Streetwise Professor

January 4, 2011

Cocaine Blues, Redux

Filed under: Commodities,Economics,Energy,Financial crisis,History,Politics,Russia — The Professor @ 10:40 am

In October, 2007, I wrote a post titled “Cocaine Blues” in which I noted the association between oil prices, and Soviet/Russian aggressiveness/obstreperousness/cussedness/hey-ma-look-at-me-top-of-the-worldness.

Anne Applebaum just noticed the connection:

Why the change of tone? Why now? Many complex theories have been hatched to explain it. This being Russia, none can be proved. But perhaps the explanation is very simple: Oil is once again above $90 a barrel – and the price is rising. And if that’s the reason, it’s nothing new. In fact, if one were to plot the rise and fall of Soviet and Russian foreign and domestic reforms over the past 40 years on a graph, it would match the fall and rise of the international oil price (for which domestic crude oil prices are a reasonable proxy) with astonishing precision.

To see what I mean, begin at the beginning: In the 1970s, oil prices began to rise significantly, along with the then-Soviet Union’s resistance to change. The previous decade (with oil prices at $2 or $3 a barrel, not adjusted for inflation) had been one of flux and experimentation. But after OPEC pushed prices up in the 1970s, oil revenue poured in – and the Soviet Union entered a period of internal “stagnation” and external aggression. Soviet leader Leonid Brezhnev invested heavily in the military, halted internal reforms and in 1979 (when oil was at $25 a barrel) – invaded Afghanistan.

Brezhnev was eventually followed by Yuri Andropov, who had the good fortune to run the Soviet Union when oil prices were still high (at his death, in 1984, they averaged $28 a barrel). Andropov could thus afford both an internal crackdown on dissidents and a continued tense relationship with the West. But Andropov was followed by Mikhail Gorbachev, who took over just as prices plunged. In 1986 (with oil down to $14 a barrel), he launched his reform programs, perestroika and glasnost. By 1989 (when oil was still only at $18) he allowed the Berlin Wall to fall, freed Central Europe and ended the Cold War.

Prices fluctuated, but they did not really rise again in the 1990s (plunging as low as $11 in 1998), the years when Boris Yeltsin was still trying to be best friends with Bill Clinton, the Russian media were relatively free and there was still talk, at least, of major economic reforms. But in 1999 (when oil prices rose to $16 a barrel), Yeltsin’s prime minister, Vladimir Putin, launched the second Chechen war, the West bombed Belgrade, and the mood in Russia turned distinctly anti-Western once again.

The fortunate Putin took over as president in 2000, at the start of a long and seemingly inexorable rise in oil prices. Indeed, Gorbachev’s calls for internal reform were long forgotten by 2003 (when oil prices were creeping up to $27 a barrel). The days when Yeltsin pushed for Russia to join Western institutions were a distant memory by 2008, when Russia invaded Georgia (and oil was at $91 a barrel).

The new Russian president, Dmitry Medvedev, did try to sound nicer in 2009 (when oil prices averaged about $53 a barrel), leaving Putin, now the prime minister again, grumbling in the background. Medvedev locked a draconian treason law, invited democracy activists to the Kremlin, denounced the Belarusan dictator and even seemed to some to have liberalized Russian television just a bit.

But now it is 2011, Putin is very much in the foreground, and Khodorkovsky has just been sentenced by a kangaroo court. As I write these words, oil is at $92.25 a barrel.

Is this analysis too simplistic? Sure it is. But I haven’t yet heard a better explanation.

That’s because there isn’t one.

And as Sergei Guriev and Aleh Tsyvinski note in their “Challenges Facing the Russian Economy after the Crisis” (in the volume Russia After the Global Economic Crisis, Aslund, Guriev, and Kuchins (eds.)), this is a big problem for Russia’s future:

Russia’s internal problems relate to the “resource curse.”  If oil prices remain high, Russia will probably delay much-needed economic reforms.

. . . .

But in Russia it is especially problematic [to improve economic and political institutions] as the ruling elite is not interested in building such institutions.  The “resource curse” provides and explanation.

Guriev and Tsyvinski argue that higher oil prices are antithetical to the political reforms that Russia requires to become a truly modern, innovative, entrepreneurial economy and more humane polity.  To which I would add they are also antithetical to the development of a more neighborly, less revisionist Russian foreign policy.

There’s another interesting implication of the rising oil price that hasn’t drawn attention, at least that I’ve seen.  In particular, it will intensify conflict between Gazprom and its customers.  Gazprom has historically sold gas under contracts with prices tied to the price of oil.  But oil and gas prices have diverged in recent years (for a variety of fundamentals-based reasons).  As a result, Gazprom’s big European customers want to change the contract terms and pricing, but Gazprom does not–and that’s an understatement.  The increase in oil prices has increased the divergence, putting Gazprom’s gas prices even more out of line with cash market values.  Which will only crank up the tension between Gazprom and its customers.  And since there is nothing that happens to Gazprom that doesn’t have a political angle, this will result in some political tensions as well.  (EG, how will BFFs Berlusconi and Putin deal with the issue?)

In a nutshell: higher oil prices will stymie domestic reform in Russia and fuel external tensions.  A fun time will be had by all, because Putin et al can’t lay off that whiskey, and let that cocaine be.

September 18, 2008

Cocaine Blues, Revisited

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:39 am

About a year ago, in “Cocaine [Oil] Blues,” I wrote:

The thing about cocaine is that what goes up, comes down with crash. After that shot, you feel invincible, but the comedown is brutal and depressing. That’s what happened to Willy Lee, and what’s likely to happen to Putin-or his successor, if there is one-when oil prices come down, as they inevitably will.

That day may have arrived. Even though oil prices are still higher than they were at the time I wrote that piece, they are well off their historical highs. Moreover, developments in the world financial markets have combined with the decline in the oil price (and exacerbated the decline) to shake the Russian financial system to its foundations. The equity market is in freefall–indeed, trading was halted today in a typically shortsighted attempt to kill the messenger. But the equity market, and the capital market more generally, is not the cornerstone of the Russian financial system. Russian finance is bank-centric. Those banks have always been shaky, and they are showing signs of acute strain in the midst of capital outflows and a flight to liquidity. Major Russian corporations are also highly leveraged, and tap external markets for credit. The credit crisis will constrain their ability to continue to finance their operations.

Sitting here in the US one can hardly crow about the state of the banking system, but as bad as things are here in the US, they are marginally worse in Europe, and substantially worse in Russia.

As oil prices skyrocketed, and billions flowed into Kremlin coffers, and the economy recovered from its 1990s disasters, Putin et all–and the Russian public–wildly exaggerated the nation’s economic strength and economic independence from the rest of the world. Like Willie Lee after his shot of cocaine, Putin (and Russians generally) felt invincible.

But the strength was extremely dependent on a factor largely beyond Kremlin control–the world price of oil. And that factor was–and is–extremely dependent on world economic activity. What’s more, Russia is dependent on external capital flows. The credit crisis strikes at both sources of dependence. Hence, when New York or London feels a chill, Russia gets pneumonia.

This dependence has been, as I have written, exacerbated by self-inflicted wounds–Mechel, BP-TNK, and, most importantly, Georgia. Russia therefore faces a perfect storm of internal and external factors that will seriously challenge Putin’s grandiose ambitions.

The question becomes–Can Putinism withstand the strain?

Recall that the Putinist economy is a “natural state” that uses resource-based rents to buy peace (or, perhaps, merely peaceful coexistence) among rival factions of siloviki. The sustainability of this system is questionable if these rents decline substantially. Moreover, using the cartel analogy I have advanced in the past, systemic crises can raise the discount rates of the rival clans, which can also undermine their incentives to maintain the uneasy cooperative equilibrium, and instead grab while the grabbing is good. Thus, at the level of the “elites” (a polite expression that in this context refers to Chekists who exercise control over the state’s coercive powers), the financial crisis corrodes the monetary glue that binds rival gangs in an uneasy peace. The crisis therefore dramatically increases the odds of an outbreak of conflict among rival clans.

But the problem is not limited to the prospect of interclan warfare alone. One of Putin’s accomplishments has been to reverse the despond of the 90s, and replace it with extremely high social and popular expectations of a prosperous future. In part, this is due to the fact that by comparison to the 90s, anything looks great. In part, it is due to the fact that the economy has without a doubt improved–in large part due to external factors for which Putin et al have been more than willing to claim credit. In part, it is due to the drumbeat of propaganda emanating from the government and its media lackeys. But whatever their source, these very expectations pose a great threat to Putin. If they are disappointed–and the credit crisis and the knock-on effects on Russia’s banking and capital markets dramatically raises the risks of disappointment–Putin’s (and Medvedev’s) popular support is at risk. Bank failures, or difficulties in obtaining credit on now accustomed terms, or a spike in inflation resulting from (a) a decline in the ruble, and (b) massive injections of liquidity in an attempt to prop up the banking sector, could all bring back memories of the 90s, thereby striking at the very rationale for Putinism.

Thus, economic weakening poses both elite and popular challenges to Putinism. Internal and external events over the last months have increased substantially the likelihood of such a weakening.

It may be premature to posit that Russia’s “Black Tuesday” and associated events represent an existential crisis for Putinism. But maybe not. Putin has essentially entered into a Hobbesian bargain with the Russian people. In exchange for a restoration of public order, and ending a war of all-against-all (as many people view the 90s), Putin demanded unchallenged authority and the perquisites of power. A struggle among the elites to protect their own shares of a shrinking pie would give the lie to the image of order that is essential to the maintenance of the system. Indeed, it could well spark a return to actual violence, either among the clans, or directed at any manifestation of popular unrest, that would call into question the viability of the Hobbesian bargain.

As I have written before, the Putinist system is extremely brittle. If it breaks, it will shatter. In a largely non-idealogical system held together by rents and a promise of order and improved living standards, financial shocks are the primary thing that can cause the structure to collapse.

What might transpire in the coming days and months? There is a distinct risk of greater instability. I definitely expect a pronounced ramping up of anti-Western, and anti-American, vitriol–as hard as that is to imagine given the rhetoric already emanating from Russia. But Putin et al have clearly made attacks against the West a major part of their political defense at home. I also anticipate an intensification of domestic oppression, and a clampdown on the few remaining independent outlets for public opinion–including especially the internet. Atomizing the domestic opposition and uniting the country against a common enemy are tried-and-true tools of control in Putin’s Russia.

There is also an air of unreality, and denial, surrounding the Russian leadership today. Medvedev gives anodyne “there’s nothing to worry about” pronouncements; Putin announces large increases in defense spending (at the same time the resources to fund such increases are declining and are likely to decline further.)

Even if Russia muddles through the current situation, there are still reasons to doubt the benefits of Putinism. For those whose horizons are defined by the Soviet period or the 1990s, Russian economic accomplishments of the Putin era do indeed seem nearly miraculous. Those, however, are very low standards indeed. What Putin has essentially created is an economic and social purgatory–certainly an improvement on hell, but hardly the best outcome that can be envisioned, and one that it is difficult to escape for something better. The prospects for moving beyond the purgatory of the natural state to something more dynamic, modern, and self-sustaining are poor.

To use a financial metaphor (which seems appropriate under the circumstances), to me Russia is like a short options position. Limited upside. Large–and potentially unlimited–downside. As North et al point out, the natural state is self-limiting; it must be so to survive, as it cannot withstand the uncontrolled development of competing sources of power and wealth. But, at the same time, it is vulnerable to collapse in the face of increased uncertainty or declines in the rents that hold the system together. We may stand at the cusp of the latter outcome.

October 8, 2007

Cocaine [Oil] Blues

Filed under: Energy,Military,Politics,Russia — The Professor @ 8:44 am

Examining Figure 2 from this article on the Russian energy economy by Gaddy reminds me of the old Johnny Cash song “Cocaine Blues”:

Early one mornin’ while makin’ the rounds
I took a shot of cocaine and I shot my woman down
I went right home and I went to bed
I stuck that lovin’ .44 beneath my head

Got up next mornin’ and I grabbed that gun
Took a shot of cocaine and away I run
Made a good run but I ran too slow
They overtook me down in Juarez, Mexico

The graph depicts Gaddy’s estimates of the energy rents accruing to the Soviet–and Russian–economy. Each of the two spikes in the graph corresponds to a period of Soviet/Russian adventurism. The first shot of oil/cocaine during the 1970s oil shock fueled Soviet aggressiveness around the world. The second oil/cocaine shot–the post-2003 runup in oil prices–is powering Putin’s recent revanchism.

The thing about cocaine is that what goes up, comes down with crash. After that shot, you feel invincible, but the comedown is brutal and depressing. That’s what happened to Willy Lee, and what’s likely to happen to Putin–or his successor, if there is one–when oil prices come down, as they inevitably will.

March 10, 2015

Resource Rents, Russian Aggression, and the Nature of Putinism

Filed under: Commodities,Economics,Energy,History,Military,Russia — The Professor @ 9:00 pm

This nice piece from the WaPo points out the link between oil prices and Russian aggressiveness:

From this perspective, Russia is not so much an insecure superpower as it is a typical petrostate with a short-term horizon that gets aggressive and ambitious once it accumulates substantive oil revenues. Back in the early 2000s when the price of oil was $25 a barrel, Putin was a friend of the United States and didn’t mind NATO enlargement in 2004. According to Hendrix’s research, this is exactly how petrostates behave when the oil prices are low: In fact, at oil prices below $33 a barrel, oil exporters become much more peaceful than even non-petrostates. Back in 2002 when the Urals price was around $20, in his Address to the Federal Assembly Putin enumerated multiple steps to European integration and active collaboration aimed at creating a single economic space with the European Union among Russia’s top priorities. In 2014 – with the price of oil price around $110 – Putin invaded Ukraine to punish it for the attempts to create that same single economic space with the E.U.

I made these basic points eight years ago, in a post titled “Cocaine Blues.”

The graph depicts Gaddy’s estimates of the energy rents accruing to the Soviet–and Russian–economy. Each of the two spikes in the graph corresponds to a period of Soviet/Russian adventurism. The first shot of oil/cocaine during the 1970s oil shock fueled Soviet aggressiveness around the world. The second oil/cocaine shot–the post-2003 runup in oil prices–is powering Putin’s recent revanchism.

There were some follow up posts on the same theme.

This post from Window on Eurasia quotes a Russian social scientist who disputes the importance of oil prices in explaining Russian behavior in the Putin era. Instead, Vladislav Inozemtsev identifies the lack of formal institutions as the characteristic feature of Putinism.

But these things are not mutually exclusive. Indeed, another SWP theme from about this same time period (2007-2008) is that Russia is a natural state in which Putin uses control over resource rents to maintain a political equilibrium. Resource rents permit personalized rule and impede the development of formal, impersonal institutions.

In other words, in Russia, resource rents, and especially oil/energy rents matter, both for its political structure and evolution, and its behavior as an international actor.

November 7, 2013

The Russian Economic Ministry Channels SWP

Filed under: Commodities,Economics,Energy,History,Politics,Russia — The Professor @ 1:34 pm

For years-probably going on 7-I have argued that Russia was in for a long period of economic stagnation.  I referred to Putin’s Hamster Wheel From Hell, on which Russia would just continue spinning.

This prediction was based on my belief that Russia’s “natural state” politico-economic system was inimical to sustained growth.  Yes, the country could experience Cocaine Blues spurts of growth (“took another shot of cocaine and away I run”)-with the Russian economic cocaine being black and gooey instead of white and powdery-but the fundamental institutional deficits would continue to hold it back.  Indeed, the rent seeking and redistributionist policies that resource wealth sustain were-and are-a detriment to the country’s long term prospects.

I stopped writing about Russian stagnation so much, well, because I didn’t want the blog to stagnate along with them 😉  What new was there to say?

Today the Russian Economics Ministry released a forecast that echoes what I’ve been on about all these years:

Russia acknowledged for the first time on Thursday that its economy would lag global growth over the next two decades, setting the stage for an era of stagnation that could threaten President Vladimir Putin’s grip on power.

Economy Minister Alexei Ulyukayev forecast that Russia’s economy would grow at an average rate of 2.5 percent during that period – down from an earlier 4 percent and half the rate Putin targeted before his return to the Kremlin last year.

The downward revision casts Russia as the poor relation in the BRICS group of large emerging markets that includes Brazil, China, India and South Africa. The ministry expects the BRICS to grow at a 5.2 percent clip during that time.

With the ministry expecting global economic growth to average 3.4-3.5 percent, the outlook threatens to make a mockery of Putin’s oft-repeated pledge to lift Russia into the world’s top-five economies by the end of this decade.

And it is still based on an oil price forecast many analysts view as over-optimistic, showing just how much Putin’s Russia, the world’s largest oil producer, relies on not only high, but rising, oil prices to prosper.

Over-optimistic.  Too funny.

Note this isn’t a forecast about a year to two.  This is a forecast that extends to beyond Putin’s departure (likely, anyways, but not absolutely certain-which is symptomatic of the problems).  It is a damning verdict on Russia’s fundamental structural and institutional flaws.  From their own mouths.

One bank analyst sarcastically remarks: “Stagnation is starting to look like a policy goal in Russia.”  Actually, there is much truth in this remark, as I also noted in my writing on this subject going back to ’06-’07.  Autocratic systems like Russia’s that exist to redistribute rents in order to maintain political control and stability hate economic dynamism.  It creates new sources of wealth that can be used to challenge existing power structures.  It creates new groups of individuals, of middling means, who aspire for greater liberties and a political voice.

Meaning that given the choice between stagnation and control on the one hand, and dynamism and a lack of control on the other, Putin and the siloviki will choose stagnation in a heart beat.  Stagnation is a policy goal.  Stagnation means that those are on top stay on top, profiting wildly from their parasitism.  And that, ultimately, is the point.

Until it all falls apart.  Which it will.   The system is strong, in its way (note the utter demoralization of the opposition), but it is brittle.  Dynamic societies can adapt to big shocks.  Stagnant ones not so much.  They tend to shatter into little pieces instead of bending and adapting in response to big shocks.

I’ll sit here patiently waiting for all those soi-disant “Russophiles” who criticized, and at times ridiculed, my earlier prognostications as the product of a Russophobe mind to explain to me how the Economic Minister is similarly Russophobic.  Because he’s just saying what I’ve said for years. Some people are slow learners.  And some are no learners.  Which means I’ll probably be waiting a long time.

March 5, 2012

Electing the Candidate of Stability Will Create Instability Before Long

Filed under: Economics,Politics,Russia — The Professor @ 11:05 pm

Tsar Vlad the Lachrymose has won his electoral bid to return to return to Russia’s presidency.  This result is hardly surprising (though for a while there was some question as to whether he would win in the first round).

What is interesting, and rather difficult to forecast, is how things will play out from here.

Part of the reason that it is difficult to forecast is that what happens will depend largely on how the results are interpreted and perceived.  The likely outcome depends on expectations; expectations depend on perceptions; and perceptions are fluid and subject to influence.  That is, there are multiple equilibria here.

The key issue in the near to medium term is whether it is widely perceived in Russia-and among the elite especially-whether Putin really won decisively (as he claims, winning 60+ percent), or whether a far narrower margin of victory was grossly inflated by fraud.  The more widespread the perception that Putin felt it necessary to manufacture a huge margin, the more vulnerable he will be.  In contrast, if it is widely accepted that his margin was legitimate and largely untainted by fraud, his position will be strong, at least in the near term.

Again, although what happens on the streets will be a good measure of how widespread the perception actually is, that’s not where the real action will take place. The real action will take place within and among the clans, the elites.  But continued protest will foment infighting that could destabilize the structure that Putin has built.

Putin really had a hard choice. A narrow victory would have undermined his position as the balancer among the factions among the elites. A big victory tainted by fraud would also undermine his position.  But whereas a narrow victory could not be spun any other way, Putin at least has a chance of convincing enough people that a large margin was in fact fairly won.  Hence the incentive to commit fraud was intense.

The opposition’s best strategy is to continue to hammer on the fraud issue.  Tainting Putin’s victory, using a judo move of turning the margin of victory against Putin (which would be ironic, given Putin’s judophilia), is the best way of undermining him and destabilizing the equilibrium he has established.

Over the longer term a several questions loom large.

The first is whether Putin really believes his campaign rhetoric that the opposition is subversive and traitorous, or whether that was merely babushka and muzhik bait.  If the former, things could get ugly, especially if the opposition persists in its efforts to accuse him of fraud and corruption-and in its ridicule, especially, for ridicule is deeply angering to an extremely vain man like Putin.  (And indeed, the most recent ridicule focuses on the manifestations of his vanity.)

The second is Putin’s ability to deliver on his promises, or pay the cost of doing so.  His lavish promises-most of which I predicted in the immediate aftermath of the December Duma election-are estimated to cost $160 billion, to which must be added extravagant military spending plans. These promises make him even more slavishly dependent on oil prices, a dependence which has wreaked havoc on his grandiose plans in the past: the cocaine blues phenomenon.  Conditions are quite bullish now, but there are many factors-continuing European economic problems, and slowing Chinese growth-which could turn the market bearish in short order-and as 2008 demonstrates, oil prices can plummet with alarming speed.

This, of course, gives Putin an incentive to stir the pot in the Mideast.  Not only does it feed his anti-US, anti-West obsessions, it helps pay for his extravagance by propping up the price of oil.  But even his stirring would not be enough to prevent problems if demand conditions soften, causing oil prices to soften along with them.

The third is the fact that familiarity breeds contempt.  People eventually tire of even the most popular politician; this is especially true when that politician’s face is ubiquitous, as is Putin’s: cults of personality sour eventually. Moreover, ambitious people grow resentful of a dominant figure that impedes their ability to advance.  And leaders in power for extended periods become tired, bored, and soft, and hence more likely to make mistakes.  They tend to become caricatures of themselves, inviting distaste-and yes, ridicule. Even in the absence of a crisis, these factors cause the phenomenon noted by Enoch Powell: “All political lives, unless they are cut off in midstream at a happy juncture, end in failure, because that is the nature of politics and of human affairs.”

It is only a matter of time before that happens to Putin.  The only real question is when, and how exactly.

All of these factors suggest that Russia is in for a period of political instability.  The only way that it will escape this instability in the near to medium term is if it becomes widely accepted that Putin’s 60+ percent margin is in fact legitimate, and represents a broad popular mandate.  This will allow him to overawe those within the elite contemplating making trouble. (I should note that Putin’s order to Sechin to prepare legislation mandating “criminal proceedings against officials at state companies who fail to report incomes or ties to private businesses” is clearly a preemptive attack on those who might be thinking of mounting a challenge against Putin. He’s not taking chances.)

But that is anything but a sure thing.  Indeed, I think it is relatively unlikely.  The narrative of corruption and manipulation is too well established. And even if that comes to pass, the other factors mentioned above are likely to undermine Putin before too long, leading to instability as the factions and clans jostle for power and spoils.

The great irony, of course, is that Putin campaigned on the theme of stability, and by stoking Russian fears of chaos.  But his personalized, brittle system is inherently unstable.  It does not have the institutional foundation necessary for true stability, and cannot manage transition smoothly.  It has, in Marxist terms, serious internal contradictions that will in the not too distant future create the kind of instability that its designer promised it would prevent.

January 19, 2009


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.

October 23, 2008

Boy, I’m Glad He Cleared That Up!

Filed under: Commodities,Economics,Energy,Politics — The Professor @ 7:10 pm

According to this Interfax report, Vladimir Putin has provided assurances that investment in Russia’s energy sector is risk free!:

Investment in Russian oil, gas sector risk-free, Putin tells Shell CEO

Moscow, 20 October: Russian Prime Minister Vladimir Putin has assured Shell chief executive Jeroen van der Veer that investment in the Russian oil and gas industry carries no risks.

“These concerns can be lifted,” Putin said, commenting on the Shell CEO’s view that Russia had to guarantee good payback terms when foreign companies developed Russian deposits.

“In Jackpot, you can win or lose, and more often than not you lose. But if we draw up a system in which we can fully repay the spending on exploration and not refuse to reimburse you for developing these deposits, then there will be no losses, and there’ll be an opportunity to win big,” Putin said, commenting on the Shell CEO’s remarks.

“We intend to continue to improve regulatory standards in the sphere of natural resources,” the prime minister said.

For his part, Russian First Deputy Prime Minister Igor Shuvalov explained the gist of the discussion between Putin and Van der Veer: “Jackpot carries high investment risks. Our head of government stressed that investment carries no risks.”

I feel so much better now!

I mean really, how is one to interpret to such Orwellian statements? Is it that Putin has an extremely sadistic sense of humor and he just wanted to torment Van der Veer, one his previous victims (Sakhalin II)? Or, perhaps, making such outlandish assertions and then standing back and to observe that nobody contradicts him validates his sense of absolute power. Or maybe, just maybe, he has stared into an (economic) void, and has come to the realization that the vision that the world was at his (and Russia’s feet) when oil was $140+/bbl was chimerical; that his previous cockiness was nothing but a case of the Cocaine Blues; and that Russia desperately needs the likes of Shell and other foreign investors.

Even if the last conjecture is right, hopefully Shell and BP and others will think “once burned, twice–no thrice–shy.” For if Vlad has turned on a dime once, he can do it again. And once somebody has put their money in assets–like oil wells–that cannot be picked up and moved out of Russia, he will have no compunction at expropriating yet again. And he will do so exactly at the moment when the investments are most valuable.

So, Mr. Van der Veer, and your fellow energy CEOs: Don’t be a sucker.

Powered by WordPress