ARE RUSSIAN RESERVES LARGE ENOUGH?
With this new dynamic, future energy markets and supplies are bound to be tighter and substitutes and supplemental supplies harder to find. While this strengthens the hand of all energy producers (and partly explains the behavior and danger of someone like Hugo Chavez in Venezuela), it is particularly important for Russia. Russia is doubly blessed. While its proven reserves of 10.9 billion tons of petroleum or 79 billion barrels (6 percent of the world’s reserves) are not nearly as large as Saudi Arabia’s 36 billion tons (264 billion barrels), they nonetheless make up 42 percent of the non-OPEC country reserves. Moreover, much of Russia remains unexplored by geologists, and while it is unlikely that there are any giant fields left to be discovered, given high enough prices and the right time and infrastructure there is probably still more petroleum to be found.48
In more recent times, as the country has allowed in Western petroleum companies and their more advanced technologies, companies like BP have found that the reserves they purchased were actually larger than they and the previous Russian operators had originally thought.49 In April 2004, Lord John Browne, then CEO of BP, indicated that TNK-BP, which officially reported it had proven oil reserves of six billion barrels, could actually have considerably more. Although most geologists think it unlikely, Lord Browne said the total could be as high as 30 billion barrels. Robert Dudley, CEO of TNK-BP, predicted that the enhanced recovery techniques used in the West alone would make it possible to increase output by 750 million barrels. Most of the higher estimates result from advanced technology: when BP, with its Western knowledge and equipment, was able to put to work its “stronger pumps and more powerful tools,” it was able “to crack open the underground sandstone,” which holds in the crude oil and which TNK on its own could not tap.50 The expectation is that as technology continues to advance, there will be similar happy surprises.51
Even if no large reserves are found, the present reserves are enough to provide Russia with an enormous financial windfall. As a look at Table 4.2 indicates, each year Russia generates an enormous trade surplus. In 2006, for example, the surplus amounted to $140 billion. That contrasts with $20 billion in 1995, when petroleum prices were much lower. Petroleum exports were $140 billion in 2006, which accounted for almost half of the overall export earnings and the entire trade surplus. Strategically, petroleum has brought Russia unaccustomed wealth. In addition to over $120 billion in its Stabilization Fund in 2007, it also held over $420 billion in the treasury and Russian Central Bank, which as we saw earlier in this chapter provides Russia with the world’s third largest stash of dollars, gold, and convertible currencies.52 This cash windfall has allowed it to prepay its debt to its creditors in the G-8 countries and several other groups. Not bad, considering that in 1998, a bare nine years earlier, the vault was effectively empty.
While its petroleum exports provide Russia with its new financial wherewithal, it is natural gas that brings Russia unprecedented political clout. Combined, the need for these two commodities makes Europe very dependent on Russia. At the same time, some Europeans insist that the Russians are equally vulnerable. As they see it, once an expensive pipeline is built and natural gas deposits developed, Russia will be as dependent on its customers in Western Europe to buy and pay for that gas as Europe will be to have access to it.53 That may be true, but only as long as Europe acts as a united bargainer and no European country seeks to sign a private agreement with Russia. It also assumes that Russia cannot find an alternative customer in need of natural gas. That also assumes that neither Gazprom nor Russia has a leader capable of trapping the Europeans into playing off against one another or of finding other large customers in a world frantic to assure themselves of secure energy supplies. As we shall see shortly, that mind-set seriously underestimates the analytical insights and talents of those in the Kremlin, especially Vladimir Putin or his successor. It also seems to overlook the Russian penchant for chess and the ability to check the moves of their opponents. Just how premeditated and masterful Putin has proven to be will be the subject of Chapter 5.
5
Putin Takes Over
The Return of the Czar
IT WAS NOT THE BEST OF TIMES
It was not an auspicious beginning for the new prime minister. Having been the head of the FSB (the modern day KGB), Vladimir Putin certainly was aware of the problems confronting his country, but awareness of problems is not the same thing as coping with them. And Russia had problems. In August 1999, it was still reeling from the financial bloodletting of August 17, 1998, twelve months earlier. In the wake of the government default on its debt, most of the country’s larger private commercial banks had shut their doors—some, such as Togobank, forever. Millions of Russians lost their savings, including former president Mikhail Gorbachev and the director of the Marinsky Opera of St. Petersburg, Valery Gergiev.
For the Marinsky, this was nearly catastrophic. Gergiev had set aside $2 million in his bank to pay for the ensemble’s trip to China. Now the bank was closed and its money gone. Had Phillips Electronics of the Netherlands not come to the rescue with $1 million, the famed St. Petersburg ensemble would have been forced to cancel its tour. Others without such a fairy godcorporation to turn to were not so fortunate. Businesses closed down, staffs were fired, and the whole concept of a market economy was cursed.
Investors fared no better. They watched helplessly as their portfolios went to zero. The RTS index (the Russian counterpart of the Dow Jones Index of Russian stocks) had been one of the world’s best performing indices prior to October 1997. But that was then. As we saw, from a high of 571, the index fell to 39 by October 1998, a mere twelve months later.
It was not only the well-off who suffered. As industrial output declined and unemployment increased, the number of Russians below the poverty level, which had fallen to 21 percent in 1997, suddenly soared to 33.3 percent, a new high. Western companies exporting to Russia were also hit. With the devalued ruble, few Russians could afford the cost of imported dollar- or euro-denominated products.
If it was not a good time to be in business, neither was it a good time to be in government. Within the subsequent twelve-month period, President Boris Yeltsin went through four prime ministers. Looking for a scapegoat, a week after the crash on August 23, 1998, Yeltsin fired Sergei Kiriyenko, a financial specialist and the presiding prime minister at the time. He was replaced with Evgeny Primakov, who lasted eight months—until May 1999. Yeltsin then appointed Sergei Stepashin. After barely three months in office, Stepashin was also pushed aside. His replacement was Vladimir Putin. Unlike Primakov and Stepashin, both of whom had also headed the FSB, as the KGB subsequently became known, Putin apparently was more amenable to ensuring Yeltsin that he and his ambitious daughters would be guaranteed legal immunity from any future investigation into contract kickbacks. From all reports, they needed such protection. It was widely rumored that the daughters had pocketed tens of millions of dollars from Swiss companies that had won contracts to refurbish the Kremlin and the Russian White House, among other projects. Reflecting the temper of the times, jokesters enjoyed recounting what happened to the Moscovite who one day drove his car into the Kremlin compound and parked it. Immediately a policeman ran up to him shouting, “You can’t park your car there. That’s right underneath Yeltsin’s window!” “Don’t worry, don’t worry,” calmly replied the driver. “I’ve locked the car.”