Re: isn't crude oil at $70/barrel the best Russian bailout Wall Street could ever hatch?
Please explain?
Here you are:
From: "Vladimir Shlapentokh" <shlapent@msu.edu>
Date: Thu, 9 Feb 2006
Subject: Russia as a Newborn Superpower: Putin as the Lord of Oil and Gas
Russia as a Newborn Superpower: Putin as the Lord of Oil and Gas
Vladimir Shlapentokh (Michigan State University)
On August 29, 1949, Lavrentii Beria, the head of the nuclear project in the USSR, informed Josef Stalin that the test of the first Soviet nuclear bomb had been a success. At that moment the general secretary knew his country had become a superpower. In the next decades, and even after 1991, Russia's nuclear arsenal ranked second only to that of the United States. However, during the post-Soviet period, the general demoralization of the army, Moscow's inability to modernize the military and the sagging Russian economy forced the leadership and the public to accept the idea that the country had lost its role as a superpower.
In the last few years, the Kremlin has realized that Russia, with its expansive oil and gas resources, can reclaim its superpower status. A few of the president's myrmidons have recently suggested that Putin had actually predicted this turn of events as early as 1997 when he worked as Petersburg's deputy mayor and wrote a doctoral dissertation entitled, "The strategic planning of the natural resources in the region." In any case, on December 22, 2005, at the meeting of the Russian Security Council, Putin proclaimed that the country was back on top and playing a key role on the world stage. A few days later, Moscow decided to settle the score with Ukraine for choosing the West as an ally after the Orange Revolution in 2004. The Kremlin sent an ultimatum to Kiev, forcing it to accept a five-fold increase in the price of gas. One month later, the Kremlin sponsored a rather primitive spy scandal against Britain in the style of the Cold War. It accused the British special services of helping human rights organizations destabilize Russia.
To elevate the country's status in the world, particularly in Europe, Putin and his narrow circle of former KGB agents have had to overcome a number of dogmas. One of them was related to Russia's dependence on the price of oil. As suggested by many Russian and foreign economists, including Putin's economic advisor Andrei Illarionov, the high price of oil could drastically decline in the future. The oscillation of oil prices in the past had often raised near-term economic concerns in the Kremlin. The financial crisis of August 1998, the famous "default," always loomed large on Putin's mind. Only months after taking office, Putin began allocating money to a rainy day fund. By the end of 2005, the so called Stabilization Fund comprised an unprecedented amount of hard currency--more than $35 billion, almost 10 percent of the GNP. Putin's government not only refused to spend money on modernizing Russia's obsolete industries, but even sidestepped the purchase of new weaponry for the army.
Illarionov resigned from his position a few days after Putin's historic speech on December 22. Today, Putin is being advised by a group of experts who believe that the price of energy, considering the rapidly growing economies in China and India, will only rise in the next years. The hope that other sources of energy can significantly replace organic fuel in the foreseeable future is mostly groundless, as suggested by Putin's advisors, because the leaders of the West lack the political clout and determination to finance extensive alternative energy projects. Putin's consultants also believe that developments in nuclear energy, as well as drilling in Alaska, will remain hamstrung by powerful oil companies and environmental movements in the West.
A second dogma that once dominated the Kremlin and the nation asserts the "backwardness" of Russia as a country where the export of oil and gas makes up 55 percent of total export revenues. The notorious "Dutch disease" --a country's dependence on the export of raw materials-- will seemingly never allow Russia to join the club of civilized nations, as Illarionov suggested before his departure from the Kremlin. This dogma has been entrenched not only in the minds of intellectuals[*], who were envious of the post-industrial progress in the West, Japan and South East Asia, but also ordinary people. According to surveys in previous years, one third of the population declared its concern that the West had been luring Russia to become its "raw materials appendage" in order to thwart competition in new technologies.
Though strong in the past, the dogma of backwardness is now being rejected by the Kremlin. Putin's team sees its enormous oil and gas reserves as a blessing that will allow them to solve many of the country's problems without increasing the production of manufactured goods for export (an unrealistic goal for a country that is unable to make structural economic reforms). However, the high export revenues have allowed Moscow to forget about the times when it had to scrounge for money from world financial organizations. Moscow can now boost military expenditures, pay salaries and pensions regularly, increase social benefits, make some improvements in infrastructure and refurbish not only Moscow and Petersburg, but all major cities in the country.
Petrodollars have made many Russians happy, including the gigantic state apparatus, army and FSB generals, people in media and political technology, oppositional politicians, as well as the hundreds of thousands of people who own or manage construction projects, five-star restaurants and hotels, high-class hospitals and the numerous boutiques and other luxury services. All of them enjoy a high style of life that can only be dreamt of by many Americans who consider themselves wealthy. In return, the prosperous ruling class faithfully serves the regime and vehemently supports the new cult of the state, as well as its imperial xenophobia and anti-American ideology, which are inconspicuously fueled by the Kremlin. While all of these people would prefer a continuation of Putin's regime in 2008, they would readily accept any of his decisions.
Even ordinary Russians are beginning to let go of the glory days of the Soviet Union and its grandiose nuclear and space projects. The fact that the energy industry represents the backbone of the Russian economy no longer generates the same level of public disdain. Almost all Russians understand that the price of energy, and not the dynamic of the GNP, literally determines (if to varying degrees) the well being of each Russian citizen. The price of oil itself has become a sort of national symbol in Russia, a country that has been searching for a national idea for twenty years.
A great majority of the population (80 percent in the country, 94 percent in Moscow and Petersburg) side with the Kremlin in the conflict over gas prices with Ukraine. This support should be attributed not only to the nation's imperial sentiments and its refusal to acquiesce to Ukrainian independence, but to material concerns as well. As the public sees it, the Ukrainians' demand for low gas prices is like asking Russia to finance an apostate nation at the expense of the Russian people.
With special pleasure, Putin's Kremlin has also overcome the widely held belief that the country will never regain the superpower status it achieved after the Second World War. The ruling elites have made an important discovery: With its natural resources, Russia is in fact a superpower. Putin said this openly when speaking to the Russian Security Council. He substantiated his views with the argument that the production of energy is "the moving force of world economic progress" and "a major condition of international stability." Putin suggested that Russia is "a world leader in energy." In this way, he enlisted the state gas company "Gasprom" as a major weapon in his foreign policy. With growing self-confidence, Putin can afford to ignore the West's lamentation about Russia's withering democracy and, among other things, its complaints about a new law that restricts the independence of NGOs. Of course, with the demand for energy growing around the world, Putin's reliance on oil is not unique. Several countries, including Iran and Venezuela, try to use their oil reserves as weapons in international relations.
What is more, Putin has realized that a strong oil and gas sector is a more flexible and effective weapon in international relations than nuclear missiles. This became clear during Russia's confrontation with Ukraine. It is obvious that the Kremlin cannot scare Kiev or Tbilisi with a nuclear strike, but it can threaten to cap its gas pipes.
Sergei Ivanov, the minister of defense and possible heir to Putin, revealed the new confidence of the Russian leadership in a December 2005 interview with the popular Moscow newspaper Moskovskii Komsomolets. Though he is known for having mild manners and a Western-style public image, he recently took an ostensibly aggressive tone, reciting the old postulate of imperial Russia that "in the contemporary world only power is respected." He talked contemptuously about the Russian liberals as the enemies of the army and special services, as well as "those crazy democrats who believed that foreign countries will help us." He praised the Russian church, an openly xenophobic and anti-Semitic institution, as "a genuine institution of the people." In another interview with a leading news agency, Ivanov went even further with his belligerent statements, suggesting that Russia may revise its borders with Ukraine and take back Crimea if Kiev increased the lease fee Russia pays to keep its Black Sea Fleet in the Sevastopol port in Ukraine's Crimea peninsula. The West felt the tremors as Moscow blackmailed Ukraine over the price of gas on the eve of the New Year in order to achieve its political goals. This deed has only one precedent in postwar history--the punitive action of OPEC against the Western countries for supporting Israel in 1973.
The conflict with Ukraine marks a significant change in Russian foreign policy. As the State Duma expert Dmitry Kulikov declared, Moscow's ultimatum to Kiev "was the first serious act of Russian foreign policy." Of course, we should not assume that Moscow will reject its policy of cooperation with the West in many areas. In no way does Putin want the Kremlin to be perceived as a permanent source of danger to the world, as it was during the Cold War. He personally appreciates his membership in the G8, as he underscored during a press conference on January 31, 2006.
Putin has a different role in mind. With the de-privatized fuel industry now under the Kremlin's control, following, as Illarionov suggested, the Venezuelan scenario, Putin is indeed "the lord of oil and gas." In this capacity, he intends to provide energy to the world, and, to paraphrase his words only slightly, "guarantee international stability and the survival of our civilization," but, of course, on his own conditions. It is evident that these conditions include the restoration of Russia's supremacy in the former Soviet space. Only a few weeks after the conflict with Kiev began on January 22, 2006, explosions severed a major gas pipeline, as well as a reserve line and an electricity line that supplied Russian energy to Georgia. While Moscow vehemently denied any foul play and attributed the breaks to unnamed terrorists, Tbilisi is confident about "the Kremlin connection."
We can only guess at what new aggressive actions will be taken against the former Soviet republics in the near future. Should Moldova, for instance, be concerned about the mobster-like threats made by Anatolii Chubais, the head of Russia's Unified Energy Systems, who could use the supply of electricity as a weapon against foreign countries? In January 2006, in the aftermath of Putin's December speech, Chubais, a former democrat and now a faithful servant to Putin, promised Moldovan President Vladimir Voronin that his country would face "big problems from now on." This response followed the sentencing of Chubais's former aid in a Moldovan court.
Of course, Russia's actions outside the former Soviet space are more potentially consequential to the international community. Will Russia thwart the Western efforts to stop Iran from developing nuclear weapons or to denuclearize North Korea? Will Russia perpetuate its unfriendly stance toward Poland? Are the chances for an accommodation with Japan on the fate of the Kuril Islands becoming slimmer? In any case, the world should know that a new superpower has been born with oil and gas as a formidable weapon.
Acknowledgment: The author wishes to thank Joshua Woods for his editorial contribution to this article.
[*] Russia’s Oily Future
By Moisés Naím
Page 1 of 1
January/February 2004
Overcoming geology, not ideology, will become Moscow’s greatest challenge.
Russia's future will be defined as much by the geology of its subsoil as by the ideology of its leaders. Unfortunately, whereas policymakers can choose their ideology, they don't have much leeway when it comes to geology. Russia has a lot of oil, and this inescapable geological fact will determine many of the policy choices available to its leaders. Oil and gas now account for roughly 20 percent of Russia's economy, 55 percent of its export earnings, and 40 percent of its total tax revenues. Russia is the world's second largest oil exporter after Saudi Arabia, and its subsoil contains 33 percent of the world's gas reserves. It already supplies 30 percent of Europe's gas needs. In the future, Russia's oil and gas industry will become even more important, as no other sector can be as internationally competitive, grow as rapidly, or be as profitable. Thus, Russia risks becoming, and in many respects may already be, a “petro-state.” The arrest of oil magnate Mikhail Khodorkovsky sparked a debate over what kind of country Russia will be. In this discussion, Russia's characteristics as a petro-state deserve as much attention as its factional struggles.
Petro-states are oil-rich countries plagued by weak institutions, a poorly functioning public sector, and a high concentration of power and wealth. Their population is chronically frustrated by the lack of proportion between their nation's oil wealth and their widespread poverty. Nigeria and Venezuela are good examples.
That Russia has lots of oil is old news. What's new is the dramatically enhanced role that changes in Russian politics, oil technology, and energy markets have given to its petroleum sector.
[...]
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