Book Review

Oil and Grease

Oilopoly: Putin, Power and the Rise of the New Russia
Marshall Goldman, Oneworld Publications, 2008, paperback pp. 244, £10.99 (amazon.co.uk)

Oilopoly should be required reading for everyone who is in love with money. People who like to cuddle up to cash really need to take an interest in the future, as Russians learned on August 19, 1998 when Inkombank (motto: “We are here to stay”) closed its doors and left its depositors panting with a bad case of cashflowus interruptus. I know elderly Muscovites who started putting money under the mattress last November, fearing that Sberbank and VTB would go the same way as Inkombank. That they did not was largely due to the fact that the Russian government is now prepared to put its resources of the state behind commercial enterprises which it judges either too big, too friendly or too “strategic” to fail. This book tells the fascinating story of how this situation has come about, and suggests some ways in which it might develop in the future.

Though futurology is ubiquitous, futurologists are rarely much closer to the truth than a witch-doctor or a gypsy would be. The author, Professor Goldman, who teaches at Wellesley College and Harvard, quotes the International Energy Authority which predicted, in mid-2007 when oil prices were roaring ahead, that they would continue to roar ahead until 2012. This prediction was not made on the basis of the way in which a pile of sacred bones lay on the ground after being shaken out of a dried wildebeest scrotum, or in the light of the distribution of tea-leaves in the Authority Director’s cup at dusk on the night of the Hunter’s moon, but on hard, Protestant-style information of the sort which real-world characters like oil traders are said to treat with respect.

The voodoo name for this type of knowledge is “market fundamentals”. So, the Authority said, world demand for oil was set “to grow at an average of 2.2 percent per annum” during the relevant period. Note the precision: not 2.1 percent, or 2.3 percent. The Authority also said without qualification that world oil supply was going to rise by “1.1 percent” per annum. With figures as precise as those, the logic is undeniable. After two years of upward “roaring”, the oil price would be at least $130 dollars a barrel. If you don’t believe me, go onto your nearest trading floor and ask the first wildebeest you meet.

Professor Goldman gives an historical perspective to his story, which is both interesting and important in revealing the fictions of futurology. Back in the days when senior people in Washington thought that money was power, and laughed at those in the Soviet Union who thought that rockets and bombs represented real power, the CIA set to work to undermine the Communists’ chief cash cow, Neftegas. President Reagan’s newly appointed Director of the CIA, William Casey, believed that the Soviet Union was the source of most of the world’s terrorism. The logic once again was ineluctable: if the world were rid of the Soviet Union, terrorism would decrease. The fact that the opposite has happened must mean that, far from disappearing, the Soviet Union has in fact expanded. Perhaps it has become invisible. Or maybe it moved west and changed its name to the European Union.

Be that as it may, the CIA’s efforts to undermine communism were based on a careful study of the Soviet Union’s energy policy and potential; the word “potential”, of course, implying another excursion into the future. Casey based his approach on a research paper produced in 1977 by a large and well-resourced team of CIA experts who predicted that within a decade Soviet oil production would fall sharply. By 1987, the USSR would be buying around 200 million tons of oil per year on the world market.

The outcome was not quite like that. Far from falling, Soviet oil output actually rose over the period, from 545 million tons per annum in 1977 to 625 million in 1987. (Oilopoly has many informative tables and statistics.) In fact, it was only in the early 1990s, when Russia began to enjoy the benefits of the capitalism which the CIA had been so concerned to force upon it, that oil production started falling sharply. By 1997, it was down to 307 million tons, which would have been about 350 million on a comparable USSR basis – a drop of about 40% over the previous decade.

The reason for this drop was the one factor which never appears to have occurred to the CIA: the owners of the new private oil companies began behaving rationally. Professor Goldman describes how they came to realize that they could make more money by asset-stripping and sending the plundered cash abroad than by producing oil. It was only after the Casey plan to break the Soviet Union by driving the oil price down to record laws had become a distant memory, in the late 1990s that the price began rising again and the oilogarchs re-thought their position and concluded that there was potential for personal enrichment within Russia.

They were helped in this by the incoming-President, Vladimir Putin, who wrote a dissertation in 1997 for the St. Petersburg Mining Institute in which he outlined his strategy for recovering lost state influence by taking control of the country’s natural resources and putting them in the hands of companies which would be controlled either directly or indirectly by the state. (Goldman says that a large part of the dissertation was plagiarized from a 20-year-old American study.)

The result of the close “co-operation” between the state and strategic industry has been that the owners of the companies concerned have remained free to pay themselves “market rates” for their daily labor, and to buy and sell shares and other assets – in other words to get rich – while simultaneously being protected from competitive pressures by a state which uses the law, the courts, environmental inspectors and all the other tools of bureaucracy to make sure that no outside companies can face them on equal terms. The further result has been the continual plunder of Russia’s resources by the few who found themselves at the top of the heap when Putin came to power and who wisely allowed him and his friends to join their game.

There is not enough space in a short article like this to give details of how this was all done. Suffice it to say that words like corruption, grease, persecution, lawlessness, stupidity, violence, greed, servility, more grease, bullying, aggression, illusion and even sometimes farce would be appropriate to describe much of Professor Goldman’s narrative after 1991.

The reasons he gives are varied. One is that “the FSB is no longer just a police organization, it is a business.” Another is illustrated by the calculation of a Japanese economist who noted that it takes Gasprom $3.3 million to construct a kilometer of pipeline, when the world average cost is $1 million. The missing $2.3 million is what finances the FSB, and its clients in government and commerce.

Finally, and in my view most importantly, there is the observation of a fellow Wellesley College academic who explains much of the misallocation of resources, and also the declining reputation of Russia as an international business partner, by saying that, after the fall of communism, the country lacked an adequate “moral infrastructure”. The result, Goldman writes, is that “there are few of the firmly rooted commercial laws or informal moral codes that are taken for granted in long-established market economies. The ‘rule of law’ becomes the ‘law of the rulers’.”

Bob Dylan famously said, “Don’t follow leaders, watch your parking meters.” The problem for Russia is that far too many people follow leaders who are so deeply in love with money that they seem to lack a moral compass. But maybe we should sympathize rather than condemn. Russia is a country entirely without parking meters.