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| Caucasus/Russia/Central Asia |
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| 2009-01-16 |
| To little notice in America, a drama is being played out in Eastern Europe that future historians may mark as the beginning of the end of Russia's neo-imperialist ambitions under Vladimir Putin, as the economic house of cards he built collapses and the tyrant himself heads for the dustbin of history. There are several facts seldom discussed in the Western media that need to be considered before one can truly understand the nature of the conflict. First, Russia has a sliding scale of prices it charges for its gas to ex-Soviet republics depending on the degree of their political sycophancy to the Kremlin. Obedient clients, like Armenia and Belarus, are charged $110-$120 per 1,000 cubic meters, more independent countries like Georgia and Moldova pay $270-$280, while current bête noir Ukraine is asked to pay a punitive $500. Secondly, Ukraine has by far the largest gas storage facilities in Eastern Europe going back to Soviet times when it was the center of the gas industry and can easily survive the cutoff for the entire winter season by using its stored reserves. The real victims are the half a dozen Eastern European countries that have neither alternative supplies nor large storage facilities and are already in the midst of a dire socio-economic emergency. Third, Russia is almost certainly more vulnerable than Ukraine to any prolonged stoppage of the gas flows. Ukrainian pipelines carry 80% of Gazprom's exports to the West and the lion's share of its export earnings. Even a few months without these cash flows are likely to bring the already teetering Russian "national champion" to its knees. Therefore, the conflict will be settled quickly and it's not going to be exactly on Russia's terms. Putin's desperation could be better understood by sketching out to what extent Russia and its oil and gas industry are in the middle of the economic equivalent of a death spiral, with potentially dire political consequences for the Kremlin. It was only six months ago that Gazprom, at that time the third largest company in the world with $350 billion capitalization, confidently forecast that it will become the largest in the world with $1 trillion valuation by 2015. Many a Western banker also nodded in agreement to Gazprom's other prediction of $250/barrel price of oil in 2009. As Putin managed to build monetary reserves of $600 billion -- the third largest in the world -- Russia did look invincible for a time. He also bribed the Russian people into political acquiescence by jacking up salaries and pensions 200% since 2000, even though GDP and productivity had gone up barely a third of that. Alas, it was but a house of cards. With no industrial production worth mentioning, its infrastructure badly dilapidated, virtually all of its food imported and mortality rates only found in sub-Saharan Africa, Russia under Putin had become a classic banana republic with oil and gas. It lived or died depending on the price of bananas over which it had no control. Quick, find my nanoviolin. Nor is the oil sector in better shape. At current market prices below $50, the oil companies lose money on exports and are shutting down wells. With most major oil fields well past their peak and many nearly depleted, the oil industry needs new investment as badly as Gazprom, but is even less likely to get it. All of this is, of course, very bad news for the oil and gas sector but it is an unmitigated disaster for a government whose very economic model is doomed if that sector does not perform. According to finance minister Kudrin, Russia needs an oil price of $95 per barrel to avoid an economic downturn and is facing huge budget deficits if it falls below $70. We're now well past these points on the way down and the inevitable bursting of Putin's make-believe economics bubble is taking place in front of our eyes. Shades of 87-91? Finally, to go back to Putin's arm-twisting in Ukraine, it is virtually certain that when all is said and done, Eastern Europe and, hopefully, parts of Western Europe as well, would decide that continued energy dependence on Russia is very bad for one's economic health and engage in a crash course of developing alternative sources. It is likely to involve a new emphasis on nuclear energy with several reactors already in the planning stages, clean coal power stations as well as coal gasification and liquefaction and liquid natural gas terminals among others. Hopefully, the new focus will involve renewed efforts to build the Nabucco gas pipeline that bypasses Russian territory, as well as stopping the construction of the new Gazprom pipelines. The United States should wholeheartedly support these policies and while at it think of dealing with its own energy dependence. Common sense in the Age of Obama? Naw. |
| Posted by:Nimble Spemble |
| #3 ..more like on the lines of a self inflicted wound. Hey, watch it were you point that thing. |
| Posted by: Procopius2k 2009-01-16 21:26 |
| #2 A sharp, steep recession. Just another weapon in the arsenal of democracy. |
| Posted by: Halliburton - Mysterious Conspiracy Division 2009-01-16 21:16 |
| #1 "continued energy dependence on Russia is very bad for one's economic health" Well, duh. Even a blind man could see that. |
| Posted by: Barbara Skolaut 2009-01-16 20:11 |