Robin Mills: Russian reforms must touch oil and government alike

The Russian economy is like a horse and cart planned to be converted to a car, argues the liberal analyst Kirill Rogov in the Moscow Times.

By adding mirrors, rear wheels, metallic paint and air-conditioning, the reformer can quickly claim to have achieved 35 per cent of the plan. At a time of low oil and gas prices, the programme for the St Petersburg Economic Forum laid out a vision of such remodelling.

The forum’s programme betrayed Russia’s preoccupations, reminiscent of similar proclamations in the Arabian Gulf. Panels praised innovation, human capital, entrepreneurship and the next industrial revolution. Russia reached out to Europe, talked of a “100-year partnership” with the United Kingdom and tried to build ties with areas as diverse as Latin America, Japan and Bangladesh.

Russia is by far the world’s biggest exporter of gas, the second-largest exporter of oil and the third-largest exporter of coal, along with uranium, diamonds, metals and timber.

The economic liberal Alexei Kudrin, recently brought back by president Vladimir Putin to draft a new economic strategy, has for a second time the job of remodelling the horse and cart.

The political system and economy are built on distributing resource revenue, but the Kremlin can no longer rely on them for growth.

Oil prices have rebounded this year but remain relatively low. The next generation of more difficult fields, the offshore Arctic and shale resources in West Siberia, is rendered harder by western sanctions on technology.

Gas consumption in Europe, still Russia’s key market, is down almost 20 per cent since 2010. The liquefied natural gas plant on the windswept Yamal Peninsula is expected to start up next year, but enters a glutted market. Tensions with Turkey have undermined plans for a new gas route into south-east Europe.

Russia has begun reorienting energy exports east. But its deal to send gas to China, announced with fanfare in May 2014, is at best only half as lucrative as European exports, and has made little apparent headway.

The seriousness of these problems should not detract from the great strengths of the Russian energy industry.

Its huge fossil fuel resources are, if not as cheap as Middle Eastern oil and gas to extract, still low-cost on the global scale. Existing oilfields are increasingly mature, but Russian companies have done well to keep nudging up output.

Devaluation of the rouble has kept production costs down, while the tax system casts most of the pain of low prices on the state budget – though the finance ministry has cast its beady eye on oil companies' profit.

The country retains enviable skills in science and engineering, its oil services firms able to fill in some of the gaps created by sanctions, as well as generating valuable exports.

Despite continuing political confrontations, western and Middle Eastern businesses remain enticed by Russia’s obvious potential, with Russian attempts to woo Italy to undermine European sanctions.

In 2008, Bob Dudley, running BP’s Russian subsidiary, was forced out of the country, a move he blamed on Igor Sechin, the boss of the state oil behemoth Rosneft. Now BP’s chief, Mr Dudley was back at this summit to team up with Rosneft to explore the virgin lands of East Siberia.

As in Saudi Arabia, privatisation is in the air. Having seized the mid-size oil company Bashneft in 2014 and added TNK, the inheritor of BP’s joint venture, to Rosneft, the government is now planning to sell stakes in both, perhaps to Italian as well as Chinese and Indian companies.

Yet corruption and the state’s over-heavy hand remain a dead weight on sustainable economic growth. At the forum, Mr Kudrin said, “The entire world has turned into a lab to generate innovations”. If his reforms are to be more than a paint job, innovation has eventually to transform the Kremlin’s political machine.

Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis.

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