Editorial
The Roots of U.S. – Russian Disappointment
By Dr. Gary K. Busch, 13/8/13
Aug 14, 2013 - 10:42:02 AM

Shortly after President Obama called the Russian decision to grant residency status for the whistle-blower Edward Snowden “disappointing” he called off a summit in Moscow with Vladimir Putin scheduled to follow the G20 meeting in St. Petersburg. With that announcement President Putin then announced that this cancellation of the summit was “disappointing” as it showed that Washington “is not ready for ties on an 'equal basis'.” This brought the focus of world attention back on that most fractious of relationships; between the U.S., the USSR and its successor, Russia.

An enduring feature of Soviet and Russian political posturing has always been its reliance on bluster, bluff and paranoia as key features of state policy. The enduring leit-motif of Soviet and Russian policy has been its paranoid concentration on the domestic implications of its foreign policy adventures and the consequences on the power and stability of the Kremlin. The growth of an Opposition in Russia is deeply troubling to the Kremlin and the Putinites. The gradual rise in strength of the Opposition is disconcerting to them. Men like Vladimir Milov, Vladimir Ryzhkov, Mikhail Kazyonov, Boris Nemtsov and Alexei Navalny have a growing following in Moscow and lend their support to a range of reforms which are destined to be postponed for lack of a Kremlin backing.

There is really very little evidence that this growth of an Opposition political movement is based on any mass national support. Like most things in Russia, power lies in a small radius around the Kremlin, contained within the boundaries of the Ring Road (the Russian equivalent of the Beltway). For most areas of Russia, particularly east of the Urals and north of the Caucasus, what happens in Moscow is only an irritant and is seen as having little bearing on he lives of the people or local political structures.

The traditional line by those inside the Ring Road has always been that it is the fault of the Americans that things are not going well. Putin and his advisers seem to believe that the rhetoric of American Congressmen and Senators about ‘spreading democracy and human rights across the globe’ is actually serious and not the American version of bluster and bluff. Putin is sure that the US will inevitably try to intervene to overturn regimes it dislikes, as it did in Afghanistan, Iraq, Libya, Serbia and now, Syria. The Russians are sure that the domestic dissent about reforms and homosexual rights are the product of America’s covert intervention in Russia’s internal affairs. The passage of the Magnitsky Act was seen as prima facie evidence of the U.S.’s intent to interfere in Russia. The banning of the adoption of Russian orphans derived from this as did the clampdown on funds being sent from abroad to Russian NGOs. Speaking to his nation on the theme of anti-Americanism is a tried and true policy for Putin and his predecessors.

However, Putin was right in a key point of his analysis when he said Washington was not ready for ties on an 'equal basis'. This is not an unreasoned view. America has come to realise that there is no longer equivalence between the two nations. Russia and the U.S. are not equals and are growing less equal every day. This is true for a number of reasons.

The Dangers to the Russian Oil and Gas Market:

Russia is in desperate need of economic reform. It is still an economy based on the export of natural resources and very vulnerable to the changes in world prices for these resources as Europe falters, China slows down and the emerging markets manage to emerge. The Russian economy has been sustained by high oil and gas prices. As the price of the oil and gas drops in the world markets, particularly after the shock of U.S. shale oil and shale gas preparing for export markets, Russia is in serious danger of the price falling below the US$105 dollars per barrel which is the ‘break-even’ point for Russian production. The current best estimates of the price of oil will see prices drop to US$85 a barrel in late 2013 and to US$65 a barrel in 2017. This will be disastrous for the Russian economy.

Russia has plenty of oil but it is missing the high technology which is needed to exploit its options. It relies on foreign technology to exploit its most substantial fields and needs Western technology to access the methane hydrates and crystals of the Artic Sea. Here the U.S. has an all-encompassing advantage. First, the United States holds more than 60 per cent of the world’s drilling rigs and 95 per cent of these are capable of performing horizontal drilling—which, together with hydraulic fracturing (fracking), is crucial to unlock shale production. No other country or area in the world has even a fraction of such “drilling power,” which takes several years to build up. For example, all across Europe (excluding Russia) there are no more than 130 drilling rigs (as against 180 in North Dakota alone), and only one-third of them are capable of doing horizontal drilling.[i]

Moreover, no other country has ever experienced even a fraction of the drilling intensity that has characterized the U.S. oil and gas history. In 2012 the United States completed 45,468 oil and gas wells (and brought 28,354 of them on line). Excluding Canada, the rest of the world completed only 3,921 wells, and brought only a fraction of them on line. Saudi Arabia brings on line no more than two hundred wells per year.

Yet the driving force behind the U.S. oil boom, that is its huge shale-oil potential, depends crucially on the U.S. oil industry’s ability to bring on line an astonishing number of wells each year.
In fact, the extremely low porosity of shale-reservoir rocks limits the recoverability of oil from one single well. On average each loses 50 per cent of its output after twelve months of activity. To offset this dramatic decline of the production and get a higher production, an oil company must drill an ever-increasing number of wells. For example, in December 2012 it was necessary to bring ninety new wells on stream each month to maintain the production rate at Bakken - 770,000 barrels per day. But as production grows in North Dakota, the number of wells also must grow exponentially.[ii]

The rise in shale gas also requires access to a great deal of water. While Russia has many large rivers and bodies of water (except for the disappearing Aral Sea) the internal transport network for this water is neglected, in disrepair or not functioning at all. China too, has large deposits of shale gas but they are to be found in China’s vast desert regions which make Chinese exploitation of shale oil and gas very expensive. Similarly the exploitation of shale oil and gas requires a vast, capital-intensive, network of pipes into which the gas and oil can be fed. The Russian system is not completed to perform these tasks efficiently. There are export pipelines being built but an expanded internal network has been late in starting.

Most importantly, Russia has large quantities of oil. This oil cannot be used directly in industry. It must be refined into its chain of hydrocarbon products (residuals, diesel, gasoline, naptha, kerosene, and gases) before it can be used. This means that the oil must be moved to a refinery and the products moved from the refinery to its consumers. This is often very expensive. It is expensive because the transport of oil is mainly unidirectional on board a ship. When it is loaded on a ship and delivered to a receiving port the vessel must return in ballast to the port of shipment, thus doubling the transport costs. Natural gas can be used without a refinery and transported easily by pipeline to the consumer. More and more industries are converting from refined petroleum products to natural gas as a source of energy. It is cleaner, cheaper and quicker to use. This will offer a major challenge to the oil and refining businesses worldwide.

The Failure of the Russian Business Model

Russian problems extend far beyond the oil and gas industries. The changes which have occurred in the Russian political system as a result of the replacement of Boris Yeltsin by Vladimir Putin have yet to be fully assessed. The most important and fundamental change, however, has been the emergence of a new class of powerful, largely unelected, people who have been put in charge of virtually all the levers and agencies of power in the state as well as in charge of the vast private enterprises which emerged from the privatisation schemes of the Yeltsin period.

Despite the notion that Communism died with the fall of the Soviet Union, the state, its agencies and its companies are populated by the Undead; the unreconstructed nomenklatura of the failed communist system. In his book, Capital, Marx wrote that 'capital is dead labour which, vampire-like, lives only by sucking living labour' He coined the term ‘Vampire Capitalism”; of corporations whose exploitations 'only slightly quenches the vampire thirst for the living blood of labour', and that 'the vampire will not let go while there remains a single muscle, sinew or drop of blood to be exploited'. What Putin has created is a society of Vampire Communism where the Undead suck the life blood from private corporations and government agencies; leaving drained and powerless structures behind them.

The new and powerful people (‘siloviki’) have been almost exclusively drawn from the ranks of the ‘Chekists’. Under Putin, these new ‘siloviki’ have been firmly installed in the corridors of power.  Under Putin, the Chekists, primarily the St. Petersburg flavour of Chekist, openly took power as ministers, government advisors, governors, bankers and politicians. There may be as many as six thousand of these Chekists in powerful positions in the Russian state... The view of Western investors is that Russia has been moving backwards. It is not a safe place to invest because the ‘siloviki’ have no controls or self-discipline on their activities. This is not democracy, it is “Bonapartism”. Marx wrote a popular pamphlet called the “Eighteenth Brumaire of Louis Bonaparte” demonstrating how the class struggle in France created circumstances and relationships that made it possible for a grotesque mediocrity to play a hero's part. Bonapartism has been used to describe a government that forms when a military, police, and state bureaucracy intervenes to establish order. There are parallels to today’s Russia.

The real question is why these ‘siloviki’ are so determined to move into business and take over control of public companies and take others back into public ownership. The answer is very simple – greed. There are no laws against insider trading in Russia. Putin actively promoted the creation of oligarchs in epaulets. There were phenomenal sums of money being earned in Russia as a consequence of the Yukos case. There is no insider trading law which prevents this. The government knew when it was going to make an announcement about Yukos; an announcement that would send its shares up or down dramatically. It knew when it would announce news about stopping or starting oil flows; an announcement that would send oil prices up or down. The siloviki were drawn to corporate affairs.

To survive Russian private companies are taking their investment portfolios out of Russia as quickly as they can. They are listing themselves on the London and New York stock markets to attract foreign partners; not for the cash but for widening of the shareholder base outside of Russia to make re-nationalisation more difficult when the siloviki decide that it their industry which must be retaken for ‘the national security’.

Any Russian company of note has succeeded or is in the process of widening its shareholder book to include non-Russians. This has also meant that the cash has stayed outside of Russia. There are several fundamental structural problems: the absence of spare industrial capacity (in the 2000s the economy could grow quickly by turning on Soviet-era plants); the lack of labour mobility; an ageing population; and, especially, the falling rate of private sector investment. Net capital outflow of US$40 billion in the first half of this year did not help, but inadequate rule of law is perhaps the major deterrent to investment. Not much is being done about it. The leaders put too much emphasis on stability. There is a lack of energy at the federal level. [iii]

These developments have had several major effects in Russia. The first is that these siloviki-led companies have reverted to be part of the state system. In Russia, this has always meant that there has never been a direct linkage between company activity, productivity and performance with the resources needed for its survival or expansion. The money pot is held by the state, as owners of the shares, and cash is made available to the companies at the whim or fortune of the group of competing siloviki who control it in the name of the state. Theoretically these state-owned companies are the responsibility of a board of directors and management appointed by the state, but their retained capital and cash-flows are controlled outside of the company structure in a parallel political system.

This has proved useful when the state wishes to purchase more shares in companies. The state uses mirrors and smoke and fake transfers to acquire companies like Yukos; pretending that these funds have been made available to Rosneft or Gazprom. There are enormous amounts of funds transferring around the Russian economy for share purchases; but no cash. The state can acquire companies this way, but they cannot make them work. Work requires investment in capital equipment; cash for repairs and maintenance; money for research and development, etc. The re-nationalised companies are all competing for the small cash reserves of the state and are dependent on which group of competing siloviki has the ear of the keepers of the purse string.

Putin’s vampires have sucked the blood out of many of what they call the ‘strategic industries’ of Russia, returning these industries to effective state control, but with profits going to the private sector of siloviki; the very model of Vampire Communism.

Modern business also requires trained and experienced managers. As the Russian state takes over more and more of its industry, good Russian managers are leaving for jobs outside Russia. The oil industry in Africa is full of good, trained, Russian managers and technicians who do not wish to live under a low-ceilinged Russian management structure. The role of state in these management decisions is often destructive.

Western Technology Needed For Defence Reform