The Putin Economy in Shambles
We learned last week that merger and acquisition activity in Russia fell a shocking 62% last year. Activity in the areas of consumer goods and retail, financial services and metals and mining was even worse, down a devastating 80%. Investors spurned Russian risk with a furious vengeance, and for this same reason the Russian stock market’s value remains utterly puny compared to the theoretical value of the assets it represents.
The world, you see Mr. Putin, is getting wise to you.
As Anders Aslund points out, the failure of the Putin economy is nowhere better illustrated than by looking at Gazprom, Russia’s most potent commercial force. He writes:
In May 2008, Gazprom’s market capitalization exceeded $350 billion, but it has dropped to $135 billion today. The Russian oil sector increased its production and exports last year, but gas exports fell by 11 percent and Gazprom’s production decreased by 16 percent because of low demand.
Ouch. Gazprom’s management, by the Kremlin itself, has been breathtakingly incompetent. The company has failed to invest and develop new fields, it has failed to anticipate new sources of competition, and it failed to anticipate the vicious effects of the global economic crisis, not just in terms of suppressing demand but in terms of encouraging the development of alternatives to Gazprom products.
Aslund gapes slack-jawed at the incompetence of Kremlin management:
Gazprom’s management — that is, the Russian government — does not seem to understand the severity of these challenges. After a long time in denial, it has reacted ad hoc. It is trying to maintain the old European demand while ceding new markets and cutting its supplies. It has reduced purchases from Central Asia and postponed the development of the giant fields Yamal and Shtokman.
Gazprom is moving to a new defensive strategy, but strangely it is still intent on building the two new huge European pipelines, Nord Stream and South Stream, for which neither new demand nor new gas supply is available. If actually built, these two pipelines might become wasteful white elephants, as it is far cheaper to use the existing pipelines through Ukraine.
In fact, the Kremlin’s management of Gazprom contradicts basic economic common sense:
In a rational market economy, a conglomerate such as Gazprom wouldn’t exist. Noncore assets from farms to television companies should be sold off. Production of gas should be separated from transportation and sales in different companies. Undeveloped medium-sized and small fields should be auctioned off to independent gas producers. The gas pipeline system could stay state-owned but be separated from production and be open to all on equal pricing. As a result of reduced flaring, Russia would benefit from a huge cheap additional supply of gas, while air pollution would decline.
Russia, in other words, ruled by the KGB, has not surprisingly created an irrational economic system that is doomed to failure.
Gazprom has already been forced to start rewriting its basic contracts with European consumers, something few thought could ever occur in the arrogant days when fuel prices were soaring. Now, the world sees Russia, and the Putin economy, exposed as wholly different than they first appeared, wretchedly incapable of responding to stress and already teetering on the brink of collapse. One more good hard economic jolt, and down they go.