Russia's Gas Weapon / background
21-December-2005 @ 16:03:06
Our director Ziba Norman's op-ed piece about the Gazprom corporation, Russia's Gas Weapon, appeared in today's IHT (http://www.iht.com/articles/2005/12/20/opinion/ednorman.php). Below is some of the background material on this subject which we prepared for internal use.
The RAND Corporation's 1997 issue paper by Adamson and DaVanzo on Russia's demographic issues (http://www.rand.org/publications/IP/IP162/) gives data on Russia's long term demographic problems, poor life expectancy and health (and health care systems) including AIDS and alcoholism, high abortion rates.
The parts of Russia and its client states which typically do not suffer from problems of population decline are the Muslim areas/ Muslim immigrants, from which Russia can expect increasing instability in future decades.
You see some of these demographic trends in the developed West (eg. Europe) but their effect will be more of a problem for a country like Russia which is not (yet) a developed capitalist economy. A large territory will therefore be underpopulated/ underdefended, armed forces and businesses undermanned.
As the RAND paper notes, this may not be a crisis now, but by the end of 21st century the results of these trends will be apparent.
Russia therefore has to play a limited hand well in order to stay in the global power game.
It is a commonplace of development theory that natural resources are often squandered with a damaging effect on the state, for example leading to civil war (Angola diamonds), or to subsidise an unsustainable domestic welfare culture and fund exported extremist ideology (Saudi oil). Conversely, lack of natural resources is no bar to prosperity (eg. Hong Kong) but Hong Kong proved vulnerable to influence of monopoly supplier of utilities in adjacent state with designs on the territory (People's Republic of China), which is ultimately why the United Kingdom could not hold on to Hong Kong (see Sir Percy Cradock's Experiences of China, 1999 edition, pp. 177-8)
Russia's aim is to manage the production of natural resources AND retain tight control over their distribution (oil and gas), to reap financial rewards and political rewards as far as influence over Russia's traditional (past) sphere of influence -- and to extend that influence to the end of the pipeline.
Vertically integrated exploration and production -- ie. prospecting, extraction, and distribution are, in the Russian system, all part of the same corporate group. The crucial clever step is to bind in other participants at all stages so that the natural resources do not turn into a specific curse for their owner, and any problems that arise are problems for someone else too (eg Europe, USA, banks, other oil companies). Eg, the current situation in Ukraine. The management techniques to spread these risks are set out in Brealey and Myers's Principles of Corporate Finance (5th edn., pp. 974-7).
Resources, financial and operational, are to be called in from the West to participate in Gazprom's projects, but their power role is to be kept limited -- minority financial participation in holding company, minority operational participation in Barents Sea consortium.
Russia no longer has an ideology to export nor military resources to fuel proxy wars or a Cold War standoff -- unlike the position in the Soviet period. Russia can and must play the capitalist game, while putting political priorities above genuine free markets.
The West, seeking to diversify energy sources right now, away from Middle East, looks favourably to Russia for oil/ gas. This is seen in Russia as an opportunity, an unmissable chance, and Putin, together with his inner circle, are making the most of this.
Posted by William Arthurs
.
The RAND Corporation's 1997 issue paper by Adamson and DaVanzo on Russia's demographic issues (http://www.rand.org/publications/IP/IP162/) gives data on Russia's long term demographic problems, poor life expectancy and health (and health care systems) including AIDS and alcoholism, high abortion rates.
The parts of Russia and its client states which typically do not suffer from problems of population decline are the Muslim areas/ Muslim immigrants, from which Russia can expect increasing instability in future decades.
You see some of these demographic trends in the developed West (eg. Europe) but their effect will be more of a problem for a country like Russia which is not (yet) a developed capitalist economy. A large territory will therefore be underpopulated/ underdefended, armed forces and businesses undermanned.
As the RAND paper notes, this may not be a crisis now, but by the end of 21st century the results of these trends will be apparent.
Russia therefore has to play a limited hand well in order to stay in the global power game.
It is a commonplace of development theory that natural resources are often squandered with a damaging effect on the state, for example leading to civil war (Angola diamonds), or to subsidise an unsustainable domestic welfare culture and fund exported extremist ideology (Saudi oil). Conversely, lack of natural resources is no bar to prosperity (eg. Hong Kong) but Hong Kong proved vulnerable to influence of monopoly supplier of utilities in adjacent state with designs on the territory (People's Republic of China), which is ultimately why the United Kingdom could not hold on to Hong Kong (see Sir Percy Cradock's Experiences of China, 1999 edition, pp. 177-8)
Russia's aim is to manage the production of natural resources AND retain tight control over their distribution (oil and gas), to reap financial rewards and political rewards as far as influence over Russia's traditional (past) sphere of influence -- and to extend that influence to the end of the pipeline.
Vertically integrated exploration and production -- ie. prospecting, extraction, and distribution are, in the Russian system, all part of the same corporate group. The crucial clever step is to bind in other participants at all stages so that the natural resources do not turn into a specific curse for their owner, and any problems that arise are problems for someone else too (eg Europe, USA, banks, other oil companies). Eg, the current situation in Ukraine. The management techniques to spread these risks are set out in Brealey and Myers's Principles of Corporate Finance (5th edn., pp. 974-7).
Resources, financial and operational, are to be called in from the West to participate in Gazprom's projects, but their power role is to be kept limited -- minority financial participation in holding company, minority operational participation in Barents Sea consortium.
Russia no longer has an ideology to export nor military resources to fuel proxy wars or a Cold War standoff -- unlike the position in the Soviet period. Russia can and must play the capitalist game, while putting political priorities above genuine free markets.
The West, seeking to diversify energy sources right now, away from Middle East, looks favourably to Russia for oil/ gas. This is seen in Russia as an opportunity, an unmissable chance, and Putin, together with his inner circle, are making the most of this.
Posted by William Arthurs
.