Russia’s Challenges Under Medvedev, or Putin

It’s still anyone’s guess whether Dmitri Medvedev comes with Putin-strings attached to his wrists and ankles. But one thing worth mentioning is that the country he’ll be governing, while certainly resurgent relative to its position ten years ago, has some clouds looming on its economic horizon. Which is just what Lee Hudson Teslik does in this CFR piece.

But he kind of glosses over Russia’s failure to invest in its energy infrastructure. This Center for European Policy Studies analysis (.pdf) by Alan Riley, while a bit dated (2006), is still informative. We’re used to hearing about Europe’s dependence on Russian gas, and the threat that raises of a Russian foreign policy based on energy blackmail. Riley points out that a much greater threat, to Europe but even more so to Russia, is the almost certain gas deficit that will result by 2010 due to Russia’s poorly developed infrasructure:

If even just foreign gas consumption is cut and Russian consumption is protected Russia face a cut in overseas earnings, and as Gazprom alone provides approximately 20% of Federal tax receipts, cuts in tax revenue. The Russian state could then face significant problems in affording additional benefits granted during the Putin years, such as enhanced pensions. If the gas deficit is more significant, then cuts are likely to fall disproportionately on industry. Unfortunately Russian industry (together with that of Ukraine and Kazakhstan) is the most energy-inefficient in the world hence gas shortages could inflict significant damage on Russian industry. To make matters worse, aside from gas exports, oil, minerals and metals are the other three principal foreign exchange earners and all rely heavily on gas or electricity generated by gas. The prospect of a serious gas deficit is extremely dangerous for Russia with the economy and the state’s legitimacy under threat from what would become a vicious downward spiral which would undermine the economic gains that havebeen made since 1999. (p. 5)

Which begs the question, With energy revenues flooding Russia’s coffers, and with foreign investment pouring in ($200 billion in 2007), why hasn’t Russia invested in its energy infrastructure? The answer, according to Riley, has to do with the sheer amount of investment needed, which would demand the involvement of consortia, coupled with Russia’s poor record of protecting investors’ rights. This, too, struck me as noteworthy given that Medvedev moves to the President’s office from his post as head of Gazprom:

It also appears to be the case that whenever Gazprom does have extra revenue it fritters it away in higher operating costs. (p. 2)

For those of you keeping score at home, that’s Russian for bling bling.

The result of Russia’s mafia-style economy limiting its ability to raise capital for infrastructure development is that when Gazprom does invest, “. . .the investment is directed at foreign acquisitions and export infrastructure, not on building and refurbishing domestic pipelines and opening up new fields.” Some of those acquisitions, while strategically savvy in that they frustrate European attempts to diversify gas sources (Turkmenistan, Uzbekistan and Kazakhstan), Riley qualifies as evidence of desperation in light of those countries’ realistic capacities.

The takeaway is that if Russia has come a long way since 1998, it still has a long way to go before it solidifies its strategic gains, whether its Putin or Medvedev at the helm.