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Russia Copes with Less Cash

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.