Thursday, October 23, 2008

Putin's Dreams Go On Hold

Just a couple of months ago people were still talking about with great anxiety about Russia's resurgence on the back of high oil and gas prices and Putin's apparent aim to bring oil and gas under state control.  These fears were reasonable, and potential threats to the post-Soviet order, as exemplified by the war with Georgia and intimations of what the Russian leadership might try to do to Ukraine if they got the chance.  

It now looks like the war with Georgia will mark the high water mark for the resurgent Russia for the foreseeable future.  In the wake of that event, western investors began to lose their appetite for investing in the non-energy economy.  Then came the credit crunch, which has hit the heavily leveraged oligarchs hard, and led Russian stock markets to halt trading, and finally rapidly declining oil and gas prices.

The first signs of the longer-term consequences of Putin's strategy are becoming clear.  The Financial Times reported today that Gasprom has announced that it may not buy TNK-BP's stake in the Kovytka natural gas field in Irkutsk after all as a result of tightening credit and declining gas prices.  This ought to be good news for BP, and yet one has to wonder if TNK-BP will be particularly eager to renew investment in the Kovytka gas fields given that once prices begin to rise and Putin and Gasprom  again have cash at their disposal they will return to their original plan. 

 In short, the already badly underdeveloped Russian oil and gas fields, will likely remain underdeveloped for some time to come as long as credit is tight and western companies are unwilling to spend their money and use their technology.  As long as this obtains Putin's dreams of firmly reestablishing Russia as global power will remain elusive.  Meanwhile, it will interesting to see how Putin's problems will affect regular Russians' opinion of their fearless leader.   

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