Ben Judah - Fragile Empire - How Russia Fell in and Out of Love With Vladimir Putin

In western Siberia, however, all is not well. Here, in the resource rich wastelands that produce two-thirds of Russian oil, the crushing majority of old Soviet fields are in production decline. The technological revolution pioneered by Khodorkovsky that jacked-up oil production has run out of steam. The 1990s problems of fields with falling production are re-emerging. Even if prices stay high Russia is slowly running out of cheap oil. Its current reserves are of declining quality and its huge potential fields lie in extremely difficult terrain in eastern Siberia or under the Arctic Ocean. At the very moment Putin needs more oil profits, oil production risks entering a long-term stagnation, even decline, unless a radical overhaul in techniques, taxation and import of new technologies gets under way. His own energy minister has warned that without a delicate, but feasible policy turn, oil production could fall from 505 million tons per year in 2010 to 388 million tons per year in 2020. 34

This can be avoided through extensive investment, tough and expensive prospecting and intrusive tie-ups with foreign companies – but the whole industry could be forced to invest not $25 billion upstream but $50 billion annually to keep production steady. 35It is hard to imagine that the Kremlin will have as much money to play with as in the past if it wants to rejuvenate the sector it depends on. The easiest way to avoid production falling is to lower oil taxes in order to give the companies the money they need to revitalize and drill for new wells.

Yet this will be difficult for the state to do at the very moment it has become more dependent than ever on high oil taxes. Similar problems are looming in the gas sector as LNG and shale pose long-term problems for Gazprom’s business model. Russia is set to stay an energy superpower – but the best years of the boom are behind it, even if the oil price continues its ever-volatile rise. The era of both a production and price boom that defined the best years of Putin’s regime are likely over. Putin had bet the Kremlin on a challenged industry, where prices are as unpredictable as the hand of a drunken card sharp. This uncertainty means that Russia is not only exporting huge amounts of raw materials – but money and people. As many as 38 per cent of the wealthiest Russians want their children to emigrate, and capital flight hit $80.5 billion in 2011. 36The two most sensitive assets in any country were fleeing Russia.

Sustained opposition in Moscow has not gone beyond 100,000, but discontent is national. The government claims that only those protesting resent the regime. If this were true, United Russia in the 2011 parliamentary elections would not have fallen below 50 per cent, despite industrial rigging. In most regions dominated neither by oil, gas or ethnic cliques, the party got far less than in Moscow – around 35 per cent. 37

They are not the ‘great ignorant’, nor are they apathetic. They are the silent Russian majority that polls show fear the police, do not feel protected by the law, think corruption is greater than in the 1990s, want a strong opposition and disapprove of this government. They are the majority who know and use the slogan ‘the party of crooks and thieves’. These are the seething people who, should Putin cut his promises in an oil tumble, would start to shriek with almost physical pain.

Travelling around Russia is like using a time machine. The botched vertical has left a country that once aimed for homogenous Soviet living standards as a patchwork quilt of regions. Each one is run as its own patronage network, some modernizing nicely, others in sociological collapse; some run by competent cadres who look to China, others by crooks in Gucci suits. It has left some cities with glass tower blocks, but others without airports; some with high-speed trains and 3D cinemas, others still single-industry rust heaps overrun by neo-fascists and gangs, where you can only have fun with a needle – a country where the capital has the human development of South Korea but many regions have life male expectancies below the Central African Republic.

Only in government propaganda is there a ‘real Russia’ and a ‘fake Moscow’. This is a fragmented country. Some say that the regions are defined by their demography, others say by geography. In Russia it is usually geology. The territories that thrive are cogs in the hydrocarbons mega-complex, giving them a cut in taxes. Oil and gas do not just create oligarchs, but regional gulfs as great as the social ones between Russia’s eighty-three regions – nine produce more than half of Russia’s GDP, but in 2010 over forty received more in federal aid than all the profits of their local enterprises. 38What this means is that gaseous Yamalo-Nenets, Tyumen and Khanty-Mansi regions technically have GDP per capita higher than the United States, but men in Pskov, Novgorod or Chita can expect to live barely beyond fifty-five years of age. 39

In these geologically unlucky lands, the political variable is personality. ‘The governor decides everything,’ said one Kremlin aide. ‘They really have the power to make the difference in our system.’ Each United Russia chieftain determines to what degree his region will be managed or pillaged. Russia is a feudalized entity, a place where the governor is personally dependent on Putin, but without a ‘dictatorship of law’ it leaves every boss to build up his own regime, his own financial–political holding, the way he wants. It could turn out like Barnaul in Siberia, where no protest permits were handed out and the opposition left protest teddy bears and Lego in the snow, which were duly ‘arrested’ for their ‘illegal public event’; or like liberal Novosibirsk where thousands marched against Putin under colourful banners after United Russia scored just 27 per cent. 40

Let’s take two regions with nothing in their subsoil, whose military-industrial roles in the Soviet plan were scrapped, one near St Petersburg and the other next to Moscow. Pskov, to the south of Putin’s home town, has a governor who was not even a member of infamous Yarva-Neva judo club of which the ‘national leader’ is the honorary president; he is the son of a member. His qualifications are scant and his record dismal. Pskov has lost one-third of its population since 1989 and has one-third of Russia’s dying villages. 41This kind of depopulation normally occurs only in times of war or plague. Despite sharing a border with the EU, no modern economy was built here to replace its socialist role, leaving the youth to be sucked into St Petersburg.

Kaluga near Moscow, however, is actually doing rather well. It makes such a difference who is in charge; there is even a modicum of decent administration here. The governor, Anatoly Artamonov, admires Lee Kuan Yew and jokes that he would like to erect a statue of him and one of Deng Xiaoping. He is seen as the most dynamic of Putin’s governors and the ‘national leader’ himself said of his work: ‘if we all go this way, the progress will be very significant.’ 42He has a lot to be proud of. Regional GDP has grown 130 per cent in a few years and Kaluga had the country’s fastest growing industrial production of any region in 2011. 43The accountancy firm KPMG judged that Kaluga was ‘the only example where a business climate was created expressly for foreign investors.’ 44The governor thinks he has pulled this off as he is a Kaluga native, not an implant. Yet even a man awarded by Putin with the ‘Order of Services to the Fatherland 3rd class’, is exasperated by his vertical:

‘The vertical of power is not what it appears. Now I am certain that I have more authority than a European governor, thanks to Putin. I can go to China and sign contracts. I don’t have to ask him to do that. But I would be happy actually to feel extra control by Putin. I’m in need of that – more estimation, judgement – I’d really like to have that. I’m really free to the point that I’d like to have some constraints. So, I have to call Putin to ask to meet him and Putin always says: “What’s the problem?” So, I say: “There is no problem. I’m just coming to tell you what I am doing.” He then says: “There is no need. I am sure you are doing good work.”’