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Tuesday, November 28, 2006

The Utter Failure of Putin's "Energy Superpower" Regime

Not only has Vladimir Putin failed miserably to deliver on his promised "law and order" platform, he's also utterly failed to capitalize on Russia's energy resources, as Edward Lucas makes clear in the following post. Yet, Russians continue to favor this malignant little troll with 70%+ approval ratings in polls. In other words, they are getting exactly what they deserve.

EUROPE has accustomed itself to a version of Russia and of Russian policy which goes like this: post-Soviet Russia is not only awash with oil and gas, it is using that energy wealth to promote its great-power ambitions through bullying and bribery. But what happens to the calculation if Russia is not an energy bully, but an energy beggar?

Russia reckons it will be short of 4.2 billion cubic metres (bcm) of gas next year—enough to fuel a couple of small countries. Alan Riley, a competition lawyer, argues in a report for the Centre for European Policy Studies that Russia's gas shortfall will increase to 126 bcm a year by 2010, only slightly less than Russia's annual exports to the European Union. Vladimir Milov, a gutsy former energy minister who runs one of the few independent think-tanks in Moscow, agrees.
At first sight this sounds preposterous. Russia’s gas reserves amount to 47 trillion cubic metres, a colossal amount. But like so many things in Russia, the gas industry, which means mainly a state-run monopoly, Gazprom, is as wasteful as it is wealthy. And Gazprom is so secretive that outsiders find it hard to say whether the wealth or the waste is winning.

Russia has not developed a big new gas field since the Soviet Union collapsed, and those it inherited are depleting fast. The pipes are clapped out (just over half are more than 20 years old). The compressors are so inefficient that they waste 42 bcm a year. Yet, for political reasons, the government is pressing ahead with “gasification”—the extension of gas supplies to private households. That means more domestic demand, just as supply is falling.

Gazprom's finances are notoriously murky, but there is evidence enough that revenues have long been siphoned away by intermediary companies with anonymous beneficial owners. Costs are colossal by world standards. Much money goes on activities such as yachts, property and sporting events, which investment bankers primly describe as “non-core”. Gazprom owns, for example, a large chain of hotels (remarkable, when your correspondent stayed in one, for the richness of the fittings, the indolence of the large staff, and the absence of guests).

In theory Gazprom can develop new fields. In practice it needs foreign help, but it hates to see the foreigners sharing ownership, which bogs down negotiations. The rich Shtokman field beneath the Barents sea was discovered in 1988, but exploitation has been slowed by technical challenges formidable enough even before Russia’s capricious and xenophobic investment regime takes its toll. Foreign companies might risk a billion dollars here or there in Russia, but in the present climate of uncertain property rights they are not going to commit the tens of billions needed to develop a whole new gas field.

Gazprom’s main stopgap is to buy gas from Central Asia. Leaving aside the irony that a country as gas-rich as Russia should need to import gas at all, there are particular snags here. The implied quantities are huge. Purchases from Turkmenistan are supposed to rise more than tenfold, to 80 bcm a year, by 2009—and the Turkmen gas industry is even worse-run than Russia’s own. Independent producers inside Russia might offer some relief, save that Gazprom is twitchy about allowing independents to use its pipelines. Instead, it likes to buy them up, preserving its monopoly. When that happens they tend to fall to Gazprom’s own woeful standards of inefficiency.

Already Russia is cutting back gas supplies to soft targets such as Belarus, and trying to raise prices wherever it can. Things will get worse before they get better. A badly-needed new power plant in St Petersburg is not yet running because there is no gas arriving to fuel it. If Mr Riley is right, this will be a fascinating winter, and a most uncomfortable one for some households. Will Vladimir Putin decide to freeze his own voters, or those of neighbouring countries? One choice risks provoking a political explosion, the other a diplomatic one. If you live anywhere between Aachen and Amur, do check your stocks of candles and coal.

1 comment:

penny said...

Like Chavez, another oil funded fascist thug, the wheels will come off Putin's wagon in due time. The morally uncompromised have withheld investments on principle. The morally compromised will invest tenatively only to the point that their fear vs greed permits short term. Russia's neighbors will forge a way around Russia's oil and gas monopoly eventually. In the global economy, you need good corporate governance, transparency, and foreign investment to prosper. Russia has none of these. one of the few Russian that really understood all of the above is rotting in Siberia.

In a not so surprising development, it looks like things aren't woking out for Chavez after all:

When the complacent Russian sheeple have their subsidies diminished, maybe, just maybe, they will get off of their knees and take it to the streets like the people in Caracas.