Wednesday, October 1, 2014
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KGB Petroleum

MOSCOW – There is one key thing to keep in mind when talking about Russia: despite what you see on the surface, it never really changes. Buildings, fashions, and even regimes (at least in name) may change, but the country’s core, its secret-police-state legacy, is never far from the surface.

Today, the contemporary version of the KGB, the Federal Security Bureau (FSB), runs Russia’s energy businesses in much the same top-down way that the KGB once ran the Soviet Union, with business always subordinate to the regime’s political needs. Since current Prime Minister Vladimir Putin became Russia’s president in 2000, the country’s vast energy wealth has become increasingly concentrated in state hands. And the actual hands at the controls of the world’s premier natural-gas economy are those of the FSB.

Indeed, today the KGB/FSB is Russia’s primary business school. Think of the graduates as holding a master’s degree in brutal (and brutally inefficient) administration. Former spies now sit atop the commanding heights of Russia’s energy-centric economy, but their role is not all that different from what it was in Soviet days. Back then, the USSR promoted its interests through satellite states and military power. Today, Russia flexes its might through its energy companies.

No company exemplifies this more than Gazprom, the state-run energy behemoth, which has gobbled up oil assets, media, banking interests, and farms within Russia, and seeks to do the same with downstream energy assets outside Russia, particularly in Europe. So it should be no surprise that Gazprom’s former chairman is now Russia’s president, Dmitry Medvedev, who was replaced by a former KGB general, Valery Golubyev. Among the company’s other senior leaders are more ex-KGB men, including Sergei Ushakov and Konstantin Chuichenko.

And what Gazprom is to natural gas, Rosneft (almost) is to oil. In 2003, Rosneft became an oil giant by grabbing most of Yukos, after that oil firm’s head and chief shareholder, Mikhail Khodorkovsky, was arbitrarily prosecuted and imprisoned for embezzlement and tax evasion.

Rosneft’s chairman, Igor Sechin, a former KGB agent in Angola, is also the main ideologue of Russia’s FSB-managed economy. When not overseeing Rosneft, Sechin just happens to be Vladimir Putin’s first deputy prime minister.

Sechin’s closest aide, Andrei Patrushev, comes from a similar background. He is a graduate of the FSB academy and is the son of the former FSB director, Nikolai Patrushev. The list goes on and on. About 30% of the Kremlin elite used to work with the secret services or still do, and an astounding 80% are associated with either the Russian or Soviet-era military-industrial complex.

Whereas the KGB once shaped Kremlin decisions to move troops into Hungary or Czechoslovakia, today the same calculating minds determine how Gazprom is to be deployed in the service of Russia’s foreign policy. Through its control of natural gas pipelines, Gazprom is by far Russia’s chief tool for maintaining influence in the former Soviet former republics of Central Asia, the Caucasus, Belarus, Ukraine, and even in the Baltic states (now EU members). Gazprom is also Russia’s main lever of influence in the EU as a whole, because the company supplies 30% of the Union’s natural gas needs.

But the global economic crisis has weakened Russia’s oil economy, shattering the KGB’s dreams of a return to superpower status. While energy prices remain high by historical standards, Gazprom now operates at a loss. Its investment plans are overextended outside of Russia – part of the imperial policy – while domestic exploration for new sources is declining, as foreign companies have been forced to surrender stakes in projects such as the huge gas development on Sakhalin Island. In addition, Gazprom is now overpaying its suppliers, because its long-term contracts are for prices that are now far above market prices. The Sechin-led Rosneft is in the same incompetently managed boat.

So the “resource curse” has hit Russia with a vengeance. Corruption on every level of the state bureaucracy is evident, while the state has consumed the economy’s oil revenue with little to show for it in terms of investment or improved services.

As in the 1980’s, when Mikhail Gorbachev came to power with no choice but to introduce his polices of glasnost and perestroika , a politically and economically weakened Russia will have to find other solutions to its development and modernization challenges in the years ahead. Reliance on natural resources and military capabilities has proven a failure.

After all, the Soviet Union collapsed not because of Ronald Reagan’s military build-up in the 1980’s, with which communism was unable to compete, but because the Soviet command economy had already become obsolete in the 1970’s.

Similarly, while the world today searches for ways to confront dependence on fossil fuels and seeks other, cleaner energy sources, Russia continues to live off its oil and gas, which only encourages it to delay the economic and political restructuring that it will need to succeed in the long term.

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