The real price of this war is future of Russia
Weekend essay, April 10, 2022
Demolishing the future
When describing the political regime built by Vladimir Putin in Russia, I use the following definition: It is an absolute monarchy without any restrictions, in which the regime of the succession of power is not defined. The second part of my definition plays a far more critical role than the first. The existence of the institution and rules of succession to the throne in a monarchy objectively creates political forces that protect the future interests—at the head of this bloc stands the heir. He is to rule the country in a few years. It is unacceptable for him to use all the state’s resources to solve today’s problems without paying attention to those problems that will become evident. One of the most prominent examples of this behavior is the creation of sovereign wealth funds in oil-producing countries, where rulers are thinking about how their country will live in the post-oil era.
In Putin’s Russia, there is no heir apparent. His appearance would immediately cause a split in the ruling group, as happened in 2008-2012 when Putin had to share power with Dmitry Medvedev. Therefore, no one in Russia, including Putin himself, knows whether he will hand over power and, if so, to whom and when.
The lack of an institution for the succession of power in Russia means that the decisions made by Putin and his entourage, while bringing him immediate benefits, deprive the country of future opportunities that are tens or hundreds of times greater than the significance of today’s acquisitions. In 2000-04, Putin stripped the citizens of the Russian regions of their land. Putin took away the right of Russian regions to elect their governors and representatives in the upper house of Parliament, which turned Russia into a unitary state in which citizens cannot influence those who should solve the problems they face. To consolidate this construct, in 2003-2008, Finance Minister Alexei Kudrin implemented a fiscal reform, as a result of which the regions and local authorities lost financial autonomy and became permanent beggars. In 2013-14, at the initiative of Finance Minister Anton Siluanov and Bank of Russia Chairman Elvira Nabiullina, Russia destroyed the system of funded pensions, which was the basis of the strategic transition from the solidarity pension system, invented by Bismarck 150 years ago, to the modern one built on pension savings.
By gaining total control of the Russian media space, Putin has begun the destruction of the moral and ethical constraints that were hard-won in post-Soviet Russia. Today, most Russians believe that a military invasion of Ukraine is justified simply because that country wants to go its way into the future. Today, Russian students in schools and universities think it is right to write denunciations about their professors who say the war against Ukraine is unfair. Today, parents of young Russians inform the secret police that their children are watching Ukrainian videos telling the truth about the war. Today, Russian soldiers torture, rape, and kill Ukrainian civilians, including women and children, and send home packages with what they have seized from their apartments.
It is well understood that not all Russians welcome the war. To keep their voices out, Putin calls them national traitors and demands law to criminalize any attempt to condemn the war and spread truthful information about what is happening in Ukraine. By removing moral and ethical constraints, Putin provokes all the darkest and meanest things in human nature to come to the surface. At the same time, he orders the police not to punish his supporters in any way but to be endlessly cruel to his opponents.
Putin’s decision to invade Ukraine severed thousands of threads that linked the Russian economy to the world economy, severed ties between Russian scientists and their foreign counterparts. The Western sanctions imposed on Russia have turned the country into something in between Iran and North Korea. But all this does not bother Vladimir Putin. He understands that he is mortal. Therefore, he does not care what state Russia will be in after he departs from the historical scene and what price several generations of Russians will have to pay for his adventure.
Putin’s system has no future—it will disappear with Putin gone. Perhaps Putin is aware of this and is doing everything he can to ensure that Russia has no future either. Of course, this naive wish will not come true, but future Russia will undoubtedly become a problem for the entire civilized world.
No embargo yet, but already there are problems
European politicians continue to debate whether their countries can withstand abandoning Russian energy resources if a decision is made to impose an embargo on their imports. Meanwhile, Russian oil producers have begun to encounter problems caused by the refusal of many large companies to buy Russian oil. For example, they have discovered that Russia has practically no storage facilities where they could send the excess oil, and that their construction might take years. Igor Shpurov, general director of the State Reserve Commission, spoke about this problem.
“One of our proposals is to create underground oil storages similar to underground gas storages, which create such a buffer today, and the gas industry feels better in this sense than the oil industry... Our underground storages are also possible today, and similar storages can be created in saline basins with the same or higher capacity... It can be done fairly quickly, but today we need to prepare feasibility studies and pre-project studies of such storage. Even if it is created in two to three years, at least it must be done.”
I am ready to believe Igor Shpurov that it is possible to create oil storage facilities in such a time. But, in my opinion, this will not solve the problems of the Russian oil industry in any way. First, these problems have already started to appear; and because there are no storage facilities, companies will soon have to reduce production with unclear prospects for its recovery. Second, if the sanctions pressure on Russia continues, “excess” oil will appear much faster than storage facilities will be built.
Signals of problems for Russian oil companies appeared last week. The TAIF-NK oil refining complex in Tatarstan announced the suspension of operations due to the lack of sales of finished products and the filling of the company’s storage facilities. The primary consumer of straight-run gasoline (naphtha) produced at the company, Nizhnekamskneftekhim (NKNKH), a part of SIBUR, announced that it had stopped its purchases after being included in the sanctions lists.
“Since the end of February, the company has been operating under unprecedented trade and logistical restrictions. This has already led to an actual reduction in exports to the European market, where a significant portion of NKNK’s products was sold (more than 35%), including the forced suspension of contracts with individual consumers. The continued accumulation of raw material and finished product residues in warehouses creates a high risk of production at least partial [shutdown].”
In the current situation, TAIF-NK is forced to break its agreements on the supply of other oil products. The enterprise processes about 8 million tons of oil a year. Still, naphtha, which accounts for only 16% of production, is the result of the first refining, without which further refining is impossible. Unable to stockpile naphtha, the refinery has to shut down all its refining units.
LUKOIL, Russia’s largest private oil company, faced a similar problem when it began to experience severe problems with export sales of fuel oil.
The head and largest shareholder of the company, Vagit Alekperov, said in a letter to Deputy Prime Minister Alexander Novak that the sanctions “resulted in a sharp decrease in the volume of fuel oil shipments and, consequently, in a surplus of this fuel in storage facilities.” According to Alekperov, filling the storage may lead to refinery shutdowns and reduced production of all types of petroleum products. To avoid this, LUKOIL wants to redirect excess fuel oil to power plants and suggests temporarily abolishing high fines for adverse environmental impact.
I have doubts that the government will support LUKOIL’s proposals: On the one hand, using fuel oil at power plants will reduce gas consumption (the two types of fuel are technologically interchangeable); on the other hand, using fuel oil will lead to a sharp increase in the cost of electricity.