Russia in decline?

I’ve written before about the threat to the major gas exporters, such as Russia, of the sudden increase in prospective world gas supply from unconventional (shale) gas, first in the US but soon in other countries. My argument is from simple economics. A larger supply of something will tend, all else being equal, to push down its price, compared with what it would otherwise have been. Shale gas also brings the prospect of a much wider range of geographic supplies, which will loosen Russia’s grip on the European market. (The increase in global unconventional oil supplies will also be unhelpful for Russia.)

An additional argument for Russia being in trouble on the gas front comes in this blog (originally a Bloomberg op-ed) from the Peterson Institute of International Economics, which points to the poor performance of Russia’s gas champion Gazprom. The article opens bracingly: “No large company in the world has been so spectacularly mismanaged as Russia’s state-dominated natural-gas corporation, Gazprom.”

The author, Anders Aslund, argues that Gazprom’s market value collapse is a result of the company being too closely tied to the Kremlin and its refusal to modernise or adapt. It has missed the shale gas revolution and the Chinese market, and has under-invested for years, except in pipelines of doubtful economic value which are principally instruments of international politics.

Gas is run by the “liberal” faction in Russia (the civiliki), and oil by the former KGB and national security faction (the siloviki), according to this Stratfor article on the challenge of keeping Russia together after Putin eventually retires. The former President, Dimitry Medvedev, was the chairman of Gazprom before that. It is an old joke to say that it is not clear whether the Kremlin runs Gazprom or Gazprom runs the Kremlin. But it seems, if Aslund is right, that the neglect of basic business principles in the Russian gas industry threatens Russian economic prosperity and tax revenue in future.

But it may be part of a wider power struggle and faction fight. As the Financial Times reported last week, China National Petroleum Corporation has signed a deal to take a 20% stake in a major liquefied natural gas (LNG) project on the Yamal peninsula. This ends Gazprom’s former monopoly on gas exports and represents part of a belated movement by Russia to serve the enormous Chinese oil and gas market. If Gazprom is left with the less promising, if not actually declining, European market served from West Siberia, its power and influence will certainly wane.

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