” launchers rolling across Ukrainian border. Russian internet users across the country watched videos of army mothers and wives covering their wet-with-tears faces with both hands, begging Putin to free their loved ones “in God’s name”, as well as video interviews with soldiers captured by Ukrainian forces.

    Early each morning, paratroopers’ wives crowded on Nikitskaya Street outside the Airborne Division, waiting to hear more official explanations about their husbands “participating in military drills in Rostov”.

    The women spoke to their husbands on the phone and knew the truth. “My boy asked me to go to church and light candles for his survival, as they were herded back to Ukraine,” one of the terrified wives, Veronika Tsiruyeva, says.

    Comment by elmer — September 10, 2014 @ 8:14 pm

  7. Relevant news:

    Decline in Russian Oil Production Will Last Until At Least 2016-2018, Russian Analysts Say

    Comment by Blackshoe — September 11, 2014 @ 11:33 am

  8. @Blackshoe-And it will last longer, if the sanctions on assisting the Russians in Arctic deepwater production go into effect and last for a considerable period of time.

    The ProfessorComment by The Professor — September 11, 2014 @ 12:53 pm

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