Petrostate: Putin, Power, and the New Russia

THE ENERGY GIANT REAWAKENS

In 1999, as petroleum prices began their climb from $10 a barrel to over $100, memories of the 1998 financial meltdown and its impact on Russia quickly faded. Fortunately for him, Vladimir Putin’s selection as prime minister in August 1999 and four months later his appointment as acting president coincided with the recovery in petroleum prices. The increase in oil prices would probably have triggered an economic recovery even if Boris Yeltsin had still been in power. Nevertheless, Putin did what he could to take advantage of that recovery in oil prices.

Putin’s first priority was to prevent any further deterioration in Russia’s political and economic situation. In the aftermath of the August 17, 1998, economic crisis, it was difficult to see anything but a continuing deterioration in the economy. The banks remained closed, and because of the sharp drop in the value of the ruble more and more businesses, especially those run by foreign companies or dependent on imported components, closed their doors as well. Many of the country’s most talented people lost almost all their savings. No wonder so many simply emigrated to the West.

The devalued ruble, however, along with the gradually rising price of oil, proved to be that proverbial blessing in disguise. A cheaper ruble made imports more expensive, so Russians began to buy goods made in Russia instead. The drop in imports may have hurt Russian consumers and businesses that depended on imports, but it was a windfall for Russian manufacturers who suddenly had the domestic market to themselves. This windfall explains why for the whole of 1999 industrial production increased 6.4 percent over 1998 and by 10 percent in 2000 over 1999. Even though Putin was appointed prime minister in August 1999, five months after industrial production started to increase, he took office the same year the economy began its recovery. So it is easy to see why, for many, including Time magazine, which named him “Man of the Year” in 2007, Putin was the reason for the turnaround.

Crude oil “price per barrel” is U.S. dollars per barrel, Brent; Russian production is in tons per year. Sources: Price data from BP Statistical Review of World Energy June 2007, p. 16; 2007 price from Energy Information Administration, Weekly Petroleum Status Report (week of February 8).

Production data from 2006 BP Statistical Review of World Energy; 2007 production value from Goskomstat (Russian official statistics).

The causes and effects of Putin’s actions in the political sphere are harder to pinpoint. Putin began to move against what he considered the excessive number of political parties in the country. With more than one hundred existing parties, too many, he insisted, were no more than vehicles for individual ego building and petty feuds. He felt much the same way about the media. As he saw it, several of the oligarchs were using ownership of their TV networks primarily to attack each other rather than advance the interests of the state. Putin never bothered to mention that his targets were almost exclusively those TV networks that targeted him for criticism. It hardly advances the interests of the state, much less the cause of democracy, when a country’s leader like Putin can single-handedly determine which TV networks should be allowed to operate and which should be closed down; nonetheless, he did have a point.

So whether Putin can be considered a supporter of democracy is not a simple black or white matter. Certainly he has no doubts. After Gerhard Schroeder (not one who could be described as unduly critical of things Russian, especially Putin) described Putin as “a pure democrat,” a reporter asked Putin if the characterization was accurate; Putin responded, “Of course I am, absolutely…. The problem is I’m all alone, the only one of my kind in the whole world.” To prove his point, he criticized the United States and Europe for Guantanamo, detention without trial, the homeless, and rubber bullets and tear gas against European demonstrators. In his view, no one else seems to care. As he put it, “There is no one else to talk to since Mahatma Gandhi died,” all said with a straight face.

Of course, not everyone would agree, even within Russia. Grigory Yavlinsky, head of Yabloko, one of the more Western-oriented political parties, put it this way in an interview in the July 15, 2006, issue of the Economist. “Boris Yeltsin took mistaken steps in the right direction toward democracy; Putin took correct steps in the wrong direction toward an authoritarian petro state.”

Perhaps the most controversial step he took while he was still prime minister in 1999 was to disavow the informal cease-fire accepted by Yeltsin in 1996 and order Russian troops back into Chechnia. In effect, he launched the second Chechen war of the twentieth century. Putin did this in retaliation for the bombing of a series of apartment houses in Moscow and elsewhere. He ordered his troops to invade, even though there was no evidence that the Chechens had actually planted the bombs. He also felt it necessary to respond to the invasion of neighboring Dagestan by an extremist Chechen group. Critics of Putin such as Boris Berezovsky insist that the bombings were actually a provocation set off, in fact, by the FSB (formerly called the KGB) itself. Whatever the provocation, Putin used the war to rally the country to fight what he saw as a potentially disastrous terrorist threat.

THE NEW ECONOMIC IMPERIALISM

Putin’s most significant contribution to Russia’s economic and political renaissance, however, was his adoption of the notion of national champions. It was his way of merging state interests with private sector capabilities. Putin correctly understood that Russia had little in its economic and business arsenal other than its energy and mineral resources. Skillfully used, Russian petroleum, gas, and other exotic minerals could be manipulated to advance state interests. But under Yeltsin, the preponderance of the country’s raw material reserves had been turned over to individual oligarchs and their corporations who used the country’s energy and metal resources to advance their own interests and profits. From Putin’s point of view, this was outrageous. In a June 1, 2007, press conference, he expressed “regret” that in the early 1990s Russian officials had allowed such transfers to take place, actions for which they should have been put in prison.¹

Even so, Putin insisted that he supported privatization. In a June 4, 2007, press conference, he boasted, “We have completely privatized our oil sector and we now have only two companies with state participation. Gazprom already has 49 percent of its shares on the market and according to our calculations, more than 20 percent are now in foreign hands…. The other company Rosneft carried out an IPO [initial public offering of stock] and as you know has sold part of its shares.” What mattered, however, was not who actually owned the shares but whether the managers of these companies acted as agents of the state and adhered strictly to the goals set out by Putin and other senior state officials as if they were wholly owned by the state.

Putin’s embrace of the concept of privatization notwithstanding, he nonetheless set out to reassert the state’s interests by either renationalizing the country’s corporations or by applying subtle—and sometimes not so subtle—intimidation to convince those corporations that they should temper profit considerations in favor of advancing what Putin had decided were the country’s geopolitical or strategic goals. While Putin may have been one of the most recent world leaders to openly espouse such a notion, he is not the only one to do so. The president of France, Nicolas Sarkozy, began to call for the same type of initiative when he was minister of the Interior, an idea earlier supported by Charles de Gaulle when he was France’s president and even earlier by Jean-Baptiste Colbert, who was King Louis XIV’s financial controller in the seventeenth century.

As market conditions tightened in the early twenty-first century, the idea of Russian national champions became particularly attractive. The advent of China and then India as voracious consumers of energy and metals put Russia, with its abundant resource deposits, in a strong bargaining position. Taking advantage of these changes in market conditions, Putin skillfully utilized Russia’s gas and oil potential to advance its economic and political agenda. At times his efforts seemed little different from what the Soviets used to call “economic imperialism.” The difference in this case, if there is any difference, is that in the pre–World War I era, most of the “capitalist” corporations controlling such resources were privately owned. But private or state owned, after they established a foothold in a foreign country, they pressured their home country to help them maintain their interests. In Putin’s Russia, most national champions are either wholly or predominantly state owned, although some, such as Surgutneftegaz, have no or limited state ownership. Whether public or private, these national champions, actively encouraged by the state, seek to dominate foreign markets, just as companies did in the pre–World War I era. Usually the corporation takes the first step to establish a foreign presence, but on occasion the state has acted first and only afterward was the national champion brought in to carry out a state-to-state agreement (see Tables 6.1 and 7.1).

This economic imperialism—as Lenin would have labeled it—is not necessarily limited to the outside world. A reverse form of economic imperialism has essentially taken place within Russia itself. As we have seen, after both the 1917 Revolution and the 1991 breakup of the USSR, the government found it necessary to offer concessions to foreign energy companies because Russian companies were unable to exploit the country’s oil deposits on their own. Unable to master the drilling challenges in extreme circumstances, particularly offshore, the Soviets in 1917 and the Russians in 1992 found it necessary to bring in foreign technicians. In the 1990s, the government even agreed to accept production sharing agreements (PSAs) with significant tax concessions for foreign companies—the sort of policy followed by much poorer and smaller third world nations. But once Russia and its industries recovered enough economically to do without such help, the state authorities either disregarded contractual agreements or found environmental loopholes or instances of tax evasion that they used to claim contractual violations, as they did with Shell at Sakhalin and BP at Kovykta.²

The bankruptcy and renationalization of Yukos, as we have seen, was an extreme example of how the state will resort to extreme measures to regain control of a private enterprise. To the victims, of course, it felt like a form of domestic economic imperialism. But this renationalization sent a clear message. Rare is the corporate chief executive officer, Russian or foreign, in Russia who today dares to defy state edicts or wishes; they all realize that if the state prosecutor wants to, he can find something they have done that was illegal. As explained by Boris Berezovsky, the exiled former oligarch behind Sibneft, Aeroflot, and several other previously privatized entities, everyone in business in Russia must necessarily have violated the law at one time or another. Given the helter-skelter, often contradictory, nature of the privatization process and the absence of any well-established interpretation of Russian legal codes, it was impossible to adhere to the letter of the law and operate profitably. A survey among businessmen and women conducted in 2001 found that only 15 percent of those interviewed claimed they could operate legally. The remaining 85 percent said that of necessity they have had to cut corners.³ As a result, almost everyone operates with the knowledge that if they step out of line or cross the wrong person, they can face crippling charges from the prosecutor general’s office. Once the prosecutor general makes such charges, he can then freeze a company’s bank account, after which it cannot pay its bills and almost inevitably cannot survive.

POLITICIANS FOR SALE

Just as the state and its national champions can force out whomever they choose, they can also use their resources to buy up priority projects or personnel. The most glaring instance of this was the way Gerhard Schroeder prostituted himself for the Nord Stream gas pipeline designed to link Russia and Germany under the Baltic Sea.

As embarrassing as Schroeder’s complicity was to most Germans, he is not the only one to be wooed or seduced by Russia’s energy money. About the same time, Donald Evans, a close friend of President George W. Bush, was offered a somewhat similar opportunity. Evans, like Bush, also has a background in the Texas oil business. (Reportedly, he was more successful at it than the future president.) Later, Evans served as chairman of the Bush-Cheney 2000 presidential campaign, after which Bush brought him to Washington in January 2001, as his first Secretary of Commerce. Attempting to take advantage of that close relationship with President Bush, in December 2005, a year after Rosneft seized Yuganskneftegaz from Yukos, President Putin offered Evans what Putin referred to as “a top job” at Rosneft.

In a May 2006 meeting with President Bush, the president told a small group of us that he had heard about the offer to Evans directly from Putin, who told Bush that he was doing this “as a favor” to President Bush. The president said he was puzzled as to why Putin thought this should be regarded as “a favor.” From the outside it was anything but. Accepting this offer from Rosneft would have served to legitimize Rosneft’s takeover of Yuganskneftegaz, which had been Yukos’s most valuable asset. If he had any doubt as to how compromising his acceptance would have been, a December 19, 2005, editorial in the Wall Street Journal warned Evans that the public would perceive his taking the job as a sellout and urged him to reject the offer. After thinking about it for two weeks (suggesting that he must have been tempted), Evans eventually turned it down, thereby sparing himself the embarrassment that followed Schroeder’s appointment.

Not everyone in the United States was so principled or so forewarned. Shortly after his daughter Karen was hired for $500,000 by ITERA, the Turkmenistan-Ukraine trading company headquartered in Jacksonville, Florida, Curt Weldon, a Republican congressman from Pennsylvania, became ITERA’s public advocate. Those connections in part explain how ITERA, a rich Russian energy company, managed to apply for and receive an $868,000 grant in February 2002 from the U.S. Trade and Development Agency. Of all things, this money was to be used to underwrite ITERA’s effort to explore a Siberian gas field.⁴ That a U.S. agency should agree to finance what in fact is a well-endowed Russian company, underwriting its efforts to explore for gas in Russia, does seem odd. The grant to ITERA bears a striking resemblance to the loan guarantees the German government gave to Nord Stream before Gerhard Schroeder lost his post as chancellor and became that company’s chairman.

Although Weldon denies he did anything wrong, the circumstantial evidence that he was unduly supportive of ITERA is hard to ignore. Among other efforts on ITERA’s behalf, Weldon sponsored a dinner in September 2002 to honor Igor Makarov, chairman of ITERA, at the Library of Congress in Washington; gave a speech in the House of Representatives in 2002 about ITERA; and participated in the opening of ITERA’s headquarters in Jacksonville in 2003, a city a bit outside his Philadelphia congressional district.⁵ The Russian paper Kommersant claims that between 2002 and 2004, Weldon also worked on behalf of two other Russian companies.⁶ Nor did it help that all of this became public knowledge shortly after the lobbyist Jack Abramoff and disgraced Congressman Tom DeLay had also been accused of taking money from Naftasib, a Russian oil company, and then lobbying on its behalf.⁷ For this, Abramoff was alleged to have been paid $2.1 million. With Russia’s energy wealth, it was hard to avoid the perception that like many U.S. interest groups, a few Russian companies had also discovered how receptive the Republican-controlled Congress had become to financial incentives in 2006.

In October 2006, U.S. government attorneys obtained search warrants and then raided four houses and offices in the Philadelphia area and the ITERA office in Jacksonville. Weldon’s efforts on behalf of ITERA then became a major issue in the election that November. Among the gaffes that became public was Weldon’s praise for ITERA when he spoke at the opening of the company’s headquarters in January 2003: “I can think of no other company that represents what Russia is today and offers in the future.”⁸ Given the accusations at home that ITERA was a classic case of Russian officials stripping assets from state companies for their own personal benefit, Weldon was probably more accurate than he intended to be.⁹

The Schroeder, Weldon, DeLay, and Evans seductions highlight not only how money can seduce some of the West’s highest ranking officials but also how the Russians are learning to use their oil wealth outside Russia (they long ago learned how to use it within Russia). This wealth has catapulted Russia into new power relationships with its customers and Russia’s main rival, the United States. Unlike the Cold War era, however, when the Soviet Union was effectively checked militarily by the United States and vice versa, it is hard today to find any similar restraint. Then, each feared to use nuclear weapons. We understood that if we used such weapons against the USSR, it would use its armed missiles against us. This was called MAD: mutually assured destruction.

NO MUTUALLY ASSURED RESTRAINT

Today, if the Russians or Gazprom threaten to halt the flow of their natural gas, there is little anyone can do about it. After twenty years or so, Russia’s natural gas has become an integral part of the economies in the countries it serves. The European pipeline network does distribute gas from other countries but by far the greatest flow is from Russia. If the gas flowing from Russia—or the gas transiting from Central Asia in the Russian pipeline—were to be curtailed, consumers in Germany and other Central European countries near the Russian border would have a difficult time finding a substitute. While there are other producers of natural gas such as Algeria and Norway supplying product to the pipeline, they are at the other end of the pipeline network in the southwest or northeast, and it would be difficult to reverse the flow in a pipeline that has been designed to ship Russian gas coming from the east. Coal could be a replacement, but several months would be required to make the needed adjustments and the affected countries could experience several cold winters in the meantime. That is why we have likened the pipeline to an umbilical cord. Because Russia controls delivery of so much gas through its pipeline, in effect it has monopoly control in the markets it serves.

As we saw in Chapter 6, some have suggested that the Gas Exporting Country Forum (GECF) should turn itself into an OPEC counterpart. The group consists of fifteen countries, including the largest gas exporters, Russia, Iran, Algeria, and Qatar. As of 2007, GECF had met seven times, but despite some occasional tough talk, it has been unable to do much more than exchange information on such matters as technology, research, and perhaps some product swaps—for example, Algeria has sent its LNG (liquefied natural gas) to the United States in exchange for Russian natural gas delivered by pipeline to an Algerian customer in Western Europe.¹⁰

Some time in the future, the market for LNG may become large enough so that if gas delivered by pipeline should be cut off, LNG can be substituted in its place. But because producing LNG is so expensive and requires such a large capital investment, in 2005, 87 percent of it was sold only on the basis of long-term contracts. Unlike oil purchases that are made on the spot, LNG transactions often require as much as a two-year contract commitment. That in large part explains why as of 2005, 19 percent of the world’s gas was delivered by international pipeline, compared to only about 6.9 percent as LNG.¹¹ LNG production is expected to double by 2010, but the likelihood is that relatively long-term contracts will still be required, making an actual spot market unlikely.

Even if some way can be found to produce LNG at a much cheaper price, remember that GECF members export only 14 percent of the gas consumed in the world. This compares to OPEC, whose members account for more than 35 percent of the world’s oil exports. The United States, for example, produces 84 percent of the gas it consumes and Canada provides another 15 percent.¹² If Gazprom were to enter into a joint venture with BP in Trinidad to produce LNG, there might be local consequences for U.S. consumers accustomed to using imported LNG, but LNG constitutes such a small fraction of the total natural gas consumed in the United States that the Russian venture would have little impact on this country. The real threat of an effective GECF would be felt in Europe where Russia and Algeria account for 44 percent of Europe’s natural gas consumption.

But there is reason to doubt that Russia would be willing to subordinate its actions to such an umbrella group. Russia has resisted membership in OPEC for that very reason. It prefers to let others coordinate production cutbacks. This allows Russia to increase its own production so it can benefit from the higher prices that OPEC cutbacks have created. It did just that in 1973. It is hard to see, therefore, why Russia would be willing to subordinate itself to a more powerful GECF. After all, it already has enormous clout.

This is why with Gazprom’s newly acquired ability to determine economic, political, and personal success or failure, Russia is in a stronger position relative to Western Europe than it has ever been in its history. The threat of mutually assured destruction may have ensured no one would use missiles during the Cold War, but today there is no mutually assured restraint (MAR) to temper what might be called a one-nation OGEC, Organization of Gas Exporting Country, which is Russia today.

This is not to argue that Russia can do whatever it wants with its natural gas reserves. There are several concerns: one set has to do with the demand for Russian energy, one set has to do with its energy supplies, and one set is an offshoot of Russia’s political and economic environment.

What would happen, for example, if there were a world recession and/or demand for Russia’s gas and oil should suddenly slacken? After all, it is not as if Russia had no petroleum or gas reserves prior to 2000. Russia has been the world’s leading producer of natural gas for some time, as well as a major, if not the largest, petroleum producer for many years. So why is it only now that Russia and Gazprom have become such concerns to the Europeans? The answer, in large part, is that as China and India have come of age financially, they have gobbled up most of the slack in the energy market. Despite the increasing emphasis on energy conservation, overall world demand continues to grow. At the same time, some of the existing reserves in Western Europe are being depleted. A far-reaching recession would undoubtedly precipitate a drop in commodity prices just as it did in 1997 and 1998, but at best that would be a temporary phase.

THE QUEST IN THE WEST FOR ALTERNATIVES

Compounding the problem, there are fewer and fewer prospects of finding new giant petroleum or gas fields. As in the past, the high energy prices of the early twenty-first century have stimulated the search not only for reserves that previously would have been unprofitable to exploit but also for new types of energy. Sources of supply such as the oil sands of Canada that until recently would have been too expensive to work now are worth developing. They provide Canada with reserves that some claim to be second only to Saudi Arabia’s. Then there is also ethanol made from both sugarcane in Brazil and corn in the United States as well as solar and wind power. Detroit automakers have been campaigning to design cars that can run on either regular gasoline or E85, a combination of 85 percent ethanol and 15 percent petroleum.¹³ They have already manufactured several million such flex-fuel vehicles as well as hybrids that utilize both electricity and gasoline. Similarly in the aftermath of the $90–$100 a barrel oil price, many in Europe as well as the United States and Asia are taking a second look at nuclear energy. Nuclear energy already generates almost 80 percent of France’s electricity. However, it is unlikely that enough new nuclear facilities can or will be built in the near future or enough new forms of energy or enough new deposits of crude oil and natural gas in Russia or elsewhere can be found to replace the reserves depleted by existing consumption, much less to provide for an increase.

Additionally, Russia’s influence could be weakened if the Europeans can find some way to gain access to natural gas from Central Asia without having to pipe it through Russia. At times, Kazakhstan has offered its support for various arrangements that would bypass Russia. (Almost as often it has disavowed any such routing out of loyalty to, and probably intimidation from, Russia).¹⁴ This alternate route has at times been supported by the United States and the European Union. It should be a major priority for both Europeans and Americans.

Conceivably, LNG from non-Russian sources might also become a viable alternative, but at the moment, few places can supply enough of it at reasonable prices. Unless new technology offers a cheaper way of processing LNG, the prospects for creating a widely used spot market for LNG where consumers can purchase LNG at the last minute are not very good. For the time being, creating processing and handling facilities for producing, shipping, and distributing LNG is very expensive. As a result, almost everyone involved insists on a long-term contract commitment before they will agree to the necessary investments.

Of course, with time, there is the danger that other countries and other suppliers might try to encroach on “Russian markets.” Alert to such a possibility, Gazprom, especially when Putin was president, could be counted on to attempt to gain control of possible producing fields outside Russia before potential competitors had a chance to intervene. For example, just as the Chinese have looked to Africa for sources of supply, so in 2008 Gazprom also sought to tie up what were thought to be very large gas deposits in Nigeria. This was seen as a strategy to gain control before private Western companies could step in, convert the gas to LNG, and use it to undermine Russian sales to Europe and the United States.¹⁵ As part of the arrangement, Gazprom also promised to help Nigeria reduce the amount of associated gas released during oil production that the Nigerians flare, that is, burn off into the atmosphere.

HAS RUSSIA OVERCOMMITTED ITSELF?

But it is not only a question of whether or not there will continue to be such a strong demand for Russian gas. Several skeptics have also warned that Russia has overcommitted itself and has not invested enough in the development of new fields within Russia.¹⁶ Among others, German Gref, formerly the minister of economic development, has complained that Gazprom has not only failed to expand productive capacity and maintain its existing infrastructure but it has also neglected commitments to re-equip and expand gas pipelines and other essential facilities, 30 percent of which he says needs replacement.¹⁷ Furthermore, while neglecting essential producing facilities, Gazprom, he complained, has squandered capital on frivolous pursuits such as TV stations and newspapers. A report in the November 9, 2007, Financial Times warns that Gazprom is now spending more in expanding into other sectors of the economy than on developing new fields.¹⁸

A recent example is Gazprom’s commitment to allocate $375 million to build a ski resort with three hotels, a covered parking lot for 1,000 cars, and a ski lift for the 2014 Sochi Winter Olympics. That comes with being a national champion. (Vladimir Potanin with his Norilsk Nickel and Oleg Deripaska with his aluminum company, Rusal, both national champions, are also diverting similarly large sums to Sochi.) But in the case of Gazprom, it is money that will not be going to the development of new gas reserves.¹⁹

Leslie Dienes of Kansas University has also pointed out that as long as domestic energy prices for both petroleum and gas in Russia are prevented from reaching market levels, those below-market prices not only subsidize excess consumption but they also discourage investment in the development of new reserves.²⁰ Prices are kept low for fear of a political backlash from the public if this benefit is eliminated. Dienes also points out that not only does the subsidized price for natural gas result in the misallocation of resources, but for the same political reasons, electricity rates are similarly controlled. Since natural gas is used to fuel almost half of the country’s electrical generators, limiting electricity rates means that the electrical industry, along with the public at large, also has a strong interest in preventing any increase in natural gas prices.

Indicative of the problem, the Russian electrical industry has estimated that it will consume 186 billion cubic meters of gas by 2010. However, Gazprom predicts that electricity generation will need only 168 billion cubic meters, a difference and possible shortfall of 18 billion cubic meters.²¹

In an effort to use market prices to restrain demand and increase supply, the government has decided to “liberalize” domestic gas prices—at least those that are paid by industrial users. To force nonindustrial consumers to pay much more was still deemed too risky. Nonetheless, by 2011, it is estimated that prices for industrial users will be double those of 2006.²² Jonathan Stern, director of natural gas research at the Oxford Institute of Energy Studies, argues that if Russia increased natural gas prices as much as they were increased in Ukraine and Belarus, less would be consumed and there would be no problem supplying both the domestic and foreign markets.²³ John Grace agrees in principle but expresses it somewhat differently. “If domestic gas prices were at parity with the European market, there would be enough to supply both [markets]…. Even so it must be done at a very measured pace.”

After widespread criticism that Gazprom had not invested enough to guarantee future production, on May 31, 2007, the government released a draft investment program spelling out what was needed to “Develop a Unified System of Gas Production, Transportation and Supply in East Siberia and the Far East.” While the details made public are a little sketchy, this seemed to be an updated version of an energy development plan (whose details were also sketchy) covering both petroleum and natural gas that was first issued by the Putin government in 2003. If implemented, this latest version should forestall possible shortfalls. According to Alexander Ananenkov, acting CEO of Gazprom, by 2020 Gazprom should produce 670 billion cubic meters, a 14 percent increase in production.²⁴

If production depended on Gazprom’s investing enough in the development of future reserves, there could well be a shortfall in supply. But there are other possible sources of supply: independent gas producers in Russia, of which there are at least two, and gas produced as a byproduct by the country’s several petroleum producers. In addition, Gazprom has also been able to count on reselling substantial quantities of gas from the Central Asian producers.

Admittedly, the gas production of Novatek and ITERA, both of which are independent of Gazprom (at least officially; in fact, Gazprom owns almost 20 percent of Novatek’s stock), amounted to only 40 billion cubic meters. Byproduct gas produced by the country’s petroleum producers equals another 40 billion cubic meters or so, which when added to that produced by Novatek and ITERA, equals about 15 percent of what Gazprom produces, which is a substantial amount. However, unless Gazprom allows Novatek and ITERA access to Gazprom’s pipeline, these non-Gazprom producers are limited to supplying consumers within a short radius of their operations. Similarly, in most cases the petroleum companies can produce more natural gas but refuse to do so, because if they want to sell it to customers farther afield or in foreign countries, they too have to gain access to Gazprom’s monopolized pipeline and Gazprom typically refuses access to any gas not produced by Gazprom itself. This exclusion is a legacy from the Soviet period.

On the rare occasion in the post-Soviet era when Gazprom has agreed to buy gas from a petroleum-oriented company like Yuganskneftegaz, it paid almost nothing for it. For example, in 2006, Gazprom paid less than $11 per 1,000 cubic meters for gas it grudgingly agreed to buy from Yuganskneftegaz.²⁵ That contrasted sharply with the $100 per 1,000 cubic meters that even Belarus was paying at the time.²⁶

Since access to Gazprom’s pipeline is not always possible nor profitable, the easiest way for the petroleum companies to dispose of their byproduct gas (associated gas)—and what for them is often a bothersome nuisance—is to flare it. According to an estimate by the French energy specialist, Pierre Terzian, Russian companies flare anywhere from 15 to 16 billion cubic meters of gas, an enormous waste. In fact a study prepared for the World Bank concludes that Russia flared more gas than any other country, twice as much as Nigeria, which was second only to Russia.²⁷ This also contributes needlessly to earth warming.²⁸ In part this was also due to the fact that until 2005, when Gazprom moved to absorb Sibneft, Gazprom did not seriously concern itself with petroleum production. It was almost completely absorbed in producing natural gas, so it had no interest in utilizing the associated gas produced as a byproduct by the country’s petroleum producers.

When the petroleum companies spun off from Rosneft became privatized, their quest for profit led them to sell both gas and petroleum for the first time. Yet with a few exceptions, they profited little from their natural gas production because Gazprom continued to deny them access to the Gazprom monopoly pipeline. The attitude of what the Russians refer to as Gazoviki was “You, the petroleum producing companies, have no business impinging on our natural gas production activities.”²⁹

For those addicted to conspiracy theories, there seemed to be another reason for Gazprom’s refusal to allow pipeline access. In several cases, refusal to allow some of the petroleum companies access to the gas pipeline was a part of the continuing effort by Putin and his Kremlin associates to regain control of properties given away during the privatization era. Gazprom’s refusal to allow petroleum producers access to its pipeline was a way of preventing nonstate oil producers from following their contractual commitments to deliver gas and thereby forcing them to return ownership of potential gas fields to the country’s national champions. In other words, this was just another form of renationalization designed to look like an initiative undertaken by the private producer, not the state.

GAZPROM: A STATE UNTO ITSELF

As an example, Gazprom refused to allow TNK-BP to build a pipeline so it could transport the gas it was producing in its Kovykta field in East Siberia to either large domestic or foreign markets. This was important because according to the terms of their license, TNK-BP promised that by April 2007 they would be producing 9 billion cubic meters of gas a year.³⁰ But as the time approached and Gazprom refused pipeline access, TNKBP found that they could find a market for their gas only in Zhigalovo, a nearby logging town, and only for slightly less than 1 billion cubic meters. This was despite the fact that TNK-BP was charging a bargain $30 per 1,000 cubic meters when Gazprom was exporting gas at an average of $190 per 1,000 cubic meters.³¹ Of course, transportation costs and market conditions in Western Europe and East Siberia are not the same, so there should be some difference in price, but this still seems to be inordinate. Beyond that, the only way TNK-BP could reach other customers would be for Gazprom to let them build their own pipeline network to the border. Potentially, Gazprom could build a pipeline network that could serve larger foreign customers throughout Asia. TNK-BP even offered to build their own pipeline for that purpose but were denied permission to do so.

Since TNK-BP could not reach any large customers if they were to produce gas, they would have had to burn it off—not only a waste but against the law and harmful for the atmosphere.³² Alleged violations of other production commitments and charges of pollution forced Royal Dutch Shell and their Japanese partners to sell more than half of their holdings in Sakhalin II to Gazprom. It did not do anything for Russia’s reputation when Shell and the Japanese agreed to sell Gazprom a half interest (plus one share of stock) for $7.45 billion. Most estimates set the value considerably higher.

While such wasteful and narrow-minded behavior has benefited Gazprom economically in the past, if it should be unable to fulfill contracts with gas from its own fields, there is the possibility that it can always seek to supplement its deliveries with gas from the petroleum companies. This may result in only a relatively small percentage of what Gazprom delivers, but we don’t know. Until now, because of Gazprom’s determination to maintain its monopoly, independent gas producers as well as the petroleum companies have been pressured to curb, not expand, gas production. If instead they were to be rewarded for increasing their gas output, output would undoubtedly be considerably higher than it is now.

There have already been hints of a change in policy. After the government agreed to raise the price for domestic industrial users of gas, Gazprom assumed that this would stimulate so much production by others that by 2020 Gazprom would be producing only 65 percent of the country’s gas, considerably less than the 87 percent it produced in 2004.³³

Gazprom’s acquisition of the petroleum producer Sibneft has also led to a change in Gazprom’s thinking. Now that a Gazprom subsidiary, renamed Gazprom Neft, is also drilling for petroleum, Gazprom finds itself producing the associated gas that comes up with the crude oil from the well. Gazprom now realizes that flaring much of that byproduct is a lost profit opportunity. Consequently, in August 2007, Gazprom announced that it had set itself the goal of utilizing 95 percent of what is called the “associated petroleum gas” (APG) by 2012. They extracted and used 14 billion cubic meters of APG in 2006 but expect to increase that to 22 billion cubic meters by 2011.³⁴

Along the same lines, there is a growing governmental awareness of how much potential wealth is simply going up in flames. Even Putin has expressed his concern. In August 2007, he held a meeting with the heads of Transneft, Rosneft, and Gazprom, his favorite national champions, and warned them that if they burn off more than 5 percent of the APG they release into the atmosphere they will be fined. According to an estimate of the Ministry of Natural Resources, that could mean that the country’s petroleum companies (both state and private) will have to pay $580 million a year because, according to Putin, Russian oil companies burn off more than 20 billion cubic meters of APG a year.³⁵

Gazprom has been able to count on one other source of supplemental natural gas. Until they can find some alternative routing, Central Asian producers such as Turkmenistan, Kazakhstan, and Uzbekistan will have to continue shipping their gas to Europe through Russia via Gazprom’s pipeline. As we saw when Gazprom cut off the flow of gas to Ukraine, much of that gas actually had been coming from Turkmenistan. Undoubtedly, the Central Asian producers will in time find some way to reach European markets by bypassing Gazprom pipelines, but for the near future most of their exports will continue to flow through Russia and at least some of this gas will continue to be resold by Gazprom as part of Gazprom’s contractual commitments.

Another alternative is for the Central Asian countries to turn east or south and sell to China, Iran, or India. Kazakhstan has done just that with its oil pipeline to China. The Kazakhs have also indicated their support for Turkmenistan, which has signed an agreement with China to build a new natural gas pipeline that begins in Turkmenistan and crosses Kazakhstan and Uzbekistan. It would supply 30 billion cubic meters of natural gas a year for thirty years. Access to gas from any of the three Central Asian suppliers would also allow China to bargain harder with Russia and Gazprom over prices. The Chinese are notorious for their hard bargaining over prices, and negotiations with the Russians have frequently broken down when no agreement could be reached.³⁶ This has not contributed to better relations between the two countries. In 2007, the Chinese refused at first to agree to a price of $100 per 1,000 cubic meters. They reluctantly agreed to go up that high but the Russians wanted at least $125 per thousand cubic meters, pointing out that as of 2011, that would be the price within Russia itself. Even then this would be but half of what the Europeans would be paying.

WHAT ABOUT TOMORROW?

Whether or not the Russians will have enough natural gas to meet their contracts, some Russians for the first time are beginning to question the wisdom of seeking a continuing increase in petroleum and gas output. What is wrong, they ask, about stabilizing output or even discouraging or reducing production? By contrast, those seeking to increase output in the petroleum industry often criticize the tax on petroleum exports that claims most of the revenue collected once the price exceeds $27 a barrel. But proponents of a freeze in production support such a tax because it discourages, temporarily at least, investment in further exploration and development. This postpones such exploration for now and means there will be more set aside for the future.

Yet if production of either natural gas or petroleum should drop or even stabilize, Russia may be unable to meet all of its export commitments. In some cases this might result in a contract violation (something not unprecedented in Russia). But since the rule of law involves a less than fully formed yardstick at best, curbing output and then failing to honor agreed-to contracts would not be regarded by many Russians as a particularly serious crime.

While he did not support any effort to break existing contracts, Sergei Karaganov, deputy director of the Institute of Europe, wondered aloud at a meeting of the Valdai Hills group in Moscow in September 2006 why Russia was so intent on increasing its annual production of petroleum and gas. Rejecting arguments that Russia should take advantage of the moment when prices were at a record high, he asserted that Russia had already collected more revenue from foreign energy sales than it knew how to spend. Look at the $100 billion put aside in the Stabilization Fund as of September 2006 when he spoke, not to mention the more than $300 billion hoard of foreign currencies and gold accumulated in the Russian Central Bank vault. Besides, if their energy reserves were valuable in 2006, given the growing world demand it was more than likely that such deposits would be even more valuable in the future. Further, he noted, the demand for natural gas is fairly inelastic, at least among already existing purchasers. Thus if supplies were reduced, the price for the gas that is being sold would most likely rise so that total revenue might actually increase.

President Putin, however, takes a different stance. At the 2007 Valdai Hills meeting he insisted that Russia should produce as much as it can immediately before someone discovers an energy substitute that leads to a drop in oil and gas prices.

JUST THE FACTS, PLEASE

Thus while some insist that Russia has not invested enough in new field development and production to assure that it can honor its existing contracts, others argue that Russia should sell its oil and gas as quickly as possible rather than set aside reserves for the future. But what has actually been happening?³⁷ Data taken from BP’s annual statistical survey and used in Table 7.2 suggest that despite warnings that growing consumption within Russia will soon make it impossible to set aside enough oil and gas to meet export obligations, so far Russia seems in no such danger, at least in the short run. In the case of petroleum for example, as of 2006, the amount produced and available above and beyond domestic needs has, if anything, increased each year.

As for natural gas, the trend is not as pronounced. The amount available in 2006 was 10 percent less than it had been in 2005, certainly a worrisome sign. Yet the amount available has fluctuated up and down from year to year. Thus while the export potential was also less in 2006 than in both 1996 and 1999, the amount available for export in 2006 actually was higher than it was in 2000, 2001, and 2002. Russian authorities would do well to discourage wasteful consumption and encourage investment in new fields, but, for the time being at least, there appears to be a comfortable cushion.

FIGHTING OVER THE SPOILS

Yet by no means is everything in the Russian energy sector is going well. Below the surface, major battles are being fought. When there is so much wealth up for grabs, there are bound to be major battles over who should control it. Certainly Russia is not unique in this respect, but since the state is so deeply involved and since the struggle for control is far from settled, the fight in Russia has some unique features—what I have called “The Russian Disease.”³⁸

Unlike the Dutch Disease, which, as we noted in the Introduction, is shorthand for the negative impact on a country’s manufacturing competitiveness that is a consequence of a major discovery of natural gas or oil, the Russian Disease has more to do with the greed and the jockeying for control and ownership that hit Russia during the privatization process. It was a particularly acute problem because Russia lacked what the Wellesley College economist Karl Case has called a “moral infrastructure” where there are few of the firmly rooted commercial laws or informal moral codes that are taken for granted in long-established market economies. The “rule of law” becomes the “the law of rulers.” As a result, when a country like Russia suddenly decides to privatize its valuable energy assets, the law of the jungle will almost inevitably take over and lawlessness and chaos will ensue. A blatant instance of this occurred when Putin formally announced that Gazprom would take over stateowned Rosneft. In what later turned out to be an embarrassing publicly televised announcement, on March 2, 2005, Alexei Miller, the CEO of Gazprom, appeared together at Gazprom headquarters with Sergei Bogdanchikov, the CEO of Rosneft. They used the occasion to congratulate each other on reaching an agreement to merge Rosneft and Gazprom under Gazprom leadership.³⁹ Yuganskneftegaz, Rosneft’s largest producing unit, had just been seized from Yukos, and the announcement was that it would become a separate state-controlled entity. The rest of Rosneft was to be incorporated as part of Gazprom. With Bogdanchikov at his side, Miller confirmed that “a final decision on the procedure to join [unite] Rosneft with Gazprom has been made and the state will receive a controlling stake [more than 50%] in Gazprom.”⁴⁰ In a bow to Putin’s determination to create national champions, Miller added, “Integration of the assets of Gazprom and Rosneft strengthens Gazprom’s presence in the oil sector [where it previously had almost no production] and allows the company to become, in the very near future, one of the biggest gas, oil, and energy companies in the world.”

Bogdanchikov, however, evidently had some reservations. While he sat smiling throughout the TV presentation, he pointed out, in a somewhat off message aside, that he would head up Yuganskneftegaz as a separate entity outside of Gazprom. This seemed to contradict Miller, who insisted that the “de facto consolidation” of the two companies would take place “in the near future” and that Yuganskneftegaz would be incorporated as part of Gazprom. This had been the original intention when Yukos was seized by the government in December 2004. The reason Yuganskneftegaz was not immediately absorbed into Gazprom was concern that disgruntled Yukos stockholders would soon launch a lawsuit in an attempt to seize some of the many Gazprom assets located outside of Russia. As soon as the likelihood of such a Yukos stockholder lawsuit faded, Yuganskneftegaz would then also become part of Gazprom. This would be another step toward enhancing Gazprom’s role as a national champion. But with or without Yuganskneftegaz, it seemed clear that Miller and Gazprom would soon assert control over Rosneft and perhaps eventually Yuganskneftegaz.

To the shock of many observers, however, the very next day Bogdanchikov insisted that no, he had not agreed to merge Rosneft into Gazprom. In fact, a press release issued by Rosneft flatly contradicted Miller. “These statements [about the merger] do not reflect reality and they seem to be seen exclusively as the Gazprom CEO’s personal opinion.” (But what did we hear the day before on television?) In response, Gazprom’s press office described the Rosneft assertion as “a technical mistake”—in other words, a lie! Continuing the soap opera, the Kremlin then issued a statement announcing that Rosneft had retracted its statement, which in turn provoked Rosneft to deny it had done any such thing.⁴¹ This event provided an unprecedented look at the bureaucratic cat fight then going on within the Kremlin and evidence that even Putin was unable to impose a coherent policy. There were then allegations by Rosneft that in the original TV presentation, Bogdanchikov had in fact insisted that Gazprom and Rosneft would indeed remain two separate legal entities, but that the segment shown on TV omitted that portion of the announcement. The Rosneft spokesman pointedly explained that the TV station reporting the announcement was owned by Gazprom and had deliberately sought to mislead the public. Shocking! Seeking to defend Rosneft, the spokesman went on to say, “Why this happened is a question for Miller.” (Who is in charge here?)⁴² In the end, Rosneft did remain a separate company and did hold on to Yuganskneftegaz, the prime cherry in the orchard.

The fact that Rosneft and Bogdanchikov, along with Igor Sechin, who sat both as chairman of Rosneft and deputy head of the Kremlin administration, dared to defy Gazprom and Miller reflects how determined the senior executives of Rosneft were to hold on to their priceless perquisites. This case study in the Russian Disease displayed a remarkable show of self-confidence by Rosneft senior executives. It was a display as bold and disrespectful as anything Khodorkovksy ever did and suggestive of the fight over the spoils that seemed to be taking place once it looked as if Putin would soon be leaving the office of president.

THE ST. PETERSBURG “MAFIA”

The difference in response to such insubordination is due to the fact that unlike Yukos and the outsider Khodorkovksy, Rosneft is controlled by a special group of insiders, what the Russians have come to call “siloviki.” There is no exact equivalent for the phenomenon in the United States and Europe, and so no word for it exists in English. The Russian word “sila” means strength, so perhaps the best way to convey the concept is to translate it as “law and order veterans.” Russians use the word to refer to former members of the KGB and to a lesser extent senior military officers and police. Given Putin’s own background as a lieutenant colonel in the KGB, it is not surprising that he has brought such people into his government.

Olga Kryshtanovskaia, a sociologist who specializes in the backgrounds of senior government appointees, has compared the number of siloviki in the senior ranks of the Gorbachev, Yeltsin, and Putin governments.⁴³ She found that the number of siloviki in the national leadership rose from about 5 percent in senior positions under Gorbachev to 58 percent under Putin.

Balancing off these law and order types, Putin has also brought in a substantial number of technocrats, former colleagues who worked with him in Mayor Anatoly Sobchak’s St. Petersburg office, where Putin headed the Department of Foreign Economic Relations. This included Viktor Zubkov, Sergei Ivanov, Viktor Ivanov, Dmitry Medvedev, Igor Sechin, Sergei Naryshkin, Minister of Finance Alexei Kudrin, and Minister of the Economy German Gref (see Table 7.3). These FOP (Friends of Putin), called by others the St. Petersburg “mafia,” are similar to the Texas “mafia” brought to Washington by President George W. Bush and the Arkansas mafia that came in with President Bill Clinton.

So ubiquitous are these outsiders from St. Petersburg that they have become a source of humor among Moscovites jealous of these officials from the provinces who have taken over their city. Resentful Moscovites tell the story of a local man riding the Moscow subway. Without warning, the man next to him steps on his foot. After five minutes, the Moscovite, in pain, works up his courage. “Excuse me, sir,” he says. “Are you in the KGB?” “No,” answers his neighbor. “Then are you from St. Petersburg?” “No,” again comes the answer. “Then tell me, why are you standing on my toes?”

But the siloviki around Putin and the privileges and power they have been given distinguish them from their Washington counterparts. The Washington political appointees are very often appointed to plum positions after they leave government service. Under Putin, they are appointed to the lucrative posts while they hold their jobs in the government. Given the way that new government officials in Russia treat their predecessors (a legacy of the USSR when predecessors were blamed for all the country’s subsequent problems—Brezhnev, Gorbachev, Yeltsin, and Stalin are good examples, not to mention Khrushchev, who was put under house arrest), Russian officials fear that once they are out of the government, they will no longer have access to such patronage. (This habit is also a source of humor. As he is about to turn over his office to his successor Vladimir Putin, Boris Yeltsin is asked by Putin if he has any words of advice. Yeltsin tells Putin that if he encounters any difficulties, he should look in his desk in the president’s office where Yeltsin will leave three envelopes. At the first sign of trouble, open the first envelope. Sure enough, Putin has trouble and decides to open the first letter. It reads: Tell everyone it was [Yeltsin’s] my fault. If the trouble continues—open the second envelope. It reads: Promise that everything will get better. If the protests still continue, prepare three envelopes.) So Russian officials have learned to take such posts and collect the fringes they bring while they can.

DOUBLE DIPPING

Whatever the rationale, Putin has instituted the practice of appointing his former colleagues not only to the most senior positions in the government but also to senior and lucrative posts in the business world. One Russian told me that senior Gazprom executives are reported to collect salaries that exceed $300,000 a month. (That surely would be high by past Russian standards but still less than what some senior executives in the United States receive today.) But unlike the practice in the West, the Russians hold these appointments simultaneously with their government positions. Since many of the posts are at the top of Russia’s most prosperous companies, they are following in the steps of the oligarchs, only they, unlike Khodorkovsky, Berezovsky, and Gusinsky, are protected by their benefactor, Putin. These FOP are doing very well. The Moscow Times on June 22, 2007, for example, reported that several of them have joined some of the old oligarchs in paying the $50,000 a year dues to the Burevestnik Yacht Club, Russia’s largest, which even has its own helipad. The yacht is extra.

This was not the only glimpse into what seems to be the acquisition of great wealth by KGB veterans or what we have called the second generation of oligarchs. In an interview in the Russian paper Kommersant, Oleg S. Svartsman acknowledged that the $3.6 billion Finansgroup investment fund that he manages is a vehicle used by members of the FSB and SVR (Foreign Intelligence Service) and other high-ranking officials and their families. They use this to enhance their wealth (at $3.6 billion, this is pretty good for a relatively small group of public servants) and promote “social responsibility to the state.”⁴⁴ In the words of Yevgenia Albats, the deputy editor of New Times and the author of The State Within a State, a book about the KGB, “The FSB is no longer just a police organization, it is a business.”⁴⁵

As a look at Table 7.3 shows, Putin appointees now run most of Russia’s national champions. At a meeting of the Valdai Hills group on September 9, 2006, at Putin’s home in Novo-Ogaryovo outside of Moscow, I asked President Putin if this was a good way to run both the government and these companies. “How could someone like Igor Sechin,” I asked, “the deputy head of the Kremlin administration, which is a full-time job, also do a good job as the chairman of the board of Rosneft, which is also a full-time job? More than that, how could Sechin be expected to be objective if the Kremlin is asked to mediate a dispute between Sechin’s Rosneft and an ostensibly private company like Lukoil? Wouldn’t this constitute a clear conflict of interest and open the door to criticism of corruption and abuse of power? Moreover, aren’t they likely to enrich themselves in the process, and before long end up as new entries on the Forbes Magazine list of world billionaires?”

Putin’s response, according to the official transcript, seemed to skirt or, perhaps more charitably, miss the point. “These people only represent the state’s interests in a given company where the state holds a certain number of shares…. They do not manage the company and do not manage its resources…. Of course we could develop a system in which independent experts and lawyers represent the state’s interest…. For now I consider this is not realistic because at present lawyers and independent managers would at once start to engage in their own private business.” He then cited as an example of such corruption the two Harvard University advisers sent to Russia to help with the privatization effort only to be sued, found guilty, and fined $2 million each by the U.S. government for violating their work contract and insider trading. “For that reason it is natural that bureaucrats working for the state should represent the state’s interests.”⁴⁶

Whatever the reasoning, it is hard to find any other country in the world where so many senior government officials can simultaneously hold such lucrative business positions, whether in wholly or partially owned government companies. It is also hard to see how such companies can avoid patronage and other political pressures—pressures that are often difficult for even purely private companies to ward off. Inevitably, the partially private Russian companies headed by siloviki or FOP face the same political pressures encountered by wholly state-owned companies over such issues as patronage appointments, where to locate factories, pricing, wage setting, and vendor selection. In most such instances, production, productivity and profits suffer.

It may already be too late. Russian state companies have begun to appoint the children of siloviki to high corporate positions. Called “princelings” in China, their Russian equivalents are a form of a kick-back for senior leaders in the party and government. While these Russian princelings may be capable, it is clear to other employees that their appointment was due more to their parentage than their training or competence. As Table 7.4 shows, these appointments are to senior posts in state-owned entities. Nikolai Patrushev, head of the FSB (once the KGB), for example, has managed to place two sons in these companies.

At the 2007 Valdai Hills meeting I asked Putin if appointing the children of government officials, who would probably otherwise not be regarded as qualified, would likely have a negative impact on company productivity. Putin responded that such impact would be minor and besides such practices are not unique to present-day Russia. They are common all over the world. To illustrate his point he related a joke from the Soviet era. An official is asked if it is possible for a Soviet general’s son to become a general. “Sure, why not?” “Then is it possible for a general’s son to become a marshal?” “No!” “Why not?” “The marshals have their own sons.”

While nepotism of this sort may have been commonplace under the Czar, except for the generals and the marshals there was very little of it in the Soviet era. At best the children of Politburo members would sometimes find appointments in academic institutions, although Brezhnev’s son-in-law had a senior appointment in the Ministry of the Interior. Other than a few such exceptions, when it comes to feathering the beds of the children of those close to Putin, Russia today more closely resembles China than the USSR. As such, there is a strong likelihood that productivity will be affected. For example, the Japanese economist T. Shiobara points out that it costs Gazprom $3.3 million to construct one kilometer of gas pipeline whereas the world average price is approximately $1 million.⁴⁷ When asked about such disparity, Putin pointed out that Russia builds many of its gas lines in permafrost and swampy conditions and so costs should be higher. “Russia is not the Balkans,” is how he put it. Yet a threefold higher cost does seem excessive.

There are other signs of inefficiency and waste that are most likely a consequence of state ownership. John Grace has found this to be the case in the petroleum industry. As for gas production, Michael D. Cohen, an industry economist at the U.S. Department of Energy’s Energy Information Administration, cites data from his office that in 2004, “roughly 70 billion cubic meters [or one-third of Russia’s gas exports] either leaked in the form of methane in the course of transmission or distribution … or were flared,” although some of the flaring was by private petroleum companies. Cohen also noted that only 20 percent of Gazprom’s investment is directed to upstream or new projects that will result in increased production.⁴⁸

On occasion, some Russians in the private sector have been bold enough, or perhaps indiscreet enough, to warn that the state was again becoming too involved in the economy, especially in the energy sector. Vagit Alekperov, the CEO of LUKoil, did just that in August 2007. Vladimir Bogdanov the CEO of Surgutneftegaz, said much the same thing a few months later in October. Alekperov later backtracked, but it is clear there is concern that if the state is allowed to become too dominant, it will affect efficiency throughout the whole economy for all the usual reasons associated with state ownership and management of economic resources.⁴⁹

In much the same spirit, once anointed as a national champion, there is a real danger that a company like Gazprom may become a law unto itself and act as if it is exempt from the normal checks and balances that restrain ordinary corporations. Gazprom, for example, despite widespread protests, has decided to build itself a new skyscraper monstrosity in St. Petersburg at the mouth of the Okhta River across from the city center. What makes such a decision so controversial is that this new structure will be 396 meters high. Therefore, in this eighteenth-century city it will tower over the rest of the buildings, which are restricted to 48 meters.⁵⁰ Moreover, once one building is granted an exception to the height restriction, it is all but certain that others will also want the same privilege and before long, the beauty that makes St. Petersburg so unique will be destroyed. Some local environmental groups as well as UNESCO have protested, but there is not much likelihood that a company as strong financially and politically as Gazprom will be prevented from moving ahead with construction.

SOCIAL PROBLEMS

While deciding how to control these new corporate entities is bothersome, Putin and his successors are faced with other issues that may be even more intractable. At one time or another Putin has indicated his awareness of most of these problems. To deal with the continuing decline in the Russian population, which has been shrinking by almost 700,000 a year, he has proposed a bonus program for Russian women to encourage them to give birth to more than one child. Russia’s population shrinkage makes it difficult to find enough young men to staff not only the army but also the industrial and agricultural workforce. As in several West European countries, a declining birth rate means that it will be harder and harder to support the increasing percentage of the population who have reached retirement age. In addition, Russia has to contend not only with a low birth rate but also with a life expectancy for men that hovers between fifty-eight and fifty-nine years. That is a disgrace for an industrial country. Excessive drinking, poor diet, automobile accidents, and violence among men account for much of the problem. As Putin pointed out in one of our Valdai Hills meetings, Russian men who live to age sixty-five have a life expectancy thereafter that is comparable to that in the West; the trick is to make it to that point.

Even if the population were growing, Russia would have a problem finding people to live in the Maritime Provinces of the Russian Far East. The population there is falling even faster than the national average. Many of those who remain want to move to Moscow and the center of the country. According to the Institute of Economic Research in the Far East, the population there has fallen 16.5 percent since 1989. As a consequence, only 4.6 percent of the total Russian population is left to occupy 36 percent of the country’s land.⁵¹ The depletion of the population there is of concern for economic as well as political reasons: while the Russian population is shrinking (only 6.6 million Russians resided there in 2006), the Chinese population immediately adjacent to the Chinese-Russian border along the Amur River is growing rapidly and totaled 38.1 million in 2006.⁵²

When asked at the 2006 Valdai Hills meeting what he would have liked to have remedied but so far had not, Putin mentioned not only the shrinking population rate but also the national poverty level: large numbers of Russians live far below the poverty line despite the substantial improvements of recent years. He also expressed frustration over his inability to fight corruption. There are many indicators to suggest that corruption has become an even more serious problem on Putin’s watch. This may explain why a year later he appointed Viktor Zubkov as prime minister; Zubkov had a reputation for successfully dealing with corruption.

Putin also expressed his hope that he might yet do more to develop the country’s political system. Given that Putin has been criticized both inside and outside Russia for doing away with elections for governors, eliminating diversity of views in the media, and purging the Duma of any meaningful opposition to one-party rule, his reply suggests that he is either blind to his own shortcomings or his interpretation of freedom of the press and parliamentary democracy differs from that normally held in the West. It may be a little of both.

Mention should also be made of the continuing unhappiness with Russian rule in parts of the country, particularly in Chechnia and some of its neighbors in the Caucasus. Putin has managed to subdue much of the open anti-Russian resistance, but few would insist that the region has been fully pacified. The battle there, just as happened to the United States in Vietnam and again in Iraq, has had the effect of bloodying and discrediting the army, and it will take some time for those wounds to heal.

As talented as he has been in resolving so many of his country’s problems, there seemed to be yet another difficulty that even Putin could not solve: what would happen to the political and social structure he has set up after he left office. Putin did a magnificent job in ending the political and economic free-for-all of the Yeltsin years. He established firm control throughout the government, removing most of the old oligarchs and installing FOP, both siloviki and economic liberals. But because so many of these KGB alumni have become new oligarchs with their own little and not so little economic empires, it was uncertain whether or not they would submit to a Putin successor to whom they owed nothing. Putin had the advantage of being able to pass out patronage plums and in doing so build up a group of loyalists, just as the former Czars did. Even under Putin, however, the prospect of controlling so much wealth has on occasion led to open feuding. A good example was the unseemly brawl between Miller of Gazprom and Bogdanchikov of Rosneft when the Rosneft group refused to submit to Gazprom control and effectively called the Gazprom executives liars.

Nor was this the only instance where rivalry among Kremlin insiders had surfaced in public. In 2007, Vladimir Kumarin, the owner of the St. Petersburg Fuel Company, a chain of gasoline filling stations, was arrested. According to the newspaper Novaya Gazeta of September 10, 2007, Kumarin’s arrest was initiated by the Igor Sechin faction in the Kremlin against the anti-Sechin siloviki. In another case, the attempted arrest of Mikhael Gutseriyev and the takeover of his company, Russneft, as well as the struggle for control of the pharmaceutical distributor Protek and Biotek, also seemed to be a part of this internal battle for control of corporate assets and other valuable spoils that was being waged by this second echelon of siloviki and FOP oligarchs. There even seemed to be a struggle within the upper ranks of the FSB. For example, the arrest of Lieutenant General Aleksandr Bulbov, chief of one of the highest-ranking divisions of the Federal Narcotics Control Service (FNCS) was regarded as just such an instance of this “interagency warfare.” This also seemed to involve a struggle between Nikolai Patrushev, the chief of the FSB, and his ally Igor Sechin, a KGB veteran and a deputy head of the Kremlin administration as well as chairman of Rosneft, on one side against Viktor Cherkesov, who is Bulbov’s boss, on the other side. In this case the FSB was retaliating for an earlier raid by the FNCS against the FSB in 2000 and the subsequent dismissal in 2006 of a number of high-ranking FSB officials who were charged with the theft of valuable property and engaging in illegal real estate transactions. Undoubtedly some of this jockeying for control reflected a deep concern that Putin’s successor would reallocate some of the country’s assets and strip the new siloviki oligarchs of their assets just as Putin stripped the original oligarchs.

As if all this were not enough infighting to keep the gossips in Moscow busy, Sergei Storchak, a well-regarded deputy minister in the Ministry of Finance, was arrested in late 2007 and charged with embezzlement of $43.5 million in state funds. Storchak had been in charge of administering the country’s $100 billion-plus stabilization fund and a close and trusted ally of Alexei Kudrin, the minister of finance. Kudrin fiercely defended his friend Storchak, who he insisted was innocent.⁵³

If even Putin could not control such open feuding, his successor was likely to have an even more difficult time herding these new aristocrats. Now that they not only have their old KGB know-how and connections but also large financial wherewithal, these new oligarchs will be much more difficult to control than the original oligarchs.

Concerns of this sort may account at least in part for Putin’s decision to stay involved as a Russian leader. Putin was clearly aware that he would be damned if he stayed on in power (at least by the outside world). He explicitly said so in the September 2006 meeting of the Valdai Hills Discussion Group. As he put it, “I don’t believe that the country’s stability can be insured by one man alone…. If everyone is equal before the law, I cannot make an exception for myself … [and ignore the constitution that limits the president to two four-year terms].”

By 2007, however, with his popularity at 70–80 percent, he also came to understand that if he did not stay on, that would also be destabilizing. That led to speculation that Putin might agree to serve as prime minister or in some other vague czar-like role as “father of his country or national leader.”⁵⁴

Ultimately, Putin decided to announce his choice for president. This put an end to most of the speculation and jockeying to stake out a claim on state assets. His nominee was Dmitry Medvedev, who was not only the first deputy prime minister but also the chairman of the board of directors of Gazprom as well as Putin’s longtime protégé and friend from their days in the St. Petersburg governor’s office. Medvedev had followed Putin to Moscow and once there eventually became the head of the Kremlin administration. Regarded as a Putin loyalist, Medvedev certainly has had administrative experience, but his relative youth (he is only forty-two) and his lack of gravitas and experience with the KGB alumni made him vulnerable to sniping and intrigue from the siloviki.

Recognizing the danger, Medvedev (perhaps with Putin’s own acquiescence and maybe even at his initiative) proposed that Putin take on the job of prime minister. Officially this seemed to represent a demotion, but it did leave Putin in place to protect Medvedev’s flank from the siloviki, and it allowed Putin to retain influence and reassure the public without having to amend the constitution. (One way to judge who really is in charge in this new arrangement is to see if Putin and his family move out of their palatial presidential residence, where Putin welcomes groups such as the Valdai Hills Discussion Group, and surrenders it to President Medvedev.) Such an appointment is no guarantee that there will be no quarreling between Putin and Medvedev, but it did seem to put an end to much of the short-term uncertainty and instability. Given Medvedev’s close involvement with Gazprom, it is also another indication of how important energy and Gazprom are to Russia’s well-being.

ECONOMIC CHALLENGES

While Putin’s selection of Medvedev may resolve some of the political issues, much also remains to be done to stimulate the non-oil, non-rawmaterial sectors of the economy. The prosperity that has accompanied the oil boom has been a key factor in improving Russian general economic health, but it has also harmed some sectors. The big boost in disposable income as a result of energy exports notwithstanding, the strong ruble has hurt Russian manufacturing efforts just as the strong guilder hurt manufacturing in the Netherlands. Except for vodka, caviar, and Kalashnikov weapons, almost no commercial products manufactured in Russia have ever won an international competitive preference. It is not that Russia had a strong competitive manufacturing sector before the jump in energy prices. Manufacturing in Russia both in the Czarist and Soviet eras has always needed government subsidies. According to Izvestia, today Russia’s share of the world’s high market is only .5 percent and its machinery exports total only .3 percent of world exports.⁵⁵ Steep tariffs or import protection barriers help domestic manufacturers compete against foreign imports, but the strong ruble complicates whatever efforts are made to foster domestic manufacturing. Because of tariff protection, a large number of foreign automobile manufacturers have opened assembly plants in Russia to take advantage of the increase in Russian consumers’ disposable income. But if and when those tariff barriers are lowered as a condition for Russia’s entry into the World Trade Organization, that is bound to hurt such efforts.

DO YOU WANT A RUSSIAN FOR A PARTNER?

With or without such tariff protection, many foreign companies will continue to search for opportunities to invest in Russia. Certainly the risks are high; remember the cases of General Motors, which was squeezed out of its joint ventures in Togliatti, and Dutch Shell, which was forced to bring in Gazprom as a partner at an enormous discount. Still, with its oil wealth and growing disposable income, Russia offers a rich market. But there is little prospect that foreign companies will be able to count on the rule of law to protect their property, especially when a national champion takes an interest in their activities. By the same token, Russian companies should not be surprised if they are treated unfairly when they seek to operate outside Russian territory. Many Russians, including Putin, were upset when the Russian steel manufacturer Severstal attempted to merge with Arcelor, the West European steel company. At the last minute, Arcelor opted to dump Severstal and merged instead with Mittal, an Indian company. Most Russians viewed this as a form of discrimination against Russia and Russians. There was a similar reaction when Russians were told that they would not be allowed to have a representative on the board of directors of EADS, the parent company of Airbus, even though Vneshtorgbank had purchased between 5 and 7 percent of the company’s stock and for a time considered buying as much as 10 percent. In the same way, Aeroflot was rejected when it sought to take over operating control of the troubled Italian airliner, Alitalia. In 2006 alone, Epsilon Corporate Finance reported that Russian companies made twelve attempts to buy shares in European companies, all of which were rejected. Five of those efforts involved Gazprom—most notably, offers for Centrica in England and PGNIG in Poland.⁵⁶

One reason for such discriminatory treatment is the real fear of the symbiosis between Russia’s national champions and the state. If a Russian company is allowed to buy a share in a Western company, the Western company may find that its partner is not a commercially oriented investor but the Russian government—a corporation that in fact is a Russian national champion and President Vladimir Putin. That is certainly what some Western critics have concluded about the way Gazprom operates when it moves into Western markets.⁵⁷ This is an example, even if indirectly, of the price Russia must now pay for the disdain and disregard for the rule of law. Whether justified or not, Russian investments outside of Russia are now regarded with extra caution and will be treated skeptically for some time to come.

Certainly Russia’s financial and economic condition has improved since the August 17, 1998, financial meltdown. As of fall 2007, all but a fraction of Russia’s foreign debt has been paid and Russia now has a $420-plus billion reserve of hard currency as well as a $120 billion stabilization fund that had been administered by Sergei Storchak from the Ministry of Finance. But while the state has an impressive cushion of assets in the Central Bank, the corporate and local government sectors have taken advantage of eager and overgenerous Western investment banks to borrow sums that by some accounts will soon equal what the state has accumulated in its reserve rainy day fund. If there should be a serious drop in energy prices, the local governments that depend on the corporate sector taxes to pay their bills would face serious difficulties. The Russian companies that have taken advantage of Russia’s high credit rating to borrow billions of dollars and euros would be in similar trouble. A really substantial collapse in energy prices would spell an end to Russia’s status as a super energy power.

RUSSIA INVESTS ABROAD

But if energy prices do not drop, or at least do not drop significantly, the Russian government will almost certainly continue to seek to exert its influence outside of Russia for some time to come. We can also expect to see a larger and larger presence of Russian companies outside of Russia. Rather than just deposit U.S. dollars in a bank or invest them in purchasing U.S. government securities, both the Russian government and Russian individuals and companies will begin to spend more and more of their dollars and euros on buying up properties outside Russia. While a few might buy up sports teams, as Roman Abramovich did when he bought the Chelsea soccer team in London, others will expand their holdings of manufacturing and service companies as LUKoil did when it bought up the Getty Oil filling stations network and Nelson Resources, which had major oil holdings in Kazakhstan. Generally Russians purchase foreign companies that produce products similar to what they produce within Russia.⁵⁸ On August 8, 2007, the Financial Times reported that Oleg Deripaska, one of the oligarchs who has worked closely in the past with Putin, had invested $1.54 billion to purchase a large stake in Magna, a Canadian auto parts manufacturer. Even more spectacular, Deripaska had bought up almost 5 percent of General Motors stock for $900 millon. The assumption is that he planned to build on this link with General Motors to upgrade the technology and work practices at Gaz, his Russian automobile manufacturing plant.

There will be people who oppose such investments, especially in companies that have strategic significance such as Stillwater Mining, the United States’ only producer of platinum and palladium. The Germans under the leadership of Angela Merkel seem to be particularly sensitive to such “sovereign investment fund” initiatives. They fear that not only the Russians but also the Chinese will use their huge foreign currency reserves to acquire equity in defense-related companies as well as recently privatized industries. According to the spokesman for the German government, while “private investors would generally be welcome,” the Germans were committed to preventing state sovereign investment funds as well as Russian and Chinese nationalized industries from buying up German businesses. In the words of Roland Koch, the German official sponsoring such legislation, “We didn’t just go through all our efforts to privatize industries like Deutsche Telekom or the Deutsche Post only so that the Russians can nationalize them.” Along the same lines, the European Commission, the executive office of the European Union, has proposed legislation that will require energy companies to unbundle or separate their energy-producing divisions from the units that distribute and transport that energy. This, the European Commission argues, would stimulate competition and prevent a single gas supplier to a region from dominating the distribution network. Such legislation will make it difficult for a company like Gazprom to institute an embargo and generally monopolize control. Subsequently there have also been proposals that would require members of the EU to notify the EU before they conclude any bilateral agreement with third parties (read Russia) that would affect EU interests.⁵⁹

The European Commission of the European Union on September 19, 2007, adopted a resolution insisting that no company from outside the EU be allowed to acquire energy infrastructure (i.e., gas distribution companies) “in Europe unless there is ‘reciprocity with that country.’ “⁶⁰ It was assumed this was also intended specifically to prevent further acquisitions within the EU by Gazprom; certainly some members of the Russian Duma interpreted it that way and were not happy about it.

Others take an opposite approach and may actually welcome Russian efforts to buy up local natural gas distribution service companies and properties, much as it has done in Belarus, Lithuania, and Germany. As they see it, if the Russians own these distribution facilities, they will be less likely to shut off the flow of gas to their own facilities.⁶¹ On the negative side, control of such assets will allow Russian interests to exclude non-Russian-originated gas from their pipeline. They may even be able to extract monopoly rents. At the same time, foreign assets owned by Russians outside of Russia risk ending up as hostages. Presumably the rule of law that prevails in the United States and other Western countries will prevent retaliation and the arbitrary seizing of property owned by Russians. As we saw earlier, however, Noga, the Swiss company, managed to win permission from a European judge to seize the Luxembourg bank owned by the Russian government, suggesting that the more property owned by Russian entities outside Russia, especially where the state is the dominant owner, the more vulnerable Russia becomes to the type of pressure and blackmail that on occasion Western companies in Russia have faced.

This implies that U.S. policy should encourage Russian companies to invest in the United States, especially when they provide goods and services that supplement those sold by others. In the same way, the more assets owned by Russian entities outside of Russia, the more Russian firms are likely to feel pressure to conform to international standards. Thus, if Gazprom should for some reason decide to withhold delivery of LNG to its U.S. customers, as a countermeasure those customers might well decide to seize Russian-owned assets as a hostage. In the same way, companies like LUKoil should be encouraged to compete in U.S. markets by exporting Russian petroleum to the gasoline service stations that it owns here. (This is also a way to diversify oil imports.) When Russia is able to act as a monopolist, however, such investments are more problematic—building a natural gas pipeline that gives them monopoly power over consumers in the territory served by that pipeline would be an example.

THE NEW ASSERTIVE RUSSIA

In the aftermath of the financial collapse of August 1998, it looked as if Russia’s day as a superpower had come and gone. That it should recover and reassert itself again after less than a decade is nothing short of an economic and political miracle.

Yet its recovery is heavily dependent on high energy prices, making that recovery precarious. Countries with a monoculture based on energy more often than not have complicated social, political, and economic problems caused in part by their overreliance on energy resources. Nevertheless, most Russians would agree that the benefits that stem from that monoculture have more than offset the disadvantages. Russian petroleum export revenue has provided Russia with extraordinary liquidity as a creditor nation—a rather unusual, if not historic, status for Russia. Moreover, its natural gas wealth and its ownership of natural gas pipelines, at a time when energy markets are likely to be severely constrained for years to come, give Russia unprecedented political and economic power. Whether Russia joins in a strong GECF (Gas Exporting Countries Forum) consortium is irrelevant; because of its pipeline operations, countries served by this pipeline, be they in Europe or Asia (including China), will have a hard time resisting Russian demands. This is very different from the MAD (mutually assured destruction) days of the Cold War when each side was afraid of the other. For the foreseeable future, there seems to be no way to restrain Russian behavior. Yet as they pile up more and more dollars and euros, the Russians are almost certain to use more and more of their money to expand and buy up assets overseas. Once they are exposed this way, they in turn may find themselves held hostage.

For now, however, Russia, with or without Vladimir Putin as president, finds itself in a newly assertive, even dominant, international position. Its emergence as a new super energy power overlaps with the weakening of the United States as we have squandered our manpower and resources in Iraq. Russia under Putin, on the other hand, has developed a new hubris that is not based on mere bluster.

This has manifested itself in several ways. For instance, with its newfound cash, Russia once again is increasing the funding of its military. In 2005, military expenditures rose 27 percent over 2004 and in 2006, they were increased by another 22 percent. And in an episode reminiscent of the nineteenth century, Russia sent an expedition in two mini-submarines 15,000 feet under the Arctic ice cap. The submarines planted a titanium capsule with a Russian flag under the North Pole and then claimed ownership of 460,000 square miles of Arctic Ocean floor. Asserting that the 1,240-mile underwater Lomonosov Mountain Range extends from the Russian mainland into the polar region, Russian geologists took core samples of the ground at the Pole which they insisted matched similar samples from the underwater area part of Russia. Their reasoning is that this makes the North Pole part of Russia. This not only has military implications but the region is thought to contain as much as 10 billion tons of oil and gas deposits, equal to perhaps 25 percent of the world’s as yet undiscovered oil and gas; and with earth warming, these energy deposits are now much more readily accessible.⁶²

A land claim of this sort by the Russian government is not all that novel. Czarist governments claimed parts of China as well as Alaska in the nineteenth century and the Soviet government regularly presented claims over territories of other countries including Finland, Rumania, Poland, and Japan. What is unprecedented now is that with its new financial holdings, Russia has also begun to demand a say in world monetary and financial decision making. In a June 2007 speech to a group of Western and Russian businessmen, Putin went so far as to challenge the way the World Trade Organization and the International Monetary Fund (IMF) operate. He called them “archaic, undemocratic and awkward,” complaining that the United States, the EU, and Japan run the organization as if it were a privileged private club. Putin wanted more say for Russia and other non-Western countries. With that in mind, a few months later Russia proposed that Josef Tosovsky, a well-regarded Czech central banker and former prime minister, be made the head of the IMF instead of the EU’s nominee, Dominique Strauss-Kahn, the former French finance minister. What made this so newsworthy is that by tradition, Europeans and now the EU select the head of the IMF while the United States nominates the head of the World Bank. Moreover, in the Soviet era, the USSR more or less ignored the World Bank and the IMF. Now that modern-day Russia is a financial powerhouse, Putin has decided to challenge such cozy arrangements. In the same St. Petersburg speech, Putin questioned why only the dollar and the euro serve as world currencies. Given the new strength of the ruble, Putin argued that the ruble should serve the same function.

These are clearly good times for Russia. In many ways it is like awakening from a decade-long nightmare. Perhaps we in the West did not fully appreciate how upset most Russians were after the loss of their country’s superpower status. It was a national disgrace and humiliation. How deeply this was felt can be gauged by revealing comments from two Russian political figures. Reacting to the British government’s demand that the Russian government turn over Andrei Lugovoi, a former KGB agent, to them so they can question him about the polonium 210 poisoning of Alexander Litvinenko, Konstantin Kosachëv, chairman of the Russian Duma’s Foreign Affairs Committee, exploded. Normally a reasonable fellow, Kosachëv protested, “You can act this way toward a banana republic, but Russia is not a banana republic.” In an even more revealing statement, one better suited for a psychiatrist’s couch than the weekly newspaper, Argumenty i fakty, in which it appeared, Valentina Matviyenko, the governor of St. Petersburg, proudly insisted that “Russia has now regained a sense of self-respect. We spent so many years feeling there was something wrong with us— others lecturing us on how we should live and where we should go. But we have overcome our inferiority complex.”

Putin clearly shares this new assertiveness. This was dramatically demonstrated in Munich, Germany, on February 10, 2007, at the Annual Munich Conference on Security Policy. In a speech to the group of mostly NATO member countries, Putin criticized not only NATO for opening bases on what used to be Warsaw Pact territory— something NATO promised it would not do—but also President George W. Bush and the United States for pursuing unilateral policies in Iraq and even Eastern Europe. The tone and the content of his speech to representatives of countries that were once enemies of the Soviet Union would have been unthinkable nine years earlier. It was a tough speech that unnerved many Western representatives who had seldom, if ever, heard such candor in a public attack on the United States at a meeting of America’s closest allies.

Putin’s speech reflected Russia’s progress in the short time since Russia had become a major energy producer. It was not the tough part of the talk, however, but the softer part that best demonstrated Russia’s new assertiveness and self-confidence. After having taken President Bush to task in such an open way, during the question period Putin suddenly softened his mood. “In spite of all our disagreements, I consider the president of the United States my friend…. He is a decent person, and it is possible to talk and reach an agreement with him”; or as the New York Times translated Putin’s Russian, Bush “is a decent man and one can do business with him.”⁶³

For those with long memories, this condescending sentiment all but echoed what then Prime Minister Margaret Thatcher said in December 1984 after she first met that “unwashed” Politburo yokel from Moscow, Mikhail Gorbachev. This was but three months before he would become the leader of the USSR. Now twenty years later as the head of this new energy powerhouse, it was Putin’s turn to show a similar condescending manner. Whether he meant it or not—and he probably meant it—Putin now wanted to show that the tables have turned. It was Russia’s turn to be condescending to that “unwashed” Texas yokel, George W. Bush. There was not much the targets of his attack could do but smile and seek to import more of Russia’s gas and oil.