Russian Energy Projects a 'Luxury' Considering the State of its Economy

Mikhail Krutikhin: Potemkin villages

When your family budget is in a poor shape it is probably unwise to invest in a diamond necklace. Paradoxically, this is exactly the kind of attitude the Russian government has adopted today. 

The South Stream gas pipeline is estimated to require as much cash as the budget of the hugely overpriced Sochi Olympic Games of 2014 does, some $50 billion, if you add the cost of access pipelines on the Russian soil. Both projects look like luxury in the situation the national economy is in. 

During the first half of 2013 Russia’s industries posted a year-onyear growth of just 0.1%. Railways transported 3% less cargo than a year ago. Overall investments fell 1.5%, and investments in construction showed a 2% drop. Regarded against the background of the 7% inflation rate, the figures signal ‘not some sort of stagnation but a fullfledged economic degeneration,’ says Sergey Aleksashenko, former Bank of Russia deputy chairman. He warns against trusting official statistic agencies, which make their economic reports look prettier by recording ‘senseless investment projects of state monopolies with 30-50% of kickbacks in them.’ 

In June, the year-on-year growth rate of Russia’s GDP equaled zero. The economy is stalling, unemployment keeps escalating. The government has had to decrease its forecast of the GDP growth for this year from 3.7% to 2.4% and admits another markdown is expected in August. The finance ministry estimates the outflow of capital from the country in 2013 to reach $50 billion, and this alarming estimate will be evidently revisited in a couple of months. 

This is hardly the best time for costly, and redundant, projects with no hope of payback in a foreseeable future. In the energy sector, the list of Potemkin villages incudes not only the South Stream but also the gas pipeline from Sakhalin to Vladivostok (already in place and expecting upgrades); the Power of Siberia gas transportation from undeveloped yet fields in Yakutia to China; the planned LNG facility in Vladivostok; Rosneft’s petrochemical venture in the Far East; etc. 

Industry observers say that Gazprom will have to double the sum of its annual investment budget for the next six to seven years to be able to fulfill all obligations dictated by the government, not counting financial ‘assistance’ to social programs and such vagaries as the Sochi Olympic Games. The ever increasing bonuses of the company’s top managers have also to be considered. 

There is a silver lining in this dark cloud. In an unprecedented gesture Gazprom has admitted it could not carry out the government’s order and start building the Power of Siberia until a gas supply contract with China was in place. Such considerations had not prevented the company before from investing in the Sakhalin-Vladivostok pipeline… It seems the situation is really bad. 

Can the shortage of cash stop South Stream? 

Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.