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Thursday, December 14, 2006

Russia's Oil Illusion (one of many)

Supporters of the Russian Communist party wait to lay flowers at the Lenin mausoleum
to mark the 89th anniversary of the October revolution.

The Guardian's former Russia correspondent bursts the bubble of Russia's oil wealth illusion with the following brilliant analysis:

RUSSIAN OIL: A SLIPPERY SUBSTANCE
Moscow's thin coating of petrodollar wealth may wash off all too easily, warns Mark Rice-Oxley

"You won't recognise Moscow," they said. "It's changed so much. It's nothing like the bad old days." Sceptically, I got on a plane and returned for the first time in six years to the city I lived in for much of the 1990s.

OK, so some things have changed: there is more money and more restaurants, bars, shops, nightclubs, supermarkets and malls; more neon, more cars and insufferable gridlock. (Here, surely, is a city crying out for congestion charging or road pricing.)

But more remarkable than the things that have changed are the things that have not. Moscow is still abundantly recognisable to anyone who has visited within the last decade. Off the main thoroughfares are the same gritty blocks of flats, separated by derelict patches of mud and ooze, that pass for courtyards. Away from the bright lights of Mayor Luzhkov's regenerated downtown, the suburbs still fan out like a concrete sneeze, largely devoid of colour (especially green). Retailers still huddle in kiosks.

On the positive side, the metro is still marvellous, and the architecture fabulous. The people have not lost that wicked sense of irony that is so close to our own. Moscow is hard to like but impossible not to love.

Even the inside of the central bastion of power, the Kremlin, appears little altered, with its miles of dimly lit corridors, all fitted out in that heavy-duty vermilion carpeting so beloved of Soviet interior designers. It's eerily depopulated as well. You could shoot a sequel to The Shining here.

Not that Dmitry Peskov is all that scary. Yes, he does, for some inexplicable reason, have a spiked wooden mace on his office desk. But even when he brandishes it, he's no Jack Nicholson; when he pops his head outside his office door to greet us, no one screams. Vladimir Putin's spokesman on foreign affairs is urbane, charming and affable, a chain-smoking apparatchik with a good sense of humour.

That is, until you dissect what he has to say, which is not always so affable. The British press, he says, is "hysterical" about the Litvinenko affair; Russia, Russians and the president himself, Vladimir Putin, are deeply offended at the suggestion of any linkage between the dark goings-on in W1 and this redbrick fortress. About Litvinenko's death, he asks: "A crime? You know it was a crime?" And as for the polonium, well, it can't be Russian, because they know exactly where all their polonium is. (My tea is rapidly losing its appeal.)

Well, the Kremlin, in my experience, always was capable of being tetchy. But in the 1990s it was never this brazen and confident. This is certainly something that has changed in the Putin years. During my last visit to the Kremlin, in 1999, I watched poor old Boris Yeltsin, teetering tsar of a bankrupt kingdom, desperately trying to hold it together during a bilateral with Bill Clinton. The carpets were the same, the leadership totally different.

As one Russian telecoms CEO told me: "Russia is up from its knees and is trying to assert its position in the world, both politically and economically. This giant is waking, and he is trying to get up. Not everyone can accept that."

Of course, it's the oil money as much as the KGB man that has roused the sleeping giant. Inside the Kremlin, the reasoning is that, with all those lovely petrodollars, Russia can pretty much do what it wants. It no longer needs partnerships, allies, foreign investors or western joint venture partners. Now Russian capital is looking to reverse two decades of investment flow. It wants to take on the world, to buy assets overseas.

Peskov was unashamed about the hazards western investors such as BP, Shell and, more recently, Peter Hambro have been experiencing. "In 2006, we don't any more need to attract western companies to come here and explore our gas and oil," he said. "We have lots and lots of money and we don't know what to do with it." (You could start with some new carpets.)

That's all very well. But here's the $64,000 question for Russia: what happens when oil prices are no longer $64, but $40 or even $25? It's an irony not lost on Russians that the biggest thing to have changed in the country in six years actually happened thousands of miles away, on international energy markets.

When I was last here, oil prices scudded listlessly around the $10 mark. The state was weak and the exchequer went bankrupt - just as it did, more or less, in the late 1980s, ruining Gorbachev's perestroika experiment. So what happens when oil prices fall again, as sooner or later they inevitably will? What happens when the Kremlin once again finds it needs a bit of love and affection - not to mention cash - from western investors.

Alexander Reebok doesn't even want to think about it. As a developer of one of the snappiest malls in all Moscow, where lunch costs £200 and a shirt sells for triple that, he has done better than most out of the Russian boom. "If oil prices fell to $15," he shudders, "then we would definitely feel it."

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