Russia's Dysfunctional Economy Hurts Its Energy Sector

Russia is a difficult country to analyse. It is the largest nation on Earth, rich in natural resources and human resources. And yet it is burdened with dysfunctional government, a dysfunctional economic and legal system, and an atmosphere of vague despair that lingers despite multiple changes in leadership over the decades.

The Russian market this spring fell faster than other so-called BRIC countries of Brazil, Russia, India and China and since mid-March is down 18.8 percent. Global oil prices have slumped, reducing expected earnings.

But even taking earnings into account, investors take a dim view of Russian equities. The Russian stock exchange now trades at an average price to estimated earnings ratio of 4.28, compared with the MSCI Emerging-Markets Index average.

It is a glum statistic for Russia, particularly as President Vladimir V. Putin is planning a wide-ranging sale of state assets to raise money for increased military and social spending promised during his campaign. The price-to-earnings ratio comparison means that, statistically, a company that mines gold or pumps oil in Russia is worth less than half as much as a company that extracts the same amount of gold or oil just as efficiently in Brazil or Indonesia.

For all the value in the Russian economy, this wealthy industrial superpower cannot convince investors that it is safe place to put money — even an oil company is a hard sell. _NYT

No wonder. When wealthy Russia cannot convince insurance companies to insure joint projects inside Russia, of course it will not be able to convince most investors to take the huge risks of exposing valuable assets to the kleptocratic Russian bear. The Russian government treats all assets -- public or private -- as its own little treasure chest of goodies.

Sergei Aleksashenko, a former deputy finance minister, said in an interview that Russian energy companies are routinely subjected to this “system of unofficial requests,” from the Kremlin — for financing everything from presidential palaces to ski resorts to military installations.

“It doesn’t really matter what it is for,” Mr. Aleksashenko said. “You receive a request and you cannot refuse.” _NYT

Mr. Putin and his friends have their fingers in all the concentrations of wealth and power inside the country. The corruption takes place overtly and covertly, legally and quasi-illegally. It is organised crime on a massive scale, and shows no sign of being curtailed -- particularly as long as weak and inept clowns such as US President Obama are in charge of the western bloc.

Based in the Siberian city of the same name, Surgut is a private company but managed by a Soviet-era director who is close to Mr. Putin. It sells much of its oil, about $127 million a day based on average prices for Russia’s export blend oil, Ural Crude, last year, to a similarly opaque commodities firm called Gunvor based in the Netherlands and co-owned by Gennady Timchenko, another longtime acquaintance of Mr. Putin.

The company has emphasized other measures of success than stock price, including high salaries for employees and a favored statistic of Soviet oil ministers but not modern petroleum analysts: the number of meters of well bore drilled. Surgut has yet to publish its 2011 annual financial report on its Web site but, in a press statement, made public that it had drilled 4.75 million meters last year.

The owners of 70 percent of the company remain a mystery. In conference calls with analysts, the company has said its own executives own a majority of the shares... _NYT

More at link above.

Russia is undergoing a demographic collapse of its core population. The country is a public health disaster. Its military and military-industrial infrastructures are rusting and crumbling under the weight of corruption, neglect, and nepotistic incompetence. And Russia's energy infrastructure -- desperately in need of foreign capital and expertise -- is going the same way of slow motion collapse. Unless something of significance changes.

Stay tuned.