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Is Russia on the eve of a new perestroika?

During a conference at the Higher School of Economics in Moscow, Alexei Kudrin, the former Russian minister of economy, predicted changes among the Russian elite. His think-tank, the Centre for Strategic Research, intends to prepare a long-term economic development plan for Russia after 2018. The initiative is supported by Vladimir Putin, the Russian president.

“I think the elite, especially the business elite, as well as workers will soon notice that public administration, healthcare services and the justice system are inefficient,”Kudrin said, adding that he was convinced other issues would appear.

April 27, 2016 - Wojciech Jakóbik - Articles and Commentary


Photo: withGod / Shutterstock.com

Photo by:withGod/Shutterstock

The Centre for Strategic Research was established in 1999 to support Vladimir Putin’s presidential campaign. All indications are that it will likely support his 2018 presidential bid as well. Perhaps this is the reason why Kudrin has been advertised for the last six months in western media as a “liberal dove” who can change Russia. However, such licensed reformers are actually supported by the Kremlin to achieve the opposite and block real change.

The liberal from Putin’s campaign is not the only one who talks about the need to adjust the Russian economy to a new reality. After the failure of the Doha oil summit where OPEC producers and Russia were supposed to co-ordinate their extraction policy, the Russian president’s advisor Sergey Glazyev admitted that the era when oil is the main energy source is coming to an end, and the future belongs to renewable energy. This is a breakthrough declaration from a country whose one-third of the state budget relies on hydrocarbon sales; as ground-breaking as Russia’s signing the Paris Climate Agreement adopted with other nations during an event in the United States on April 22nd.

The Russian prime minister, Dmitry Medvedev, sent a letter to Putin appealing for a committee to improve the administrative system. He stated that the existing system was paralysed by inertia and Soviet-era mechanisms based on old school methods of monitoring and motivation. He suggested that every ministry and institution should have key performance indicators, which would allow the government to create a framework that would encompass the entire state apparatus. The ministers would be personally responsible for the results, not just for reporting them. A special presidential commission would calculate the outcomes. It would include ministers, deputies, senators and experts. The body would also co-ordinate the country’s economic development in accordance with the parameters. It would streamline the work of ministries and their subordinate institutions. The daily Vedomosti reported that Putin purportedly agreed to that proposition. However, the Kremlin has not officially confirmed this.

According to the Kommersant daily, the Kremlin is planning to convene the Presidium of the President’s Economic Council for the first time in two years. This is mainly a result of the country’s economic crisis. Putin is head of the body and other members include economic advisor Andrey Belousov, head of the Central Bank of Russia Elvira Nabiullina, CEO of Sberbank Herman Gref, head of the Civil Initiatives Committee Alexei Kudrin, Rector of the Russian Presidential Academy of National Economy and Public Administration Vladimir Mau and Sergey Glazyev, an economic advisor.

According to the Kommersant, the council did not intend to discuss how to decrease budget expenses and keep financial reserves before the 2018 presidential elections. Instead they are to present a plan to develop the Russian economy using the federal budget. The Kremlin is also deliberating on whether to establish a commission on public administration reforms. Its goal would be to rein in bureaucracy. Gref and Kudrin supported giving the new commission special powers that would make it efficient, but their idea was not met with acclaim.

The presidium is set to meet every two months to discuss a wide variety of subjects from demographics to macro-economics. The first topic will focus on speeding up economic development in Russia and will be discussed in May 2016 at the earliest.

The Russian economy has been in crisis since the collapse of oil prices that impacted profits from Russian hydrocarbon sales. The economy hinges on this source of revenue, yet has not been structurally reformed to decrease this dependency. The Kremlin fears negative social consequences caused by cutting employment and salaries. The situation is exacerbated by western sanctions that have limited the access of Russian companies to gain foreign capital.

It is clear that the Kremlin wants to convince the West it is on the eve of a new perestroika. This is probably because of shrinking reserves and general underinvestment that may lead to the economy’s implosion caused by its structural problems. This is a good occasion to return to business as usual. Naturally, this will be done through economic co-operation that, as the media reports, will be based on projects profitable for Russian and western companies, eventually becoming the foundation of a new alliance.

Nord Stream 2 can serve as an example here. This is a project that the European Union does not need. According to World Bank data, cited by the Energy Community Secretariat, the cost of modernising Ukraine’s gas infrastructure would be 4.5-5.5 billion US dollars, while the construction of Nord Stream 2 is estimated at 8 billion EUR, which is around $9 billion. While Ukraine did increase its transfer tariffs, which was done in accordance with EU law, they would be higher than those offered by Nord Stream 2 only if the pipeline was not covered by the same law that other EU hydrocarbon infrastructures are. The project’s critics want the pipeline to be subject to EU regulations and their propositions are gathering more understanding within the European Commission.                             

Additionally, calculations regarding natural gas demand in Europe presented by Russia and the EU differ. During the last five years demand has dropped by 23 per cent. Therefore, the estimates made by Russian companies are off the mark by 30-50 per cent, as stated in the Agora Energiewende report. This means that agreeing upon and implementing Nord Stream 2 would not add extra gas onto the market; instead, it would push out Gazprom’s competition. Owing to the attractive gas prices caused by low oil prices in 2015, Russia recovered one per cent of its share in the European gas market; it increased from 30 to 31 per cent. Alexey Miller, the company’s CEO, announced that between January 1st and April 16th this year, gas supplies to non-CIS countries increased by 22.6 per cent.

“The demand for Russian gas abroad significantly increased since the beginning of the year in comparison to the same period in 2015″, Miller assessed. He also specified that the increase of supply to Germany was 21.3 per cent, Italy 16 per cent, the United Kingdom 162.3 per cent, Poland 35.7 per cent, France 50.2 per cent, the Netherlands 115 per cent and Austria 24.7 per cent. Releasing extra gas supplies from Russia will strengthen this trend and we will see diversification diminishing across Europe, not just in its Eastern and Central parts, which are most afraid of this development.

Some wonder why Western Europe couldn’t care less about this situation. This is because good changes in the Kremlin herald great hopes for profit. Nord Stream 2 foretells a new perestroika and corrupt offers for the West entail contracts worth billions for western companies that will provide pipes and construction equipment. This also involves a broader exchange of assets that will allow Gazprom to delve deeper into Europe’s gas infrastructure. In return, giant project participants such as BASF, E.ON, OMV, ENGIE and Shell will gain access to cheap Siberian gas.

The stakes also include oil projects in the Bazhenov Formation and other profitable extraction endeavors that are far more attractive than expensive drilling in the almost drained North Sea, especially considering the low prices of oil, which will probably persist for a long time. Hoping for this El Dorado, western companies are poised to pressure their governments to tighten relations with Russia again, which means business as usual.

As always, community mechanisms in the form of the EU and NATO are the last resort. Nord Stream 2 has not received a green light from Brussels yet, only due to the European Commission’s doubts about the project, which have skilfully been exacerbated by Poland and other countries from the region. Additionally, the only reason why the first NATO-Russian Council after Crimea’s annexation did not end with a reset attempt was NATO’s principled approach to international law. Despite that, Russia’s leadership is trying to convince the West that good changes are coming to the Kremlin. The 2018 presidential elections might be the perfect occasion to re-evaluate relations between Moscow and the West, provided Russia will be able to hold on until then and despite sanctions and cheap oil. Will the West be fooled again?  

Wojciech Jakóbik is an energy analyst at Jagiellonian Institute and editor-in-chief of economic portal biznesalert.pl.


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