Oil Slump Leaves Russia Even Weaker Than Decaying Soviet Union
Comment of the Day

October 23 2014

Commentary by David Fuller

Oil Slump Leaves Russia Even Weaker Than Decaying Soviet Union

Here is the conclusion from this informative article by the ever-interesting Ambrose Evans-Pritchard for The Telegraph:

This time Russia is not facing Reaganesque rearmament, but it is facing nuclear-tipped sanctions, more destructive than many realise in a globalised banking system. It is not a stretch to say that American regulatory power has never been so far-reaching, or imperial. The result is that Russian banks, companies and state bodies are shut out of the global capital markets, unable to roll over $720bn of external debt.

Russia's reserves of cheap crude in West Siberian fields are declining, yet the Western know-how and vast investment needed to crack new regions have been blocked. Exxon Mobil has been ordered to suspend a joint venture in the Arctic. Fracking in the Bazhenov Basin is not viable without the latest 3D seismic imaging and computer technology from the US. China cannot plug the gap.

Andrey Kuzyaev, head of Lukoil Overseas, said it costs $3.5m to drill a 1.5 km horizontal well-bore in the US, and $15m or even $20m to drill the same length in Russia. "We're lagging by 10 years. Our traditional reserves are being exhausted. This is the reality for our country," he said.

Lukoil warns that Russia could ultimately lose a quarter of its oil output if the sanctions drag for another two or three years.

The IMF's latest "Article IV" report on Russia is an acid verdict on the Putin era. Product market barriers are the worst of any large country in the world. The economy is a tangle of bottlenecks. Russia's development model has "reached its limits".

For details, try the World Economic Forum's index of competitiveness. Russia ranks 136 for road quality, 133 for property rights, 126 for the ability of firms to absorb technology, 124 for availability of the latest technology, 120 for the burden of government regulation, 119 for judicial independence, 113 for the quality of management schools, 107 for prevalence of HIV, 105 for product sophistication, 101 for life expectancy and 56 for quality of maths and science education. This is the profile of decline.

Russia had a window of opportunity at the end of the Cold War to build a modern, diversified economy, with the enthusiastic help of the West, before the ageing crisis hit and the workforce began shrink by 1m a year. This chance has been squandered. Mr Putin's rash decision to pick a fight with the democratic world has made matters infinitely worse. Cheap oil could prove to be the death knout.


 

David Fuller's view

The statistics above are a tragedy for Russia, and the legacy of Putin’s kleptocracy.  Imagine what could have happened if Garry Kasparov had followed Yeltsin, rather than Putin, not that it was ever likely. 

The question now is how will Putin go?  Will he be pushed, or flee from Russia, or lash out?  After all, Russia remains a formidable military power which Putin has strengthened in recent years.  I certainly hope this ends quietly but it is still a risky situation for Europe.

See also: Russia prepares for ice-cold war with show of military force in the Arctic, by Isabelle Mandraud for The Guardian.  You may also be interested in: George Soros: Russia poses existential threat to Europe, By Julian Borger, also for The Guardian. 

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