La Fontaine told a fable of two donkeys who came to misfortune.
The first, the vain one, was carrying a load of cash; the other, a load of oats, On a lonely road, they and their masters were suddenly surrounded by thieves who weren’t interested in the oats. After making off with bearer for dead, the dying ass said to his companion that his end was unfair. Replied the humbler of the two:
“Wealth cannot always at the poor man scoff.
If you had been content to do as I,
You’d not at present be so badly off,”
In China this week, Prime Minister Mikhail Kasyanov could do worse than hum that little jingle. It might help him face up to a conflict his Chinese hosts appear to understand better than he does and are becoming impatient at Kasyanov’s apparent inability to solve it. This is the conflict between Russia’s oligarchs and their supporters who dominate the export of resources and those who favor heavy taxes on the resource industries to fuel capital investment in diversified Russian industry,
The policy conflict has immediate implications for the Chinese government and for Japan and South Korea as well, because their interest in expanding imports of Russian oil, gas, metals and other resources is running into stumbling blocks that start with Kasyanov’s inability to make decisions between the warring lobbies in Moscow,
A fresh statement of the oligarchs’ point of view has just been issued by Moscow-based investment bank Brunswick UBS, In a report titled “Russia: One Foot in Europe, One in Asia,” analyst Al Breach argues there is “an impending shift” in the direction of Russia’s export growth toward Asia, especially the “Confucian trio” of China, Japan and South Korea. “The important point for Russia,” Breach writes, “is that the economies to its eastern borders are likely to become bigger than its Western neighbors in the next couple of decades, Since they are each big importers — and expected to become more so — of many of the raw and semi-processed materials that form the backbone of Russia’s exports, Russia is looking at a huge and ready market just beyond its borders.”
While the report stops short of recommending government backing for the resource exporters to Asia, it implies that the Russian corporations best-positioned to take advantage of the predicted expansion of Chinese demand are the oligarch-owned oil, metals and mining companies, Tellingly, there is no reference to the prospects for Russian arms and heavy-machinery exports in Asia, nor to the concerns that Russian manufacturers have towards the competitive pressure of low-priced Asian imports. From diamonds to electricity, copper concentrate to gas, the resource exporters °argue that they should be free to export without limitation. Their critics argue that, if the current approach is not modified, the domestic industries will be starved of raw materials, and driven out of business,
At the moment, according to Russian trade data, 68 percent of Russian exports go to Europe and 8 percent to the Americas. China accounts for just 7 percent, Japan 2 percent, South Korea 1 percent and other Asian destinations 9 percent, Asian exports are still a minor part of the Russian trade picture, although the precise dollar values are skewed because Russian exporters undervalue their exports when they clear Russian customs and move their profits offshore to avoid Russian taxation. In the six months to June 30, for example, Russian statistics value exports to mainland China at $3,6 billion. Chinese import data show the figure to be 31 percent higher, at $4,7 billion.
According to Breach, the growth of China’s oil consumption will be massive, at an average of around 600,000 barrels per day (that’s a growth rate of 25 percent per annum), while growth in Russia’s annual production will kick off from 8.5 million Barrels per day (bd) of present output to 10 million bd by the end of the decade. That’s a Russian growth rate of about 215,000 bd per annum, or 3 percent per annum.
Breach believes the fit is obvious. Russia’s eastern Siberian, offshore Sakhalin and eastern Arctic oil reserves need substantial capital to come onstream, which the major Russian oil companies have refused to provide. They have concentrated instead on lifting Soviet-discovered oil from the western Siberian basin, exporting it to Europe and taking their trade profits and huge cash dividends offshore to the private accounts of their shareholders. Breach implies that Russia can afford to meet China’s demand and, also, Japan’s need to diversify its oil sourcing away from the Middle East; but only if the Kremlin gives way to the current demands of the oil company oligarchs. These include the demand to allow construction of pipelines by private investors to the Asian markets — principally China and Japan. A more fundamental and controversial demand is for the Kremlin to allow the oligarchs to cash out of their shareholdings and allow foreign oil companies to take over the task of raising capital and developing new fields.
The fight over the cash-out option is the impetus behind the Kremlin’s crackdown on Yukos shareholders, led by Mikhail Khodorkovsky and Platon Lebedev — the latter has been imprisoned on fraud and embezzlement charges since July. Sources close to Yukos have told The Russia Journal that Khodorkovsky has told his board of directors that in two meetings with President Vladimir Putin, he got an O.K. to proceed with a cash-out and share-swap deal with ChevronTexaco or another U.S. oil company. That is Khodorkovsky’s interpretation and it referred to meetings before Lebedev’s arrest. The Kremlin then made its view clear when Lebedev was arrested. Lebedev is now telling associates that he expects to be in prison for another year or more, indirectly confirming that Putin has made up his mind, or changed it. His chief of staff, Alexander Voloshin, usually an open advocate for the oligarchs, has been caught wrong-footed, promising to deliver Lebedev, but unable to do so or to anticipate what will happen next.
In the heat of this fight, independent Russian economists have been urging the government to remove the distortion in the domestic economy — between the rich asses and the poor ones — by applying capital gains, foreign remittance and super-profit taxes to the oligarchs and then channeling the funds back into the economy as capital investment for a balanced industrial approach.
Although the election campaign has already begun for the national parliamentary poll on Dec. 7 and presidential ballot next March, not a single political party has issued a clear campaign position on this fundamental economic policy choice. Not even the Communist Party, which has assigned two slots on its ballot to former Yukos executives, who still represent their company’s interests.
Meanwhile, ahead of Kasyanov’s talks in Beijing, Yukos has leaked a warning that, unless Kasyanov stops delaying Russian government approval for the pipeline to deliver crude to Daqing, new oil pipeline deliveries to China could not begin before 2006, a year later than scheduled,
An industry source in Moscow noted that the Yukos leak “must be interpreted as encouragement for the bureaucrats to get a move on. Any delay, should It be confirmed, is doubly frustrating, because the government had already decided in May to build a pipeline to China first and leverage this to the Far Eastern port of Nakhodka at a later stage. A delay would also force wholesale revisions to the country’s (and the companies’) crude-output forecasts, which are primarily dependent on constrained market access.”
According to Transneft, the state pipeline agency, the delay reflects indecision on the part of the Russian government on whether to give priority to a rival proposal from the Japanese Government to build a pipeline to the port of Nakhodka and, from there, ship the crude by tanker.
Sergei Grigoriev, vice president of Transneft, told The Russia Journal that “Transneft, like everybody else, simply waits for the government to pronounce its decision on the route. We do not lobby for anything. We have made our proposals concerning the route. After the government decided to merge the two projects — that of a pipeline to Nakhodka and the pipeline to China — we provided a modified proposal. Until the government makes its final decision, nobody can say what route will be chosen.”
In April, the government announced it would authorize construction of the pipeline between Angarsk, in southeastern Siberia, and Daqing, with capacity for 400,000 bd. Then it announced the intention to study a second 970,000 bd-pipeline to Nakhodka. Then, after lobbying from Tokyo, government officials opted to build the Nakhodka leg first and add the China pipeline later.
The Nakhodka option not only pits the Japanese lobby against the Chinese; it forces the government in Moscow to address the fundamental question of how and when it can expect to see the oilfields of eastern Siberia come onstream. And that in turn pushes Kasyanov and his ministerial colleagues towards a fork in the economic-policy road they feel unable to pick right now. Of course, as La Fontaine warns, they may not survive in time to get there.