EDITORIAL: The Putin Economy in Shambles


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.

5 responses to “EDITORIAL: The Putin Economy in Shambles

  1. Yes, by this Anders Aslund
    ‘The End Seems Near For Putin Model’:


    Let us truly hope that those who have some common sense over there, can find a way, to remove the parasites and gangsters in the Kremlin, and free Russia, for a better life!

    • Strange how their propaganda mouthpieces, like Nikita, Artie (jerk) boy and AT are so silent on this topic.

      But then what lying propaganda can they present that a sane person would believe.

  2. When Putin decided to use energy as a political weapon, he made the fatal mistake of ignoring the simple truth that every action has a reaction. Before the orange revolution in Ukraine there was never any problem with gas transit, Putin engineered disputes to punish Ukraine and bring it back into line, Russia raised the price of gas to a level it knew Ukraine could not afford, it then accused Ukraine of siphoning gas meant for the EU market and in the winter of 2008/9 cut of the gas supply leaving countries like Hungary to freeze even though they had pre-paid for gas at a premium rate.

    Russia as the supplier should have never let this situation get out of hand, but Putin believing that Europe was his “gas prisoners” seemed to care little about Russia’s long suffering European customers, bringing Ukraine back into line was Putin’s number one geo –political aspiration. Russia and its state monopoly gazprom are now beginning to pay the price, EU diversification has been given priority, countries that would have taken piped gas from Russia’s now abandoned shtoman field have been scared off and have opted to build specialised ports to accept LNG gas which is traded like oil and purchased on the spot market. Russia’s lose is Qatar’s gain.

    Ukraine’s new president is now offering to stabilise the situation by selling gazprom a third stake in Ukraine’s transit network. Russia is losing market share but now has the very real prospect of a stable route through Ukraine, one would think that gazprom a company $59 billion in debt would be jumping for joy as now it makes no economic sense to proceed with the multibillion dollar pipe lines nord and south stream, and if this were purely a business proposition and they were privately owned they would drop these projects like hot potatoes, but gazprom is not a normal company, it is a state owned monolith overseeing a geo-political asset called gas. So gazprom will no doubt proceed with these projects and pray that the EU’s demand will grow enough to warrant this massive investment, they will also have to protect Ukraine’s 80% share of transited Russian gas if they want to keep the current Ukrainian regime happy, To pull this trick off I suggest they employ the American magician David Copperfield as gazproms next CEO, because under current conditions and with the new challenges gazprom faces this current strategy is doomed to be an expensive disaster, in future the development of unconventional gas (shale) is likely to take another big bite out of gazproms market share.

    Putin his cronies and gazprom have had their collective fingers very badly burnt over recent years, but have they learned the lesson?, of course not these people live in their own deluded little world, they still carry on making the same disastrous blunders, for example BP is Russia’s largest single investor, and has introduced technologies the Russians could only have dreamed of, but do they treat their largest investor with the respect befitting their global significance?, no of course they don’t only a few days ago the Russian state once again threatened BP, this time with the removal of TNK-BP licence to produce gas from the Kovykta field, Putin is angry that only 40 million cubic meters has been produced from this trillion cubic meter field, and he blames BP (well it’s easier to blame the Brits), but BP who can’t quite believe what’s happening state that because gazprom have not build the pipe line that’s supposed to transit this gas to china, there’s no where for this gas to go, and removing there license would serve no purpose, BP say give us the pipe line and we will produce as much gas as you want, gazprom because of nord/ south stream the two “lemons” now being planned are overstretched and have given a time frame of 5 years before the Kovykta pipe line can be build meanwhile Russia’s CIS neighbours have jumped in and have build a pipe line to supply the Chinese market.

    The lunatics seem to have taken over the asylum in Russia, and that asylum is called the Kremlin.

  3. R John like your comment very much. Especially so the last paragraph, which also happens to be a sentence, “The lunatics seem to have taken over the asylum in Russia, and that asylum is called the Kremlin.”

  4. this is really shocking,they must take primitive steps to better the condition.

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