Resistance is Futile: the Kremlin’s Oil and Gas Agenda
By Daniel Simpson
“Lower your shields and surrender your ships. […] Your culture will adapt to service us.”
– The Borg (Star Trek: First Contact)
“Russia needs a Tsar”
– (Not so) popular saying
MOSCOW – Depending on your choice of newspaper, Vladimir Putin’s Russia is either creeping towards fascism or a Soviet-style anti-Western collective. Or both. Murdered dissidents and volleys of rhetorical missiles sell alarmist banner headlines, while the business pages are given over to fretting about state-sponsored scams by the Kremlin’s corporate behemoths. But much of what’s actually happening is buried under forests of misleading cliché. If anyone’s lost Russia, it’s arguably the foreign press.
Strip away the sensationalism and there’s a government with an authoritarian streak, trying to centralise power. If it’s paranoid, then that’s partly because it’s weaker than it looks. And if it seems hostile to foreign energy companies, well, that’s largely a function of how they muscled their way into the country on preferential terms, hoping to siphon off valuable resources. As Putin prepares to stand down, as he’s constitutionally required to next March, the clearest legacy of his two terms as president is already established: a consolidating chaebol of commodity monopolies, enriched by record oil prices and run, if not quite as fiefdoms, then as semi-nationalised instruments of an assertive foreign policy.
How worried should we be? Not especially, notwithstanding the scaremongering and souring relations with NATO governments, chiefly Britain and the United States. Russia’s economy keeps expanding, as does international trade. And a quarter of Europe’s natural gas still comes from Gazprom, the conglomerate that epitomises a fusion of state and corporate power, doubling as Putin’s piggy bank. Despite a succession of setbacks for Western oil majors, Russia remains open for business and the coming decade offers numerous opportunities for foreigners, provided they’re prepared to play by new rules. Essentially, these amount to accepting minority ownership of energy joint ventures, as in most oil-producing nations, and a role as service providers, rather than equal partners. Transition to the post-Putin era may prove fractious, but the one thing almost everyone wants is stability and radical policy shifts are unlikely. From a long-term investor’s point of view, if not geopolitically, the outlook seems broadly positive. So why do we hear so little about it?
“Most of today’s coverage is all about the state taking over the economy, even if the vast majority of business is private and booming,” laments a foreign correspondent in Moscow, who struggles to interest his editors in more representative financial news. “It’s either that or ‘if the Russian’s aren’t threatening us with nukes then they’re going to turn off the gas taps’, which is just laughable when their wealth depends on export revenues.”
According to Bernie Sucher, an entrepreneur and investment banker who’s worked in Moscow for the past decade and a half, there’s a matrix of biases at work. Whether seen through a Cold-War prism, or just disillusionment after a gush of post-Soviet optimism, news about modern Russia focuses on negatives, stereotypes and official spin, as it tends to elsewhere. It also loads words like “liberal”, “reform” and “democracy” with meanings that convey little about the complexity they describe, adopting labels worn by disenfranchised oligarchs, and their U.S.-sponsored political allies, as they bid to regain power. The nastiness of the state’s assorted tentacles makes a better story than business as usual, which is quietly changing the country while a handful of thugs and former spies hogs the limelight.
“The most important dynamic in this country politically is liberty, personal liberty,” Sucher notes. If Moscow stands for anything these days, it’s a turbo-capitalist cocktail of greed and fear that’s been spawning a society of consumers as quickly as it’s jacked up prices. The girls queuing up for nightclubs where pink champagne costs $1,500 a bottle aren’t all out to bed a “minigarch”. Many have happily spent a hefty percentage of their salaries on imported makeup just because it’s the done thing. “The space for the state has shrunk dramatically in the past 15 years and ordinary people filled the vacuum,” Sucher continues. “When people focus on the Kremlin they’re looking at a window on the part of the country that’s changed the least.”
That view can be pretty ugly. While government-backed rent-a-mobs stir up trouble on the streets, and high-profile murders go unsolved, TV offers a focus on the president’s daily activities that’s as fair and balanced as Fox News. Would-be challengers are harassed, sometimes detained and routinely denied airtime. The space for more independent-minded journalism keeps shrinking, muting Putin’s critics and stifling the range of debate in most media, except on the Internet. It’s easy to exaggerate these trends, many of which are mirrored abroad. But when the grandmaster-turned-protester Garry Kasparov says Russia is “a police state masquerading as a democracy”, he’s not just talking up the unpopular opposition.
Nevertheless, argues Eric Kraus, a French investor who moved to Moscow 10 years ago, it’s misleading to project sweeping theories onto Russia, where even the clique of KGB men in power have undergone a paradigm shift. “This is the most non-ideological country on earth,” he says; if there’s any guiding principle these days, it’s all about the money. “Putin is a nationalist, as he has to be in his position, and he sees quite simply that for Russia to be powerful, it has to have a strong economy.”
PLAN, WHAT PLAN?
Contrary to what’s often implied, Putin’s regime isn’t a diversion from Russia’s post-Soviet transition. If anything, it’s an attempt to get it back on track after the Yeltsin years, in which the state was weakened to the point where talk of it fracturing completely wasn’t just a fantasy of retired American planners like Zbigniew Brzezinski.
Though debate still rages about whether U.S.-backed liberalisation went too far in the 1990s, or not far enough, it seems clear that Russians got plenty of shock and not a lot of therapy as the economy collapsed twice. While the managers of some state enterprises, such as Gazprom, set about auto-privatisation by taking their assets home, other companies were sold for a pittance, creating an oligarchy of robber barons, who raided the security forces for bodyguards. The government scarcely controlled Moscow, never mind the regions, which were offered as much autonomy as they liked, only to offer it in turn to local criminals. Little wonder, then, that the state budget dried up as biznes boomed on the black.
Enter the siloviki, the “power men” or “men in grey”, as the uniformed cadres are known. When Putin was plucked from obscurity to become Yeltsin’s prime minister, and designated successor, he was supposedly hand-picked for loyalty. But loyalty to whom? In hindsight, it seems that the security services, which he ran at the time, had decided to restore some order to the free-for-all. Putin’s agenda was defined by the combination of weak authority and strong powers he inherited from Yeltsin, who changed the constitution to bolster the executive against a hostile parliament, which he shelled with tanks when it blocked neoliberal reforms.
“It was an incredibly difficult period for the Russian people,” says Roderick Lyne, a former British ambassador to Moscow, who nowadays represents the business empire of an oligarch partner of BP. “At the end of it, they were yearning not for what was sold to them under the label of democracy; they were desperate for stability.”
That’s exactly what Putin has delivered, together with the prosperity that Yeltsin couldn’t. The poverty rate has halved and per capita incomes in Moscow, above $20,000 a year in terms of purchasing power parity, are about seven times what they were after the last financial meltdown. Pensions have doubled and, for the first time since the 1970s, the government is investing seriously in healthcare. Add to this the restoration of national pride that was dented by a decade of being dictated to by Washington and it’s easy to see where Putin’s 80 percent approval ratings come from. A poll 18 months ago showed more than half of people felt it was up to the government to ensure their well-being. As one Muscovite puts it: “Russians often say we’re lazy and we’re dishonest and we’re alcoholic and we need a strong leader to save us from ourselves.”
Consolidating control through what Russians call “the power vertical” has been the defining logic of Putin’s rule. He’s surrounded himself with loyalists from St. Petersburg, whether technocrats, like Gazprom’s two most senior executives, or the former intelligence officers who form the core of his inner circle, and control the Rosneft oil company, among others. Although rivals, these two principal cliques both support the continued centralisation of political and economic power, buttressed by robust security forces. They also endorse state control of strategic business sectors, such as the extractive industries, and protection of national champions, particularly those with global ambitions like theirs.
Despite these common priorities, which are geared above all to tightening their grip on power and the wealth it provides, it seems unlikely that Putin started out with much more of a blueprint than hobbling oligarchs and other potential threats. The decision to monopolise the oil and gas business was apparently made on the hoof. “People always assume that someone in the Kremlin has a plan that they’re keeping top secret,” says a former administration insider. “The secret is that there’s no plan.”
Observers generally agree, arguing that the plan was a consequence not a cause of Putin’s crackdown on Mikhail Khodorkovsky, the oligarch behind the oil company YUKOS, which has since been swallowed by the state. “When this thing started over YUKOS it wasn’t about policy at all,” says Bernie Sucher, who runs the popular Starlite Diner when not managing Merrill Lynch’s operations in Russia. “It was about thieves falling out. About money for me not money for you.”
The most attractive thing about oil and gas companies, generators of a $750 billion revenue stream since Putin came to power, is access to their cashflows. Transparency International ranks Russia alongside Albania and Sierra Leone near the top of its list of the world’s most corrupt countries. Even Kremlin insiders concede that officials are complicit. “Corruption is one of the cornerstones of our economic system,” says Arkady Dvorkovich, a senior Putin aide. “The authorities are afraid that if this cornerstone is removed, the whole system may collapse.”
Paying off the tax police is a routine hazard of Russian business, but having your oil company seized, and being sent to Siberia like Khodorkovsky, is an entirely different order of threat. It’s never been repeated, industry insiders say, precisely because it was all about the personalities involved and had very little to do with energy policy. “Khodorkovsky made the mistake of thinking he was untouchable,” notes one foreign executive. “Putin can leave the boys to feed happily within certain limits, but if your greed sets you against the interests of the state you get a warning. And if you ignore that warning… well, the example of YUKOS is there to remind you what can happen.”
MORE OF THE SAME
So who’s next? Investors worry that British and American criticism of Putin’s government, and its attacks on Western warmongering and hypocrisy, could put them in the firing line. Houston-based Parker Drilling, which has built rigs on Sakhalin island in Russia’s Far East, says it’s wary about doing more business there without contractual assurances to protect its assets, and an agreed exit strategy. “We wouldn’t go in if weren’t confident we could get those terms,” says the company’s chairman, Robert Parker. “I wouldn’t say that we are confident today that we could get them.”
Others question whether guarantees would be worth the paper they were printed on. An oil worker on Sakhalin, where Russia recently forced Shell to sell control of a $20 billion project to Gazprom, says the revocation of Shell’s production sharing agreements there reflects a disdain for foreign firms. The deals, which gave companies stakes in new fields in return for developing them, were the best Russia could get in the 1990s, he argues. “It’s simply realised that now the foreign investment has been made it can do a whole lot better if it doesn’t have to uphold its end of the bargain and hand over the agreed share of the production.”
This is not a widely held view, however, even in the industry. Although there are still some PSAs in force in Russia, the only country where new ones are on the table is Iraq, which is still being offered better terms despite having been invaded. In any case, the government weren’t the only ones to reappraise the deal. “Shell stupidly created this problem by doubling its valuation of the investment, which put back the date the Kremlin could start taxing them,” says another contractor on Sakhalin. “Why should the Russians sponsor European companies? These days they have enough money to just pay for the development outright.”
It’s worth stressing too that Shell doesn’t seem too bothered. Its chief executive, Jeroen van der Voer, was filmed late last year thanking Putin for buying him out, leaving Shell with a minority stake and a string of lucrative export contracts. “Gazprom is very welcome as a partner in our project,” van der Voer beamed. Six months on, he’s still not scared off. “If we see other opportunities for setting up offshore joint ventures,” he says, “then we will look at them without a doubt.”
All that’s changed, it seems, is the business model. “These are all important national strategic assets – nowhere in the world will the state not have a majority stake,” says Hans Klampferer, a veteran of Halliburton’s expansion into Russia and now a board member at Integra, a local oil services start-up. “They’re taking back things now that someone else, six or seven years ago, literally gave away.”
The last remaining anomaly is Kovykta, an east Siberian gas field acquired in the 1990s by two oligarchs, Mikhail Fridman and Viktor Vekselberg, who transferred it to their Anglo-Russian joint venture, TNK-BP. Regulators are now considering whether to revoke the firm’s licence on the pretext that they’re failing to produce the volumes of gas they promised. The trouble is, there’s nowhere to send it. Gazprom has a pipeline monopoly and they haven’t started building the link to China they’ve long been talking about. “TNK BP has offered them on many occasions to just open up and flare off the gas,” Klampferer says. “What’s happening right now with Kovykta’s really funny. I’m sure they will cut a deal with Gazprom, Gazprom will get a majority stake and they will keep BP somehow in there.”
The British company agrees, having lobbied intensively to defend its investment in Russia, and even bought up YUKOS assets to ingratiate itself with the Kremlin. “The problem isn’t BP, it’s the Russian partners,” says Vladimir Averchev, BP’s Moscow-based director for analysis. “This is about getting rid of them to reinstate state control.” Quite how, or when, this might be secured is open to question. If TNK-BP’s licence is revoked, it could be bought back by a new joint venture in which Gazprom holds at least 51 percent. Or the Kremlin could use the auction to entice another Russian company into its ever-expanding web of businesses. Surgutneftegaz is sitting on a multi-billion-dollar cash pile, making it a logical candidate, and an attractive target for anyone looking to secure assets before Putin stands down.
There are others on the horizon too. With echoes of YUKOS, the president of Russneft, an oil producer that’s grown into one of Russia’s top ten in three years, is being charged with “illegal activities committed by an organised group on a grand scale”. Companies don’t need to be strong-armed into submission either, or even sold by fearful oligarchs, like the Sibneft empire controlled by Chelsea owner Roman Abramovich until he moved to London to join his exiled partner Boris Berezovsky. Lukoil, a private company with expanding operations overseas, has just agreed a 49/51 joint venture with Gazprom to conduct explorations in eastern Siberia and abroad. That could easily be rolled into a deal covering ongoing business, again using the same division of control that applies to foreigners.
The clearest indication of the state’s long-term vision is Shtokman, a vast gas field in the Barents Sea that was originally due to be developed in partnership with an international consortium. Chevron, ConocoPhillips, Statoil, Norsk Hydro and Total were all lined up to take minority stakes until Russian policymakers changed tack. Having touted a possible asset swap, Gazprom said it wanted to retain 100 percent of the project’s equity because the assets it was offered in exchange were inadequate. Industry insiders dispute this, suggesting the change of heart was more likely tied to European opposition to a Russian bank’s plans to buy into the Franco-German defence contractor EADS. Whatever the explanation, Shtokman still needs to be developed and Western firms are still badly needed because of their expertise in offshore liquefied natural gas production. Those that remain interested will just have to sell their services as contractors. “Shtokman is the model for future foreign involvement,” says BP’s Vladimir Averchev. “Russia will buy in the technology and project management skills that Gazprom lacks.”
SERVICING THE RUSH
Service contracts are also a feature of the industry’s future more generally. As recoverable reserves from Russia’s existing oil and gas fields decline, most companies are hiking capital expenditure by at least a third to start exploring and developing new sites, as well as squeezing the last drops from old wells. Estimates vary widely as to just how quickly the oilfield services market is growing, but the consensus is that its value will double, whether over five years or 10. It’s already worth somewhere in the vicinity of $10 billion and Russian companies are starting to grab a bigger share of the action. “Until now it was Halliburton and Schlumberger who reaped the benefits of the Russian oil boom, not the oil majors or the independents,” says Vitaly Yermakov, the Moscow director of Cambridge Energy Research Associates. “Russians needed access to the technology and they didn’t have it themselves.”
That’s slowly changing as the services sector consolidates, led by the two 30-something entrepreneurs who set up Integra. Felix Lubashevsky, the nephew of TNK oligarch Viktor Vekselberg, has teamed up with John Fitzgibbons, a Harvard-educated adviser to the Yeltsin government, to snap up an agglomeration of small vendors of drilling services and equipment. They’ve only been in business for a couple of years, but they’re already seen as credible challengers, even if they don’t massively undercut the prices charged by foreign rivals.
“There’s a clear shortage of drilling capacity and operators are waiting to drill more than they can place orders for,” says Sergei Rudnitsky, the deputy director of energy research group RPI. “The biggest demand is for basic services, not the high-tech stuff Schlumberger specialises in. So Russian companies are in a pretty good position.” Integra makes no bones about drilling and well workover being a dirty business, even if it’s also buying in more exotic technologies. “Right at the outset their finance guy was saying ‘look at Kalashnikov’,” remembers CERA’s Vitaly Yermakov . “It’s a very simple design, but it does the job. That’s the model.”
For now, Integra’s focusing on acquisitions and concedes it will take years to be able to “go head to head” with Schlumberger, even in their most competitive operations. Some analysts question whether deal-making will be enough to sustain the company. Its growth ultimately depends on eating into the 50 percent of the market that’s taken by Russian oil companies that provide their own service operations in-house.
“Across the globe the trend is to spin off service subsidiaries and actually international majors went through this 15 or 20 years ago,” says Leonid Mirzoyan, a former banker who’s in charge of business development at C.A.T.Oil, another recently listed Russian firm. Unlike Integra, C.A.T.Oil focuses on the hydro-fracturing technology that can be used to revive existing wells, a speciality at YUKOS before it was broken up. The growth potential in this sector is more limited, although the same processes can be employed to stimulate higher production from new fields. But by far the biggest danger facing both companies is that Russian firms simply stick to doing these operations themselves, fearing that depletion could otherwise leave them vulnerable.
“Ultimately, TNK-BP’s objective is to be a consumer of oilfield services, and not a provider,” says Russia’s second biggest oil company. “However, due to limitations in the quality and availability of such services from third parties, TNK-BP OFS continues to maintain internal service operations.” It’s also investing in new drilling rigs, suggesting this is a long-term strategy, rather than a stopgap. Other firms are less well-placed, but they’re also, according to BP’s Vladimir Averchev, more likely to buy in foreign technology, almost preferring to pay a premium as a mark of quality. A popular anecdote about two “new Russians”, both of whom have recently bought a tie, is a case in point. “Mine cost 500 roubles,” says one man. “That’s nothing,” says the other, waving almost identical neckwear. “Mine is much better – it cost 2,500.”
The biggest clear advantage that Russian firms have is local knowledge: the ability to deal with the nitty-gritty of doing business in Siberia, whether in terms of having infrastructure in place or when dealing with officials and the obstacles they can throw up, which more rules-bound Western firms might be less well-placed to negotiate. If they do become as profitable as their rivals, however, mightn’t oil services turn out to be the next sector in which Russia decides it needs a state-run national champion (after shipbuilding, aerospace and whatever else might be on the cards)?
“Theoretically this could happen,” says Sergei Rudnitsky at RPI. “I just hope it doesn’t. It would throw the market back in terms of management, technical development and sound business thinking.” Industry insiders think it’s unlikely, although the idea has been circulating for the past couple of years. There’s no need to buy up these companies, it’s argued, if they can be regulated with a subsoil law. “The service sector is below the radar screen of the government,” says C.A.T.Oil’s Leonid Mirzoyan. “What they care about is controlling reserves.” Hans Klamperer agrees. “Purely from a technology point of view, I think this will never happen,” he says. “You cannot be an operator and run a streamlined, high-end technology, well-organised oilfield services company – these are two totally different things.”
MINISTRY OF GAZPROM
Sound business logic isn’t always what drives Russian energy companies, however. Consider Gazprom, which has been ploughing its money into almost anything other than developing new reserves of gas. Investments in utilities make sense, given the amount of wastage in Russian electricity generation, but it’s less easy to see the synergies in owning newspapers, radio stations, cinemas and hotels, let alone a football team. “Think about how successful Gazprom could be if run like a company,” muses Integra’s Hans Klampferer. “But it’s still doing very well. Look at the size of the reserves – it’s almost a no-brainer.”
The big question is how many of those 20-odd trillion cubic metres of gas can be brought to market soon. Most of Gazprom’s output is from three supergiant fields that it’s relied on for 40 years. Production from the newest development peaked in 2005 and the rest are close to depletion. “It’s not an immediate crisis, but within three to four years it could be,” says Jonathan Stern, the director of gas research at the Oxford Energy Institute. “They’ll have to ration gas for the domestic market and much will depend on whether they can continue to step up imports from Central Asia and supplies from independents.”
How has this come about? In large part because the domestic gas price is a fifth of what buyers pay in the European Union. For a long time, it simply wasn’t economic to invest in developing new fields. And since export prices started soaring a few years ago, Gazprom has been preoccupied with other projects – not least getting back the assets that were looted in the 1990s. Then there was Sakhalin, where Shell’s LNG capabilities were too irresistible to ignore. Gazprom now looks unlikely to achieve its target for bringing northern Yamal fields onstream by 2011 and others like Shtokman would take seven or eight years to develop, even if work started tomorrow.
European governments may be making noises about decreasing their imports from Russia, but they don’t have any immediately obvious alternatives. They’re also looking checkmated by the recent Russian initiative to form a gas producers’ cartel to set global prices, regardless of who’s selling. “Gazprom is the new Saudi Arabia,” says Chris Weafer, the chief strategist at Alfa Bank in Moscow. “The emergence of a gas OPEC, in which Gazprom dominates, will finally confirm that. It means all major decisions concerning Gazprom are taken in the Kremlin.” Nevertheless, argues Jonathan Stern, export growth is likely to slow down. “For supply and demand reasons and particularly for political reasons, I don’t expect Russian gas exports to Europe to increase much beyond current long-term contract levels,” he says.
At current volumes, that’s a little over a third of the company’s total output. But this doesn’t imply that supply could be partly shut down. “Gazprom has always been a scrupulous counter-party for all its Western buyers,” says Patrick Heren, the managing director of Heren Energy in London. “Many contracts have recently been extended to 2035 at the request of the Russians, not the western European buyers, thereby illustrating the real Russian fears about the firmness of European demand for their gas.” For now, exports to the EU are essential to the company’s profitability, but it’s ultimately looking to diversify into China. That may take decades, however: the Chinese have an abundance of cheap coal and want gas imports to be priced to match, which Gazprom says it won’t do. So although the fields of Eastern Siberia lie tantalising close to China’s energy-hungry market, they’re unlikely to send it any gas in the next 10 years. “Any pipeline to China is going to cost billions of dollars which means it isn’t going to be cheap gas anyway,” says Stern. “It will just sit there, just as it has for 20 years.”
Other markets closer to home are more profitable since rates were raised for Ukraine and Belarus, along with other former Soviet republics. Although the decision to stop supplying them at prices comparable to those paid in Russia was portrayed in the press as political, it was actually more commercial, argues BP’s Vladimir Averchev. “The business logic of Gazprom defines Putin’s thinking more than vice versa. He wants these companies to be major global players and in order to achieve this it’s necessary to run them as commercial entities.” That’s hardly compatible with subsidising energy for hostile neighbours who threaten to disrupt supplies to your most valuable markets.
Still more important has been the long-awaited approval of domestic price rises. Even if these fail to deliver the stated aim of “netback parity” by 2011 (making Russian prices equal to those in Europe, minus the cost of transport and export duty), they’re due to more than double over this timeframe. However, unless there’s a massive drop in the oil price (to which European gas prices are linked), it will still pay to export as much as possible. And the long-term growth potential of the company will remain as dependant as it has been on the outlook for the cost of oil, rendering Russian politics by and large irrelevant.
The biggest downside for investors is that there might be no upside. Given Gazprom’s objective of becoming “a global, vertically integrated energy company occupying a leading position on the world market”, it is almost certain to remain listed. Putin addressed the nation this year on the importance of market capitalisation, which is becoming something of an obsession with Russian managers whose taste for all things big is positively Texan. There’s no obvious reason why Gazprom would buy out minority shareholders who have no impact on corporate decision-making, even if the company stops short of reminding them of their irrelevance in public, like the state-controlled pipeline operator Transneft. But there’s also no obvious reason why it would move to pay bigger dividends any time soon, especially not while pushing through price rises that the government had been resisting for fear of courting unpopularity. In the long run, there’s an argument for the state taking its cut in the form of dividends, but for now it seems satisfied with taxes, even if Gazprom can keep blocking efforts by technocrats in the administration to raise them.
Being government-controlled is often to Gazprom’s advantage as a company, even if it’s not especially healthy for the development of the Russian energy sector, where the state’s hand is undoubtedly a brake on efficiency. Without competition, and with revenues soaring, there’s little incentive at the moment to tackle the low productivity that economists expect to cause a serious bottleneck at some point in the coming decade. Until now, Gazprom has been able to enjoy its dominant position, buying Shell’s Sakhalin stake for a discount of at least 30 percent on its market value. “They’ve been empire building all over the place in recent years,” says Kaka Kiknavelidze, an energy analyst who was forced to leave Moscow last year, when the Kremlin kicked out Georgian nationals over a spat with the government in Tbilisi. “Now they need to start taking better strategic decisions if their empire’s going to function.”
It’s questionable in the short term how likely that is: government pressure could easily embroil Gazprom in more economically dubious projects like the effort to gasify distant regions. Instead it needs to focus on the long-term goal of moving into LNG production to unlock valuable new markets in Japan, North America and the rest of the Pacific rim. Now that Gazprom’s bought into Sakhalin, argues BP’s Averchev, it’s up and running on that front. But the key is to get more active in East Siberia and the commercial imperative to do so is bound to win through, he believes. “We will see inevitably that Gazprom, and Rosneft too, will evolve gradually to behave like proper corporations,” he says. “Of course they will retain close ties with the state which controls them, but in the same spirit in which BP relies on the British government to sign deals with Libya to open up access for investments. After all, it’s quite common for oil and gas majors to rely on government support.”
READING THE RUNES
One thing that’s almost certainly off the agenda is a revived attempt to merge Gazprom and Rosneft. The failure to seal the deal after Putin announced it three years ago was a serious humiliation for the president, revealing his ultimate weakness in the face of differences between the two rivals. The key to his success in office has generally been his ability to balance these competing factions in his administration. Some observers liken his legacy to a delicately poised game of Jenga: all the blocks are still in place but a careless move could bring the whole edifice crashing down. For now, however, the jockeying for position in the post-Putin era is visible only to Kremlinologists, who pore over every clue as to what might be coming next. As Winston Churchill famously quipped, understanding Russian politics is like watching bulldogs fight under a rug: “an outsider only hears the growling, and when he sees the bones fly out from beneath it is obvious who won.”
Current consensus has it that Sergei Ivanov, the former defence minister, is the front-runner to take over, while his presumed rival, Dmitri Medvedev, is seen as a busted flush. Those with an eye on the dark horse fancy the former government chief of staff, Sergei Naryshkin, who has a talent for administration and has just been promoted. Others say Vladimir Yakunin, a former KGB man who runs the Russian railways, is a likelier bet. The list of names being touted also includes the St. Petersburg governor Valentina Matviyenko, her predecessor Sergei Sobyanin, and Putin allies Dmitri Kozak, Boris Gryzlov, Sergei Mironov and Sergei Chemizov. Or maybe none of the above. There’s little to choose between them in any case: ideologically, all are committed to defending the status quo, which probably means a shade more authoritarianism if needs be.
Change is what everyone’s afraid of, particularly those at the top. If there’s one thing no one can afford, it’s their rivals getting the upper hand, which suggests stability for the first half of the next presidential term, if not far beyond. But the paranoid mindset of the powers that be will be unlikely to leave much to chance. Some observers fear there’ll be explosions in Moscow before the election, like the 1999 apartment bombings blamed on the security forces by (among others) the ex-KGB defector Alexander Litvinenko, who was assassinated in London last year. The government said separatist Chechens were responsible for the blasts and used them as a pretext to start another war.
Challengers to the Putin administration are next to non-existent. The Other Russia coalition, fronted on foreign TV screens by Garry Kasparov, will do well to poll single digits. And its likeliest presidential candidate is tainted by his record as a prime minister under Yeltsin. Nevertheless, the group has only ever managed to hold two public protests in Russian cities without the police intervening, perhaps because the exiled oligarch who claims to fund it says he’s backing an anti-Putin revolution. There seems nothing around which more popular opposition might coalesce. The church is co-opted, non-governmental organisations are hamstrung by state regulations and the trade unions are impotent. Even the perennial last resort of patriotism is already one of the government’s biggest brand values. And the credibility of big business as an engine of change has been undermined by the theft of the country’s biggest company and its flotation on the London Stock Exchange.
Looking to the future, then, sustained chiding from Western governments seems inevitable, helping to reinforce the Russian government’s claim to be fending off hostile outsiders. Putin’s successor looks likely to continue what he started when he declared there’d be no free lunches for Russia in its fight to be taken seriously at the top table of geopolitics. “What do we want?” Putin rhetorically asked foreign reporters before the recent G8 summit in Germany. “First of all, we want to be heard.” Having sat back while the U.S. expanded NATO into eastern Europe, scrapped an arms reduction treaty and tried to build permanent bases in Central Asia, while funding self-styled revolutions against Moscow’s allies in other former Soviet Republics, many Russians think it’s about time. “We have to stop Americans from undermining our country – they only want reforms that weaken us,” says one young Muscovite. Another defines his hostility more simply: “We don’t like being told what to do.”
It would be easy to get carried away. “Russians,” cautions Anatol Lieven, an international relations scholar at the New America Foundation, “need to understand that they are not strong enough either to push back against the West on many issues, or to develop their economy without massive international investment, and that this requires fostering confidence on the part of international investors.” Ian Bremmer, a political analyst with the Eurasia Group, thinks Russia’s ability to project its power has a limited shelf-life as its population shrinks and investment gets harder to come by in the next decade. “Investors in Russia and the Russian president share a similar outlook,” Bremmer says: “get while the getting’s good.”
Moscow’s stock index may have dipped in recent months as some funds put their capital into other emerging markets. But there’s no shortage of others still bullish on the Russian bear. Shares in newly listed companies have been snapped up, despite suspicions that some of this year’s flood of initial public offerings were more about people cashing in assets before the elections. Foreign direct investment keeps rising too, chasing a boom that’s expected to last for years as money starts pouring into construction as well as consumer goods. “Russia’s transition to a market economy has been successful and cannot be undone,” says Hans Joerg Rudloff, the chairman of Barclays Capital and a board member of Rosneft. Gerhard Schroeder, the former German chancellor who now sits on Gazprom’s board, goes further. “People must understand that the Cold War is over,” he told a gathering of foreign executives in St. Petersburg last weekend. “Russia is self-confident in political and economic terms and this is good, not bad for Europe.”
Even discounting these two men’s vested interests, business seems to be moving in the opposite direction to political rhetoric, unhindered by Tony Blair’s call for an investment boycott. Leaving aside the ongoing confrontations over missile shields and independence for Kosovo, not much is likely to improve relations before the next American president takes office in a couple of years, by which time plenty more disputes could be festering. In which case, Russia will probably seek alliances of convenience with China and other Asian powers, despite its instinctive Western orientation.
What the next generation makes of it all remains, in the hoariest of clichés, to be seen. But today’s young Russians are ambitious, Internet-literate and completely detached from the Soviet mindset. Even if they’re apolitical, future leaders have to come from somewhere other than Putin’s mould. Before then, though, the man himself may return, after a stint in his successor’s shadows. “Theoretically it’s possible,” he says of a third presidential run in 2012. “The constitution does not forbid it.” In the meantime, someone else will have to pick up where he leaves off, to the extent that he actually does.
What’s most unclear is the impact that the positive economic outlook will have in time on the less rosy prospects for politics. Many people make the case for an emerging middle class demanding more pluralistic public debate, but it’s questionable whether the airwaves will resonate to anything more polyphonic than MTV and mobile phones. Nevertheless, anecdotal evidence suggests it’s possible to fight the state and win, even if only in resisting a compulsory purchase order on your flat. Opinions vary on the Kremlin’s justifications for its seizures of oil and gas assets, but investors generally see them as the exception, not the rule. “Russia is a level playing field if you stay out of a few key industries and don’t try to take on the state,” says Eric Kraus, who moved here as a banker before starting his own business. “I own a number of apartments in Moscow and I get no more hassle than the average Russian.”
