Fri, Jan 13, 2006 - Page 9 News List

'Oil-for-skills' scheme fortifies Russian regime

For Moscow, profits from oil mean it is cheaper and safer to import knowledge and the products of that knowledge, and keep its own citizens undereducated

By Alexander Etkind

Whenever you fill up your European compact car's gas tank, or that of your US SUV, you pay as much as a Russian schoolteacher earns in a month. And every time you pay, you subsidize a regime that relies on energy, not information, as its main product. You finance the pre-modern and the inefficient, and perhaps worse; every time you pay, you may be collaborating with political evil.

Russia began 2006, the year of its chairmanship of the G8, by launching a gas war with Ukraine. Having a virtual monopoly on supply, Russia decided that it could dictate prices. But Ukraine has a virtual monopoly on delivery, so Russia blinked in this standoff as soon as gas supplies to Western Europe dropped.

Modern economies rely not on monopolies, but on competition. Contemporary Russians consume competitive products: Nestle cereals, Mercedes cars, Hollywood movies. The problem is that they do not make them.

Russians pay for this consumption from the profits of gas and oil. State-owned and private multinational companies drill fuel in Russia and sell it to Europe and North America. The government partially redistributes profits by collecting taxes and paying salaries. Gas prices are growing, and so are Russian salaries. This causes inflation, because, other than fuel, Russians do not produce much else. To avoid inflation, the government deposits a large part of its profits into a Stabilization Fund.

But, because the Kremlin does not trust its own stocks and bonds, the Stabilization Fund invests in Western securities. Thus, the government loses its chance to modernize Russian cities, roads, hospitals, and universities. But inflation still grows, as do real estate prices. Mortgages are available at outrageously high interest rates. No civil servant, military officer, or professor is able to buy even a modest apartment, unless they have an additional, often illegal, source of income. Most don't.

Russia exposes an ugly truth of our era: illiberal societies can grow just as fast -- even faster -- than open ones. Oil-rich states need global networks to sell their oil, to export their capital, and to import technologies and technologists. Among current UN members, countries with large natural resource endowments are also more likely to have a non-democratic regime.

In the 1980s, Mikhail Gorbachev warned that Soviet oil resources were exhausted. Of course, due to the Western engineering and management that became available after Gorbachev launched his perestroika reforms, the country was soon producing more oil than ever -- indeed, more than was ever believed possible -- and oil men like Mikhail Khodorkovsky arose out of the blue.

But, while machines work everywhere, managers must abide by local traditions and belong to indigenous social networks. If the cultural component is important, why share the profits with Western-minded people like Khodorkovsky? So no surprise that other managers, with better relations with those in power, now run Khodorkovsky's Yukos Oil, as well as another major firm, Sibneft.

Foreign managers don't seem to mind. On the contrary, some of these managers, such as former German chancellor Gerhard Schroeder, who now chairs a Gazprom subsidiary building a pipeline under the Baltic sea, are helping to expand Russia's oil-based imperial designs over Europe.

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