2009 March 10 Tuesday
End Of Boom In Russia

Declining oil production and decline in prices for oil and other commodities spell trouble for Russia. Under Putin Russia's rise came from commodity sales. There was no great boom in the private sector across many industries. The decline in the value of the ruble in response to declining oil prices cuts living standards since Russia depends on imported manufacturing goods.

The immediate response from Moscow has not been greater humility, but deepened bitterness and aggression. Predictably, Russia blamed the United States for everything, from the economic crisis itself to instigating the recent gas conflict with Ukraine. The anti-American hysteria in Russian state media is deafening. The hubristic tone of Russia’s leaders is buoyed in part because the crisis is not yet starkly visible in Moscow. Restaurants may not be full, but they are still busy, and supermarkets are heaving with people.

In Russian homes and on the streets, however, the talk is of crisis. Stories of layoffs and reduced salaries, canceled projects, and frozen funding have replaced the chitchat about holidays abroad and new foreign cars. Slowly but surely, the truth is starting to set in: After eight years of economic boom, the growth of Russia’s economy is now slowing.

Real incomes are dropping at the same time utility bills are going up. Inflation is forecast at 13 percent, and the ruble has lost more than 30 percent of its value since last summer. Given that half of all goods Russians buy are imported, the impact on living standards will be dramatic. The long-term risk is that the crisis will undermine private initiative and empower inefficient monopolies and opaque state corporations. The new economic model that could emerge would reflect the worst mixture of the private sector and public sphere: nationalization of debts and privatization of profits. This, on top of Russia’s other chronic problems (which include dysfunctional public services, thriving corruption, and an aging, shrinking workforce), does not bode well for the country.

Russia could use a larger private sector with less state interference. Will the Russian leaders eventually realize they need a bigger private sector?

Vladimir Putin remains popular so far. But will that popularity last as living standards drop?

But the chances of a liberal renaissance as a result of Putin’s social contract unraveling are highly unlikely. There is nothing more misleading than to portray Russia as a liberal-minded society suppressed by a nasty bunch of former kgb agents. The uncomfortable truth is, as Mikhail Khodorkovsky, the jailed boss of the Yukos oil company destroyed by the Kremlin, put it: Putin “is more liberal and more democratic than 70 percent of the population.” And unlike late Soviet leaders who inspired the contempt of the population, Putin even now remains authentically popular.

Russia appears to have hit its second and likely final oil production peak at the end of 2007. Also, Russian natural gas production is probably near or past peak. So while commodity prices will recover Russia will have less to sell when prices start going up again.

Share |      By Randall Parker at 2009 March 10 11:40 PM  Russia


Comments
Ned said at March 11, 2009 7:27 AM:

Russia remains Russia. Under the tsars, under the Communists, under Putin/Medvedev, nothing much ever changes. Authoritarianism, corruption, a foreign policy based on bullying weaker neighbors, demonization of foreign or domestic "enemies" (America, Japan, Poland, England, Germany, the EU, the Jews, take your pick) - it's all so depressingly familiar. A Russian collapse may occur. This will almost certainly result in the accession of a more authoritarian, hypernationalist regime. The bright side is that Russia will be so weak that it will not be able to project power too far beyond its own borders. Central Asia, Armenia, Georgia, Azerbaijan and the Ukraine will all be fair game, but the Russians won't go too far beyond that. They may growl toward Eastern Europe and the Baltic republics, but these nations mostly loathe the Russians, and the last thing that Moscow wants is a confrontation with NATO.

The Vladivostok repression is nothing new. In 1905, Russians assembled peacefully outside the Tsar's palace in St. Petersburg to ask for modest reforms. The Tsar responded by having his Cossacks slaughter them. I read the signs that many of the protesters in Vladivostok were displaying - some of them compared Putin to Hitler, so I guess his popularity has begun to slip, at least in the Far East.

The Ostrovsky article is well worth reading in full. Here are some additional points:

Putin’s most damaging and possibly longest-lasting legacy is that he has played to Russia’s worst instincts. Rather than develop a sense of pride in Russia’s victory over the Soviet Union in 1991, Putin has fostered feelings of past humiliation and defeat, and subsequently a longing for retribution. Many foreign responses haven’t helped in this regard: American hawks who argue triumphantly that their old Cold War adversary is irrelevant have been of as much assistance to Putin as some of Europe’s appeasers.

At the same time, Putin has stamped out any nagging sense of unease and shame over Russia’s bloody past, including Stalin’s painful “Great Break.” Indeed, these days Stalin is described in Russian textbooks as a successful manager who led the country’s industrial transformation. Using state television, Putin has nurtured not only nationalism, but a new wave of anti-Americanism. In the 1990s, these feelings were mainly prevalent in the older generation of die-hard communists. Today, they are firmly grounded in a generation of Internet-savvy 16-year-olds.

When Putin came to power a decade ago, he stirred dormant nostalgia for the lost Soviet empire. “It is an illness,” warned former liberal Premier Yegor Gaidar. “Russia is going through its dangerous stage.” This danger is made all the more real by today’s crises: an imploding economy, expanding economic hardship, and an increasingly desperate Russian state that must rely on repression and nationalism. Whether Russia recovers from the illness or succumbs to it may be as crucial to the world’s security as it was in the year of the Great Break.

Anon said at March 11, 2009 8:36 AM:

Ned,
The Russians can(and have) turned off the gas/oil pipe to Europe. The Europeans are terrified of this. You can be sure that Russia will play this card quite a bit. One major reason that Russia can and has been very anti-American is that those Harvard assholes helped loot Russia after the USSR fell. They are pissed about that, big time.

wolf-Dog said at March 11, 2009 9:29 AM:

I thought that it was the Stanford @#%*&@s who helped loot Russia.

Bentley said at March 11, 2009 1:06 PM:

You have it all wrong. The Russians are trying to help Europe meet its carbon reduction goals, to reduce global warming. Whenever Europe gets too close to exceeding its carbon caps, Russia cuts off the gas pipelines. This is just looking after one's smaller brother, on the part of Russia. Now that the US is shrinking in wealth, credibility and importance, Russia is the head of household around these parts.

We have nothing to fear from a co - hegemony of Russia and China. Both are responsible nations with powerful militaries that can keep third worlders in line one way or another. The old era of the US is over. Mr. Obama understands this and is using the economic crisis to hammer the point home to the American people.

Ned said at March 12, 2009 7:19 AM:

The Russia-EU gas situation has nothing to do with carbon reduction goals and everything to do with money and politics. The issue is complex. From Time Magazine Online:

This New Year proved no exception. In the buildup to Dec. 31, Russia accused Ukraine of having arrears of more than $2 billion on its expired gas contract. Ukraine said it had paid all its debt. Moscow said it would start charging a new price, which it presented as both the "market" price and a "preferential" rate — just $250, a rather sharp increase over the 2008 price of $179.50 per 1,000 cu m of gas. Ukraine said it could pay $201. (See pictures of rich Russians.)

In response, Gazprom, Russia's state-run natural gas monopoly, dropped its preferential offer and said it would have to charge the real market rate of $418. It also insists that Ukraine still owes Moscow $614 million and at 10 a.m. on Jan. 1, turned off gas taps to Ukraine.

Both Russia and Ukraine vow that their spat won't affect gas supplies to the European Union. But within a day, Balkan countries were complaining that the gas flow had dropped, in some cases by 25%. Gazprom says Ukraine is "cynically stealing" Russian gas. Naftogaz, the Ukrainian counterpart of Gazprom, said it had used 21,000 cu m of Russian gas to keep up the pressure in pipes and ensure gas could keep flowing further west. Ukraine had never committed to use its own gas to do that, it said.

The 2009 spat is different in crucial ways from previous years'. Politics is still central to the disagreement. Moscow remains unhappy with Ukraine's pro-NATO President, Victor Yushchenko. That has been bolstered by accusations that Ukraine helped Georgia in last summer's war with Russia over the breakaway province of South Ossetia. Both Russian President Dmitri Medvedev and Premier Vladimir Putin, Russia's real boss, vowed to punish Ukraine for having supplied weapons and personnel that made it possible for Georgians to shoot down Russian planes, including a strategic TU-22 bomber.

But Putin's first concern is cash, especially because Russia's economic indicators are heading south fast. Russia's foreign reserves dropped from $597 billion last August to $438 billion last month. Putin wants to collect as much as he can from the Ukrainian enemy because he just promised his allies in Belarus to cut gas prices three times this year in exchange for political concessions.

Russia doesn't have sufficient gas supplies of its own to sell. Moscow buys gas from Central Asian countries — at $386 per 1,000 cu m — mixes it with its own cheap gas and then sells it to Ukraine. Ironically, these supplies are delivered through a company called Rosukrenergo, 50% of which is owned by Gazprom. In effect, Gazprom is angry at its own subsidiary.

...

Russia ships most of its gas to Europe through the Ukraine. That country is currently a financial wreck and can't afford to pay the Russians right now, at least according to the Russians. Therefore Russia cuts off the gas flowing to the Ukraine, which also cuts it off to Europe. Russia contends that Ukraine siphons off gas from the supplies it sends to Europe. Ukraine denies this. The Europeans get caught in the middle of this dispute, and each side tries to use the Europeans as leverage against the other.

At the heart of the dispute is the stressful relationship between Russia and Ukraine, which has been ruled from Moscow (or Saint Petersburg) for a big part of its history. Stalin, wishing to suppress Ukrainian nationalism, induced a famine in Ukraine in the 1930's, causing the death of millions. Most Ukrainians bitterly resent Russia. However, there is a large Russian minority in the eastern Ukraine which looks to Russia as their protector. (Nikita Khrushchev was part of this minority, although, at the time of the USSR, it didn't matter).

In 2009, US defense expenditures are ten times China's and fourteen times Russia's. They exceed the combined Russia-China total by about six-fold. Russia's military, though improving from the bad old days of the 1990's, is still fairly decrepit. China is increasing her defense expenditures, but her navy remains weak. Neither Russia nor China has much ability to project military power beyond her own borders. Both are hemmed in by land borders with traditional or potential enemies (Russia - NATO, the Islamic countries of Central Asia, including Chechnia, and China; China - Russia, the Islamic republics of Central Asia, India, Vietnam, Taiwan, Japan, Korea).

Bob Boudoir said at March 12, 2009 6:58 PM:

Interesting, Ned. So Russia and Ukraine together are attempting to discipline Europe for past grudges held long beyond their due date. Unbelievable!

One interesting site dealing with this topic is http://www.larussophobe.wordpress.com

The only peak oil that Russia is experiencing is peak incompetence in it oil crews. Alcoholism is the chief hobby of most Russian men, so you can imagine that routine maintenance takes a back seat to hitting the bottle, on all industrial equipment.

Randall Parker said at March 12, 2009 7:45 PM:

Guys,

Also see Jerome a Paris' Ukraine-Russia gas spat: some background and context on The Oil Drum for some more background on it.

shoulder stander said at March 15, 2009 11:59 AM:

Russia is perfectly capable of rebuilding its economy and military. Once China stops wasting money on America, they will start subsidizing Russia. And lemme tell you, $400B per year will go A LONG WAY there. Add a couple of highly intelligent leaders into the mix (or just foreign Chinese management consultants, for that matter) and you will be surprised how quickly and how well they will put their act together. I don't mean that they will turn into Switzerland or anything, but it will be like Russia around 1942 - bad place to live in, but even worse place to have as your immediate neighbor. As Germany, of course, found out circa 1944.

As for whoever said about how nice and peaceful will be the world ruled by the Moscow-Beijing axis, yeah, dream on. Then again, the world will NOT be ruled by that axis, certainly not for long. There are other candidates waiting in the wings. There is the EU which makes no secret of using "green" and "sustainability" as a political cover for seeking world domination, just like Russia once used Communism. And then there is Japan that has more to fear from the Russo-Chinese alliance than anybody else. And of course don't forget America - who knows who will rule here after the Weimarobama era comes to a close.

Oh, and another thing. Randall, how come if I fail to fill out name or email, it counts as a "post" so I am required to wait for a long time until the comment can finally be posted? I mean, was it the Pentagon who developed this genius spam defense? Or who was the brilliant guy behind it?

Randall Parker said at March 15, 2009 1:08 PM:

shoulder stander,

In April or May I'm going to upgrade my blogging software and hope the comment posting problems magically disappear.

Russia as major power: Their oil production is going to decline and their population is declining. Plus, corruption and bad government limit the growth of private industry and talented Russians move abroad. I think their influence has peaked.

Shoulder Harness said at March 16, 2009 2:25 PM:

Randall is right. Russia's population is melting faster than a popsicle on the fourth of July. China doesn't want to subsidize Russia, it wants to take over Siberian mineral wealth and lebensraum. Russia's oil ain't declining, but Russia's ability to get at its oil is getting out of Dodge as fast as its little feet can run.

Every few years, Putin has to lure in foreign experts to get Russian oil pumping again. This is followed quite soon by Putin's expropriation of assets that the foreign experts invested in the oil fields. Suckers again and again. The oil's there. Idiot Russians just can't get it without help, so production follows an interesting curve.

Of course, Russia gets suckered by China every time when China buys Russian weapons systems, then copies them and undercuts Russia's price on the international arms markets. Russia's losing its hard currency trying to support its own currency that nobody wants. For Russia to recover, the price of oil has to go over a hundred US dollars a barrel and stay there. Else, Russia has to make deals with China that result in China owning Russia.

China wins, Russia loses.


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