#18 - JRL 2009-171 - JRL Home
Russia Profile
September 14, 2009
Russians: Addicted to Oil, Addicted to Liquor
With the Economic Crisis Having Strengthened Russia's Dependence on Oil and Gas, Medvedev Looks to Society to Get Russia Off the Hook

By Graham Stack

As the ongoing crisis descended on Russia in the last quarter of 2008, its most blatant manifestation, twinned with the stock market collapse, was the plummeting oil price, falling from a record-breaking $145 to a low point of $35 a barrel. Back then it seemed that collapsing oil prices would trip Russia up as catastrophically as they did in 1998. But they soon recovered, leaving Russia ever more dependent on the black gold, and causing the country’s president to appeal to the public for help in kicking the addiction. But is Russian society able and willing to respond to his pleas for modernization?

One year on since the collapse of the Lehman Brothers ushered in the crisis, the oil price has more than doubled from that low point, to reach $72 per barrel last Thursday, with the stock market following eagerly in its footsteps. Each day, economists are proclaiming the sighting of more green shoots in the economy, and it now seems that the price of oil will be the factor that lifts Russia out of collapse, rather than ditching it.

The oil price hike looks set to continue in the short term. Last week, the International Energy Authority (IEA) raised demand forecasts for this year and next by 500,000 barrels. OPEC, also meeting last week, retained its current quotas to support the price. As a result, Goldman Sachs, Wall Street's biggest commodities dealer, declared that oil prices could hit $85 a barrel by the end of 2009. Gazprom’s boss Alexei Miller predicted that oil could even break the $100 per barrel mark.

So despite the global crisis, oil prices have fallen only to their 2007 level ­ a level that at the time was hailed as unprecedentedly high. Compare this to 1998, when in the wake of a regional (Asian) economic crisis, oil prices collapsed as far down as $8 a barrel.

And there was more oil-related “good news” for Russia last week. Russia's crude output in August hit an 18-year high. State-owned Rosneft notched a 5.5 percent year-on-year increase thanks to launching its Vankor field, and the sector as a whole is slated for a 0.3 percent increase on the year instead of the originally estimated 1.1 percent drop. Consequently, the Russian Trading System (RTS) index is likely to reach a new high for 2009 this week. Analysts and economists forecast the resumption of growth this quarter.

No credit revival

But coming out of the immediate crisis, the Kremlin is confronting the fact that Russia is now more dependent than ever on the price of oil - the very dependency that Kremlin policies over the last eight years have been trying to reduce. This is not just because the stabilization fund, intended to act as an air bag in the case of a commodity price crash, will have been used up by 2010 on funding a massive budget deficit. And not just because the current oil price still seems detached from the fundamentals and another sharp drop could still be around the corner next year.

The problem is that the flow of cheap financing from global markets to Russia that drove a lot of economic growth during Vladimir Putin's presidency has now dried up for good. It was the dramatic expansion of credit during Putin's second term that created the first signs of diversification - through consumer demand and the funding of new industrial projects.

The continued availability of such funds was crucial to the “Putin plan” of diversifying the economy. According to Chris Weafer of UralSib, "the evidence is that, even from the early days of Vladimir Putin's presidency, there existed at least a broad outline of a long-term development plan to transform the economy from its dependency on natural resources to one with a better range of drivers, where the risk of the sort of boom-to-bust cycle experienced recently is substantially reduced." The mechanism for achieving this was the classic plan to “move up the value-added chain.” Weafer claims that "the main message of last week is ‘don't worry so much about the oil price.’ By far the bigger problem is the near-absence of credit and lending in the economy."

Cheap credit and open Kremlin encouragement for Russian companies to borrow abroad caused an influx of international funding into the Russian private sector that now has left the county's companies with nearly $500 billion in foreign debt to pay back. And no new credit is on the horizon. This means that growth, when it resumes, will be one-legged, based on and limited to commodity sector revenues, bereft of the prospect of industrial diversification as envisaged by Putin - and all the more vulnerable to another downturn in commodity prices.

A cry of desperation

With the credit-starved economy unable to deliver the modernization the Kremlin wants, there is no alternative now but to turn to society and campaign against the litany of social ills that throttle Russia's prospects just as much as the drying up of credit markets has. This is the significance of Dmitry Medvedev's cri de coeur article "Forward Russia!" published Thursday, September 10, almost exactly one year since the start of the crisis.

"First, let's answer a simple but very serious question," begins Medvedev. "Should a primitive economy based on raw materials and endemic corruption accompany us into the future? And should the inveterate habit of relying on the government, foreign countries, on some kind of comprehensive doctrine, on anything or anyone - as long as it's not ourselves - to solve our problems do so as well? And if Russia cannot relieve itself from these burdens, can it really find its own path for the future?"

"Twenty years of tumultuous change has not spared our country from its humiliating dependence on raw materials," he continued. "With a few exceptions, domestic business does not invent nor create the necessary things and technology that people need. We sell things that we have not produced, raw materials or imported goods."

Alongside calling for heightened rule of law, Medvedev has recently called attention to crucial social problems: road deaths that have robbed Russia of an incredible 300,000 citizens over the last ten years, and alcoholism and smoking accounting for many times that number. Economists put the cumulative effect of these evils at two to three percent of GDP per year.

Thus, with Putin's plan to tap industry for a modernization drive left on the rocks by the outgoing credit tide, Medvedev's plan is to tap society's modernization potential. The day following the publication of the article, a raft of proposals to regulate the alcohol market was published.

There should be some easy gains here, analysts say. It surely can't be that hard to persuade Russians to wear a seatbelt or to drink and smoke less, especially given the extent of media control. All Western governments have wrestled with these same problems over the last 30 to 40 years with considerable success.

But huge hazards await anyone trying to change Russian society from the top, as Mikhail Gorbachev found out to his cost during his Perestroika-era anti-alcohol campaign - a campaign that positively impacted life expectancy, but reflected negatively on Gorbachev's popularity. Basically, Russians do not like being preached to by their leaders.

This is the risk Medvedev will run if he tries to mobilize a distrustful society for modernization. It is a dilemma that a colleague of Medvedev's, the Governor of the Kirov region Nikita Belykh, documented very accurately on the exact same day when Medvedev’s article was published.

Thirty-five year old Belykh, the former head of opposition liberal party the Union of Right Forces (SPS) and a sharp critic of Vladimir Putin's policies, was appointed to head the Kirov region by Medvedev in December of 2008. "When I was in opposition," Belykh said at a roundtable discussion on “Society and Reforms,” "I despised the authorities. Now that I am in office myself, I still don't like them, perhaps even less so, but to be honest, I am starting to dislike society as well. A more destructive, obstinate, inadequate and stupid institution than society does not exist. We sit down together at one table, talk, discuss problems, reach an agreement and sign, and the next day they are out demonstrating against you under your window."

"People refuse to recognize that the authorities can achieve anything," Belykh was quoted by Polit.ru as saying. "There's an assumption of guilt. Any actions are regarded either as a provocation, or simply go unnoticed. It's difficult not to act as a dictator, to break with the liberal idea."

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