Lenin defined communism as "Soviet power plus electrification of the entire country." Vladimir Putin takes a similar view. An updated slogan for Putin's regime might read "Kremlin power plus control of the oil and gas industry."
Europe received a taste of how the Kremlin might wield that power at the start of the new year when Gazprom, the world's biggest gas company, reduced the pressure on pipelines carrying gas through Ukraine to western Europe. The decision to end subsidies to Ukraine and other former Soviet bloc states may have been Russia's legitimate right. But the take-it-or-leave-it style, the fivefold price hike and the accompanying threat to cut off supplies raised questions about the reliability of Gazprom as a growing supplier of Europe's gas – including to Britain as North sea supplies run down.
Whichever way you look at it, this was not just the action of a big gas company seeking to maximise profits – it was the Kremlin flexing its political muscles. Not quite the same, perhaps, as Khruschev rattling his nuclear rockets in Cuba, but a recognisable move from the same thuggish political repertoire.
It should not have come as a surprise. Gazprom, which was semi-privatised in the early 1990s by senior managers of the former Soviet ministry of gas, is no stranger to a "Bolshevik" style of negotiation. Its former boss, Viktor Chernomyrdin, was appointed prime minister by Boris Yeltsin and used Gazprom money to fund a political party called Nash Dom-Rossia – "our home is Russia." Wags quickly renamed it "Nash Dom-Gazprom."
In recent years, Gazprom has often cut gas supplies to Georgia, at the Kremlin's request, and built an expensive and ecologically risky gas pipeline under the Black sea rather than pay transit fees through the Caucasus. It is planning to build a similar pipeline under the Baltic to Germany rather than pay transit fees to the Baltic states and Poland.
When President Putin succeeded in persuading Gerhard Schröder to take a lucrative, high-profile job as chairman of the supervisory board of this 1,200-km long Baltic pipeline, dark historical memories were reawakened in some. The pipeline agreement was quickly dubbed the "Schröder-Putin pact" – a bitter reference to the 1939 Molotov-Ribbentrop pact whose secret provisions led to the division of Poland and Soviet reoccupation of the Baltic states.
The compromise which ended the long-simmering Ukrainian "crisis" was also more revealing about Russian energy policy than the Kremlin perhaps intended. Ukraine agreed to pay a higher "European price" for its Russian gas. But Gazprom sweetened the pill by offering additional central Asian gas for a much lower price through an obscure operating company controlled by Gazprom, with mysterious minority shareholders.
Gazprom's compromise with Ukraine came at the expense of central Asia, whose gas can only reach western Europe through Gazprom's Russian pipelines. While Russia is no longer subsidising Ukraine, the Turkmens and Kazakhs are. Thanks to its monopoly power, Gazprom was able to reduce the average price of gas supplied to Ukraine to around $95 per thousand cubic metres - nearly double what it paid before, but less than half the $230 it now pays for Russian gas.
This low price is part of the hidden cost of Moscow's political support for central Asia's authoritarian regimes and for allowing millions of "gastarbeiter" – mainly Uzbeks—to work on Russian construction sites, farms and factories. They send back remittances which keep their families alive and help dictators like Uzbekistan's Islam Karimov and Turkmenistan's Saparmurat Niyazov remain in power.
The entire Soviet economy rested on a deliberate network of mutual dependency of this kind – with little thought to economic efficiency. What Putin has done is to claw back Kremlin ownership of key energy assets, and use the bargaining power of energy ownership to reinforce the concentration of political power in the Kremlin.
This may not bode well for the future democratic development of Russia – if that is what Russians desire – but it has not harmed Putin's abiding popularity in a country which has traditionally respected a "firm hand" in the Kremlin and likes being respected, and if possible feared, abroad. Under Putin, the Duma and other democratic institutions have lost control over budgets while big foreign and local companies need Kremlin approval for their investment projects, especially in the natural resource sector.
For all Boris Yeltsin's faults, his presidency saw the rebirth of civil society institutions and attitudes. These green shoots have now been covered back up with snow. But the men in the Kremlin still act as if they were under constant threat – even though opinion polls indicate that, for now at least, most people are happy enough to leave politics to them so long as high energy prices are fuelling strong economic growth and wages and pensions are paid on time.
This also seems to be the view of foreign investors. Gazprom became the new star of the Moscow stock exchange last year – nearly tripling in value against the background of an oil-induced boom in Russian stock prices generally. The boom continued into the new year following Putin's decision to abolish the "ring fence" which restricted foreigners to no more than 20 per cent of the company's shares.
Abolition is a smart move. It only became possible after Putin had built up the state's holding to a demonstratively controlling 51 per cent. Foreign investors are now welcome to buy as many of the remaining shares as they like. Their money is needed to buy the future equity issues needed to finance badly needed investment. They invest in the knowledge that the Kremlin holds the whip hand, but thus far the prospect of future growth and higher revenues, including from Ukraine, has outweighed perception of political risk.
Like a second marriage, however, the current investor love affair with Gazprom could well turn out a triumph of hope over experience. Gazprom is a bureaucratic monster employing over 330,000 people, many of them holdovers from the Soviet ministry of gas. Despite efforts to rein in corruption, the company has been a legendary sieve – as well as a cash cow for the state, providing nearly 20 per cent of tax revenues and subsidising gas prices.
Gazprom's share price was so low until last year's buying frenzy because profits were low and existing gas reserves were running down after decades of forced production and underinvestment. Up to $100bn will need to be invested over the next decade or so to build huge new offshore projects, such as the Shtokman field in the Barents sea, on and around Sakhalin island, and up north in the frozen Arctic and eastern Siberia.
But Gazprom has changed a lot over the last two years and high oil and gas prices are only one factor. It is no longer "just" the world's biggest gas company with over 114billion barrels of oil equivalent in reserve. After its Kremlin-sanctioned $13bn purchase of Sibneft, Russia's fifth largest oil company, from Roman Abramovich last year, it is now both an oil and gas company - with ambitions to become a Russian Exxon or BP.
The big question now is whether the Kremlin, having reorganised Gazprom and oil company Rosneft into big state-owned energy corporations, will find the managerial and other skills needed to run them as efficiently as private companies seeking profit – rather than end up as dismally as their bureaucratic Soviet counterparts.
Andrei Illarionov, Putin's outspoken former economic adviser, fears the latter. He warned a year ago of the "monstrous incompetence" of the plotters behind the virtual confiscation of a majority stake in oil company Yuganskneftegaz from oligarch Mikhail Khodorkovsky in lieu of arbitrary back tax payments. Last month Ilarionov resigned in protest against the resurgence of big state corporations run by such men.
Putin has a cold-eyed attitude to foreign investors, especially in this era of high energy prices. His self-confidence has been strengthened by the inability of the international business community – not to speak of the G8 of which Putin is now chairman - to register an effective protest over the expropriation of Yuganskneftegaz. A flurry of personal diplomacy by Putin in Asia in recent months also reflects confidence that the Kremlin will be able to gain from the new competition for Russian resources from China and India.
Reinforcing this new-found confidence is the sterling performance of the Russian stock market. Ironically, share prices started to take off within days of a Moscow court sentencing Khodorkovsky, once Russia's richest man, to nine years in jail nearly 18 months ago. "Markets hate uncertainty," explains Al Breach, a leading Moscow-based analyst. "Once the sentence was read out, the uncertainty evaporated, and the market took off against a background of high oil prices, record reserves, rapid growth and rising profits." For the Kremlin this must have seemed further proof of Lenin's dictum that "the capitalists will sell us the rope by which we'll hang them."
It is hard to remember that only a year ago Putin appeared to have been knocked off course by the orange revolution in Ukraine, a pensioners' revolt at home and the emergence of a potential challenger in Mikhail Kasyanov, the former prime minister. Since then the pensioners have been quietly paid off, Kasyanov's credibility has been undermined by allegations of alleged corruption, and Ukraine has been forced to accept a politically unsettling gas price hike which strikes a severe blow at the country's traditional gas-intensive heavy industries. It is hard to imagine a more effective way of making life difficult for President Viktor Yushchenko only months before Ukraine's highly charged general elections in March.
But it remains to be seen whether, in the longer term, the Kremlin has been wise to reveal the snarling bear image to its closest neighbours, when a good-neighbour policy would probably offer greater long-term security and economic gains to both sides.
Putin's tactical dexterity also masks deeper rooted problems. These include instability in the Caucasus which spreads beyond Chechnya, a deeply worrying but largely ignored Aids pandemic, and a demographic implosion. These are some of the long-term, indirect consequences of the terrible upheavals and bloodletting of the Soviet years, which the state-controlled media prefer to ignore. Corruption is another systemic problem – and surveys show that it has increased dramatically since the Kremlin undermined the trend towards greater transparency and rule of law by its targeting of Khodorkovsky.
Barred by the constitution from standing for a third term, Putin is now focused on the succession issue. The Kremlin's control over Gazprom and Rosneft and their huge cash flows have raised the stakes. The aim of the current masters of the Kremlin is to secure the succession for a man unquestionably loyal to them in 2008, not only to ensure continuity but also the tranquillity in which to enjoy the fruits of power.
For many close to Putin, the ideal solution would be to simply bypass the constitution and for their man to stand again. An alternative would be to build up Gazprom, put Putin in charge and allow him to continue to rule Russia by proxy. Recent events indicate that this is the way things are going. But two years is a long time in politics – especially in a country where even the past is so difficult to predict.
