Future of Russian Government

[55North]

The government has fallen 4 times I think.  So what?  Politicians align, realign, learn, settle down, often with guidance from others.  A new nation, without a previous culture of parliamentary democracy and the facility of free political alignment, do you expect it come out right first time?  Add to that the cultural traditions and corruption that are endemic, how could it be smooth?
 
Check somewhere like Italy.  Or Greece.  To northern Europeans, sometimes basket cases.  They improve gradually, but it's a long game.   At the end of WW2, these countries were completely devastated, particularly regards civil society.   They've come a long way.
 
The UK has been relatively uninterrupted in her civil progress since the 16th century.  And we still haven't got it right.

[timothe]

Sorry Timothe, but it does. Russia's main exports are oil, gas and a handful of other raw materials (revenue from oil and gas account for something like one half of the Russian's state revenue IIRC, perhaps even a bit more). Much of the new "middle class" are in effect government works benefiting of the largesse of the state that is now awash in oil money. If oil prices were to drop, then the state would have less money, and a lot of the new "middle class" would quickly evaporate. Simple economics.

The way Russia could drop oil prices is by producing significantly more oil than they are doing now.  More oil exports = greater revenues. 

You're really off base here, gabaub. 

[SANDRO43]

Russia's main exports are oil, gas and a handful of other raw materials...

Including, as I discovered a couple of days ago from a TV report, ivory .

The international ban on elephant/rhino ivory trade does not contemplate another possible source, mammoth tusks, and Siberian findings are fueling a lively trade, with China in particular .

[Misha]

The way Russia could drop oil prices is by producing significantly more oil than they are doing now.  More oil exports = greater revenues. 

You're really off base here, gabaub. 

To increase oil and gas production requires a lot of investment. If we look at GAZPROM, it has invested relatively little on production and is still coasting on old gas field that have peaked and are now on the decline. I don't have time to search for more articles, but here is a piece translated from German and on Robert Amsterdam's blog as to how Russia is running out of gas: http://www.robertamsterdam.com/2008/01/russia_is_running_out_of_gas.htm.

[timothe]

Gabaub, you seem to be implying that Russia is causing the rise in oil prices.  I assumed (maybe falsely) that your reasoning for this was that Russia was holding back on production. 

You don't actually believe that the Russian government can simply set a price on oil and everyone will just pay their price because they say so, right?  That's not how oil prices work.  They are a commodity and the market sets the price based on supply and demand.

Now natural gas is a different story because Russia is the sole supplier of natural gas to other FSU countries.  Russia can strong arm its former members and does so.

But your original point was that the Russian government sets oil prices for the world.  They can't and they don't. 

[deccie]

  They are a commodity and the market sets the price based on supply and demand.

Not quite true because you take no account of the futures market which has little to do with actual price and demand.
I read one assessment that the TRUE price of oil according to current supply and demand was around the $70-$80 USD mark. Speculators were responsible for the current difference.

[Misha]

Gabaub, you seem to be implying that Russia is causing the rise in oil prices.  I assumed (maybe falsely) that your reasoning for this was that Russia was holding back on production. 

But your original point was that the Russian government sets oil prices for the world.  They can't and they don't. 

No, my original point was that Russia benefits from the high oil prices. Every increase in oil price means that the state collects billions more in oil rents (i.e. royalties and taxes on oil exports). This takes the pressure off of Russia to reform its economy: it does not need millions of profitable small and medium-sized companies, rather it relies on a handful of large companies and the sale of natural resources. What risks happening under such circumstances is what economists call the "Dutch disease" whereby "an increase in revenues from natural resources will deindustrialise a nation's economy by raising the exchange rate, which makes the manufacturing sector less competitive" (source: http://en.wikipedia.org/wiki/Dutch_disease). It is one of the reasons why Spain did not become a leading economic power in Europe, in spite of all the gold and silver that flowed into the country from the Americas: too much easy money can discourage economic and industrial development in other spheres of the economy. Likewise, too much easy money can drive up prices (inflation) and discourage sound economic growth.

The problem that I am pointing out is that many have noted that Russia and its companies are not investing enough in production. At this pace, they will not be able to fulfill their contract requirements. Also, Russian demand for natural gas is increasing, and this is also leaving Russia with less natural gas for export. The oil industry is a bit better off in Russia, but it will still need massive investments over the next few years. Will private investors do this if they fear their companies will be subtly nationalized? Will the state invest if the money can be spent on flashy projects or more likely siphoned off to offshore accounts?

[Eduard]

Including, as I discovered a couple of days ago from a TV report, ivory .

The international ban on elephant/rhino ivory trade does not contemplate another possible source, mammoth tusks, and Siberian findings are fueling a lively trade, with China in particular .

My wive's family is from Siberia and they brought a couple of mammoth figurines carved out from mammoth tusk, also a couple of carved medalions that I wear sometimes. They are really neat!

[timothe]

The problem that I am pointing out is that many have noted that Russia and its companies are not investing enough in production. At this pace, they will not be able to fulfill their contract requirements. Also, Russian demand for natural gas is increasing, and this is also leaving Russia with less natural gas for export. The oil industry is a bit better off in Russia, but it will still need massive investments over the next few years. Will private investors do this if they fear their companies will be subtly nationalized? Will the state invest if the money can be spent on flashy projects or more likely siphoned off to offshore accounts?

OK.  I misread your post.  I thought you implied that Yeltsin or Putin had something to do with the price of oil. 

Foreign investors are putting their toe in the water with Gazprom, Luk Oil, etc.  These investors will never make a full commitment to Russia unless/until they are satisfied they won't have their investments stripped from them by the government.  Until that time, Russia will continue to sit on huge amounts of untapped resources while not meeting their own demands, much less the demands of their neighbors.   

[Misha]

OK.  I misread your post.  I thought you implied that Yeltsin or Putin had something to do with the price of oil. 

Foreign investors are putting their toe in the water with Gazprom, Luk Oil, etc.  These investors will never make a full commitment to Russia unless/until they are satisfied they won't have their investments stripped from them by the government.  Until that time, Russia will continue to sit on huge amounts of untapped resources while not meeting their own demands, much less the demands of their neighbors.   

I agree in that investors would have to be quite masochistic to invest billions of dollars into Russian oil and gas. We only have to look at the treatment that BP and Shell got this past year. That should be enough to make any sane investor think twice before going into Russia in the oil and gas sector.

[DKMM]

I have a client that bought mammoth tusks 15 years ago as collectors items and sold them this year for a 1000% profit.  We were wondering around the office why the price increase but now I know, thanks!

Russia's lack of investment is nothing new and shouldn't be to anyone investing there.  In any case, the state companies + Lukoil should be able to handle the new production needs IF they get their butts in gear which they currently aren't (except LukOil).  Their Sakhalin Oil ouput is slated to drop 25% this year.  The gas issues are a larger problem though...

Rising oil prices don't help Russia as much as you might think.  1st it causes the ruble to appreciate on the dollar, which decreases their take since they sell the oil in dollars.  2nd they siphon off the excess revenue to the reserve fund to keep the cash from heating up the economy.  3rd rising oil prices are inflationary for them because they still don't produce enough other goods to make up for it.  Not as much of a problem when you have a postive trade balance though...

[Misha]

Not as much of a problem when you have a postive trade balance though...

Even that is quickly disappearing. When the rouble appreciates in value, foreign goods become cheaper so more people buy them. More imports means that your surplus trade balance can become a negative balance in a few years.

[BC]

I agree in that investors would have to be quite masochistic to invest billions of dollars into Russian oil and gas. We only have to look at the treatment that BP and Shell got this past year. That should be enough to make any sane investor think twice before going into Russia in the oil and gas sector.

http://www.euractiv.com/en/energy/new-russian-gas-pipeline-deal-cuts-eu-unity/article-164920

Eni is Gazprom's largest customer and Europe's largest gas company in terms of sales. Unlike BP and Shell, which have been forced to sell key Russian assets to Gazprom, as part of the South Stream deal Eni will likely allowed to keep a number of assets recently acquired in Russia.

Seems others are viewing this situation also as opportunity.  Isn't this capitalism at it's best?

It is quite common and normal for large companies to use various types of 'leverage' to attain their goals. 

Is it possible that Shell and BP simply got their bluff 'called'?

[Misha]

The last I have read was that BP was looking at investing a few billion in the the Canadian Oil Sands (http://www.guardian.co.uk/business/2007/dec/06/bp.oil) and another report they were meeting with Iraqi government officials about developing an oil field in southern Iraq (http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3315476.ece). Looks to me like they are looking to diversify their investments and are looking for new opportunities anywhere but Russia.

[ScottinCrimea]

I was listening to a commentator on television the other day and what he said really should open some eyes.  He recalled how the US "won" the cold war and what the conditions were that caused the break up of the Soviet Union.  At that time the US was very strong economically because of the low oil prices.  The USSR was struggling economically and was stuck in the middle of an expensive war in Afghanistan fighting against some guy named Osama Bin Laden.  Now look at what we are seeing now.  Russia has a strong economy because of high oil prices while the US economy is struggling.  The US is stuck in an expensive war in afghanistan and Iraq fighting some guy named....you get the picture.  The very conditions that brought about the fall of the USSR are now reversed, and not in our favor.  I'm sure Putin isn't blind to the lessons of history.

[wxman]

The Russian economy is based soley on it's depleting oil reserves. It has nothing to fall back on. It relies on the rest of the world to feed it's dwindling population. The population is aging and will cost the government more and more, with fewer younger people coming along to support the system.

Russia's GDP in 2006 was $989 billion while the US GDP was $13.13 trillion.  Russian economy is no better than a third world country and is less than Mexico's GDP of $1.149 trillion, who's population is 40 million less than Russia.  What will Russia do in 50 years when their easy oil reserves are gone? I think Russia is in big trouble in the long run. They are so bogged down in bureaucracy that they are unable to diversify their economy. They had their chance 20 years ago but didn't see it. China and India got a hold of those reigns, and now Russia is too bogged down chasing the wrong giant.

It's not the wars the US is fighting that will cause economic problems. It's just a small blip on the budget. It's the entitlement programs. Of course I remember the 70s when inflation in the US was double digits, unemployment was over 10%, interest rates were near 20%, gas prices were historically the highest and the dollar was worthless. It was the end on the US. Japan was going to pass us by and their GDP would be higher than the US. Now the same talk, but this time China will bury us. It didn't happen in the 70s, and it's not going to happen now. Everytime we have a recession, the same doom and gloom pops up, but in the end, recessions are the best thing for the economy. Everytime it happens, business gets more efficient, new technology arises to modernize business, the US regains a competitive edge, and the US emerges stronger than before. 

[Eduard]

The Russian economy is based soley on it's depleting oil reserves. It has nothing to fall back on. It relies on the rest of the world to feed it's dwindling population. The population is aging and will cost the government more and more, with fewer younger people coming along to support the system.

Russia's GDP in 2006 was $989 billion while the US GDP was $13.13 trillion.  Russian economy is no better than a third world country and is less than Mexico's GDP of $1.149 trillion, who's population is 40 million less than Russia.  What will Russia do in 50 years when their easy oil reserves are gone? I think Russia is in big trouble in the long run. They are so bogged down in bureaucracy that they are unable to diversify their economy. They had their chance 20 years ago but didn't see it. China and India got a hold of those reigns, and now Russia is too bogged down chasing the wrong giant.

It's not the wars the US is fighting that will cause economic problems. It's just a small blip on the budget. It's the entitlement programs. Of course I remember the 70s when inflation in the US was double digits, unemployment was over 10%, interest rates were near 20%, gas prices were historically the highest and the dollar was worthless. It was the end on the US. Japan was going to pass us by and their GDP would be higher than the US. Now the same talk, but this time China will bury us. It didn't happen in the 70s, and it's not going to happen now. Everytime we have a recession, the same doom and gloom pops up, but in the end, recessions are the best thing for the economy. Everytime it happens, business gets more efficient, new technology arises to modernize business, the US regains a competitive edge, and the US emerges stronger than before. 

Great post Wxman!
I agree that in a long run Russia will loose it's strength that it gained due to oil hungry West, but generally other than natural resources it doesn't produce much, and many products that it does produce are inferior to Chinese and others.
Terrible Corruption and bureaucracy puts the last nail in the coffin of any hope in Russia.
Many people who made serious money one way or another move abroad, Russia has lost and still loosing some of the best brains, because they don't believe in compensating well their scientists.
I recently discovered a website: odnoklassniki.ru it's a site where you can find your classmates from elementary/middle/highschool, college, or even people from your apartment building where you grew up. Well, I found a bunch of people that I knew in my childhood and teens. It's amazing, but out of about 30 people that I found, 7 live in the USA and a couple in Europe!
I talked to one guy who I know since the age of 7 y.o. he now lives here in the US since 1996. He was an aerospace scientist in Russia, him and a couple of his colleagues invented some amazing new technology. They tryed to get it recognised and developed in Russia but Russian bureaucracy and corruption did not allow them to get anywhere. Then they took part in some scientific convention and displayed their invention there...guess what..NASA noticed them, offered them a contract right away and here he is! People like him are appreciated here much more than in Russia, and that's why Russia alway looses it's brightest minds to the West.
In my travels I talk to many common folks in Russia, outside of the glamorous Moscow lifestyle. And I sense a lot of discontent. People who live in small cities and villages are dirt poor, make hardly enough money to survive and generally don't have any hope for the future...some are fondly remembering life during the Soviet era when they at least didn't have to worry about having enough money for food and could take a month vacation on the Black Sea coast once a year...old people are mistreated and the overall feel I get is - depression, lack of hope.
On the other hand in Moscow, the feeling is a 180 degree opposite. People are enjoying the lifestyle in the big city, and as long as they have the right connections they live a very nice lifestyle and many drive very expensive high end autos that they pay almost double for that we here in the USA. I have a couple of friends that own businesses that have contracts with the government...obviously very well connected, VERY wealthy and they are very optimistic and sing praises to Putin and Luzhkov...
So really it's who you talk to...they think the future of Russian government is very promising...

[Misha]

This morning I read a fascinating piece in The Moscow Times about corporate raiders. The article provides an account of how people are driven out of business by competitors who use corrupt police officers and judges to trump up charges against their competitors to drive them out of business. The article writes:

Andrei's business is among thousands that are taken over in illegal raids every year in and around Moscow. The number has soared in recent years, creating such a huge problem that the State Duma intends to consider legislation to fight the raiders this spring, Duma Deputy Speaker Oleg Morozov said last month.
   
In the West, corporate raids are run-of-the-mill affairs: A stronger company legally takes over a weaker one, and both sides usually benefit from the deal.

Not so in Russia. Raiders here use their links to corrupt officials to illegally seize businesses, often with the aim of acquiring prime real estate. The raiders often include former intelligence officers, policemen, lawyers and people with ties to well-placed state officials. On their payrolls are judges, prosecutors and bureaucrats on all levels. Through them, the raiders can order a search of a business, gather information about the owner, and falsify whatever documents they need to take over the business.

"Unfortunately, raiders are people who work for the system, and through it they can falsify anything they want," said Gennady Gudkov, former head of a working group that tracked the issue in the previous Duma.

The article recounts the case of one businessman who was ruined by such practices:

The policemen showed Andrei a transparent bag with a white sugar-like substance that they said was cocaine found in his office. They detained Andrei and shoved him into an isolation cell. He was not allowed to make any telephone calls to his family or to speak with a lawyer.

"I racked my brains for two days trying to understand what was going on and why someone wanted me in jail," Andrei said.

The mystery was cleared up when a smiling lawyer came to the cell on the second day and announced that he had a solution. He said the criminal case would be dropped if Andrei signed a contract transferring ownership of his office to a company that he represented.

How can any country's economy prosper under such circumstances? If this is capitalism then Adam Smith must be certainly spinning in his grave. Source: http://www.moscowtimes.ru/stories/2008/02/13/001.html

[Eduard]

yes, this sounds like my motherland...I remember some people were defending this capitalism "Russian style" in My first thread, saying that bribes are just another form of taxation, etc. It's all good while they have their "protection" in place. But situation can change and they can lose everything they own and their life, if somebody who has better connections will decide that he wants their business.
I actually know a guy that I went to school with in Moscow and when we met up with him on one of my visits, he told me his story:
In the 90s he managed to buy up a small shopping mall, expanded it put a lot of money in it making it look nice and modern. Obviously he had to have a "roof" - mafia protection to be doing this. His business was thriving...bratki (brothers - the name used for gangsters in the criminal world) came to him and wanted him to pay more. He had to agree, then again they raised the price...then finally they told him that they want the business - pack up and go...say thank you that we are letting you live.
So his own "roof" took his business away from him. And there is no one to complain to! He is thankful to be alive. The moral of this story is that you might have great connections and great, powerful "Roof" and enjoy a very lavish, lucrative lifestyle in Russia. But since there is no real rule of law all that can come to an end when someone who is better connected (weather it's criminals or government officials...is there a difference there??? ) wants to take it away from you.
Sadly this is the norm for Russians...