Archive for the ‘Russia’ Category

The chutzpah!

Putin Defends Ukraine’s Jews, Slams Ukraine’s Jewish Oligarchs

Cites Ukraine’s appointment of oligarchs as governors as reason for unrest
Yesterday morning, Vladimir Putin, president of the Russian Federation, gave his first post-Crimea invasion press conference. What rapidly became apparent, as he slouched in a gilded hall studded with Russian flags, was that the combination of Putin’s surreal interpretation of events with his lavishly baroque epistemology has given form to some bizarrely contradictory dualities in his worldview. He railed against a politicized judiciary selectively prosecuting the enemies of the chief executive, overlooking that it’s exactly what the Russian Judiciary does routinely; he argued the change of government in Kiev was an armed coup, but the one in Crimea was entirely legitimate. The usage of force by Ukrainians is unjustified, but completely justified from the Russian side.

The Russian leader also insisted that Ukraine’s deposed president, Viktor Yanukovych, retains authority as the country’s elected head of state, but also described him as a corrupt failure whose political career was finished. Putin also admitted that he understood well popular demands for “cardinal changes in government” by Ukrainians—demands, he asserted, that simply stemmed from their “having become habituated to switching one thief and opportunist for another thief and opportunist.” He spat out the word “opportunist” in disgust.

Putin underscored that this radical discontent—what political scientists refer to as a democratic deficit—was the reason Ukrainians were no longer interested in participating in regional elections, and argued the appointment of oligarchs as governors of the Eastern Ukrainian provinces, not the Russian tanks that preceded them, is the reason for the unrest there. “Of course people do not accept this,” Putin thundered—a message which was directed less at the Ukrainians than at his own oligarchs, who shouldn’t entertain any ideas about becoming governors themselves.

And then Putin offered an intimate glimpse into the highly personal power politics playing out among the relatively tiny and tightly interconnected group of oligarchs—all men of a similar generation—who together control vast swaths of the post-Soviet economies. Putin called out one, `monsieur` Ihor Kolomoyskyi—either the second or third richest man in Ukraine and the newly appointed governor of Dnepropetrovsk, the country’s industrial hub—by name. “This man is a unique opportunist,” Putin remonstrated.

Kolomoyskyi is not unique, but he is a figure of collosal wealth and importance in Ukraine’s industrial behemoth of Dnepropetrovsk. Along with his friend and fellow oligarch Vadim Rabinovich, Kolomoyskyi also founded the successful Jewish News One TV station. He has also helped fund and recently inaugurated the Dnepropetrovsk Jewish cultural center, the biggest in the world. In a press conference that Kolomoyskyi held four days ago upon being appointed governor, he admitted that he had been put into place as part of a campaign of “expanding government outside of the purview of traditional politicians.” He also acknowledged that part of his job as the newly appointed governor of Dnepropetrovsk was to “tamp down separatism,” and spoke out against a century of Russian-driven partition of the land. Many Ukrainians assume that he had taken up the position mostly to protect his myriad business interests from being expropriated by the new regime.

Putin, however, had his own axe to grind against Kolomoyskyi on behalf of his friend Roman Abramovich, one of Russia’s wealthiest men. “He even conned our own Abramovich,” Putin asserted. Alternating legalese with tough guy slang, he explained Abramovich had transferred Kolomoyskui millions for a contract several years ago, and Kolomoyskyi other did not finish the job but pocketed the money. “I myself asked Abramovich why he did it later, and he told me he did not think it possible that someone would play him like that,” Putin explained. “This is a real life story. And that is the sort of bounder they wish to make governor!” The point to this brackish bit of business gossip, to put it as crudely as Putin did, was that the Ukrainian Jewish oligarch Kolomoyskyi out-Jewed Russia’s own top Jewish oligarch, Abramovich.

Putin then transitioned his rhetoric smoothly back to the “masked and unidentified armed groups of anti-Semites” running around Kiev with machine guns. Any resemblance to masked and unidentified armed men running around the Crimea with machine guns went unmentioned. What followed was curious display of Putin’s exceedingly odd usage of philo-Semitic tropes to appropriate the Soviet legacy of rescuing all Soviet people, but most especially the Jews, from the specter of fascism.

That the black and red flag of the Ukrainian Fascist partisans of UPA (The Ukrainian Provisional Army) flew over the Maidan is an undeniable fact, but the actual number of fascists in the Kiev streets remains a point of contention. The logic of the Russian chauvinist position in this crisis is that the Ukrainian opposition is composed entirely of Ukrainian fascists, neo-Nazis and Banderovtsi—partisans of the nationalist hero Stepan Bandera—frothing to commit pogroms against Jews as well as ravish Russia’s daughters and outlaw the usage of the Russian language in Odessa, Donetsk and, yes, the Crimea. In Eastern Ukraine, such sentiments amongst ethnic Russians are rooted in memories of World War Two. When expressed by politicians or government propaganda channels in Russia proper, they are manifestations of irredentism and political expediency.

Related: Before Crimea Was an Ethnic Russian Stronghold, It Was a Potential Jewish Homeland
After Yanukovych, Maidan’s Next Fight Will Be To Preserve a Ukraine Safe for Minorities

By sending troops into Crimea, Russian President Vladimir Putin has amplified Ukraine’s turmoil and set off the most dangerous crisis Europe has seen this century. Less noted, however, is that the move portends a significant change in Russia’s domestic politics. Putin has abandoned the strategy that has underwritten his political dominance for the last 14 years. And in doing so, he has bet the throne on an approach that is likely to fail.

The secret to Putin’s past political success is simple: Presiding over years of rapid economic recovery, he could claim credit for restoring stability after Russia’s chaotic transition from communism. During his first two presidential terms, from 2000 to 2008, the country’s growth rate averaged seven percent a year. In fact, that success mostly reflected factors beyond Putin’s control, including surging oil prices and a flood of liquidity into emerging markets. But it did also require a commitment to open borders, integration into international institutions such as the World Trade Organization and the Organization for Economic Cooperation and Development, cordial relations with Western business circles, and efforts to project an image of modernity and increasing sophistication. A 13 percent flat income tax and a conservative macroeconomic policy did not hurt.

As Russians’ incomes soared, so did Putin’s popularity. His consistently high approval ratings — since 2000, they have never fallen below 60 percent on polls conducted by the Levada Center, a Russian nongovernmental organization — have rallied Russia’s fractious elites to the president’s side and kept naysayers at bay. The global financial crisis in 2008–9 threw Putin’s strategy into doubt. By massively boosting spending, the government managed to protect Russians’ living standards. But in the last two years, the public has recognized that the growth rates of Putin’s first two terms are not returning. Since late 2011, quarterly growth has fallen steadily from 5.1 to 1.2 percent a year.

Recharging the economy would require a serious commitment to safeguarding property rights and attacking corruption. As stagnation deepened, rumors circulated in Moscow last year that Putin would reinstate his competent and respected former finance minister, Alexei Kudrin, and allow him to introduce political and economic reforms. But that did not happen.

Instead, with the invasion of Crimea, Putin appears to have settled on a Plan B for mobilizing support. Whereas the first approach demanded integration, the second embraces isolation. It involves appealing to emotional nationalism, berating the West, and rallying the public against supposed attempts at cultural imperialism. Plan B is not entirely new. In fact, Putin has been flirting with it since the mid-2000s. Since then, the two approaches have coexisted awkwardly. He has managed to slip back and forth between aggressive rhetoric — for instance, comparing NATO foreign policy to that of the Third Reich — and signing deals with Wall Street executives.

But with Russian troops now in Simferopol, Putin appears to have doubled down on nationalism and given up on rapid growth. The great champion of “stability” has taken to tearing up the map of Europe. Whatever the ultimate outcome of the recent intervention, it has already done serious damage to Russia’s economic prospects.

The military operation itself will not cost much, although perhaps more if Putin extends it to other regions of eastern Ukraine. Subsidizing the Crimean economy — and perhaps even that of Ukraine’s Russian-speaking rust belt — is not even the main concern. Nor is the ruble’s fall, which the Central Bank slowed on Monday with a frantic raise in interest rates and the sale of $12 billion of currency reserves. That will drive up prices of imports, which will surely anger consumers, but it will help exports and ease pressure on the budget.

The real problem is the potential medium-run fall in foreign investment and acceleration of capital flight. Wars tend to elevate perceived political risk — and that goes double when leaders’ decisions appear erratic. Western sanctions, if they materialize, will add to the discomfort. Few investors will want to tie up money in companies whose executives may be banned from travel to the West, whose accounts may be frozen, and whose board meetings may be upstaged by the home country invading another of its neighbors.

Putin may have discounted such economic consequences based on the short-lived and moderate international reaction to Russia’s 2008 war with Georgia. But that was quite different. Russian troops intervened only after Georgian artillery fired on Russian peacemakers and local South Ossetian civilians. In the Crimea, no one had shot at the locally stationed Russian troops with so much as a peashooter. The Ukrainian case looks more like unprovoked aggression. It also starts to look like a pattern — one that already has other countries with large Russian-speaking minorities, such as Estonia, Latvia, and Kazakhstan, worried.

If Putin has decisively embraced anti-Western nationalism as his mobilizing strategy, evidence suggests that it will not work.

For one thing, Russians, in general, do not like foreign adventures. A survey one month ago by the polling firm VCIOM found that 73 percent of respondents were opposed to Russia getting involved in Ukrainian politics. Not even supporters of the ultranationalist Liberal Democratic Party or the communists favored intervention. Of course, at the time of polling, Putin’s supporters might have thought that he favored staying out as well.

No polls have yet appeared on the Crimean operation. When they do, we should expect a temporary rally. Still, after previous comparable incidents, the immediate boost has been fleeting. In late 1999, Putin, then prime minister to President Boris Yeltsin, sent troops into Chechnya and saw his approval rating leap to 79 percent. By June 2000, it had tumbled to 61 percent. In March 2000, 73 percent of Russians favored continuing the military operation that Putin had started. By January 2001, that had fallen to 38 percent, and a majority already supported negotiating with the Chechen guerrillas. Russians rallied behind Putin in 2002, when Chechen terrorists took hostages in a Moscow theater. But just two months later, the six-point jump in his rating had evaporated. Similarly, as Russian troops fought in Georgia in September 2008, Putin’s approval surged by eight percentage points. Yet by February 2009, it had fallen back below the initial level.

Second, playing the anti-Western card may also work less well than Putin imagines. Strange as it may seem, Putin is actually much less popular among Russians who are hostile toward the West than among those with pro-Western views. After 13 years of hobnobbing with former Italian Prime Minister Silvio Berlusconi and German Chancellor Angela Merkel, it is hard for him to play the anti-establishment nationalist. In a November 2012 Levada Center poll, 72 percent of those who said they felt “very positive” about the United States approved of Putin. Among those who said they felt “very negative” about the United States, his approval rate was only 42 percent.

By reaching out to Russian patriots, Putin risks splitting his elite supporters. For his friends in business, the Ukraine operation creates enormous headaches — from potential sanctions and travel bans to market volatility and tighter Western credit. They will see the vulgar nationalism of some of Putin’s other friends costing them money and respect, and Putin’s unpredictable behavior threatening their investments. Their loyalty will become more conditional than it already was. And as economic conditions worsen, protests are likely to break out among ordinary Russians.

Putin’s Crimean adventure thus promises to accelerate the degeneration within his regime that started with the December 2011 demonstrations and the economic slowdown. Even if the Kremlin finds a quick and face-saving exit, it will have to juggle a multiplying series of challenges — dealing with the Ukrainian aftermath, minimizing international fallout, reassuring other neighbors, managing economic turbulence — just as differences of opinion within the inner circle make action more difficult.

Read the article online here:

Or money talks…

Khodorkovsky Pardon Underscores Russia’s Special Ties with Germany

Mikhail Khodorkovsky showed an affinity for things American during his glory days as CEO of Yukos Oil Co. in the early 2000s. He discussed selling Yukos to Exxon Mobil Corp., acted as an adviser to an energy investment arm of the superconnected Washington-based private equity firm Carlyle Group and donated $1 million to the Library of Congress at the request of then–First Lady Laura Bush. But he has German politicians to thank for his freedom after ten years in Russian prisons on dubious charges of fraud and embezzlement.
Hans-Dietrich Genscher, the 86-year-old former foreign minister who oversaw German reunification in 1990, reportedly laid the groundwork for Vladimir Putin’s presidential pardon of Khodorkovsky with two-and-a-half years of quiet negotiation. He flew personally to pick up Russia’s most famous prisoner from his camp near the Arctic Circle and whisk him away to Berlin; on German television, Genscher described the mission as “a humanitarian action.” Chancellor Angela Merkel did not hide her own participation in the release. Genscher “worked successfully on possibilities for a solution with a great level of commitment and the support of the chancellor,” she told a news conference shortly after Khodorkovsky’s arrival on German soil.
Genscher, who was Germany’s top diplomat from 1974 to 1992, crafted an elegant compromise between two stubborn antagonists, Khodorkovsky and Putin. The deposed magnate evidently agreed to leave Russia, stay away from politics and not fight to reclaim Yukos assets, most of which were scooped up by Russian state oil company Rosneft. Putin commuted Khodorkovsky’s sentence without a customary admission of guilt, a step that the former billionaire said would have put ex-Yukos colleagues at risk.
Merkel had reasons of her own to press Putin for a human rights concession. She has long been caught between a German business community pressing for warmer ties with Russia and civic groups that abhor the country’s autocratic ways. In 2012 a Bundestag dominated by her Christian Democratic Party passed a motion “expressing concern” about Russia’s law forbidding “homosexual propaganda.”
The timing was also ripe for Putin to toss a bone to Western neighbors enraged over Russia’s torpedoing of a free-trade agreement between the European Union and Ukraine, which provoked huge popular protests in Kiev. Khodorkovsky’s abrupt late-night release came just four days after Putin announced that Russia would buy $15 billion in new Ukrainian bonds, staving off for a few years the threat of bankruptcy for the government of President Viktor Yanukovych. The release also came seven weeks before the opening of the Winter Olympic Games in Sochi, Russia. Putin personally lobbied for Russia to host this spectacle, which official media have trumpeted as an event of national prestige. Two terrorist attacks that killed 30 people in the southern Russian city of Volgograd on December 29 and 30 underscored the vulnerability of the Games, and Russia generally, to terrorism, and hence Putin’s need for international moral support.
But the Russian leader’s concession to the German establishment has much deeper economic roots. Americans like to assume that Washington speaks with the loudest voice on any foreign affair, but the U.S. is something of an afterthought for Russia, being only its eighth-largest trading partner. The EU remains Russia’s economic lifeline, and Germany its gateway to the EU.
Germany on its own holds sway as both the top market and supplier for Russia. It bought €39.8 billion ($54.5 billion) in Russian goods and services in 2012 and sent €37.9 billion in exports to the country, according to Eurostat. “Russia believes its historic reconciliation with Germany is creating a partnership that will bring immense benefits to both sides,” Foreign Minister Sergei Lavrov said in a speech in April.
The EU bought €213 billion of Russian exports and sent €123 billion worth of goods and services to the country. Those amounts dwarfed Russia’s two-way trade with China, which amounted to $88 billion in 2012, according to the Chinese General Customs Administration. The rebound in cross-border commerce has been a conspicuous bright spot for both the EU and Russia as they struggle to recover from the aftershocks of the 2008-’09 financial crisis. The two-way trade hit a record high in 2012 and was up 83 percent from the dark days of 2009. EU countries — including Cyprus, which largely recycles Russian oligarchs’ own capital — account for 75 percent of foreign direct investment in Russia, according to Eurostat figures.

The mutual dependence between Russia and Western Europe persists despite a decade of efforts on both sides to reduce it. Putin has sought to foster closer economic relations with China as a counterweight to the West, but efforts to strike a 30-year agreement to supply natural gas to China have stalled after nine years of negotiation, reportedly because Beijing is demanding much lower prices than Russia’s Gazprom charges European customers.
The EU has tried to cut its dependency on Russian gas with alternative pipelines stretching out to Azerbaijan, Turkmenistan and even Iraq, but none have yet borne fruit. The most persistent project, Nabucco-West, which was meant to bring fuel from Azerbaijan’s giant Shah Deniz field through Turkey to Central Europe, was abandoned in July 2013 after 11 years of planning. Russia accounted for 34 percent of EU natural gas imports in 2012, according to the BP Statistical Review of World Energy.
Russia has also had limited success disentangling its all-important natural gas trade from Ukraine, which became an unreliable partner from Moscow’s point of view after the Orange Revolution of 2005. A new undersea pipeline direct to Germany, known as North Stream, started operating in 2011 (with Merkel’s predecessor as chancellor, Gerhard Schröder, as its chairman), and the Blue Stream pipeline underneath the Black Sea has enabled modest Gazprom exports to Turkey. But a more ambitious end-run around Kiev, known as South Stream, has bogged down. Some 80 percent of supplies to Europe still flow through the pipelines Soviet planners laid out beneath Ukrainian soil.
Against this backdrop of Russia’s economic imperatives, Putin’s zigzag behavior during an eventful December looks less puzzling. The Kremlin feels it cannot afford to “lose” Ukraine. It scuttled Kiev’s pact with the EU not just from knee-jerk imperialism but also as a potential threat to its gas-fueled cash flows. Yet cordial relations with Western Europe, particularly Germany, remain essential. The release of Khodorkovsky, a man for whom Putin has never hidden his personal disgust, can be seen as an easy way to buy some goodwill.
Kremlin watchers hold out little hope that the Khodorkovsky release, and a broader year-end amnesty that also included the jailed rockers from punk group Pussy Riot, herald a Russian tack toward a liberal reform course. Earlier in December Putin disbanded the most respected state-owned news operation, RIA Novosti, and transferred its staff to Russia Today, which will be headed by a conspicuous Kremlin propagandist.
“Putin’s pardon of Mikhail Khodorkovsky is a confirmation of the omnipotence of one man who rules Russia and the fluctuation of his moods and whims,” Lilia Shevtsova, a senior associate at the Carnegie Moscow Center, wrote on the think tank’s web site. “It is definitely not a confirmation of a political thaw.”
But the move does at least show that Putin remains in touch with reality after 13 years in autocratic power, and committed to a pragmatic course by his own lights.

Khodorkovsky Pardon Underscores Russia’s Special Ties with Germany

The deal over Syria’s chemical weapons marks a low for those who cherish freedom

1972 Anwar Sadat, president of Egypt, suddenly decided to turf out thousands of Soviet military advisers. Menaced by Egyptian leftists and undervalued by the Kremlin, he calculated that he had more to gain from siding with America. Henry Kissinger, Nixon’s secretary of state, administered some deft diplomacy to broker a ceasefire between Egypt, Syria and Israel in the Yom Kippur war, and American aid duly flooded into Cairo. So did American influence: the Soviet hold over the Middle East never recovered.

The plan to wrest chemical weapons from Syria, shortly to be embodied in a UN resolution, has echoes of that era—except that the modern Metternich is a serial abuser of human rights and occasional op-ed writer on democracy for the New York Times, called Vladimir Putin. Russia, the country he leads, is too frail to regain its place in the Middle East. But this week, a decade after the invasion of Iraq, it suddenly became clear just how far the influence of the West has ebbed. The pity is how few Americans and Europeans seem to care about that.

See the rest of the article on the Economist website here:  America, Russia and Syria: The weakened West | The Economist

Joke’s on Putin, Americans don’t read newspapers. He should’ve made a vine or some shit.
— Allison F. (@ablington) September 12, 2013

From Russia with love: In plea ‘directly to the American people,’ Putin pokes Obama on Syria

Dear inglorious country, you are not so special.
That was the essence of Vladimir Putin’s letter “directly to the American people,” published on the website of the New York Times on Wednesday. The op-ed, which ran under the byline of the Russian president, urged the United States not to strike against the Syrian regime and to stop thinking of America as “exceptional.”
You have to hand it to Putin, despite his dry apparatchik style, the guy knows how to play to his audience. “We are all different,” Putin writes, seemingly channeling Sylvester Stallone in Rocky IV, “but when we ask for the Lord’s blessings, we must not forget that God created us equal.”
Sadly for Putin, many journalists and celebrities quickly took him to task on Twitter. Maybe they felt the article lacked the passion and wit of Putin’s 2012 op-ed on “true democracy.” Or maybe they simply noticed the distance between the former KGB man’s rhetoric and his cuddly record on gay rights.
Either way, below are some of our favorite tweets. Vladi, perhaps you should keep your day job.

Putin has NYT op-ed out tonight and is also working on 20 Russian bears who would be so disappointed if you bombed Syria for BuzzFeed.
— pourmecoffee (@pourmecoffee) September 12, 2013

It’s always nice when a guy who thinks homosexuality is contagious gives the world lectures about dangerous ideas. #Putin — LOLGOP (@LOLGOP) September 12, 2013

Good thing we don’t run photos of op-ed writers. Putin might want one with his shirt off. — Nicholas Kristof (@NickKristof) September 12, 2013

Did the New York Times announce a joint venture with RT and I missed it? — Tom Watson (@tomwatson) September 12, 2013

Putin just won the world champion belt in concern trolling
— AdamSerwer (@AdamSerwer) September 12, 2013

“Vlad? Barry. Just calling to say that everyone loves it. It had exactly the intended effect. Next week, write one trashing Obamacare.” — Duke (@DukeStJournal) September 12, 2013

Now that Putin is technically a Russian journalist, will his phone be bugged, his work self-censored, I wonder? — Amie Ferris-Rotman (@Amie_FR) September 12, 2013

Overheard at NYT: “Bad news is Assad bailed on his piece. Good news: We landed Putin!”
— Jonah Goldberg (@JonahNRO) September 12, 2013
Let’s speed up the lede RT @jackshafer “We really like your piece, Vladimir. But it’s way, way long and you need to grab the reader sooner.” — Blake Hounshell (@blakehounshell) September 12, 2013

Joke’s on Putin, Americans don’t read newspapers. He should’ve made a vine or some shit.
— Allison F. (@ablington) September 12, 2013

I was kind of hoping the Putin op-ed would start in a cab.
— Tim Murphy (@timothypmurphy) September 12, 2013

“Tom Friedman is on vacation. His column will return next week.” — Ryan Lizza (@RyanLizza) September 12, 2013

At least Russia is the kind of free, open society that will allow President Obama to respond in their biggest newspaper. Oh wait. — Jon Favreau (@jonfavs) September 12, 2013

I never thought I would see the day when Vladimir Putin would become both the world’s leader AND moral authority.
— Rob Lowe (@RobLowe) September 12, 2013

In Russia, the op-ed writes you! (Drops mic, picks up mic, apologizes, stares into space)
— Seth Meyers (@sethmeyers) September 12, 2013

@sethmeyers you’re going to love the Sunday crossword puzzle written by Kim Jong-un.
— Dave Itzkoff (@ditzkoff) September 12, 2013

From Russia with love: In plea ‘directly to the American people,’ Putin pokes Obama on Syria – Vocativ

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Or How America’s Energy resurgence is making him crazy… From BusinessWeek:

Behind this week's cover

Why Is Vladimir Putin Acting So Crazy?

Global Economics

(Corrects spelling of Vladimir Putin’s name in the headline.)
Behind this week’s cover
For Russian leaders, sticking it to the Americans has long been a source of both personal satisfaction and political gain. By that standard, President Vladimir Putin is riding high. He’s enraged Washington officialdom by supporting Syrian President Bashar al-Assad—despite his apparent use of chemical weapons against civilians—and obstructing efforts to rein in Iran’s nuclear ambitions. Activists in the U.S. and Europe have called for a boycott of the 2014 Winter Olympics in Sochi over the country’s harsh new antigay law. The Kremlin’s decision to shelter National Security Agency contractor Edward Snowden, wanted on espionage charges in the U.S., prompted President Obama to nix a one-on-one meeting ahead of the Group of 20 summit in St. Petersburg, Russia, on Sept. 5 and 6.
Since reclaiming the presidency in May 2012, Putin has become the biggest impediment to the Obama administration’s foreign policy aims. That’s undoubtedly played well with Russians yearning for the days when the country was a superpower. Yet beneath Putin’s swagger lie weaknesses at the core of the economy that threaten Russia’s future—and with it, his power base. And for that, he can blame a familiar nemesis: the U.S.
His difficulty has nothing to do with intercontinental ballistic nuclear missiles—and everything to do with natural gas that’s cooled to -260F at normal pressure, condensed into liquid form, and transported on special tankers to markets around the world. America’s surprising return as an energy superpower is complicating life for the Russian petro state. The rise of a vibrant, global, and pipeline-free liquefied natural gas (LNG) market is a direct threat to Russia’s interests in Europe, where Gazprom (GAZP:RU), the state-owned energy giant, supplies about 25 percent of the gas. So is the shift in pricing power from suppliers to consumers as a result of the huge supply shock emanating from North America.
Russia is still the world’s biggest overall energy exporter: It’s the No. 1 oil producer and No. 2 in gas after the U.S. However, the country’s known oil reserves—primarily between the Ural Mountains and the Central Siberian Plateau—are enough to sustain current production levels for just 20 years, according to a study in December by the European Bank for Reconstruction and Development (EBRD), vs. 70 years for Saudi Arabia and 90 years for the United Arab Emirates. Untapped oil and gas reserves in eastern Siberia and the Arctic will take massive investments to explore.

Putin’s aware of the problem. “For many years we have had a situation when prices for our main export goods rose fast and almost without interruption, and this made it possible for Russian companies and for the government to cover high expenses,” he told global executives at the St. Petersburg International Economic Forum on June 21. “But this situation has changed now. There are no simple solutions and no magic wand we can wave to change things overnight.”
That may be true, but the country has little time to waste. Many Russians, and in particular members of the president’s inner circle, have benefited hugely from the country’s energy-export windfall. Now that foundation is slipping away. The question is whether Putin’s power will, too.
When he took over at the start of the last decade (he served as president from 2000 to 2008 and premier for four years after that), the global economy was in the early stages of a commodities supercycle. Accelerating global demand, led by a China growing at about 10 percent annually, coincided with rising prices for oil, gas, copper, coal, and other natural resources. Political instability in Venezuela, the start of the Second Gulf War, and Hurricane Katrina all constrained supply and refining capacity, sending energy markets into overdrive.
Through 2008, Putin oversaw an average of 7 percent growth in gross domestic product and a huge expansion in Russia’s middle class. At its 2007 annual meeting, Gazprom, the world’s largest gas producer, served red and black caviar. Management Committee Chairman Alexey Miller said the company, whose market value at the time was $360 billion, would someday be worth $1 trillion.
Russia’s phenomenal run of prosperity would have been an ideal time to diversify the economy beyond energy, a goal that harks back to the days of Soviet leader Leonid Brezhnev. Instead, energy’s share of the economy actually increased; as of late 2012, oil and gas accounted for about 70 percent of exports, compared with less than 50 percent in the mid-1990s, providing half of the government’s revenue and roughly 17 percent of GDP, according to the EBRD. Gazprom alone represents 14 percent of the Russian stock market’s total capitalization. “It has been an issue since the late 1970s and early 1980s, and it has gotten worse,” says Alexei Kokin, an energy analyst with UralSib Financial. “I don’t see that changing.”
Russia’s energy dependency problem became impossible to ignore in 2009 as the global recession crushed oil prices, which fell to $34 a barrel from a precrisis high of $147. Russia’s economy contracted almost 8 percent, the steepest drop among the G-20 industrialized nations that year. Since 2010, the economy hasn’t come close to hitting the 5 percent to 6 percent mark that Putin has said it needs to close the gap with leading developed nations. On Aug. 9 the government said the roughly $2 trillion economy unexpectedly slowed in the second quarter, growing a below-expected 1.2 percent from the previous year, the sixth consecutive quarterly deceleration. As for Gazprom, it’s worth all of $94 billion, down 74 percent in six years.
Photo illustration by Crash!; Putin:
Putin, 60, has long viewed the nation’s natural resources as a foreign policy lever. He learned about the economics of scarcity growing up in the 1950s in a decrepit communal apartment complex in postwar Leningrad (now St. Petersburg). “There were hordes of rats in the front entryway,” Putin said in an autobiographical compilation of interviews, First Person, published in 2000. “My friends and I used to chase them around with sticks.” In a 2012 interview he said that his elder brother died from diphtheria during the Nazi siege of Leningrad; his father barely survived his combat tour with the Soviet army.
Many years later, as deputy mayor of St. Petersburg, Putin wrote an academic thesis advocating that Russia flex its energy muscles. Once in power, he did just that: In price disputes, Russia turned the taps off on its gas pipelines to Ukraine in 2006 and 2009 in the dead of winter, causing shortages elsewhere in Europe. Gazprom has been able to extract high prices, particularly in former Soviet states, by indexing its long-term contracts to the price of oil.
Putin renationalized the oil industry and dialed back the involvement of Western oil companies. Authorities arrested and later convicted Yukos Chief Executive Officer Mikhail Khodorkovsky in 2003 on tax charges just as the company entertained selling stakes to ExxonMobil (XOM) and Chevron (CVX). Approximately $27 billion in state tax claims bankrupted Yukos, whose assets were sold off to other companies. After pressure from Moscow, Shell (RDSA) gave up part of its stake in an LNG venture in Sakhalin to local interests. British Petroleum (BP) sold its stake in an Anglo-Russian joint energy venture called TNK-BP to Rosneft (ROSN:RU) after a dispute with investors in the country.
At the same time, Putin placed loyalists throughout most of the oil industry or secured the allegiance of executives. In December a report by Yevgeny Minchenko and Kirill Petrov for Moscow-based consulting firm Minchenko Consulting Communication Group portrayed Putin as an energy czar with direct control over “long-term gas contracts, management of the gas industry, and, basically, Gazprom, as well as the control over backbone Russian banks” such as VEB, VTB, and Sberbank.
Taxes on the energy industry are vital to the Kremlin patronage system. They give Putin the means to woo key constituencies such as the military, security, and political elites; to improve government pensions; and to spend in poorer regions in the Muslim North Caucasus and other rural areas. During his 2012 campaign, he promised to improve wages for doctors and teachers, increase retirement checks, and invest in Russia’s military arsenal. The former KGB career officer is unlikely to loosen his grip on the state-owned energy sector, because that would endanger his grip on power, says one economic adviser who declined to be identified for fear of offending the president.
Five years ago, peak oil theorists predicted that global production would soon hit its high-water mark and then decline inexorably, with the U.S. growing even more dependent on overseas energy imports. Those trends seemed to play into Putin’s hands. What he didn’t anticipate was that U.S. oil production—thanks to horizontal drilling and hydraulic fracturing technology, in which pressurized water and chemicals are blasted into rocks to release energy—would increase 46 percent. That equals the entire output of Nigeria, estimates Daniel Yergin, vice chairman of consulting firm IHS. “Think of it like a non-OPEC country appearing in North Dakota or southern Texas,” Yergin told executives at the St. Petersburg forum in June.
Between now and 2018, North America will provide 40 percent of new supplies through the development of light, tight oil and oil sands, while the contribution from the Organization of Petroleum Exporting Countries will slip to 30 percent, according to the International Energy Agency, which also sees the U.S. emerging as the biggest oil producer by 2020 and a net exporter of oil by about 2030. Meanwhile, the agency trimmed global fuel demand estimates for the next four years.
The U.S. is also on pace to add 2 trillion cubic feet per year of natural gas once three just-approved LNG projects start operating, an 8 percent increase in total U.S. capacity based on 2012 production levels. More LNG facilities are coming onstream in Australia, South Korea, Mozambique, and Tanzania. Yergin predicts natural gas, both conventional and liquefied, will be the No. 1 energy source by the end of 2030.
Russia’s worry is twofold: An expanding supply of affordable LNG, which is transported by ship, is forcing Gazprom to either cut prices or lose share. (Weird and surprising fact: As American utilities shift to gas, displaced U.S. coal is flooding into European markets. The U.S. may supplant Russia as the world’s No. 3 coal exporter by yearend, according to Goldman Sachs (GS).) Second, the Russian gas giant is under pressure to adopt spot-market pricing instead of tying its prices to oil. In June, Gazprom agreed to revise its gas contracts with German utility RWE after losing an arbitration case; it’s renegotiating supply contracts with other utilities, including Eni (ENI:IM) and EconGas. The European Union is also drafting an antitrust complaint against Gazprom for abusing its dominant position, say three people familiar with the probe who asked not to be named. The company declined to comment. Longer term, the Russians may even have to contend with shale energy assets being developed by Western oil majors in Poland, Ukraine, and Lithuania, all Gazprom profit sanctuaries.
With the LNG trade expected to almost double to 450 million tonnes a year, according to Bloomberg New Energy Finance, the Russian government is expected to take up legislation that would for the first time allow companies other than Gazprom, which has been slow to respond to big industry changes over the last decade, to export LNG. Energy Minister Alexander Novak said in June the country is also committed to building out its LNG capacity—Russia has just one plant up and running in Sakhalin—and more than doubling Russia’s share of the LNG trade from 4 percent to about 10 percent by 2020. With Gazprom’s traditional gas business facing pricing and demand pressure in Europe, Russian companies need to be bigger players in faster-growing Asian markets. “We are really behind the curve and need to accelerate,” says Ildar Davletshin, an oil and gas analyst with Renaissance Capital.
The challenge for Putin is to simultaneously revive the country’s colossal energy sector—and then place Russia on a track to break free of its hydrocarbon dependency. The country needs to make huge infrastructure investments in the east and to expand nonenergy sectors where Russia has real potential, such as information technology, airplanes, helicopters, engines, turbines, and industrial pumps and compressors.
The country’s recent entry into the World Trade Organization could be an opportunity to reduce or eliminate import tariffs and trim domestic subsidies. Putin’s near-total control of Russia’s political apparatus—he’s marginalized, intimidated, or silenced any potential opposition—gives him the space to push through painful reforms. It would require not only the kind of tough-mindedness the bare-chested outdoorsman and YouTube sensation is known for but also a fair amount of business savvy and strategic vision. Failing to reform risks condemning Russia to a future of middling growth, declining standards of living, and diminished stature abroad. If Putin truly wants to restore the country to economic greatness, Russia will need a 12-step program for its energy-addicted economy.
With Anna Shiryaevskaya and Jake Rudnitsky
Bremner is an assistant managing editor for Bloomberg Businessweek.

©2013 Bloomberg L.P. All Rights Reserved. Made in NYCWhy Is Vladimir Putin Acting So Crazy? – Businessweek

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