“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."
Monday, October 20, 2014
What have we here?
Total CEO De Margerie Dies in Moscow Plane Crash, Interfax Says
By James PatonOct 20, 2014 7:29 PM ET
Christophe de Margerie, chief executive officer at Total SA (FP), Europe’s third-largest oil company, died in a Moscow plane crash, Interfax reported.
The 63-year-old CEO died at Moscow’s Vnukovo airport when a business jet crashed, Interfax said citing an unidentified law enforcement official. All four people on the plane died and were French citizens, Interfax said.
De Margerie started his career in Total’s finance department in 1974 and took over as CEO at the French company in February 2007, when that post was split from the chairman’s.
Before becoming chief executive, de Margerie, known by the nickname “Big Mustache,” because of his curved mustache, oversaw exploration and production and headed up Total’s business in some of the world’s political hotspots including Iraq, Iran and Myanmar.
In October 2014, the Russian economy set a number of negative records. The ruble’s exchange rate against the U.S. dollar for the first time exceeded 40 and reached 52 against the euro, which forced the Central Bank to spend several billion dollars on intervention. Political analyst Tatiana Stanovaya analyzes the key risks currently facing Russia’s economy.
Since the beginning of Vladimir Putin’s presidency, Russia has not faced such dangerous and destructive processes in the country’s economic and financial spheres. The country is currently entering a zone of economic turbulence, making it extremely difficult to make medium-term forecasts about its future. The year 2014 may turn out to be one of the most difficult in recent years from the point of view of the risks facing the country’s economy.
Let us try to describe the five key types of risk the country is facing. The first category of risk is geopolitical, embracing the entire complex of sanctions against Russia and the “containment policy” adopted by the United States, the European Union, and a number of other countries with regard to Russia. Analysts from the Raiffeisen Bank, one of Russia’s major banks, expect that the sanctions will result in a fall in Russia’s GDP by 0.3 percent in 2014. According to the Russian Finance Ministry, Russia’s balance of payments has suffered a shock equal to 2 percent of GDP as a result of growing geopolitical tensions. Furthermore, the Russian government has as good as acknowledged that the country could fall into a recession.
According to forecasts by Fitch Ratings, consumer price growth will reach 7 percent in 2014 before declining only slightly to 6.8 percent in 2015 and 6 percent in 2016. The ratings agency also says that the international restrictions introduced with regard to Russia and the measures the country has taken in response have negatively affected the business environment, resulting in a falling value of the national currency, accelerating inflation, rising interest rates, accelerating capital outflow, the aggravation of structural flaws, and an increasing risk of recession as well as of Russian companies being cut off from international capital markets. According to Fitch, the capital outflow from Russia in 2015 will reach $100 billion. On October 15, experts from the Center for Macroeconomic Analysis and Short-Term Forecasting declared that Russia is experiencing a systemic banking crisis that will likely only deepen in the coming year.
These are only preliminary estimates. As became clear in late September, the European Union does not intend to review its sanctions against Russia despite the relative peace in Ukraine’s eastern regions. Russia still has not complied (and seems unlikely to comply) with the West’s primary demand that it pull its troops from Ukrainian territory. This means that geopolitical risks will remain the same and will produce further depreciation of the ruble, rises in inflation and capital outflow, and investor disappointment.
The second type of risk currently plaguing Russia is systemic risk, which has only become more acute in the face of external shocks. Systemic risks include the country’s high corruption level, ineffective ruling system, weak government, poor quality of lawmaking, and lack of parliamentary, civil, and media control.
For the last two years, Russia has been striving to implement Putin’s “May decrees,” issued once he was inaugurated as the country’s president for the third time. Crisis tendencies in the economy that were obvious even before the Ukrainian revolution and the annexation of Crimea have made this program impossible to implement. The government, however, does not seem able to come up with a different plan.
“Oligarchic risks” are connected with the desire of the businessmen close to Putin to distribute assets among themselves and at the same time obtain privileged working conditions.
The third category of risks is connected to the oligarchs. Western sanctions that have made it impossible for businesses to get long-term loans from abroad and have frozen relations with foreign investors have placed enormous pressure on businessmen from Putin’s close circle as well as on the state companies on which “Putin’s economy” is based. The U.S. energy giant ExxonMobil decided to withdraw from its joint ventures with Rosneft in the Arctic. Similarly, the French oil and gas company Total suspended its joint venture with Russia’s Lukoil to explore hard-to-recover oil in Western Siberia.
Under these rapidly deteriorating economic conditions, Rosneft asked the Russian government for 1.5 trillion rubles from the National Welfare Fund (NWF), an account created to service the debts of the Russian Pension Fund. The Russian Ministry of Economic Development recently approved the allocation of 150 billion rubles ($3.75 billion) from the NWF to Novatek, Russia’s second-largest gas producer, for the development of the Yamal LNG project to tap the resources of the South Tambey gas field. Gazprom is also facing difficulties and has announced that it will considerably decrease its production in the coming year.
The consequences of economic difficulties are not only financial. According to many observers, the much-publicized arrest of Vladimir Yevtushenkov, chairman of the Russian conglomerate Sistema, is connected with Rosneft CEO Igor Sechin’s ambitions to get his hands on Bashneft, an oil company owned by Sistema. The State Duma is considering a law that would allow Russian citizens whose foreign-held assets were frozen as a result of “unlawful decisions of foreign courts” to demand compensation from the Russian budget. This initiative, which was previously rejected in March 2013, was revived after the Italian government decided to freeze the assets of Arkady Rotenberg, an influential Russian businessman connected with Putin. If this law is adopted and all people blacklisted by the United States and the European Union seek compensation, it is hard to imagine the consequences for the Russian budget.
In other words, “oligarchic risks” are connected with the desire of the businessmen close to Putin to distribute assets among themselves and at the same time obtain privileged working conditions. These measures are being offered as a sort of compensation for the damages caused by sanctions—compensation that would be paid by taxpayers who still believe that Russia is surrounded by enemies.
The fourth category of risk is related to negatives conjunctures regarding energy markets. On October 16, Brent oil prices dropped below $83 a barrel, a historic low since 2010. Considering that Russia needs an oil price of around $90 a barrel to balance its budget, this low price poses a serious risk to the country’s economy. According to the Russian Finance Ministry, low oil prices could shave 2 percent off Russia’s GDP and reduce the value of its exports by $55 billion a year. “The current situation is the payment for the soft policy of the last few years,” said Maksim Oreshkin, head of the Finance Ministry’s Strategic Planning Department. He added that if the oil price was set at $80 a barrel when calculating the budget, the Russian economy would not notice any shocks when oil prices dropped.
Finally, the fifth category of risk is sociopolitical. Polling and sociological research organizations, including the Levada Center, are not currently recording any shifts in public attitude that could provoke the government’s concern. However, sociologists note that the population sees the rise in prices as a major social issue. The effort to halt the rise in prices after the introduction of an embargo on products from the European Union and Norway proved impossible. The government keeps saying that this situation is only temporary, but Russians see a different picture in stores. The obvious weakening of the ruble has made things worse: the population’s profits and purchasing power are decreasing, while basic necessities are becoming more expensive.
Former Finance Minister Alexei Kudrin recently declared that the window of opportunity to introduce reforms and restore economic growth in Russia has closed under the pressure of Western sanctions and a new election cycle. The country is facing several years of stagnation on the brink of recession in the face of a lack of political will to generate change. However, stagnation is not the worst thing that the country might face if the current tendencies continue to develop. The inertia of Putin’s regime is becoming the main threat to its stability in the future, and if a social and economic crisis were to be provoked by the cumulative effect of the aforementioned risks, there exists no “vertical of power” that could prevent an internal explosion from happening.
The Institute of Modern Russia (IMR) is a nonprofit, nonpartisan public policy organization—a think tank based in New York. IMR's mission is to foster democratic and economic development in Russia through research, advocacy, public events, and grant-making. We are committed to strengthening respect for human rights, the rule of law, and civil society in Russia. Our goal is to promote a principles-based approach to US-Russia relations and Russia's integration into the community of democracies.
IMR is a federal tax-exempt Section 501(c)(3) public charity, incorporated in New Jersey.