Russia’s Bridge to Nowhere

In 2006, Thomas Friedman argued that the price of oil correlates to democracy in emerging markets. With characteristic grandeur he remarked, “give me $18-a-barrel oil and I will give you political and economic reform from Algeria to Iran.” But now with the economic crisis continuing to slag markets and pin down oil prices for the third straight month, many producer nations are shuddering under the weight of this burden. Is the First Law of Petropolitics finally getting its true test?

The thesis is most definitely being challenged in Russia, where we’ve seen the markets lose 70% of their value in just half a year, and erasing more than $300 billion of oligarch fortunes. Despite boasting what I believe are very strong economic and financial fundamentals (mostly thanks to Andrei Illarionov’s parting gift – the oil stabilization fund), the contraction observed in the Russian economy has illustrated just how powerfully dependent the country remains on the export of just one resource.  Earlier this week, oil trading on Wall Street fell below $50 a barrel, while the Kremlin appears to be steeling itself to fend off a popular revolt with riot squads and extended presidential terms.

But the assumption that the powers will just come crumbling down is premature, and it appears that low oil prices can be just as much as a threat to democracy as they are to authoritarians.

So who are the winners and losers in Russia’s particularly painfuleconomic crisis? Will a sustained drop in the price of oil provide along-awaited opening to political reformers, and loosen the iron gripof Vladimir Putin and the warring junta of former KGB officers? Or willthese autocratic elements simply be further entrenched as the stateassumes an even larger role in the economy?

Some Russians are optimistic that the crisis could paradoxically begood for Russia. I recently spent time with the civil society leaderOleg Kozlovsky, who commented to me that the crisis might cause themasses to “lose their illusions” about the regime and “breathe freshlife” into the political process.

That may prove to be true, but recent events leave one much less sanguine about the weakening of the regime.

Over the past few months, we’ve seen some negative developments which show the ascendency of the wrong groups within the Kremlin.  First, a Russian court granted parole to former Deputy FinanceMinister Sergei Storchak, who spent the last year jailed on what arewidely believed to be politically motivated charges. Storchak seemed tobe a hostage of the internecine “clan wars” between hard-line and moreliberal, market-oriented Kremlin factions.

The release of a political prisoner by this government is unlikelyto be a gesture of altruism. Storchak’s release is likely to draw somemajor concessions from one of Russia’s last remaining economicliberals, embattled Finance Minister Alexei Kudrin, who has spent yearsfending off various bureaucratic factions from dipping into Russia’s$515 billion stabilization fund (I should mention that the fund has dropped perciptiously).

The national piggy bank has already sprung some big leaks lately.After bailouts of several Kremlin-connected banks, favored oligarchs, and state-owned business, it was announcedthat Russia’s national wealth fund would invest $6.9 billion intodomestic securities via Vneshekonombank, a move that Kudrin has longopposed, not least because of the enormous risk that corruption willshift the funds hither and fro. In the longer run, most market analystsagree we are about to observe a historic re-nationalization of privatesector assets by the state.

Following the Storchak-Kudrin episode, the Kremlin made a boldfaceattempt at energy market manipulation in announcing an OPEC-style gascartel was being considered along with Qatar and Iran, followed by the signing of an agreement for a massive new “oil consortium” with Venezuela. The Russians began flirting with OPEC to discuss new levels of cooperation to help drive prices back up.

Unlike oil,natural gas is a mostly regional commodity whose price cannot bemanipulated easily through production quotas, however the carve-up ofmarkets significantly reduces competition and can have a real impact onconsumers. As Carl Mortished wrote in the Times of London, “what we canexpect, and what we ought to fear, is the exchange of information aboutprices, development schedules and investment plans” among the membersof this new gas troika.

Part of Russia’s rationale in announcing these cartels was to feed thepanic in the markets and encourage profitable instability. Similarmoves have been made in the oil market. In late October, Deputy PrimeMinister Igor Sechin, among the most powerful of the siloviki,announced that the government may attempt to raise the price of oilthrough the creation of a new domestic production reserve, where Russiacould store its oil until the state feels the price is right. That sameweek, OPEC Secretary General Abdullah al-Badri was feted about Moscowwhile the government flirted with joining in on coordinated non-memberproduction cuts.

Both the gas cartel and the partial embrace of OPEC form part of alarger and long established pattern by Russia to disrupt energymarkets, preceded not only by the supply cuts to the Ukraine andongoing campaigns to defeat alternative supply pipelines, but also by arash of deals everywhere from Nigeria to Bolivia. Some argue that animportant factor behind the war in Georgia was to target the onlynon-Russian energy conduit from Central Asia.

In combination, events like these point Russia in the wrongdirection. The resolutely anti-competitive and anti-market practices ofthis oligopoly appear to be deepening. The last guardian of economicorthodoxy is being marginalized as the state once again makes itself anarbitrary kingmaker rather than an impartial overseer ofentrepreneurial activity.

The good news is that this Putinist system of authoritarianracketeering is not sustainable in the long-term. Russia’s ability tosurvive the years following this financial crisis is entirely dependentupon something the country has very little of: transparency.

While the total value of Russia’s stabilization fund exceeds all rubledeposits in the country by more than $100 billion, low levels of trustand confidence in the state persist. Many doubt the accuracy of keyeconomic indicators, as well as the state’s ability to keep foreignreserves “reserved.”

With free market capitalism in the throes of crisis, the time isripe for bold proposals for a new world economic order. Russia made aweak attempt at assuming a leadership role at the October 8 meeting inEvian, France, when President Dmitry Medvedev outlined his country’svision for a multipolar world of strictly sovereign nations, whereby noone would seek to force their norms upon others. Medvedev’s speech hadadmirable and compelling ideas, but at the end of the day, Russiafailed to define its national project beyond that of contrast with andopposition to the United States, and the protection of the enormouspersonal wealth accrued by government officials who double as statecorporation executives.

Much like the home state of the former vice presidential candidate (andself-proclaimed Russia expert) Sarah Palin, Putin’s Kremlin has createdan economic, political, and social bridge to nowhere. Russia’sstability is underpinned by a group of millionaire (and billionaire)businessmen whose fortunes are dependent not on their competitivenessor business acumen, but on arbitrary political decisions, tied selling,market manipulation, and, sometimes, outright theft and bullying of theshrinking private sector. This is by nature a system of diminishingreturns for each additional participating member, where merit andefficiency are punished rather than rewarded.

Don’t be fooled into thinking that Russia’s brand of authoritariancapitalism represents a viable alternative to liberal democracies andmarkets. A system of institutionalized corruption and graft should notbe confused with a real ideology or vision for the world.