Political uncertainty in Russia fueling capital flight says NY-based Russian analyst

By Ted Regencia
Written for the Business and Economics Reporting Class
at Columbia Journalism School

Russian Prime Minister Vladimir Putin’s return to the presidency for the third time is causing political uncertainty among Russia’s business elite, so much so that it is fueling a capital flight, a Russian energy analyst said.

Natasha Udensiva, a visiting Russian scholar at Columbia University’s Harriman Institute, said a retreat in direct investments particularly in the energy sector could cost Russia its current position as the number one oil-producing country in the world.

“There is a lot of outflow investment coming from Russia because there is no political stability,” Udensiva said during the forum, “Russian Energy Diplomacy under Putin,” in New York. “There is a lot of doubt how [Putin] will handle the economy.”

Putin was voted back to the presidency in March with over 60 percent of the vote. He is expected to take over the post from President Dmitry Medvedev on May 7.

“Putin’s slogan in his previous terms was stability,” Udensiva said referring to Putin’s two terms as president from 2000 to 2008. “Right now this slogan doesn’t work because nobody believes in that, because the oligarchs are displeased with Putin’s way of handling the economy.”

Capital outflow hit $35.1 billion in the first quarter of 2012, almost double compared to the same period last year, the Wall Street Journal quoted Russia’s central bank last April 4. That number could balloon to more than $80 billion by the end of the year, according to the same report. If that holds true, it would be the second largest capital outflow since records were kept in 1994.

While acknowledging Putin’s role in reviving the Russian economy in the past, Udensiva, author of the paper “Geopolitics of Russian Gas,” said his attempt to hold on to power has left the electorate frustrated and emboldened the opposition.

“If the world will be organized in an idealistic way, there will be enough investment into Russia because there’s a lot of money,” Udensiva said at the forum attended by Russian scholars and international relations students.

A lot is at stake in the present political uncertainty, the New York-based Russian scholar said. Internationally, a disruption of the Russian supply of oil and gas could roil the market. For the third consecutive year, Russia has remained the top oil-producing country in the world, easing out Saudia Arabia from the top spot.

Russia is also the number one exporter of gas and largest supplier for the European gas market, supplying 25 percent of EU’s gas needs. But with Europe stagnating, that steady source of income could also contract, Udensiva said.

Meanwhile in the domestic front, Udensiva warned that Putin needs to quickly take action to reconcile public finance and the oil tax system. Russia’s Gross Domestic Product is 40 percent oil tax money. Of the total GDP, 39 percent goes to the budget for public salary.

Udensiva pointed out that the present GDP setup is not working because oil companies “are heavily overtaxed” so there is “no breathing space and financial leeway” to further develop Russia’s energy sector, which “badly needs investment and development.”

Without the needed investment Udensiva warned that Russia’s oil and gas export could suffer a steep decline by 2015 “unless something magical will happen.” “And that’s the core of the Russian GDP,” she stressed.

Already over the past four years, the tenuous GDP situation has created some tension between Russia’s Ministries of Finance and Energy, Udensiva said. Whereas the energy department wants to levy more taxes on the oil and gas companies to keep up with the budget, the Finance Ministry is pushing for lower taxes and more investment on the oil fields.

Udensiva said Putin is very knowledgeable when it comes to the energy sector, but he should not allow the current situation to go on. Instead, Putin should push for a more “decentralized” control of the industry.

“There’s a lot of talk of privatization, at least partial privatization of energy companies, because they are looking for more cash flow,” she said. “And it’s not happening.”

Udensiva pointed out that Russia is “always late” in making innovation in terms of oil and gas exploration, and it can only remain a dominant player in the energy sector if it partners with private investors from abroad to attract robust investment and acquire new technology for research.

“I think that Russia can integrate into the world market through partnerships,” Udensiva said. “They need investment, they need new technology,” she added with emphasis on investments from “foreign partners.”

But in a sign of a more open Russian market for foreign investors, American multinational company Exxon Mobil signed on Monday a $3.2 billion agreement with the Russian state oil company Rosneft to explore oil in Siberia.

According to a New York Times report, the agreement would give Russia access to modern drilling technology that would allow it to explore Kara Sea, which reportedly holds 39 billion barrels of oil and gas reserves.

It is a sign of more agreements to come, Russian and American experts told the New York Times. But as it is now, Russia remains too “timid” in welcoming foreign investors and it needs to step up its game before it is left behind in the oil production race, Udensiva said of the overall business environment in Russia.

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