Russian Oil: Heads I Win, Tails You Lose
12/24/08 08:57
High oil prices earned Russia the tax revenue to renationalize its oil companies as oil prices fell.
High oil prices served Russia well - financing a military buildup and allowing it to build big cash reserves from tax revenues. But now prices are low, Mr. Putin is using its cash to renationlize the oil companies (along with steel, iron and other firms) in another dangerous step towards rebuilding the Soviet Union. His next step?
During the recent era of high oil prices, Russia’s oligarchically controlled oil & gas companies grew rich and powerful. Perhaps too powerful for Mr. Putin who wrested state control of one oil company Yukos by imprisoning its CEO, and bought others for pennies on the dollar for excuses such as not producing enough or environmental regulations. Now Mr. Putin sees a way for Russia to renationalize the rest of its oil and gas companies along with iron, steel and piping companies. (Mr. Putin has already privatized shipbuilding and aircraft manufacturers by simply seizing them.)
Russian oil companies took on massive exploration programs over the past few years financed with loans based on high oil prices. With today’s low oil prices they cannot repay these loans. Self-servingly, the Russian State bank VEB (which Mr. Putin also heads) has “emergency loaned” these companies moneys that will convert into equity ownership in one year if the companies cannot pay Russia back. (Which, conveniently, they are unlikely to be able to do.)
Now that Mr. Putin well on his way to restoring the old Soviet Union oil infrastructure, he wants oil prices to rise to stem civil unrest and fulfill Russia’s expansionist plans. He is working hard to accomplish that.
Mr. Putin may win this new cold war if we cannot quit our addiction to his oil and gas.
Russian oil companies took on massive exploration programs over the past few years financed with loans based on high oil prices. With today’s low oil prices they cannot repay these loans. Self-servingly, the Russian State bank VEB (which Mr. Putin also heads) has “emergency loaned” these companies moneys that will convert into equity ownership in one year if the companies cannot pay Russia back. (Which, conveniently, they are unlikely to be able to do.)
Now that Mr. Putin well on his way to restoring the old Soviet Union oil infrastructure, he wants oil prices to rise to stem civil unrest and fulfill Russia’s expansionist plans. He is working hard to accomplish that.
- Yesterday, Mr. Putin announced the “end of cheap (natural) gas” at an organizational meeting of the Gas Producing Countries Forum, an OPEC-like entity founded by Iran. (Mr. Putin also announced he is selling missiles to Iran but that’s a topic for another blog.)
- Today, Mr. Putin has begun his fifth annual winter game of cutting off gas supplies to Ukraine to raise prices and signal Russia’s foreign policy desire to rebuild the Soviet Union.
- As a hedge, Mr. Putin has decided to sell missiles to Iran.
Mr. Putin may win this new cold war if we cannot quit our addiction to his oil and gas.
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