February 21, 2007

The Beginning [WIGOR, part 1]

Several million years ago (ask a geologist for an exact figure), the landmass that would one day become Russia was gifted huge oil, gas and mineral deposits. In fact, they were such rich and deep deposits that even 70 years of communist ineptitude could not entirely wipe them out. Some boring, but telling facts:

  • OIL: By one estimate, 20% of the world's known oil reserves are in Russia. Russia currently supplies the US with 4% of its oil.

  • GAS: 25% of the world's proven reserves of gas are in Russia. Western Europe currently depends on Russia for 28% of its gas supplies; Germany alone depends on Russia for an estimated 40% of its natural gas (and 18% of its oil).

  • MINERALS: Russia contains the world's largest diamond reserves, and the second largest coal reserves (17% of the world's known reserves). Nearly a third of all tin and iron ores are in Russia, as are over 40% of all platinum group minerals and over a third of all nickel reserves.

Russia is not soon going to be an exporter of finished industrial goods or competitive services (with a notable exception being computer programming - more about that another time). But right here, right now, it is a global powerhouse in the trade for energy and natural resources.

Expect Russia to exploit this fact as would any nation in its position.

Expect Russia's leaders to be interested not in preserving the volatile international market for energy commodities, but to instead bank on long term contracts which give them some important price protections.

Expect the Kremlin to continue to do all it can to "verticalize" any and all "strategic" industries, to be defined as industries on which the economic future and security of Russia depend. This means not just oil and gas and minerals, but nuclear technology, aerospace and transportation, among others.

Expect that the leaders of these industries and sectors will be the up and coming leaders of the country. Thus, one of the most important facts on the resume of Dmitry Medvedev, who is the current front runner for president in 2008, is his position as Chairman of the Board of Gazprom, the gas monopoly. It is also why Sergei Ivanov, formerly Defense Minister, was transferred away from that post this month to test his mettle running some industrial sectors of the economy.

To wit: According to the Moscow information agency Medialogia, out of 2,064 news stories on Dmitry Medvedev last year, there was not a single negative report on the news broadcasts of six television channels, including the three major national stations. There were 17 negative reports on Ivanov, most of them centered on a brutal hazing incident in the military to which he was slow to respond. Anyone being groomed to compete for the top slot needs to get away from that kind of environment...

Expect that Russia will take a hostile attitude to any country or entity which seeks to limit its ability to do whatever the hell it pleases with its natural resources, interpreting same as a threat to the stability of the Russian economy. Witness the blow-ups with Ukraine and Belarus in the last year. Both of those former Soviet republics wanted to prolong their subsidized prices for gas. Russia - in a rather ham-handed way - was seeking to end this practice and have oil and gas prices at international levels.

Except domestically. For now.

The lumbering Soviet era enterprises have to be helped along, after all. And it does not hurt to have industry dependent on the State, now does it?

Which brings us to the subject of my next observation...

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