Craig Pirrong has a stinging piece over at Seeking Alpha on all the upcoming nastiness he expects out of the economic crisis in Russia, beginning with the Sayano-Shushenskaya dam explosion to Gazprom’s disappointing first quarter results. It’s good article (especially the sharp rebuke against bullish analysts predicting a Gazprom rally), but I think the eagerness to hold a parade over the collapse of the gas giant will only guarantee its next wave of revanchist corporate foreign policy strategy. Gazprom has a lot of ways to still make money, and the full bore weight of the Kremlin helping it out.
In brief, Russia faces a yawning capital gap. The country has lived, after a fashion, on the Soviet inheritance, from huge hydro stations to massive gas fields. “Deferred maintenance” became a modus operandi. The Sayano-Shushenskaya disaster is just a vivid illustration of the consequences of this. It makes me wonder what the true rate of Russian growth in recent years would be, if the true depreciation/consumption of capital were taken into account. The country has consumed much of its seed corn.
The country’s major source of cash-the energy business-has lived off the Soviet inheritance as well, so Russia can’t look to that for succor; indeed, that sector needs a massive infusion of capital too. Foreign investors won’t step up. Compared to other countries, Russia invested relative little as fraction of its GDP even during the seven fat years.
So, no money: big problems.
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Hi, James–Thanks for the link, and the kind words about the piece.I agree with you re the likely effects of Gazprom’s bad news on its future behavior, and Russia’s. Similar considerations were the gravamen of my disagreement with Biden’s assessment of the effects of economic and demographic weakness on Russia’s conduct. Namely, that the difficulties will make Russia/Gazprom more aggressive, not less.This could lead to an interesting dynamic. Western companies with investments in Russian gas (that means you, Exxon!) can expect a ratcheting of pressure. But the ratcheting pressure will make other western investors more reluctant to commit funds.The inability of the Russian government to commit credibly not to expropriate will cause continuing problems going forward. (Though some western companies are a little slow to go down the learning curve.)And it’s not just treatment of western investors too. I expect an increase in aggressiveness across the full spectrum of Gazprom contact points, from Turkmenistan to Ukraine to Europe.All this puts Putin et al on the horns of a dilemma. Pressing short run cash needs will lead to opportunistic actions that will impair the ability to attract the capital needed to address the pressing needs to invest in new fields, infrastructure, etc.Thanks again!
That could pose an interesting dynamic, but it does run up against a few established trends…One is that energy corporations and investors will continue throwing billions into Russia no matter how high the political risk rises. Even when they get hit hard, like BP and Shell, they don’t seem to learn their lesson.Second is that I think the leadership has figured out a slightly more sophisticated method of expropriation: you let a company in on generous terms, create false regulatory and tax problems, and then offer a mediation which involves a transfer of just 51% of the production project to Gazprom/Rosneft, or even another local partner. They don’t want to expropriate outright anymore like they did with Yukos, they want to leave their victim with just enough hush money to stay in business.How the Russians continue to handle the Central Asian suppliers is a whole other puzzle, but one can’t help but think how much larger, more profitable, and more powerful the company would be if it had not been used as a political instrument. Nabucco would still probably only be an opera.
“All this puts Putin et al on the horns of a dilemma. Pressing short run cash needs will lead to opportunistic actions that will impair the ability to attract the capital needed to address the pressing needs to invest in new fields, infrastructure, etc.”I guess that’s why Western investment in Russian infrastructure declined from the Yeltsin years to the Putin years. The West reciprocated Yeltsin’s adoption of the major positions of Western foreign policy with large-scale investment in Russian infrastructure.Oh, wait, it didn’t.The very idea of the West making serious investment in Russian dams, bridges, etc., whatever Russias foreign or internal policy, is ludicrous on its face.
@rkka – I never seen anybody slip so quickly from the “it was the West’s responsibility to rebuild Russia” right back into the “keep ‘yer hands off our damn sovereignty, imperial yanks!!!”What is it then? Is Washington supposed to run Russia? Japan and Germany don’t look like they have any postwar complaints, and I think if there were greater Russian willingness to just move along with things, I think the United States has shown a very high level pragmatism in transforming relationships with former adversaries and establishing cooperative, and often mutually beneficial, relationships.Just so weird that there is more resentment in Moscow than there is in Ho Chi Minh City.
“Is Washington supposed to run Russia?”Washington did…”Japan and Germany don’t look like they have any postwar complaints”The Marshall Plan involved spending ~2% of US GNP per year for five years. That was a serious effort.”I think if there were greater Russian willingness to just move along with things”There was, for a decade and more.”I think the United States has shown a very high level pragmatism in transforming relationships with former adversaries and establishing cooperative, and often mutually beneficial, relationships.”Certainly not in Russia’s case.”Just so weird that there is more resentment in Moscow than there is in Ho Chi Minh City.”The Vietnamese were wise never to let US advisors run their economy.
The Western Oil Majors will just keep coming back, even right after get expropriated. The harsh truth is that finding new oil/gas reserves in the world for exploration by private companies is becoming extremely difficult, as over 80% of the world’s hydrocarbon reserves is held by state-owned company, much of it shut off to foreign investment. Russia is one of the countries around which makes it a little more tolerable than others for western oil majors to enter. Iran would possibly be another potential one, but the biggest obstacle and problem there is Washington behaviour.
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