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THE RING OF ABSOLUTE POWERBy Yevgeny Trifonov
September 2006
SourceThe authorities have finally chosen a strategy for Russia’s development: the country is to remain a raw materials appendage to the developed nations
The absorption of Sibneft by either Gazprom or Rosneft was predicted quite a while ago, at least when the government bought Yukos biggest subsidiary and Gazprom attempted to amalgamate Rosneft. This brought to light the strategy of the Kremlin’s most radical groupings: to set up a single state-owned company to produce, process and sell oil and gas, a company to serve as the backbone of the nation’s economy. The giant corporation will let the state absorb the principal money flows of the country and manipulate massive funds at will, while private business will be pushed to the fringes of economic life.
Can it be said that Russia’s oil riches are being nationalized? Yes, in a way. Almost a third of the country’s oil resources are in the hands of government companies, and that share will reach nearly a half after Gazprom or Rosneft absorbs the Yukos leftovers. The survivors (LUKoil, TNK-BP and smaller ones) will get the right to develop oil fields that are of little interest to the government super-corporation. The private companies too are fully dependent on the state Transneft pipeline operator.
What is not of interest to GazpromA majority of experts, except the most partial, have a pessimistic view of the outcome of the deal. First of all because Gazprom is known for inadequate managerial skills (why should a monopolist require professionalism?) and excessive staff. The company’s finances are knotty. Nobody knows who owns and who runs what inside it. Real governmental control has long turned into control by its top management and a group of senior officials. That is not all, however. Gazprom has a defective strategy for gas industry development. The company people like to say that, thanks to high export prices of gas, they keep prices low for Russian consumers. With all that, Gazprom managers often complain that the domestic prices are too low… How can that be understood? Probably, this way: for political reasons, domestic gas prices are indeed not too high, but the gas giant would like very much to raise them. The pride of Gazprom, besides the low price of gas, is the gradual gasification of Russia. Actually, the web of gas pipes covering the country is a questionable achievement. First, it is dangerous. Second, local grids occupy too much land that is, consequently, lost for other economic uses. Electric hotplates in towns and countryside are much safer, while modern heating by electricity instead of gas is much more promising in all respects. One point more: Russia’s gas reserves are not unlimited. In 30 or 40 years, they are bound to shrink, leaving us to face a choice between exporting it or supplying national consumers. Just guess what the government’s choice will be.
Gazprom is not rich in the innovations that could provide Russia with gas for decades or even hundreds of years, above all, in what concerns methane or marsh-gas. More gas can be extracted from the coal fields of Kuzbass alone than is produced today in all of Russia. A while back, the administration of Kemerovo entered into an agreement with Gazprom to start commercial production of methane, but the idea died out, apparently because Gazprom could not bring itself to go in new technologies. Gas can be also extracted from coal beds in Central Russia, the Urals, Extreme North, and Far East. However, this would involve large investments in research, equipment, and a general revision of the overall development conception of the industry. Instead, it has been planned to lay a pipeline from the Kovykta field to China, Korea and Japan, and to develop the Shtokman field in the Barents Sea. That’s fine. The money will go into the national budget for some time. When these fields are exhausted, we will move on to the shelf of the Okhotsk and Chukchi Seas. And then it will be the end.
A corporation of monstersThe creation of the oil and gas super-corporation indicates that the government has at last selected a development strategy for Russia: this country will remain a raw materials supplier of the developed nations and cease its attempts to move on to a higher and more deserved level. The seabed pipelines to Europe (in Baltics) and Asia (Kovykta-Datsin-Nakhodka) that are advertised so much of late are a sign that the government has little interest in other branches of the economy that do not bring in as much revenue. The Kremlin’s intentions of spending more on social needs and infrastructure projects are fine but they look very much like a pipe dream. Like any alms, the money dispensed to the needy directly cannot raise living standards because infrastructure projects can be only started by the time the current president’s powers expire and his successor will bring in his own ideas and priorities.
Of course, it is much easier to state Russia’s strategy of development as a raw materials appendage of the West than take efforts to expand hi-tech branches of its economy, first of all machine building industry. This is more than just a matter of the difficulties the authorities would have to overcome should they really apply their efforts to aircraft, auto and tractor manufacturing industries. The problem is private interests. The Russian elite has turned into the typical bureaucracy of a Third World country and is primarily concerned with its own business projects, which are more profitable in oil and gas extraction than in any other fields. Unable to implement science and technology projects, Russia’s technologically backward economy will not move forward without action by government bodies. But the latter, it is clear, have no interest in it.
In Yeltsin’s time, high-ranking officials used to make arrangements with the oligarchs; in Putin’s time, they are turning into oligarchs themselves. It is of no little importance that the current rulers do not conceal their Soviet origins, and this explains a lot. In the past, in the time of Lenin-Stalin-Khrushchev-Brezhnev, there existed bank accounts abroad at the collective disposal of Politburo members. The earnings from sales of our oil, gas, diamonds, timber etc., were used to finance economic mega-projects like building the Druzhba oil pipe, as well as on building villas for the Central Committee members and vacations on the Cote d’Azure. These were called “party money” in the 1990s and served as the foundation of all privately owned wealth. There were no other sources of the primary accumulation in the USSR.
As perestroika was coming to a close, top officials hired young businessmen as managers. The latter, using the crumpling state, took control of the anonymous funds whose true owners were mostly too stupid and conservative to become businessmen themselves. Only a fool could believe that Gusinsky, who was moonlighting as a driver; Berezovsky, who counted the money of VAZ; Khodorkovsky, who started his career running young communists’ video salons, and Abramovich, who is alleged to have highjacked a trainload of oil (by the way, the most unbelievable story of them all), could become billionaires without some access to Party gold.
Of them all, only Abramovich is sitting pretty, because he did not try to play his own game and did not imagine himself a true oligarch. Abramovich remained a manager of other people’s money, as he realized that, should he show independence, he would be eaten alive or, in the best case, given a morsel and banished forever, like Berezovsky and Gusinsky. That is why he was allowed to sell Sibneft instead of having it confiscated. The narrow circle of top officials sees all the big businessmen as common thieves exploiting government property that has been given to private persons in trust to save and multiply. That’s where the unbelievable sum of $13 billion for Sibneft came from.
That sum was paid not to Abramovich but to the Millhouse Capital Co., which controls the Sibneft stock. The governor of Chukotka and the offshore company that received the money are not one and the same thing. Abramovich owns but a quarter of the Millhouse Capital stock, and the other owners are unknown. However, there can be no doubt that those anonymous persons are the very people who approved the Sibneft mega-deal and were behind the destruction of Yukos. Before that, they had been behind the banishment of Gusinsky and Berezovsky. They were the people who paid themselves for Sibneft.
ZAO RossiyaThe creation of the oil and gas super-corporation is a return to the Soviet system, where a group of top officials were in command of all the country and its money. But the current rulers have had some slight experience of the market and have grown wiser. They do not want to handle businesses that do not yield a fixed and rapid profit. Those are left to the small fry of private business.
The Gazprom-Rosneft alliance is not a monster corporation, it is a corporation of monsters who own Russia. In fact, it can be named the Closed Stockholding Company (ZAO) Rossiya. A couple of years ago, at the first discussions about what Vladimir Putin would be doing after retirement, there was mentioned, along others like the premier’s chair and head of the ruling (actually the only) political party, the option of head of Gazprom, which is to acquire oil assets by 2008. So far, there has been no progress in the amalgamation of Gazprom and Rosneft because of the infighting within ZAO Rossiya. But this is a passing problem, and when the trumpet sounds, all differences will be forgotten and the assets of both companies will be amalgamated without a hitch. As a matter of fact, Putin is well aware of Gusinsky’s and Khodorkovsky’s lot and does not seem to care for the management of other people’s money, and the corporation of monsters can find some other top manager.
The ruling grouping expects the government-owned oil and gas giant to become the omnipotent ring that would guarantee it political survival and control of the nation irrespective of the makeup of the next parliament or who the next president may be. In other words, ZAO Rossiya intends to rule the area under its sway forever and ever with a pretense of democratic procedures. One can suppose that a lack of education prevents the project’s authors from realizing that similar things have taken place even in the Third World’s wildest countries, always with a poor end of those who handled their countries like their private shops. Ethiopia’s last emperor was strangled by Major Mengistu. “Generalissimo” Trujillo was shot to death by a CIA agent. The Paraguayan tyrant Stroessner was driven into exile by his retinue. This is a hopeless business. And the gas and oil are bound to end.