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Russia’s Economic Boom Strenghtens President Putin’s Government

December 22, 2006 at 6:20 PM EST
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SIMON MARKS, NewsHour Special Correspondent: Every night for 28 years, Gennady Loginov has driven the streets of Moscow. One of the longest-serving trolley bus drivers in the Russian capital, from behind the wheel he’s been able to measure the historic shift that took place here after the Soviet Union collapsed and a new Russia rose to prominence in its wake.

Driving the streets at night, he can physically see the energy-led boom that is bringing unprecedented prosperity to Moscow, flooding the Russian capital with cars and bright lights that at this time of year illuminate this once-gloomy city for 15 hours a day.

GENNADY LOGINOV, Trolley Bus Driver (through translator): It’s impossible to keep to the schedule now, because there are traffic jams everywhere. And the city used to be a lot darker.

First of all, we never had these kind of illuminations. And even the street lamps were different. There were lights, but compared with today, it was a lot worse.

SIMON MARKS: The lights of Moscow bear witness to Russia’s new economic confidence and to a sense that, in the capital at least, the authorities have money to burn.

That prosperity is derived from Russia’s natural abundance in gas and oil and the soaring prices of both on global markets. Russia controls around one-third of the world’s total natural gas reserves, and most of the gas industry is controlled by the state-owned conglomerate Gazprom.

It’s now the world’s third-largest company, worth more than $300 billion. Its business reaches far beyond Russia’s borders. It now supplies fully one-third of Western Europe’s gas imports from its control room in central Moscow and is quite literally a major player, keeping European households warm and industries powered this winter.

Sergei Kuprianov is Gazprom’s spokesman.

SERGEI KUPRIANOV, Gazprom Spokesman (through translator): There is no alternative to Gazprom for European consumers. Maybe they are starting to realize this, and they’re getting a little nervous about it. But this has been clear for a long time.

There are no equivalent gas reserves to ours, and gas output in Europe has been rapidly falling. Our position is absolutely constructive. We reach out a hand and offer partnership; we offer to build our relations in a way that causes no one any offense, so that we can really build our joint businesses, over the long term, based on contractually defined relations.

SIMON MARKS: Gazprom is defensive on the issue of its motives and business practices, insisting publicly that it’s like any other global corporation, simply seeking the best financial deal it can find for its 470,000 shareholders, the largest one of which happens to be the Russian government.

Energy Problems in Ukraine

SIMON MARKS: But travel just 500 miles southwest of Moscow, to Kiev, the capital of neighboring Ukraine, and you can hear a very different story.

As winter closes in on Ukraine, protestors have taken to the streets of the capital. This demonstration was called to focus attention on rising prices in general; among them, the soaring costs of energy.

Since Soviet times, Russia has supplied Ukraine with fuel at deeply discounted prices. Ukraine keeps some for domestic use, but sells the lion's share at a profit to Western Europe.

Eighty percent of Russia's gas exports have to pass through Ukrainian pipelines on the way to Western Europe, and the protestors blame the rising prices on the Russian government.

VLADIMIR MARKYAVICH, Pensioner (through translator): Russia is hiking prices because it wants us to give up the pipelines that transit gas to Europe. It wants to put a rope around our necks so that we give up our pipelines, and then it will be able to do whatever it wants with us.

SIMON MARKS: The demonstrations come just two years after a popular uprising known as the Orange Revolution overturned the result of a rigged presidential election here, an election in which Russia directly intervened to the anger of many Ukrainians.

Ukraine is part of what Russia refers to as the "near abroad," the now-independent states of the former Soviet Union that constitute its own backyard. And in that backyard, Russia is seeking to maintain, and these protesters say expand, its sphere of influence.

And it's using its control of oil and gas as a principal weapon in that campaign.

It's a weapon that many Ukrainians argue was unleashed last January. In the midst of a dispute over the price Russia wanted to charge Ukraine for natural gas, Gazprom suddenly cut supplies to Ukraine. It, in turn, reduced supplies to Western Europe.

Even today, there is no agreement on why the dispute was elevated to a level where it dramatically caught the attention of governments in several European capitals.

OLEG RYBACHUK, Presidential Adviser: My feeling is that that was motivated politically.

SIMON MARKS: Oleg Rybachuk, at the time the Ukrainian president's chief of staff, says the Russians were simply holding his country to ransom.

OLEG RYBACHUK: The world suddenly realized that something is wrong or something is missing in the code of conduct in the sphere of energy security. But we had the privilege to be the first ones to feel, how does it taste? Actually, we didn't like it very much.

SIMON MARKS: The Russians put the blame for the disagreement firmly at Kiev's door, saying the Ukrainians balked at starting to pay market prices for natural gas that for decades has been sold to them at heavily subsidized levels.

SERGEI KUPRIANOV (through translator): If you receive an electricity bill that says electricity in the entire building is going to be more expensive, and you say, "I'm on the first floor of the building, I want to pay what I paid before, or else you can't come into the building," and then instead of reducing your consumption, you turn all the lights on in all the rooms, well, a situation similar to this happened on January 1st.

Our Ukrainian partners believed that, through their unique transit position, they could get special prices for themselves.

Foreign policy leverage

SIMON MARKS: Independent observers say there's a third dynamic at work: a desire on the part of the Kremlin to use Russia's energy resources as a tool of foreign policy that rewards countries for pursuing friendly relations with Moscow and punishes those that don't.

In the past few weeks, the Russians have turned their attention to Georgia, an ally of the Bush administration, announcing today that the government there had agreed to a 125 percent rise in the price of Russian gas, 24 hours after being threatened with cuts in supplies; and Belarus, where the government is facing similar pressures after failing to integrate its economy with Russia's as fast as Moscow would have liked.

ROLAND NASH, Chief Strategist, Renaissance Capital: If a country wants to receive cheaper gas from Russia, then it has to recognize it has certain responsibilities towards Russia to get that cheaper gas.

SIMON MARKS: Roland Nash is the chief strategist at Renaissance Capital, an investment banking firm specializing in Russia and the former Soviet Union.

ROLAND NASH: I think that Russia decided that Ukraine was following a policy objective that it didn't like, and that Ukraine is within Russia's sphere of influence, and that a way in which Russia could put pressure on Ukraine to follow policies that Russia liked better was through the use of their energy position, and the fact that they are a monopoly supplier of energy to Ukraine and put pressure on Ukraine for exactly that reason. It seems pretty clear to me that that's what they were trying to do.

SIMON MARKS: "Not so," say advisers to the Russian president, Vladimir Putin. They vigorously contest the notion that Gazprom is pursuing anything other than transparent relationships with its customers based on current market prices.

ARKADY DVORKOVICH, Department of Presidential Experts: Energy is important, in terms of politics, but it is not the thing that we would like to use as a policy instrument. It just gives us enough economic strength to be considered as one of the active participants in the world of politics.

SIMON MARKS: So not used by the Kremlin as a tool of foreign policy?

ARKADY DVORKOVICH: No, no, not at all. It might seem as Kremlin used this as a policy tool, but it's not right.

SIMON MARKS: But a Russian audience has been hearing a difference message from Vladimir Putin himself.

In late October, the Russian leader appeared on a television program, taking questions from Russian citizens from the Baltic to the Pacific, and he appeared to endorse the notion that Russia and its neighbors should use their economic power to buy themselves foreign policy leverage.

VLADIMIR PUTIN, President of Russia (through translator): We understand that, for hundreds of years, the people of Russia and these republics have existed as the people of one country. This could not but be reflected in our human relations, in our economic ties, in our transportation systems.

Whatever anyone says, this is a special case in international relations. I think we should use this absolutely obvious competitive advantage over our partners and competitors in world markets; we should move towards, not only coordination, but integration, above all in the economic sphere.

European reaction

SIMON MARKS: That kind of talk alarms Europeans. A recent edition of the London-based newsweekly the Economist offered one assessment of the Russian leader's approach.

"Today, Vladimir Putin, on his first visit to Ukraine for two years, was pledging to build relations with the country based on neighborly ties and equal rights, but many Ukrainians believe the Russians still have a problem with the whole idea of their country's independence."

And among those concerned is Oleg Rybachuk, the former chief of staff to the Ukrainian president.

OLEG RYBACHUK: If you talk to Russia's diplomats and if you talk even to citizens in the street, they would say that they do not understand things like "independence of Ukraine," because it sounds stupid.

And they would speak about spheres of influence or they sometimes call it "soft underbelly," so they would be choosing different words, sending a clear signal that, by dealing with Ukraine, you have to prior discuss it with Moscow.

SIMON MARKS: Financial analysts worry that Russia's geopolitical goals are now damaging the climate for foreign investment, certainly in the energy sector. Western partners are being kept, at best, at arm's length. Some, including B.P., Texaco and Shell, have seen existing agreements constantly revised by the Russians.

Financial prospects

SIMON MARKS: The fast money the country is earning, thanks to buoyant world prices, obscures what many analysts argue is a potentially disastrous lack of investment in the energy sector. Russia's oil output rose only 2 percent in the first 10 months of 2006; exports were actually down. And the country is facing a shortage of gas for domestic consumption in 2007.

LILIA SHEVTSOVA, Carnegie Endowment for International Peace: To pretend to be a superpower when your pipelines are 25 years out of date, when Gazprom production output last year has reached only 0.8 percent, when oil production this year is expected to reach only 2 percent, is a bit of a creation new illusion.

The only question is whether Russian political elite and the Kremlin team really believe in its mirage, in the inevitability of Russia's becoming a superpower, or it's simply a trick, a gimmick, and a fairy-tale that they are playing, you know, with the West and with its own electorate.

SIMON MARKS: Russia continues to project itself as a major power-broker, both in terms of supplying energy and in terms of wielding influence throughout the former USSR and around the world.

If global energy prices fall or Russia fails to invest adequately in its energy sector, the outward signs of prosperity may be threatened. But for now, the bright lights of Moscow continue to burn.