Tuesday, January 9, 2007

Alleged "Oil Woes" of an Alleged "Energy Superpower"

Joining The Economist's permanent obsession with Russia's economic doom and gloom is Leon Aron with his alleged "Russia's Oil Woes". Many amazing discoveries await us in this article. We find out that "the idea that Russia is a new “energy super­power” is all the rage in Moscow", and that it's in fact Putin's idea. That this idea is hollow because Russia cannot produce enough oil to satisfy world's demand. That the reason for this sad state of affairs is the statist ideology of the diabolical Kremlin, which takes over Russian oil companies and prevents them from increasing production due to its mismanagement. Once again, Russia is bound to fail.

The first thing I did upon reading this was to go to a Russian search engine and search for "энергетическая сверхдержава" (that's "energy superpower" in Russian). Quite predictably, the main hits that came up were translations of English language publications into Russian, e.g. from The Wall Street Journal. Now, there is some evidence of discussion on the topic, but the timing of the materials is quite clear. The "energy superpower" concept originated in the West and then migrated to Russia, and now the Russians are trying to figure out if it's worth it or not. Russia has not set out to become an "energy superpower" -- it's merely wondering about another set of ideas the West is trying to force on it. And incidentally, since Leon Aron hasn't noticed it, I have to point out that Putin has already rejected the idea of Russia as an "energy superpower". So, once again Russia is being ascribed a goal it doesn't have, and once it naturally doesn't achieve the goal it didn't have in the first place, Leon Aron, as well as most certainly the WSJ, will gleefully declare that Russia has failed yet again. Nothing new there.

Now, is all that Leon Aron's scaremongering worth the megabytes of network traffic it has generated? From the start, Leon Aron waxes indignant about how the diabolical Russian state destroyed and bought the allegedly "most transparent and efficient companies", Yukos and Sibneft, how it uses "environmental and ecological 'violations'" of Western oil majors to force them to renegotiate contracts. That's right, Leon Aron put "violations" in quotes. Apparently, he doesn't believe that Shell could ever allow any environmental violations while drilling for oil or gas. Apparently, numerous environmental activists who were writing on this topic long before Russia ever publicly concerned itself with Shell's doings, were actually secretly in the employ of the diabolical Kremlin. Leon Aron's indignation about Sibneft's purchase by Gazprom is also a total mystery. Sibneft was bought and paid for, where's the problem in that? As for Yukos, despite any machinations around the transfer itself, the basic cause is that Yukos failed to pay the taxes it owed (is anyone sane who's not being paid by Menatep going to argue that Yukos had been a law-abiding taxpayer?). The government could've chosen to go easy on it, but it didn't, and wiped out the company through legal means. It was within its rights. Finally, I find it difficult to see how anyone can take the claim of Yukos's alleged transparency and efficiency seriously, when enough has been written already to demonstrate that it was patently not the case.

Now that the issues of morality (why did they have to come up anyway, just to add noise and confusion?) have been settled, the only real question remains: is this situation really detrimental to Russia, as Leon Aron claims, or not? First, some facts: Oil, paid for in USD, accounts for more than half of Russia's export revenues (even if for a much smaller chunk of Russia's GDP). This flood of US dollars comes into Russia and is converted into rubles. The Russian Central Bank, in order to keep the ruble exchange rate stable, is forced to print rubles just to buy up all these dollars. In fact, practically all ruble emission is driven by export revenues, while Russia's foreign currency reserves have reached $299.2 billion as of 22 Dec 2006. The rapid increase in money supply causes significant inflation, which in 2006 was barely contained at 9% (it was even higher during the previous years). The federal budget captures more than half of the price of each barrel of oil exported through taxation. Due to rising oil prices, the budget has been running with significant surpluses, which were put into the so-called Stabilization Fund. The government cannot use that fund for fear of stoking inflation. This Stabilization Fund is now at around 3 trillion rubles. It is a paradoxical situation -- the Central Bank keeps printing rubles and the government keeps storing them away in order not to mess up the economy. Hence, the net benefit to Russia of a large chunk of current energy exports is simply more zeroes being painted on presently useless foreign currency reserves, and more zeroes on the presently useless Stabilization Fund balances.

In this situation, Leon Aron, can you somehow explain why anyone in Russia should give a rat's ass about decreasing oil production and energy exports? If Russia fails to export more oil and gas, a real disaster will strike -- the currently bloated foreign reserves will fail to increase yet again. How will Russia survive that? Not to mention the fact that any oil not sold today will remain for future generations of Russians to be used for themselves. Also, could you possibly explain why the government should not in fact own most of the country's oil and gas, as is customary in almost all other energy exporting countries? If 40% of the federal budget depends on energy export revenues, shouldn't the government have a large say in how that revenue is received and used?

So, if Russia doesn't lose from the decrease in energy exports, who does? Hmm, maybe looking at the figures for world's oil consumption will help. I am reasonably certain that China and Japan would love for Russia to produce and export more oil. I am also reasonably certain that the entire EU would jump with joy if Russia produced and exported more oil. But I am more than certain that the US, which consumes one quarter of world's oil, and which has a penchant for starting wars over it, would kill anyone to have Russia produce and export more oil. But short of that, maybe Leon Aron can do the work of trying to convince anyone credulous enough that it is apparently in Russia's own interest to further succumb to the Dutch disease in order to keep the US, the EU, China, Japan and many others supplied with energy.

Now, the conclusion: With all due respect, dear Leon Aron, but if you want to keep your article in its present form, you should retitle it "America's Oil Woes", since it is the US, not Russia, who is poised to suffer. If you want to discuss Russia's oil woes, I recommend examining how Russia exports entirely too much oil, and why she still accepts US dollars as payment for it. It also wouldn't hurt to write an article about the need for the energy importers to start seriously thinking about consuming less, rather than recommending to energy exporters to sacrifice the livelihood of their future generations in order to appease the spendthrift habits of today's SUV-driving suburbanites.

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