The End of Putinomics


by Owen Matthews

A dozen years of prosperity and stability have kept Russia’s leader wildly popular. Now his whole world is about to collapse.
The world is changing. Russia is not. And Vladimir Putin would like things to stay that way. Stability has been his No. 1 selling point ever since he came to power 12 years ago. Even prosperous Muscovites—people who don’t much care for their president’s brand of Soviet nostalgia, his macho nationalism, or his KGB-style crackdowns on dissent—mutter among themselves that for all his regime’s flaws, its predictability is still preferable to the wild upheavals of the 1990s.

And who can blame them? Over the past century, Russians have seen their full share of excitable demagogues, from Bolsheviks to capitalist shock therapists, all of them promising big changes for the better, and most of them dismally failing to deliver. If graphic designer Shepard Fairey were to make the equivalent of his Obama “HOPE” election poster for Vladimir Putin, it undoubtedly would say “NO CHANGE.” Th at reassuringly solid sense of permanence is why more than 60 percent of Russians say they still love Putin after all these years.

Unfortunately for the Russian president, however, change is imminent—and in a form utterly beyond his control. Two words have already begun rocking Putin’s world: shale gas. The new technology, which allows natural gas to be extracted cheaply and in previously untapped places, is about to upend not only global energy prices but also the geopolitical status quo—with Russia as the prime loser.
For more than a decade, rising oil and gas prices have kept Putin’s Russia aloft. The entire unwieldy apparatus, from massive military spending to the magical thinking of Putin’s lowtax, high-spend policies, is based on petro-wealth. When Putin was anointed as Boris Yeltsin’s successor in 1999, oil stood at $17 a barrel. Today it’s bumping along at roughly $110. Th at windfall is the secret of Putin’s economic miracle, of his popularity, and of his arrogance.
But 2013 is shaping up to be the year when the magic stops. Putinomics is in many ways like a gigantic Ponzi scheme. Free money comes bubbling out of the ground; the government and its cronies skim off a sizable chunk, and then spend the balance on keeping the people happy—subsidizing a vast and antiquated military-industrial complex, for example, thereby ensuring plenty of steady jobs for defense workers. But just like a Ponzi scheme, it works only as long as supplies of new cash keep growing.
And Russia’s fountain of loot is beginning to dry up. Although crude-oil prices have stayed pretty firm, propped up by rising Chinese demand and continued unrest in the Middle East, world natural-gas prices have fallen through the floor. In the past five years the United States has overtaken Russia as the world’s largest natural-gas producer, and U.S. domestic prices are a quarter of what Russia’s gas giant, Gazprom, has been trying to charge in Europe. Liquefi ed natural gas (LNG), another growing piece of the global energy market, is trading at half the Russians’ price, which is indexed to crude oil.

The impact is already apparent at Gazprom. The state-owned company employs nearly half a million people and accounts for 8 percent of Russia’s GDP; its taxes constitute roughly 20 percent of the state budget. And according to preliminary figures, its profits fell by half in the last quarter of 2012. Its total stock value has plunged from $365 billion in May 2008 to $120 billion as of this writing.

The road ahead looks no less grim. Although Gazprom remains the supplier for a quarter of Europe’s gas, customers slashed orders and negotiated price discounts worth $4 billion in 2012 alone. Worse, the European Union is investigating Gazprom for allegedly “preventing the diversification of supply of gas” and “imposing unfair prices on its customers by linking the price of gas to oil prices.” A $20 billion exploration project under the Arctic Sea was supposed to open Russia’s first new gasfields since the 1960s, but it has been shelved after foreign partners dropped out, citing lack of demand. For the foreseeable future, natural-gas prices are headed only one way: down.
Putin likes to think of his country as an energy superpower , and it’s true that Russia remains the world’s biggest energy exporter. But shale gas and LNG have broken Gazprom’s stranglehold on Europe’s energy supply. Th at in turn is leading to a profound shift in the relationship between Russia and Europe. A decade ago, Putin counted then German Chancellor Gerhard Schroeder among his closest friends and shared traditional Russian saunas with him (not to mention signing him up for a cushy job at Gazprom when Schroeder retired in 2005 ). But Schroeder’s successor, Angela Merkel, is not so shy about taking Putin to task for human-rights abuses.