20 years under Putin: a timeline

The Russian government has “developed” an unprecedented level of know-how in extracting resources in Eastern Siberia and the Far East. In the near future, a new state corporation is slated to get control 60% of the territory of Russia, including the largest oil and natural gas deposits, railroads, forests, and mines in the country. The corporation will essentially function as a state-within-a-state.


Left to right: Sergei Shoigu, one of the architects of the new state corporation, and the territories of Eastern Siberia and the Far East


According to Russian analysts, there are 1.2 to 1.8 trillion tons of fossil fuels and brown coal in Eastern Siberia and the Far East; the total balance reserves of iron ore number 17.7 billion tons; there are 954 million tons of known reserves of oil; and 64.3 trillion cubic meters of natural gas. The region has one of the largest gold deposits in the world (140 tons extracted annually) and is also one of the richest in diamonds (2 billion dollars worth are extracted annually.) Ninety five percent of all expected tin resources in the country are in the Far East. The hydroelectric potential of Eastern Siberia has no analogue in the world in terms of total reserves (848 billion kilowatt-hours), or in terms of concentration. The hydroelectric potential of the Far East region is 270 billion kilowatt-hours. Beyond that, there are the forest resources: in Eastern Siberia, they make up 27.5 billion cubic meters—40% of the reserves Russia-wide; in the Far East, they number 11 billion cubic meters.

The idea of creating a new state corporation is tantamount to the appearance of a kind of new political super player—be it a business or a regulating body; most likely, both one and the other at the same time—that takes on the functions of a government agency. The corporation will determine which private companies will develop resources in Eastern Siberia and the Far East and on what terms, how much the ‘price of admission’ will be, and make the rules for regulation procedures.

IMR has already predicted that with Vladimir Putin’s return to the presidency, the gold age of state oligarch will also return, and these figures will once more be able to breath easy following the “interim rule” of Dmitry Medvedev. The world markets have stabilized, oil prices are also pretty stable, and petrodollars are streaming into the Russian budget, which means that there are sufficient assets to be spent on extracting natural resources from the eastern part of the country. In Russia, state-controlled corporations are legal entities that are allowed to appropriate asset contributions from the government without having to account to the government or shareholders, since the corporations, and not joint stock companies,  have full control over all assets. It is difficult to disagree with Stanislav Belkovsky, who recently wrote that, “the country seems to be controlled by so many mischievous hands, there is no way to keep track of them all.”

The new state corporations will be, along with everything else, outside of the jurisdiction of Russian law. The Ministry of Economic Development has proposed to release corporations from the obligation of paying federal taxes on profits, mineral extraction, or water taxes. They will also not have to pay regional taxes on property, land, and transportation for five years. Specifically for the purposes of this corporation, the procedures regulating urban planning and land relations will be simplified. The new state corporation will receive substantial tax breaks, but it will not be subject to the law on bankruptcy. Furthermore, “in realms essential to the realization of the investment project” it will be able to issue licenses for mineral and forest resources without any competition.

The Ministry of Economic Development proposed turning all administrative income from the National Welfare Fund into the asset contribution for this new corporation within the first ten years of its existence. In other words, the state oligarchs ambitions will be payed for by the future retirees.

It is no secret that the size of the country has always been Russia’s great boon and burden. A significant portion of Eastern Siberia and the Far East have dramatically underdeveloped infrastructure, difficult-to-extract resources, and under-populated expanses with economically disadvantaged people who are deprived of access to the most fundamental government services. For centuries, the eastern part of the country has remained on the periphery of socio-economic development.

Only 18.3% of the total Russian population lives in Siberia and the Far East; they number 26 million people. The average population density in this region is 2 people per square kilometer. Despite the social, industrial, and infrastructural underdevelopment of the area, it is the chief source of oil, natural gas, coal, rare and base metals, gold, silver, and diamonds in the country. For some, this is a point of pride; for others, this serves to support the argument that Russia is doomed to remain a nothing more than a supplier of raw materials on the world market.


Mineral resources in Yakutia


In Siberia, nature’s splendor is paired with complete social degradation. Siberian filmmaker Slava Ross' Siberia. Monamour, which came out in 2011, in part deals with this phenomenon. From 1991 to 2010, the region lost nearly 22% of its population. This is an area of stark contrasts: a handful of rich but large cities with a higher quality of life than the average across Russia exists side by side with centuries-old tribal and familial social structures on the very outskirts of Russia. Many nationalities continue to live according to their traditions, maintaining subsistence economies based on hunting, fishing, and herding reindeer, folk medicine, and education that has nothing to do with modern systems. In areas of Eastern Siberia and the Far East, there are eight active language groups and over 100 languages are spoken. Historically, the relationship between these areas and Moscow has entailed the exchange of raw materials for state paternalism with the freedom to preserve their ethnic identity.

Since tsarist times, Eastern Siberia and the Far East have been conquered on a so-called “voluntary-compulsory basis”: first, Russian Empire would took over the new territories and extended its borders to the East. Then, in the 1920s and 1930s, USSR forced collectivization on the people, changing their way of life. Finally, Russia used and continues to use up these people’s resources, mainly exporting them and without creating any added value. However, neither in Soviet times nor today has the conquest of Eastern Siberia and the Far East entailed bringing technological, socio-economic, or industrial progress to the region. Eastern Siberia and the Far East remain Russia’s cellar, where, due to geographic, climate, socio-historic, and economic factors, the cost of the plunder, not to mention industrialization, remains too high. In addition to this, there are a number of geopolitical issues at play: the incredible distance of the region from the administrative center (Moscow) and the eternal competition for economic influence with China. However, from the perspective of the Far East, the situation is very different: they are very upset at the federal center’s crude politics in their region, which they believe is what pushes their elite and general population into China’s arms. Today, governors of the eastern states blatantly blackmail the center, threatening to build stronger ties with their Chinese neighbors if Moscow doesn’t provide sufficient economic support.

The new crop of ambitious plans for breaking the soil began appearing in 2003 when, at the beginning of the prime of Putin’s regime, a new breed of elites started flexing their muscles. These were the state oligarchs. The tempting resources of Eastern Siberia and Far East (including deposits that were controlled by private corporations) promised billions in profits on the condition that budgetary funds could be allocated toward their extraction.

The first, albeit unsuccessful, attempt to mobilize government forces toward corporate interests in the eastern regions of the country were undertaken by Gazprom in 2003. At the time, against the backdrop of the campaign against Yukos, Gazprom, together with certain state and operatively state companies (namely Rosneft and Lukoil), put forth the initiative to create a consortium for developing deposits in Eastern Siberia. By the beginning of 2004, Gazprom, Rosneft, and Surgutneftegaz had even signed an agreement concerning its creation. As the president of Rosneft Sergey Bogdanchikov said at the time, the triumvirate wanted to receive open acreage licensing in Eastern Siberia. However, at that time, the conversation concerned complex extraction of oil and gas deposits in Eastern Siberia and the Sakha Republic,  which included the Chayadinsk, Kovykta, Verkhnechonsk, Talakhan, and Srednebotuobin deposits.  Three of the deposits on this list belonged to private corporations, which unequivocally set off the alarms on the future limits that would be imposed on private ownership in the interests of large state-sponsored companies.

The consortium was only partially realized. While the large state corporations indeed received control over the largest deposits (Kovykta ended up being purchased by Gazprom after several years of twisting the arms of privately owned TNK-BP; the Chayadinsk deposit was also transferred into the possession of Gazprom from a open acreage fun). On the other hand, the growing muscles of the state corporations proved incapable of withstanding competition amongst themselves, and the members of the consortium simply fell victim to in-fighting.

Gazprom came up with the development scenario for Eastern Siberia and the Far East, and it was to be implemented under the auspices of Gazprom. This is what Rosneft was dissatisfied with; at the time, the company was still being established by, among others, the then-Presidential Aide Igor Sechin, the chief architect of the Yukos affair, who planned the takedown of the largest oil company in Russia and the shady transfer of Yukos' enterprises to Rosneft.


Rusneft assests: in yellow, assets appropriated from Yukos; in blue, Rosneft's original holdings


Russia is to pay China with those same East Siberian resources for this “present” from Rosneft. Gazprom was even scheming to merge with Rosneft with all of its bonus assets appropriated from Yukos. But the all-mighty Sechin, patron saint of Rosneft, turned out to not only be a tough match for the gas monopoly, but he even surpassed his gas competitor in terms of influence and ambition. Today, none other that Sechin (the Kremlin's main mover and shaker) proposes dismantling the Gazprom monopoly on the pipeline, and clearly, not out of liberal values.

It is interesting that the new plan for the super-corporation was not invented by Gazprom or by Rosneft, but by a long-time member of the Russian government, the former Minister of Emergency Situations Sergey Shoigu, appointed the Governor of the Moscow District by Dmitry Medvedev. Shoigu had proposed the creation of a new state corporation for the development of Siberia and the Far East to be paid for by the National Welfare Fund. Incidentaly, the governor of the Moscow District has also suggested moving the capital to Siberia.

The features of the new corporate monster are not yet being discussed officially. However, the business press is already buzzing with details that make even the most seasoned Russian elites’ hair stand on end. Finance Minister Alexei Kudrin, who had been kicked out of the Cabinet of Ministers by Medvedev, unexpectedly turned out to be the former President’s greatest  ideological ally in his fight against state corporations. According to Kudrin, he wouldn't believe that a law granting a corporation such laissez fair was in force, until he saw it on paper. Kurdin added that one of the gravest consequences of creating this state corporation will be the degradation of the financial climate in the country. As for developing Eastern Siberia and the Far East, the former Minster of Finance says it will slow down as a result: “Creating a company that is capable of realizing any private project using state and administrative resources on a preferential basis will mean that all other investors that wish to work in this region will have to compete with a company that has these advantages.” Thus, private investments in this sector would decrease.

The Ministry of Economic Development proposed turning all administrative income from the National Welfare Fund into the asset contribution for this new corporation within the first ten years of its existence. As of March 1, 2012, this means 2.6 trillion rubles. The National Welfare Fund had been created in 2008 in order to provide co-financing for independently accrued pension savings and to cover the deficit of the Pension Fund. In other words, the state oligarchs ambitions will be payed for by the future retirees.

Part of the asset contribution into the corporation may also include shares from other Russian state corporations. According to Kommersant, discussions are underway about major companies such as OAO RZD (Russian Railways) Alrosa, and Inter RAO, among other energy companies, which would contribute more than 500 billion rubles all together.

In the grand scheme of things, creating state corporations is nothing but a sign of the weakness and inefficiency of the state. For every problem, a new institution or special post is created simply because the traditional institutions or mechanisms don’t work. The function of government agencies are taken over by state corporations whose directors have built their careers around physical proximity to and the personal trust of the “nation’s leader.” For some reason, Putin seems to think that no one but him and his closest associates can raise Russia off its knees and lead it down the optimal (in their view) path of development. Putin’s twisted worldview is clearly fixed on the idea that he is surrounded by enemies. Putin seems afraid of laws, afraid of the market, afraid of actual competition, which, incidentally, his trusted associates don’t guarantee him beating. Because of this, he is unwilling to even analyze more logical strategies for developing Eastern Siberia and the Far East. Why not create the conditions that would allow for the flow of private capital and foreign investment into these regions? Why not invest in developing the infrastructure or put the latter into private hands? Why not develop programs for the social welfare of the people who remain in undeveloped and underdeveloped regions? Simply out of the fear of losing control, of coming up against a more effective and politically autonomous player. Loyalty is more important than efficiency—that is Putin’s and his associates’ fundamental principle of leadership.


Good plan, Comrade Putin


It goes without saying that one obstacle to Russia’s development is the size of its territory, which dictates its own logic, and coincides with center’s desire to make decisions from the top down, showing no trust to regional leaders or the self-governing structures that are already in place. But in Putin’s Russia, this logic becomes hypertrophied and so distorted, that even seemingly rational ideas are turned on end and accomplish the opposite of what they intend, tearing a single legal territory in two and creating a fertile foundation for corruption on an epic scale. With this logic, Putin is making a historic mistake: by suppressing local initiatives and competition on the markets, he is creating many more conditions that could easily lead to the people’s uprising if the federal government were to find itself in the middle of a political and socio-economic crisis. More than anything else, irrational decisions create the conditions for the country falling apart at the first serious obstacle Russia may face in the future. Perhaps, in the future, it will be small territories and newly-independent states that will triumph over corruption and find the real democracy and efficient modern economy that Russians have been seeking in vane for over 20 years.