Russia Feels the Pinch

There is a particularly self-destructive aspect to Russia as a nation, albeit no means unique to Russia, whereby outside forces are always to blame for their own predicament and no responsibility whatsoever lies at home.  Even today Russians speak about the Soviet Union as though it was imposed on them instead of readily adopted by enough Russians to enable the system to stay upright for 70 years.  Today the Russian government is complaining about the high costs of capital borrowing and the effects it will have on their oil and gas developments:

Russia warned today oil could soar to $150 a barrel if the global economic crisis continued to curb investment in capacity by top producers.
Moscow’s top energy policy official also warned output from Russia could be hit unless borrowing costs fell for its energy giants and called for a move away from trading oil only in US dollars.

“If capital investments do not recover then the recent forecast of the Saudi oil minister, when he said in Rome that oil prices could be $150 (per barrel) in 2-3 years, could become reality,” Reuters quoted Deputy Prime Minister Igor Sechin as telling the St Petersburg Economic Forum.

“I can tell what we think is needed for us – we need not less than $75,” said Sechin, one of Prime Minister Vladimir Putin’s most trusted advisers.

The economic crisis hammered confidence in Russian corporate borrowers – who owe $400 billion to foreign lenders – and some major Russian companies have said they are finding it too expensive to borrow in Western markets.

Now there is some truth to what he is saying: borrowing has become more difficult with the onset of the global economic crisis, and lenders have become much more risk averse than a year or so ago.  But that Russians should be finding it extremely expensive to borrow money from foreign financial institutions should surprise nobody.  Having embarked on a deliberate policy of forcing foreign companies to cede ownership of oil and gas projects to favoured national champions, the Russian government can hardly be surprised that investors now consider Russia to be a risky place to do business now that spare cash is more scarce.  Back in April 2008, when the oil price was still well over $100 a barrel, I concluded a post on Russia’s oil and gas developments as follows:

Without a doubt, Russia will still attract inward invesment, enormous amounts of it, and much of this will be into its oil and gas sector. But this investment will come at an increased cost, be it in the form of upfront payments or reimbursable terms on major projects, higher interest rates from banks and financial institutions, or more stringent guarantees and performance criteria. At a time when Russia is going to be shopping around for $2.6 trillion of investment, it could probably have handled things better this last few years.

Who’d a thunk it?

Compounding this problem is Russia’s failure to maintain its own output, which has everything to do with Putin’s policy of putting all Russia’s hopes and dreams into just two nationalised companies – Gazprom and Rosneft – whose development plans never looked realistic from the outset.  I wonder how Russia’s output would be looking if Yukos was still a going concern?

In September 2007 I reviewed the events that had taken place in the Russian oil and gas business and predicted that this period would be cited as the point at which Russia made the decisive turn in the direction the country would take.  Almost two years later the consequences of that period are being keenly felt, and not in a good way for Russia, its people, or its government.

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