Commenting on Lipman

It seems I’ve lost the drive that once made my blogging possible; but I was asked to comment on this column by Masha Lipman, and as my comment has disappeared from the WaPo blog (or never got there), I am reposting it here, with minor changes.

As far as pure politics goes, I mostly agree with Lipman. When it comes to the economy, I feel she misidentifies Russia’s weaknesses. There is little doubt that Russia’s oil and gas sector remains extremely important to its economy (although less so than the author would have us believe), which is why Putin has been so keen on regaining control of it. The problem with this sector, however, is hardly access to capital or technology. Gazprom, which Moscow has controlled, though not fully owned, since the mid-1990s, has raised billions in debt; like Rosneft, it can afford to buy any technology and expertise it needs. The trouble is, they don’t always know, and don’t always have the will to do, what they need, suffering (as Gazprom has for over a decade) from inefficiencies inherent in behemoth state companies. These inefficiencies will always threaten to swell into an obstacle to sector growth.

As for the crude production peak-out we are about to observe in Russia, it is something experts predicted several years ago: in response to high oil prices, Russian oil producers boosted output by opening up shut-in wells, drilling new wells in old fields, or increasing well runs by hydrofracturing and other such means. These measures have run their course; if crude output is to keep growing, new fields have to come onstream.

Outside oil and gas and some other “strategic” industries, such as defense and aviation, the picture is rather different from one Lipman paints – I concur with George (another commenter) on this. Looking at the Russian stock market would give some idea of those other sectors. As Charles Ganske writes, “Though he [Putin] has created mammoth state-run national champions that dominate the oil and gas industry, they [international investors] say there is plenty of competition in other sectors. And in sharp contrast to the spendthrift populism of Venezuela’s Hugo Chávez, Mr. Putin has kept tight control of Russia’s purse strings, despite the oil boom.”

But obstacles to Russia’s growth are structural and long-term and have not changed much since 1991: its inefficient, corrupt bureaucracy threatening to merge with big business; its poor court system; massive underinvestment in infrastructure, education and health care. The Kremlin can afford to channel federal money into the last three areas but has no mechanisms to do so: institutionally, Russia remains extremely underdeveloped. Apart from having emasculated the country’s political institutions, Putin’s clique seems to be unable to think in institutional terms: they are focused on goals and means, not mechanisms.

Needless to say, their goals are not worth achieving, and their means are ugly.

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