24 October 2012

How Long Can Russia's Soviet Era Oil Infrastructure Go It Alone?

The following article was previously published on Al Fin Energy''


“For foreign oil companies seeking to expand production and reserves, Russia is now off limits,” Robbert Van Batenburg, head of research at Louis Capital Markets LP in New York, said in a telephone interview yesterday. The BP accord “is probably scaring the others away.” ...

Since 2004, Putin has been tightening the government’s grip on the Russian oil sector, moves that made it increasingly difficult for foreign producers to establish or maintain footholds in the country, said William J. Andrews, a fund manager at C.S. McKee & Co. in Pittsburgh....

“The Russians are nationalistic and are going to keep the oil reserves for themselves,” said Andrews, who helps manage $14 billion. “They don’t really have a legal system or a political system. It’s a dictatorship.”

...“Ten years ago, Russia was a much more open place to do business,” Molchanov said. “But that is no longer the case, thanks to Vladimir Putin. The international oil companies are having to look elsewhere for opportunities at a time when the set of opportunities is growing more limited and costly.” _BW
But is Russia -- with its neolithic infrastructure and shrinking ethnic Russian population -- in a position to cut itself off from western expertise and the technological advances that are occurring at a rapid pace in the western world? Is this the same phenomenon of a hubris born of backwardness that brought down the Soviet Union?

Russia's Putin has been banking on rapidly rising oil prices. But more and more western analysts -- including Citi and Goldman -- believe that global oil prices will stabilise near present levels through 2020, and possibly beyond. To finance his ambitious military, nuclear, and technological goals, Putin needs for oil prices to approach $150 a barrel. As long as prices stay near $90 levels, Putin must either restrain his ambitions, or draw down his dwindling reserves.

If Putin refuses to open Russia to outside investment and infrastructure upgrades, he is limiting himself to more devious methods of supporting his grandiose goals for Russia. Methods which include starting proxy wars in and around the middle east to increase the geopolitical risk premium of oil -- driving up global oil prices.

It is a type of "painting oneself into a corner," which appears to be a common character failing of Russian leaders down through history.

Between Russia's core population collapse, its disintegrating public health infrastructure, a debilitating brain drain, and the steady drip, drip, drip of capital flight outside the country -- more intelligent and wise Russians must understand the desperate need for a change in direction.

With Putin at the helm, Russia sails perilously through hazardous straits.

More: A Weak Russia is A Dangerous Russia

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