Sunday Book Review: “Fortunately, China is not a Russia”

Chen Weidong, the Executive VP of COSL, China’s leading oilfield services company, writing on the Energy Tribune:

“The Advantage of Petroleum in Russia” (US edition was published as “From Soviet to Putin and Back: The Dominance of Energy in Today’s Russia,” Energy Tribune Publishers) is another powerful book from my friend Michael Economides. We had discussed the possibility of publishing this book in Chinese last May right before the publication of the book in the U.S. Under the coordination of the Graduate School of China Social Sciences Academy and Huaxia Publishing Co., the Chinese version of this book has finally become reality.

For most of the last 100 years, since the Nobel family created the Russian petroleum industry in 1873, crude oil and natural gas have been Russia’s “pillar of power, the forever foundation of the state, and the lifeline of Russia.” In this book, Professor Economides and his co-author, Russia and former Soviet Union specialist Donna D’Aleo, with their broad knowledge of petroleum and geopolitics, have showed us a panorama of life and death, success and failure of Russian petroleum industry with rich history, clear logic, and abundant events.

Russia and China not only have very deep historical roots, they also have the advantage of being complementary strategic superpowers, especially in the energy and petroleum fields. I have been thoroughly entranced by the stories in the book about the petroleum elites, cruel wars and political struggles made very lively by the authors’ narrative and their humorous and philosophical comments. After finishing the reading, I whispered to myself: “fortunately China is not a Russia.” Herewith, a few more thoughts.

Petroleum is Russia’s panacea and its poison

Oil and natural gas resources in Russia are extremely abundant. The country has by far the largest natural gas reserves, produces and exports the most natural gas in the world, and exports the second most crude oil, after Saudi Arabia.

Since the Nobel brothers built the Russian petroleum industry in 1873, crude oil and natural gas have played the role of either the holy panacea or the devilish poison over and again. During the early years of the Soviet Union in the1920s, to smother this emerging power, enemy bandits and the Turkish army blood bathed Baku, the petroleum center, slaughtering over 20,000 petroleum workers and Armenians. Petroleum production dropped by 80 percent.

Before World War II, Stalin truly believed that war between Germany and the Soviet Union was inevitable. To gain precious time to prepare for war, Stalin and Hitler signed a treaty refraining from invading each other. In that treaty, Stalin used petroleum as a diplomatic tool. He exported crude oil to Germany to gain hard currency. To Soviets, petroleum gave them political power. When the war started, the Red Army destroyed the oil-wells and refining facility in Baku right before the German invasion. Germans did not get a drop of what they wanted the most – oil. This event had significant effect on the finally victory of Allies in World War II.

The destruction of the oil industry was a steep price to pay for Stalin’s industrial model and the Soviet agricultural productivity decreased by nearly a quarter. Only in the good harvest time between 1950 and 1954, grain production reached the level of 1925. In 1963, the Soviets spent one third of their gold reserves to import grain for the first time. By the end of the 1970s and early 1980s, the Soviet Union became the world’s largest grain importer. Nikita Khrushchev said, “A big country like the Soviet Union cannot bear the shame of exchanging grain with large amount of gold.”

But by then petroleum emerged as the holy panacea. The value of petroleum resources discovered at the end of 1960s in Siberia greatly increased during the 1973 and 1974 Arab oil embargo. As a major exporter, the Soviet Union gained big profits. The massive hard currency from exporting oil and gas provided the critical monetary source for the flawed economic infrastructure.

In the second half of the 1980s, the oil price had dropped, oil production decreased, and the Soviet consumer market collapsed. There was a shortage of daily goods. At the end of 1991, the eve of Russian economic reform, people used “disaster” as a way to describe the situation in the petroleum industry. The hard currency reserve had been totally consumed. The government not only didn’t have the money to buy enough grain, it did not even have the money to transport grain that was already bought to Russian ports. Soviet vessels were often detained in foreign ports, and the Soviet Union was bankrupt.

The former Russian Acting Prime Minister Yegor Gaidar said in the preface of this book, “I want to emphasize again, the collapse of the Soviet economy and the Soviet Union was only partly caused by the collapse of the world oil price and the strategic mistake during the development of Siberia oil and gas fields. But the main reason that caused the crumple of the Soviet Union was its flawed economic system. The collapse was not in the middle of 1980s, it started at the end of 1920s and the beginning of 1930s. The then Soviet leaders refused what eventually became the “Chinese way” and killed all its advocates.” Several generations of Soviet leaders attempted nothing and accomplished nothing in reforming the ossified economic system. Even with such rich petroleum resources, the Soviet Union fell apart in the turbulence caused by the world oil price collapse.

In the last hundred years of modern petroleum history, China was merely the importer and consumer for the most part. We need to fully use our resources, including human resources, intellectual power and system advantage, to stay strong in the world. We are not chosen by god for natural resources, it’s our misery and also our fortune. We have reformed and have worked hard to keep balance, and to have the “Chinese way”.

The system smothered petroleum and destroyed the Soviet Union

The authors write that politics and energy resources (first oil and then natural gas), have been intertwined in Russia in an unprecedented way. There have been many brilliant Soviet engineers and scientists in petroleum production technology, following the creativity and innovation that have been a tradition since the Nobel family found a foothold on Russian land. Even in jail a first class engineer created the technique of steam flooding to recovery oil. Many leaders from the oilfields became famous professors, and passed on their knowledge, techniques, and management skills to the younger generations. The authors wrote: “The Soviets working in a totally isolated environment built an amazing petroleum technology system and have had spectacular achievements, some of which more advanced than those in the West. Some of the legendary scientists and their achievements were not known to the outside world until very recently.”

One cannot exaggerate the importance of oil and gas on Russia. According to most expert estimates, the oil and gas industry comprises 90 percent of the Russian economy. And like in an important war the leaders cannot be just military men. For Russia oil and gas have been so important that the managers cannot be just the petroleum engineers and technical experts.

For Russia, the president, the prime minister, the minister of foreign affairs, the finance minister, the energy minister, most legislators, political activists, and scientists all have had some involvement in the petroleum industry. This is not a recent phenomenon. Starting with Lenin, practically every high Soviet leader had been directly involved in decision making, both economic and political, in the petroleum industry. Khrushchev, Brezhnev, Gorbachev, Yeltsin all attempted to reform and manage the petroleum industry but failed.

At a Siberian oilfield Mikhail Gorbachev tried to explain to the petroleum and government officials why the Soviets could not produce more crude oil. He said that the petroleum workers only had part of the responsibility. If machine manufacturers could not produce enough high quality equipment, the workers could not perform well even with a good attitude. There was not enough electric power to run the equipment, and the construction workers not had to cope with bad-quality equipment they also did not have good housing and living conditions. For example, there was not a single movie theater in Hawaltovski, a city with a population of 200,000. Local stores only sold out-of-date goods that could never be sold in Moscow and Leningrad. All those problems were intertwined, it was impossible to solve one problem without solving the rest. Gorbachev’s failed reform indicated the previous system was the culprit, it choked the whole Soviet society and economy, including the energy industry.

Since the establishment of new China, the People’s Republic had been building its petroleum industry system solely according to the Soviet model of planned economy with centralized control. Some of the residuals of that background are still present in our system today. However, China does not have vast natural resources and the basis for technology innovation. China is a country that imports lots of oil and gas. Although 30 years of economic reform brought China’s petroleum industry some new energy, the residuals left from the past still affect its present. The collapse of the Soviet petroleum industry taught us that the past definitely affects the future.

The revenue of ExxonMobil is more than the ones for CNPC, Sinopec and CNOOC, combined but the number of employees of those companies, combined, is 30 times more than ExxonMobil’s. Oil price has become internationalized; the price of oil products in China is higher than in U.S., indicating low efficiency and perhaps lack of competition. We all hope to improve the efficiency, but we are still not clear how this can be done.

China’s reliance on foreign oil is more than 50 percent and is increasing. However, our petroleum industry has been built on a “self reliance and self sufficiency” model. Half century has passed since that model, petroleum industry reform has been going 20 years, and yet our petroleum organizational frame is still confined by the state. Because of the recent good economic growth and profit, there has been not much motivation for further reform. The most important capital in petroleum companies consists of oil and gas reserves. During the last 30 years of reform, this capital had been transferred from the public to the companies and investors for free. The good performance of our petroleum companies might not be as good as it looks if reserves were considered, especially taking into account the crude oil and oil products price increase. The oil embargo made Brezhnev very happy and he thought that there was nothing to worry over the next 15 years and there was no need to reform the petroleum industry. But less than 15 years later, the collapsed petroleum industry brought the Soviet Union, a giant in appearance, with it. Hope this is just my imagined fear about China.

Putin and the re-Sovietization

The authors used Chapter 9 as the core of the book. From the point of view of the West, Russia under Putin has been far to the left politically. The central government has intensified the control toward the oil and gas industry and resources have been widely re-nationalized.

Professor Economides has been a technical advisor since the Brezhnev era and has met all the presidents since then. He was also the technical advisor to Yukos Chairman Mikhail Khodorkovsky. After Khodorkovsky’s arrest, Economides went to the remote Siberian prison to visit him. As a technical expert of Dowell Schlumberger, Economides has also participated in the management of the Chernobyl nuclear explosion disaster. I have visited Russia along with Economides. He has talked to me many times about the privatization of Yukos, the fast development and the bankruptcy of the company. He is very familiar with and has been very concerned about the petroleum industry of the former Soviet Union and Russia. As a world renowned petroleum expert, Economides is concerned not only about the history, the present and the future of the technology but he is also very passionate about the geopolitics, the petroleum system, the relationship between the state and its energy development. Through the analysis of Yukos from multiple directions, the authors described in detail about the Russian culture, history, politics, society, and the development. The authors criticized the reform direction of the Russian petroleum industry during the Putin era and how the government handled Yukos. At the same time, they also pointed out the historical and economic reasons that Putin has been widely supported.

Yukos was declared bankrupt by the government in August 2006. Its assets were sold in 2007. The authors considered this “a burglary act supported by the government”, but the mass of Russians positively considered it as “a new movement of nationalization of the petroleum industry.” Khodorkovsky became very rich during the privatization and westernization, Putin declared war on privatization and made it possible for the government to control the energy wealth again. The result is that state owned companies control 60 percent of the Russian oil and gas assets. The authors pointed out that there has been a wide cultural gap, lasting for centuries that separates Russia and the West. The returning of Russian totalitarianism reflected hatred of Russian people towards rich entrepreneurs. Putin fully understood this mentality and used it successfully.

Khodorkovsky not only accumulated massive wealth during the westernization which broke the limit set by Putin and was disliked by the Russians and the Russian culture, he also challenged Putin politically. Khodorkovsky’s failure was inevitable. In the mean time, Putin successfully got rid of the impression of the financial oligarch during the Yeltsin period, and turned the oil and gas resources as the pillar of his world power. His hard line energy policy gained political and economic profit for Russia, and gained himself strong support of the people.

In Russia, political power has always been interwoven with petroleum. However, the effect of petroleum on personal financial profit and political influence has only existed in the last 20 years after the collapse of the Soviet Union. Khodorkovsky was the poster child of the petroleum privatization process. The demise of Khodorkovsky and the re-nationalization of the petroleum industry also brought billions of dollars to some other Russians.

The authors’ keen analysis has prompted us that the market economy is driven by profits. Financial greed and power greed must be balanced and monitored to avoid disastrous outcome. During the transformation of the society, the system, and the culture, the government usually lacks the effective means to punish corruption and criminal activities during the early period of privatization. We have heard, have seen, have experienced, and have participated in this great era during the 30 years of China’s economic reform and open up period. I believe that we will have a lot of resonance and thoughts by reading this book. Even just this, we have reached our goal by introducing this book to China.

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4 responses to “Sunday Book Review: “Fortunately, China is not a Russia”

  1. The demise of Khodorkovsky and the re-nationalization of the petroleum industry also brought billions of dollars to some other Russians.

    At the time of Khodorkovsky arrest Yukos was a well managed company modeled on western accounting transparency with public quarterly earnings statements. Money was being invested for enhanced production and he had a vision of partnering with western oil companies for needed capital.

    The biggest losers are the Russian public who are denied transparently run private businesses free of their gangster state and developing an investor class like everyone else in the west by “the some other Russians”, Putin’s gangster clan.

    The mess Russia has backslided into is a reflection of mass ignorance, willful or not. Unless that ever changes, doubtful, it would take a miracle or mass lobotomies, there will always be a Putin in their lives.

    • Chodirkovsky stole these oil field in the 90s during the “cash for assets ” privatization.
      The money he used to “buy “these assets was amassed through corrupt government contracts which were arranged by his fathers connections in the government and tax evasion…
      Like Berezovsky,Gussinsky,Abramovich and others he is just a thief and criminal who got what he deserved…

  2. More on Russia’s impending banking nightmare from Reuters

    MOSCOW, June 23 (Reuters) – Russian bank profits could be erased in 2009 if bad loans rise to 10 percent of credit portfolios.

    http://www.reuters.com/article/rbssBanks/idUSLN6624620090623?sp=true

  3. Russian Oligarchs>Russian KGB
    Any day, any where, in any aspect.

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