Oil in Putin’s Russia, The Contests over Rents and Economic Policy by Adnan Vatansever
Recommendation
The oil sector has long dominated Russia’s economy, for better and for worse. In this study of President Vladimir Putin’s policies, scholar Adnan Vatansever delves into Russia’s oil sector through the prism of who owns the energy assets and how much the oil industry pays in taxes. Vatansever argues that Russia’s economy is more sophisticated than those of the petro-states in the Middle East and Africa, and he details how Putin imprisoned one oil executive and seized his assets, a display that caused the industry to fall in line. Though Vatansever’s plodding prose can be challenging at times, students of energy politics will find this a fascinating read.
Take-Aways
- Oil has driven Russia’s economy during the Putin era.
- Vladimir Putin tightened his grip on power early in his tenure.
- The sharp drop in the number of bills vetoed illustrates the relationship between the Duma and the Russian president.
- Putin benefited from a surge in oil prices.
- After consolidating power, Putin called the shots about the oil sector’s future.
- Even as Russia’s oil sector privatized, the government maintained control.
- Putin’s leadership team didn’t unanimously support the expropriation of private assets.
- Putin inherited a deeply flawed tax regime but then dramatically boosted tax collections.
- Tax reform shifted the tax burden onto the oil sector and off other industries.
Oil in Putin’s Russia Book Summary
Oil has driven Russia’s economy during the Putin era.
Vladimir Putin became prime minister of Russia in 1999, and his arrival coincided with a decade-long surge in oil prices. During Putin’s two decades in office, revenues from oil exports reached a cumulative $3 trillion. Putin has given some hints that he hopes to avoid the “resource curse” that afflicts nations heavily reliant on the extraction of natural resources. Many oil-rich countries in the Middle East, Africa and Latin America are “rentier states” – places where the government controls the oil industry and where there’s little effort to diversify the economic base. Russia doesn’t quite fit this mold. Privately-owned oil companies coexist with state-owned ventures, and during the Soviet era, Russia took far-ranging steps to create industries beyond oil extraction.
“Natural gas may have put Russia more often in the spotlight, but it is oil that has delivered the largest revenues for the state and the economy as a whole.”
There’s no question that Putin has grown more authoritarian during his years in power. Less clear is how oil wealth has played into Putin’s reign. In many rentier states, strong leaders use oil revenues to hold on to power. In nations where incumbents disperse power to others, the rulers often find their time in office cut short.
Putin tightened his grip on power early in his tenure.
When Putin took office, he quickly changed Russian politics. He dispatched with checks and balances and raised the profile of the executive branch in Russian politics. Scholars specializing in Russia disagree about just how much sway Putin has accrued. Professors Stephen Holmes and Eugene Huskey see Russia operating a “super-presidential” system, one in which the top executive can govern by decree and with little concern for the separation of powers. However, political scientist Matthew Shugart describes Moscow’s system as “semi-presidential,” one in which the executive branch doesn’t carry outsized weight.
Russia’s 1993 constitution gave veto power to the Duma, the nation’s lower legislative chamber. The document created roadblocks for a president attempting to overturn legislation that had already passed the Duma: The idea was that laws enacted by compromise and widespread support would generate more enduring credibility and legitimacy than policies imposed by decree from the executive office. Putin has enjoyed a more loyal base of support in the Duma than his predecessor, Boris Yeltsin. Meanwhile, Putin was more willing to confront regional governors and Russia’s oligarchs, two other sources of political friction that Yeltsin encountered.
The sharp drop in the number of bills vetoed illustrates the relationship between the Duma and the Russian president.
Prickly relations with the Duma characterized Yeltsin’s tenure. He sought to overturn one-quarter of the bills passed by the Duma, while Putin has fought fewer than 2% of measures passed by the legislative body. Yeltsin made some of his most sweeping reforms by decree. Under Putin, the cozier relations between the branches partly reflected the fact that the Duma was more ideologically aligned with Putin than it had been with Yeltsin. As a result, Putin was less apt to govern by decree.
“It is not surprising that one of Putin’s earliest efforts to consolidate power involved Moscow’s relations with Russia’s regions.”
While Yeltsin had struggled to tame regional governors, Putin quickly subdued them. In one significant change, Putin signed off on a rule giving him the authority to remove governors being investigated for breaking federal law. Previously, governors had enjoyed parliamentary immunity, but the new legislation brought the governors in line. By 2003, nearly all of them had joined Putin’s United Russia party and expressed their fealty to him. Putin also removed the governors’ access to public money; he centralized budget authority so that he controlled the regional purse strings. In a final power move, in 2004 he ushered through a law allowing Putin himself to nominate all governors.
Putin benefited from a surge in oil prices.
Russia has long been one of the globe’s most prolific producers of oil. It was the world’s top producer for a time in the late 19th century, and then again in the 1970s and in 2007. Oil makes up a huge part of Russia’s economy, and Putin’s timing was nearly perfect. In 1999, shortly before he became president, the price of oil had dipped below $10 a barrel. But prices rose sharply after Putin took office, topping $100 a barrel during the period from 2011 to 2014. Even when oil prices retreated, the ruble lost value, which helped Russia’s oil exports continue to grow.
“Sudden drops in the price of oil have typically triggered depreciation of the ruble.”
During the energy boom years, oil and gas took on an outsized role in the Russian economy, contributing 47% of overall revenues by 2008. Even after the collapse of the Soviet Union, the government maintained far more control of Russia’s oil sector than countries did in the West. In 1992, Yeltsin called for the former Soviet oil industry to be organized into four companies – Lukoil, Yukos, Surgutneftegaz and Rosneft. The plan was that these companies would be sold to private interests but that the government would retain a significant stake.
Even as Russia’s oil sector privatized, the government maintained control.
During the 1990s, ownership of the Russian oil sector was transferred from the state to private investors. Unlike other oil-rich nations, Russia didn’t welcome foreign investment. While dozens of international companies invested in Russia’s oil sector, joint ventures with outside firms accounted for less than 7% of Russian production in 1999, well below the levels seen in other nations. Meanwhile, even as Russia’s oil sector was in need of foreign investment, its newly private oil giants began making their own investments abroad.
“Unlike governments adhering to the Anglo-American model, the Russian government remained inclined to regulate prices in the oil sector during the 1990s.”
Meanwhile, Moscow never relinquished command of the oil industry. In most modern economies, the public sector confines its oversight of energy to such ancillary issues as safety and environmental concerns; it’s up to the private sector to do the hard work of drilling, refining and transporting fuel. Russia, on the other hand, kept oil pipelines in state hands. Moscow also held onto the ability to control petrol prices. When Putin came into office in 1999, he seemed to embrace the new privatization ethos, making no moves to nationalize the oil sector. In 2003, he allowed British Petroleum to invest nearly $7 billion in a major oil company. However, that proved to be the first and last major investment in a Russian oil firm by a foreign entity.
After consolidating power, Putin called the shots about the future of the oil sector.
Putin’s power moves in his first few years in office placed him firmly in charge. Oversight by legislators and regional governments had all but disappeared. Putin’s growing power, combined with Russia’s weak rule of law, meant the executive had carte blanche. Putin enjoyed strong public support, and he often mentioned in speeches that the private sector had gotten formerly state oil assets for a pittance.
“Public animosity against Russia’s private oil companies was apparent; government polls illustrated strong support for nationalization of the country’s leading sectors in general and the oil sector in particular.”
In one particularly fateful episode, Mikhail Khodorkovsky, the head of private oil giant Yukos, was imprisoned in 2003. He remained jailed for a decade. His shares were seized by the government without compensation and then sold to Rosneft. In a similar move in 2014, Putin’s regime placed a top executive of oil company Bashneft under house arrest and then took its assets and sold them to Rosneft. Another oil company, Sibneft, was also nationalized. The dramatic reversal of 1990s policies underscored the shifting political realities in Russia. During the 1990s, Yeltsin’s support was tenuous, so sweetheart deals that enriched elites bought him much-needed backing. But the calculus changed under Putin: He no longer needed the support of oil oligarchs, so he took their companies. The Yukos takeover in particular sent the message that there would be no more private ownership of oil assets, merely “quasi-private” oversight that existed at Putin’s whim.
Putin’s leadership team didn’t unanimously support the expropriation of private assets.
Putin quickly vanquished any potential foes in the legislative branch, but some members of his brain trust opposed his strong-arm tactics. His inner circle included a group of former Yeltsin advisers known as “the old Kremlin elite.” While these officials had supported Putin, they also backed the Yeltsin-era privatization of oil assets. They argued in favor of a Western-style oil industry with strong private companies. These advisers included Mikhail Kasyanov and Alexander Voloshin, who opposed the imprisonment of Khodorkovsky. They worried that, as the world watched, the move had sent a bad message about property rights and the rule of law in post-Soviet Russia. Their protests were in vain – Kasyanov was sacked and Voloshin resigned.
“By the time Putin was sworn in for his second term as president, the vestiges of the old Kremlin elite were removed from Russia’s executive branch.”
Another faction within the executive branch was known as the siloviki. This group shared Putin’s sense of outrage about the asset privatizations of the 1990s. Restoring some semblance of justice in the oil economy required renationalizing oil assets, this cohort argued. The ethos of the siloviki melded nicely with Putin’s own worldview. He wanted more state control over an unruly economy and a more prominent position for Moscow on the world stage.
Putin inherited a deeply flawed tax regime but then dramatically boosted tax collections.
During the 1990s, Russia’s scheme for taxing private oil producers was a patchwork. Corporations were able to avoid billions in taxes due to a variety of factors, including myriad loopholes and little capacity to enforce tax laws. What’s more, any given company’s tax bill relied in large part on its ability to lobby the executive branch. Russia’s tax structure also allowed oil producers to artificially depress revenues by citing low oil prices or by selling oil to affiliates in offshore tax havens.
“The year 2003 was a turning point for oil companies’ ability to take advantage of tax minimization schemes.”
Putin began to address the tax loopholes as soon as he took office. He lowered many taxes in an effort to improve compliance, and he also simplified the types of taxes, shortening the list from more than 200 to just 15. When Khodorkovsky was jailed, one of the accusations against him was underpayment of taxes. That led other oil executives to abandon their use of tax havens and to become more meticulous about following tax laws. In just a few years, government revenues from the oil industry soared from less than $6 billion to more than $83 billion. The new tax system also captured most of the price increases above $25 per barrel; for every dollar of revenue above that threshold, the state collected 86 cents in taxes. The high tax rates disincentivized investment in new production.
Tax reform shifted the tax burden onto the oil sector and off other industries.
By 2005, oil and gas revenues generated nearly 37% of government revenue, up from 8% in 1998. The shift was partially a result of rising energy prices but also because of Russia’s new tax regime. Tax revenues from other parts of the economy declined. While the nation maintained fiscal discipline in the early 2000s, the government’s reliance on oil and gas increased. By 2008, energy revenues generated nearly half of federal spending. The 2008 financial crisis kicked off a volatile time for Russia’s oil-dependent economy. Oil prices crashed, the ruble cratered and the Russian stock market shed much of its value. Putin’s response was a generous stimulus package.
“The last leader in the Kremlin to find himself with such vast oil windfalls was Leonid Brezhnev. It is remarkable that Putin and Brezhnev have been the two longest serving leaders since Stalin.”
Even as oil prices bounced back, Russia failed to return to a solid financial footing. In 2013 and 2014, Russia ran a deficit, despite high oil prices. Part of Moscow’s challenge was that it couldn’t easily reverse some of the recession blandishments, such as more generous pensions. Eventually, Russia had to acknowledge that its forecasts for oil prices were overly generous. Moscow cut pensions and froze public sector salaries, which was politically unpopular. To raise money, Putin began privatizing state-owned assets. The incongruous move underscored Putin’s inconsistent economic policy – he endorsed free market ideas in some instances but embraced statist policies in others. Maintaining his popularity and his control remained his top priority.
About the Author
Adnan Vatansever is a senior lecturer at King’s Russia Institute at King’s College in London.