The gas and oil industry has been important to Russia since the tsarist era. This text outlines both its necessity to the economy as well as Putin’s attempts to re-nationalize the sector. Russia has relied on oil and natural gas as a main export for decades. In the 1990s, there was an international energy glut which made Russian energy irrelevant. The Russian government defaulted on debt and the economy crashed in 1998 as a result. It was also around this time that Vladimir Putin became prime minister of Russia. In 1999, Putin wrote a dissertation that outlined a plan for Russia’s economic recovery. He wanted to nationalize the Russian economy so they could compete with the West. He promoted the idea of “national champions”, or companies that would put national interests in front of their own profits. Private industries could still operate as long as they submitted to the state and maintained majority shares when working with foreign companies. Putin’s dissertation has informed his domestic policy regarding energy ever since. Putin’s first step to promote “national champions” was to replace the heads of Russian-owned companies with those who would submit to the Kremlin. A primary example of this was in 2000, when he fired Viktor Chernomyrdin, chair of Gazprom (Russia’s largest company and the biggest producer of natural gas in the world). The CEO of Gazprom, Rem Vyakhirev, was removed in 2001. Chernomyrdin and Vyakhirev were replaced by Dmitri Medvedev and Alexei Miller respectively, who had worked with Putin in St. Petersburg. The next step in creating “national champions” was to nationalize control over all the major oil companies. Putin did this through arresting or threatening their owners when their companies were no longer following the ideals of “national champions”. One such example is of Mikhail Khodorkovsky, who owned a majority share of the large oil company Yukos after purchasing stocks through a rigged auction in 1992. He was arrested in 2003 on dozens of charges, including tax evasion, fraud, and embezzlement. Khodorkovsky’s arrest came shortly after his plan to sell shares of Yukos to Western companies Exxon-Mobil and Chevron, which Putin had not been consulted about. This sale was not being conducted with the interests of the state in mind. After Khodorkovsky’s arrest, the planned deal with nullified. Yukos was dismantled and sold in rigged auctions back to the Russian government. Any companies that did not fulfil Putin’s idea of “national champions” were subject to this pattern, including Sibneft and Russneft, two major oil producers in Russia. In any projects where outside companies must be hired, such as Shell or BP, Russian companies must have at least a 51% stake to maintain control. The Production Sharing Agreement was signed with foreign companies so they could bring in the necessary technology to drill for oil and gas on Russian territory and Russia would make a profit. However, the Russian government backed out of a majority of these deals, claiming that the Western party did not fulfill their end and including their owner Russian companies in the ventures. This way, the government was making profits immediately. Through threats and legal action, Putin was able to force the major energy companies in Russia to comply with his vision of “national champions” and ultimately take back state control of Russia’s largest industry. Russia is now considered an energy superpower.
Questions Prepared by John D.
Introduction: Russia once again an energy superpower
Chapter 5: Putin takes over
1) The author argues that Russia is now more powerful in world affairs than the Soviet Union at the height of the Cold War. Why and how? Do you agree with his assessment?
2) For those interested within Western governments, the "blueprint" for Putin's interventions in the energy sector of Russia's economy, should have come as no surprise. Why? What outlines were provided when and where? Were his ideas original?
3) Once in power as President, what actions did Putin take to establish his primacy over those who had done well for themselves under more chaotic (but freer) Yeltsin years? What differences could be discerned between the fates of ex-nomenklaturas and the oligarchs? Explain these differences.
4) Listed by Forbes as Russia's richest man in 2003, worth an estimated $15 billion, Mikhail Khodorkovsky's fall from grace was more spectacular and his punishment harsher than that of his peers. What four actions does the author cite as the immediate precipitating factors in bringing about his trial and downfall in October 2003?
5) Question directly taken from the Introduction-so Goldman's not mine! What are the implications of Russia's current superpower energy status for the US and Europe?
6) Question taken from Goldman - again not mine! How much of this influence is a matter of endowment of natural resources and how much due to a carefully designed policy?
7) Question taken from Goldman again from Goldman-not mine! What is Putin's endgame?
Key Points Prepared by Justin
Several Western European states are heavily reliant upon Russian natural gas. Some, such as Germany, import up to 40% of their natural gas from Russia. Others, such as the Baltic states and Finland, are 100% reliant upon Russian gas. Russian gas imports to the US are slowly increasing, though still only comprise a small percentage of the US gas supply. Gazprom controls Russian natural gas and is the largest company in Russia (3rd largest globally) Half of the company is controlled by the Russian government. Despite claiming that politics does not influence the actions of the company, Gazprom has occasionally suspended gas supplies to some states as a tactic of international negotiations. Russian territory features the largest global reserves of natural gas and other minerals. However, it is difficult to access those resources due to unfavourable geography and the necessity of advanced extraction technology Throughout more than a century, Russia has been the leading global natural gas supplier on multiple occasions. In the late 2000’s Russian gas made up ~35 percent of its GDP, and 65% of exports. Such a reliance on natural resource exports carries the risk of “Dutch disease”—as demand rises for Russian gas, the value of the Ruble rises. This makes Russian industrial and consumer exports less attractive and damages domestic Russian industries.
Ch. 5—Return of the Czar
1998, the Russian government defaulted on its debts. Many Russian individuals and businesses were bankrupted as a result. The Russian economy began to recover around the time that Putin became Prime Minister, largely due to rising global oil prices. Putin believed that the best way for Russia to utilize its natural resources would be to create “national champion” companies that would serve state political and economic interests rather than private interests. Shortly after becoming President, Putin made a secret offer to the nation’s oligarchs: avoid politics, and the Kremlin would turn a blind eye to their questionable affairs. Though most oligarchs heeded Putin’s warning, some did not. Mikhail Khodorkovsky and his Yukos oil company became the Kremlin’s targets after seemingly overstepping the boundaries between business and government. Orchestrating independent business deals with China, attempting to compete with the state oil monopoly and planning to sell off large parts of his company to the American Exxon-Mobil made Putin believe that Khodorkovsky was infringing upon his own powers as president. Through shady practices, Khodorkovsky was eventually imprisoned for various white-collar crimes. Yukos was dismantled through bankruptcy court, with the majority of its assets awarded at auction to shell companies of the state-owned Rosneft and Gazprom. With the looming possibility of state harassment, many private companies in Russia have begun to act as if they were at least partially state-owned. Many companies put the interests of the state before their own, seek government approval before carrying out their activities, and attempt to limit the amount of Western control exerted over their affairs.
Group Kremlin Simon Pirani. Change in Putin’s Russia: Power, Money and People
Abstract - Kremlin Prepared by Takdeer
Simon Pirani’s book, “Change in Putin’s Russia: Power, Money and People” examines the relationship between the Russian population, money and power in the Soviet Union and Russia. Included in Pirani’s book is the detailed relationship of the aforementioned three factors, from a closed centralized Soviet economy in the 1950’s, to Russia’s centralized capitalist economy in 2007. This book attempts to show the introduction of capitalism as decimating the economy, standards of living and creating a vacuum for political power.
Pirani argues that, despite its vast size and resources, the Soviet Union continued to lag behind Western nations as it spent its oil wealth on weaponry to keep up with the U.S. The adoption of globalization and the abandonment of the link between dollar and gold would see Western and Asian economies embark on a long period of expansion from the early 1980s to 2009. However, the Soviet Union would continue to increase its dependency on Western grain and loans to maintain its social order. For example, the USSR imported 35-40 million tons of grain in the 1980s and saw net debt to western governments rise from $600 million in 1971 to $37.3 billion in 1989.
Pirani argues that economic output consistently slowed down in key areas such as armaments and consumer goods. Low oil prices in the 1980s forced the Soviet Union and its republics to buy technology and consumer goods from the West on loan. Gorbachev’s attempt to introduce market mechanisms began the further collapse of the Soviet and post-Soviet society and economy because his reforms caused widening economic inequality between the capitalist elite and lower classes. More importantly, Pirani sees Gorbachev’s reforms as a spark that revived the workers movement. These worker movements would spread across the Soviet Union and would demand secession for the republics until the Union was dissolved in December 1991.
With the arrival of capitalism in 1992, Russia continued to sink into economic, political and social chaos. Indeed, Pirani states the western governments introduction of ‘shock therapy’ - price liberalisation and privatisation - caused Russia’s GDP and population to fall dramatically. For example, population fell from 148 million in 1992 to 142 million in 2000 alongside GDP shrinking to half its size.
As of 1991, Russia was introduced to and interlinked with the global market despite its shrinking economy. The global recession of 1998, alongside Yeltsin’s war in Chechnya, added to the misery of the Russian state and its president, Boris Yeltsin. For example, going into the election Yeltsin carried a 2 percent approval rating. In order to supply the governments and his elections need for cash, Yeltsin worked out a ‘loans-for-shares’ scheme in which powerful businessmen and bankers would provide him with access to their financial and media resources in exchange for ownership to Russia’s vast resources. This relationship would continue on until Putin’s rise to power in 1999.
As Pirani argues, Putin’s appointment of ‘siloviki’ (i.e. 'sila' = 'power' in Russian; meaning strong men), politicians from the security and intelligence services and their centralization reforms, the capitalist economy along with the oil boom caused tax revenues, GDP, standard of living all rise to levels not seen before. However, taxable revenues and capital outflow from state and Oligarch-owned companies continued to leave Russia for tax havens across the world. Despite Putin’s elimination of Oligarchs, he continues to further monopolise Russian resources and assets.
Questions Kremlin Prepared by Thomas Apostle
1. What did OPEC do that created the artificial impression that the Soviet Union’s economy was strong in the 1970s? Approximately what percentage of the economy was the Soviet Union spending on its military at the height of the cold war? How did Regan inadvertently take advantage of this?
2.What were the key economic stresses on the Soviet Bloc that hurt their fiscal position? What were the political consequences of these stresses?
3. What is Shock Therapy? Why did the economy and standard of living in Russia improve after Vladimir Putin came to power?
4. Why did Boris Yeltsin allow the oligarchs to buy state companies at a fraction of their value? How well did Yeltsin manage the Russian economy in the years preceding Vladimir Putin becoming President?
5. What is chekisty?
6. What was Putin’s new deal with the oligarchs? What happened to the oligarchs who refused to play by these new rules?
7. What is transfer pricing? How did it hurt Russia?
8. Did Russia use energy as a weapon against Ukraine and Europe?
Key Points Prepared by Rose
1. There are two main relationships that have changed significantly in 21st century Russia: that between money and power, and that between money and power together as a single entity and ordinary Russian people.
2. The Soviet Union’s economy was not as isolated from the global economy as many people believed; the crisis in capitalism in the 1970s, as well as further Western and global economic developments in later decades, affected (i.e., harmed) the Soviet and post-Soviet economy (seen especially in the rise of criminality in the 1990s; it was difficult for Russia to integrate healthily into capitalism when the global capitalist system was itself not healthy). And this equally shaped how Yeltsin constructed post-Soviet power, particularly through his oligarch system where the indebted state was propped up by billionaires and in turn became a weak state, losing some of its power to the billionaires (“oligarchs”), who grew enormously influential.
3. Putin’s Russia can be seen as the Russian state trying to take back some of its power from the oligarchs that wielded so much control under Yeltsin and instead represent the interests of all wealthy Russians (not just a select few), in part by introducing “siloviki” (former intelligence officers now in positions of political power) and market reform economists into the government. This change has been made possible by the oil boom that coincided with Putin’s early years in power: despite increasing oppressive measures and a widening gap between the rich and poor, Russia’s economy and Russian people’s living standards improved during that time.
4. Under Putin, the Russian state has enriched itself by taking control of oil and gas revenue and by cracking down on the tax evasion that was so widespread under Yeltsin.
5. Just as the oil boom affected Russia’s political climate, so too has (the author of the book, writing in 2010, says “will”) the 2008 recession, which provided evidence for the inherently unstable nature of capitalism. Even before the recession, people had already begun to question whether “shock therapy” (i.e., the rapid transition to capitalism that post-Soviet Russia underwent at enormous human cost) was really the best option for Russia, or whether a healthier alternative could have been found.
Group Cheburashka Putin’s Oil: The Yukos Affair and Struggle For Russia
Abstract Prepared by Chris Wieczorek
This selection of excerpts from Martin Sixsmith’s Putin’s Oil: The Yukos Affair and Struggle For Russia chronicles the economic rise of Mikhail Khodorkovsky and the political rise of Vladimir Putin in the late 1990s and early 2000s, with Sixsmith framing his analysis of the two by suggesting that one may understand their rivalry, and later enmity, via how each sees Russia’s natural resources – oil, in particular. Sixsmith spends the first excerpts focusing primarily on Khodorkovsky’s personal history, depicting his rise (along with several other soon-to-be oligarchs) from a small cooperative owner during the early stages of Perestroika to a computer and IT company, eventually accumulating enough capital to open a private bank and subsequently bail out the Russian government under Yeltsin in exchange for the opportunity to take over Russia’s natural resources, oil chief among them. While these developments make Khodorkovsky fabulously rich, they come to sit poorly with Putin and his ex-KGB advisors in the Kremlin, who believe that restoring the Russian economy is necessary for Russia to regain its lost prestige, and neither can be accomplished when Khodorkovsky and other oligarchs control the country’s natural resources. Putin also begins to perceive Khodorkovsky as a political threat due to his increasing outspokenness, and the oligarch’s emphasis on the need for transparency and honesty in Russia goes against the Kremlin’s often-shady practices and Putin’s limited political desire to address corruption in a meaningful way. In 2003, Khodorkovsky attempts to partner his oil company with an American corporation; Putin believes that Khodorkovsky has once again proven his dishonesty, and essentially seizes the company and sends Khodorosky to prison, neutralizing him as both a political and economic threat to Putin’s regime.
Discussion Questions Prepared by Victoria Macies
Do you perceive any similarities between Khodorkovsky and Putin's style of doing business and politics?
Do you think that them growing up with opposing ideologies of the Soviet era impacted their decision making?
What do you think Khodorkovsky's reasoning was behind him choosing to stay in Russia, despite being encourage to go abroad for his safety?
How different would contemporary Russia be if Khodorkovsky had succeeded Putin politically?
Will Khodorkovsky's legacy be remembered with him as a martyr for western democratic beliefs, or will he be remembered as a power-hungry oligarch?
Was it smart of Khodorkovsky to try and sell parts of his companies to American buyers, or was this decision a fundamental misreading of Putin's Kremlin?
Key Points Prepared by Hailey Reid
1. Pages 17-35 This section outlines Khodorkovsky’s youth and the way in which the State worked to alter his perception and desire to become a businessman. He worked through the Komsomol (Communist university organization) to work closely and within the system to gain managerial skills and find loopholes in the law. The political climate and change that came with Gorbachev created a time of uncertainty made for him to have private enterprise. “working with the system, he would build himself into a position where he could change it” (pg. 18)
2. Pages 45-50; The rise of Putin illustrated a shift from lassiez-faire to reintroduction of state control. After being placed in power by the funding of oligarchs he turns, telling them they now need to follow his rules. “He said he would not interfere with their business activities and would not reverse the privatization process that had made them all rich, as long as they agreed to stay out of politics.” (pg. 46). In the meantime, Khodorkovsky is cleaning up his oil company Yukos and bringing it up to western trading and transparency standards to attract foreign investors.
3. Pages 55-62; Putin’s chief of staff Igor Sechin and the Soloviki (strongmen) in the kremlin work to nationalize companies. “The implication seemed clear: Khodorkovsky was accumulating funds — ammunition — to use in a future battle for political power” (pg. 57). On the 19th of February 2003 Khodorkovsky confronted Putin in front of the media and other oligarchs. Sixsmith notes that Khodorkovsky is saying “one-third of Russians believed their President to be powerless in the face of organized corruption, while another one-third believed he was complicit in it” (pg. 61), directly challenging Putin.
4. Pages 115-127; The Kremlin accuses Yukos of tax fraud and begins to raid the company. Khodorkovsky is not willing to leave, and believes he will be given a fair chance to defend himself. Khodorkovsky is working on a deal to sell small shares to American investors through Chevron with the implied consent of Putin, and another deal to sell the major portion of the company to another American company Exxon. Putin catches wind of this second deal, and believing Khodorkovsky is going to retire to politics, puts an end to the uncertainty, arresting him. 5. “A Canadian gambit" (pp. 262-265). “Yukos’s total tax liability for the period to over $42 billion, greater than 100 per cent of the company’s gross income! This is not taxation. This is confiscation!” (pg. 261). In a belief that the Kremlin was willing to work together, John Chretien works as emissary for Yukos. He is completely ignored and his attitude from hope to sadness to complete disdain alludes to the realization that the negotiations were over. The government was going to do whatever they pleased with Yukos and Khodorkovsky.
Group Sputnik The Oligarchs: Wealth and Power in the New Russia by David Hoffman
Abstract Prepared by Julia Belittchenko
Hoffman’s analysis of oligarchs and their role in the society and economy of pre- and post-perestroika USSR explores the rise and fall of various empires within different industries throughout Russia, specifically oil, automobiles and the media. The book follows six Russian oligarchs in specific: Khodorkovsky, Berezovsky, Gusinsky, Smolensky, Luzhkov and Chubais, and the assigned chapter holding a special focus on the first three. The prologue begins with a critique of Putin’s soft authoritarian rule in his attempts of eradicating the oligarch class, which rose to power under Boris Yeltsin’s “warped proto-capitalism” (Hoffman 2011: 13). After the collapse of the Soviet Union, Yeltsin attempted to completely reform the country, giving the Russian population more freedom from the state than they have ever enjoyed before. However, he neglected to establish a formal rule-of-law to govern the new freedom, and this resulted in the rise in wealth and power of ambitious and well-connected individuals all over the country; as long as they were able to network within their chosen industry, they could succeed to make millions under this new rule. Looking specifically at the cases for Berezovsky and Gusinsky, it is evident that Putin’s coming to power were their ultimate downfall, with Putin’s near-autocratic government making all efforts to exterminate any wealthy corporations and industries owned by individuals. Using Berezovsky as an example, who built himself an empire and created a legitimate market in the Soviet automobile industry and took over the manufacturing, import and export for Zhiguli cars all over the country. The fall of the ruble in 1995 was a catalyst for success for Berezovsky, who used this to turn the debt he owed to Avtovaz into pennies and dimes. However, the fast profit the entrepreneur was turning provided him, in Putin’s eyes, with too much control both within the industry and with foreign export corporations, to the point where Putin began to pick fights with the man who was partially responsible for his seat in the Kremlin. Ultimately, Putin’s obsession with state-controlled industry led to the arrests, convictions, and exiles to most of Russia’s former oligarch class.
Questions Prepared by Nicolas Plourde-Fleury
Who are the six oligarchs discussed in the book and what field did they succeed in?
Where did Berezovsky work before the perestroika?
With which important economic actor did he cultivate a relationship?
What is vnedrenie and why was it important to Berezovsky?
How did Berezovsky make most of his early fortune?
What was the key factor which allowed him to make incredible profits?
What was Gusinsky’s business and why did it fail?
How does it contrast with Berezovsky’s?
Gusinski talks of a mistake made by the media in 1996, what was that mistake?