Monday, April 26, 2010

Putin's Choice: Reform or Go Down With the Ship...?

Vladimir Putin has an interesting way of dealing with Oleg Deripaska....

Putin's Choice: Reform or Go Down With the Ship...?

The political shakeup to come from the U.S. shale gas boom. I expand on the scenario this week in The New Republic, which titled the piece, Kaboom! For those lacking a TNR subscription, the gist is that the shale gas, having already disturbed the political calculus in Europe and Russia, is likely also to help shift the ground underneath the Organization of Petroleum Exporting Countries. Among the winners will be liquid natural gas giants such as Qatar and Australia; losers will be Iran and Venezuela. In the middle will be Saudi Arabia, which will sustain itself, but lack much of the disposable income with which its princes currently bankroll militant Islamic groups.

In the interest of discussion, a different conclusion from my own on Russia appears in the just-out Spring/Summer volume of the Journal of International Affairs, published by Columbia University’s School of International and Public Affairs. Notwithstanding the hot air and hand-wringing standard in such journals, the 257-page issue, “Rethinking Russia,” includes a half-dozen highly interesting pieces.

The one to which I refer -- by Sergei Guriev, rector of the New Economic School in Moscow; and Ekaterina Zhuravskaya, an economics professor at the school -- is about as gloomy as projections come. Titled “Why Russia is Not South Korea,” it jumps off from suggestions by some economists that Russia is following the economic trajectory of South Korea, with an 11-year lag. Meaning that Russia is on its way up, in a big way. For a striking snapshot of why this theory has broad traction, look at the chart on page 2 of the link.

Guriev and Zhuravskaya, however, dismantle that interesting theory and conclude that the comparison is specious. They project that Russia's economy "will revert to stagnation and will not catch up with the economic level [of industrial countries] in the next ten to twenty years unless its political institutions undergo a drastic change."

Mainly the authors are talking about corruption and the capricious way laws are enforced.

What sours them on Russia's prospects of making those drastic changes is how Prime Minister Vladimir Putin and President Dmitry Medvedev have responded to the global financial crisis. Their actions provide "another convincing piece of evidence that the government is more interested in preserving the status quo rather than using the crisis as an opportunity for restructuring the economy," Guriev and Zhuravskaya assert.

This grim appraisal has validity. Quite apart from the specific data and arguments that Guriev and Zhuravskaya bring to the table, oil prices in the long term -- contrary to the conventional wisdom -- are going to have a general downward trajectory, and eventually tank. This will be a direct result of the natural gas surplus -- the shale gas and LNG -- plus the motherlode of Iraqi oil to arrive on the market. Russia's main source of income would shrivel, and the country would be looking at a dire economic and social scenario resembling the 1990s.

Yet one cannot ignore Putin's instincts for survival. Given the unignorable presumption by Putin’s inner circle that they will remain in power through around 2030, it seems to me that, faced with the prospect of a bankrupt country and being thrown out of office, Putin’s team may very well finally embrace the fundamental reforms they’ve resisted – respect for the rule of law, economic diversification, and so on.

Putin certainly does not wish the Guriev-Zhuravskaya world....

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