Over the past decade, the fortunes of Russia and its leading oil and gas company, Gazprom, have improved dramatically.
A decade ago, the price of oil was languishing and Russia was facing possible bankruptcy. Today, with oil at $140-plus per barrel, Russia and Gazprom have achieved remarkable progress.
In fact, Brazil, Russia, India and China, collectively referred to as the BRIC nations, are developing so rapidly that some economists predict that by 2050 their economies will eclipse the current richest nations of the world.
Vladimir Putin, the former Russian president, deserves significant credit for the commingled resurgence of Gazprom and Russia. Putin reversed the failed economic policies of his predecessors — Mikhail Gorbachev and Boris Yeltsin. Under their aegis, a few oligarchs grabbed disproportionate ownership of its important industries, leaving most of Russia’s population even more destitute than under communism. The impoverished public sought a “benevolent” autocrat who could elevate their standard of living.
To redress the dire situation, Putin orchestrated a 20-year economic plan that sought to stabilize the country and the economy after the chaos of the 1990s. He emphasized central planning, especially over strategic industries such as hydrocarbons. He abrogated favorable concessions that had flourished under his predecessors.
In his new role as prime minister, Putin continues to pull most of the economic strings. He recently reorganized the cabinet to include economic liberals as well as several hard-liners who share Putin’s KGB background.
As president, Putin instituted policies to ensure Gazprom’s pre-eminence. The combination of its daily oil and gas production surpasses the energy output of Saudi Arabia. Gazprom employs 432,000 people, pays taxes equal to 20 percent of the Russian budget, and has a market capitalization of $349 billion. Gazprom’s goal is to achieve a market capitalization of $1 trillion by 2014.
Gazprom and Russia are inextricably linked. Kremlin leaders dictate Gazprom’s major financial decisions. As president, Putin used Gazprom’s wealth in several ways:
* To fight his political enemies inside Russia.
* To reassert influence over former Soviet republics.
* To gain leverage over energy-dependent Western European countries.
The Russian government believes that the success of Gazprom can be replicated into an industrial policy. In essence, Russia is pinning its hopes on government-sponsored monopolies rather than competition.
However, few oil-rich countries have converted successfully their hydrocarbon wealth into a well-balanced industrial powerhouse. The successful transition requires both oil and gas prices to remain high and the development of an entrepreneurial class that can create the dynamic infrastructure found in Western-style economies.
Historically, entrepreneurship and heavy-handed government have not mixed well. Thus, Putin’s policy prescription for Gazprom might be the wrong medicine for developing a truly diversified modern industrial society.
Also, capitalism requires a vibrant private banking system that channels funds to profitable projects. During the first years of Putin’s rule, his tight monetary discipline prevented the modernization of Russia’s outdated hydrocarbon industry. Projects stagnated until hydrocarbon prices rose dramatically.
Under capitalism, financial middlemen hedge funds, venture capitalists, merchant bankers and commercial bankers all play a critical role in raising capital to ensure the growth of entrepreneurial upstarts.
New York’s billionaire Mayor Michael Bloomberg, who created a major media enterprise, summed up the difference between private and public enterprises. He said that in the private market, new money is allocated to winning strategies. In the public arena, public pressure forces more money to be allocated to “failed” programs.
Thus, going forward Putin must make the right bet on new technologies with his Gazprom windfall.
Originally published in the Sarasota Herald-Tribune
