Gas, black gold and the country’s future

Drawing by Natalia Mikhaylenko

Most observers agree that after making generous promises during the presidential election campaign, Vladimir Putin has finally realized that Gazprom is no longer the state’s cash cow. In October, he warned that the development of shale gas “could seriously restructure the global market for hydrocarbons,” although experts argued it was a game changer long before.

The same observers see all the moves to create a huge energy conglomerate at Rosneft in recent months as Putin’s attempt to shore up the budget to keep his election promises.

The problem is not only that Russia still seems totally wedded to the failed Soviet methods of state-run gigantism, but has simply shifted all its eggs from one basket to another and will remain just as exposed as before to the vagaries of global energy prices.

In this sense, the economy’s structure has hardly changed since the Soviet era, when oil propped up the budget, but the country had to import grain periodically from the likes of the United States, Argentina and Australia to make up for failed harvests due to bad weather and its chronically inefficient agricultural sector.

Before and after the Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok in early September, Prime Minister Dmitry Medvedev and Oleg Deripaska, one of Russia’s richest oligarchs, wrote virtually identical articles in the Financial Times about Russia’s need to “pivot to Asia,” which involves developing Russia’s sparsely populated, poorly developed and often inhospitable Far East Region in order to supply Asia with the resources it needs, especially oil, gas, metals and electricity.

Russia, however, has been here before – the Kremlin was convinced that the commodity boom would last until 2014, despite warnings to the contrary from numerous experts, including even Jim O’Neill, the inventor of the much vaunted BRIC acronym. Once again, the approach is typically Soviet-cum-Russian – grandiose medium and long-term plans and projects that do little to ease pressing problems now.

And once again, there are significant risks. The BRIC countries, three of which are in Asia, are all experiencing significant slowdowns following their unbridled optimism in 2000-2008.

Then there’s energy – the threat to Russia is not just from shale gas and oil. As energy expert Daniel Yergin asks, if global GDP jumps from some $70 trillion now to $130 trillion in just two decades and the number of cars doubles from 1 billion in 2011 to 2 billion, mostly in Asia, will fuel resources be sufficient? If not, Russia will of course benefit enormously.

But the future is unknowable, and another disruptive technology – or technologies – could change the equation fundamentally.

Given its educational level and intellectual history – the Soviet Union produced 27 Nobel Prize winners in economics and science – Russia should be doing much better in diversifying its economy, but as in the Soviet period, modern Russia is finding it astonishingly difficult to move up the value chain. As Ruchir Sharma, head of Emerging Market Equities and Global Macro at the investment bank Morgan Stanley, has pointed out, the Moscow stock exchange lists not even one large global manufacturing company, while none of the top 5 global vodka brands is Russian!

Ultimately, Russia’s problems come down to politics. There are no rich countries of any size that are not democratic.

As Sharma noted, “Russia needs not only a new non-oil economic model. It needs a new non-tsarist mindset.” That means fundamental economic and political reforms – and development of the rule of law and trust in society both between state and people and between the people themselves.

A modest start might have been made. Recently, Russia finally passed a law to allow people to register businesses at home – just 21 years after the collapse of the Soviet Union!

Ian Pryde is Founder and C.E.O. of Eurasia Strategy & Communications in Moscow.

Published by Russia Beyond The Headlines at http://rbth.com/articles/2012/12/04/shale_gas_divides_russia_and_the_us_20801.html

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