Black Gold's Curse:Crumbling Empire

The Scenario

Crumbling Empire

The Myth

• Greed

  People’s inability to think about the future and their concern with money and power leads to a fragmented Russia with powerful regional leaders fighting among themselves for control of resources. Russia as a country or an idea ceases to exist.

1. Relatively small market (few people); not a particularly wealthy market; not a technologically advanced market; therefore not an attractive market.
2. Oil price remains relatively high and stable.

Timeline

Period of 2010 - 2015

In 2012 current Russian President Dimitry Medvedev runs again for the presidency. His United Russia Party is by far the largest political party in Russia and Medvedev wins by a landslide. Having said that, the opposition parties managed to improve their positions by gaining 15% (Communist Party of the Russian Federation) and 8% (Liberal Democratic Party) of the vote, respectively. Though the opposition parties are still unable to influence policy or legislation in any significant manner, their improved showing is believed to evidence increased popular discontent with Putin and Medvedev.

Although United Russia is still a dominant, unitary force in Russian politics, evidence of internal tensions is becoming increasingly visible. Putin remains strong and influential from his position as prime minister. Putin and Medvedev share power and responsibility much as they have for years however it is widely believed that Medvedev has succeeded in cementing his position despite Putin’s desire to remove him once he has served his usefulness. Each leader has his supporters within United Russia and amongst the siloviki (oligarchs). There has been increasing competition between these and other groups in recent years, especially for control of oil and gas resources which are by far the greatest sources of revenue for the Russian government.

Oil and gas prices have been high and relatively stable for a number of years, buoyed by growing global demand. A number of factors contribute to keeping prices high: (a) rapid economic growth and rising standards of living in developing countries, principally India and China, (b) relatively slow progress on the development of energy efficient and alternative energy technologies, and (c) lack of international agreement and coordination on energy and environmental policies. The high prices ensure that, despite the notorious inefficiency of Russia’s oil and gas infrastructure, the Russian government still receives steady revenues and accumulates massive foreign reserves.

It has been widely known for decades that Russia’s infrastructure has been in dire need of upgrading. Roads, schools, hospitals, etc. were all in bad shape. Even the energy infrastructure, from hydroelectric dams to oil refineries, were outdated and inefficient. United Russia made the improvement of infrastructure and the raising standards of living for average Russians central pillars of the presidential election campaign. Yet, despite the fact that Russian government coffers have been filled to overflowing, by 2015 there has been little improvement in energy, transportation, health or education infrastructure.
Due to the expectation throughout Russian government and business that future oil revenues would remain high there is no sense of urgency with respect to making the necessary investments in infrastructure, health, education and technology. In addition, an ineffective tax regime incentivizes Russian enterprises to invest in capital projects outside of Russia rather than inside. Those projects that did get underway, especially lucrative infrastructure projects, generally suffered from political infighting and corruption among the political and business elite, which diverted funds. In addition, since many political appointees were evaluated based on political allegiance rather than technical expertise and competence, the economy as a whole suffered from poor management. This is especially prevalent in the strategic resource sectors: oil, gas and mining. All of the above factors combined to cause some high profile project delays and failures, such as the Nord Stream pipeline project under the Baltic Sea to Germany. Originally slated for completion in 2010, it only begins operation in 2014 and is massively over-budget.

Period of 2015 - 2020

In effect, Russia is not able to extract maximum value from its resources because, then as now, it lacks the technical expertise, organizational skills and political will to do so. For example, it does not have sufficient refining capacity and derives much of its export revenue from exporting crude oil. The value that Russia does obtain from exports of its resources are inefficiently applied to the needs of the country. As a result health and education are stagnant and infrastructure gradually deteriorating.

The military, which is seen as essential to the protection of Russian resources and pipelines, to the maintenance of the regional integrity of the country, and to the assertion of Russian integrity in the arctic, receives gradual funding increases and is modernized. Conscription is ended, salaries are raised, the forces are downsized, training is intensified and hardware is upgraded. The military is deployed from time to time to bring back into line ambitions regional leaders or to quell insurgencies. The Caucasus remains unstable and the Russian military maintains a heavy presence there for decades. Despite maintaining military control over the region, standards of living steadily deteriorate due to persistent conflict, low economic activity and lack of governance. This results in a drift of the local population towards increasing Islamic extremism. Which steadily infects and gains support from sympathetic muslim ethnic groups in neighboring regions in the Caucasus and south Urals and Central Asia.

The increasing use of the Russian military to enforce Kremlin policy in restive regions reflects Russia’s decreasing ability to project its soft power. Ukraine has started to lean progressively westward after seeing the economic success of the booming Polish and Slovak economies. This inevitably increases tensions between Kiev and Moscow. Emboldened by the fact that it was difficult for Russia cut off gas supplies to Ukraine without affecting supply to the EU, in 2017 Ukraine initially refused to renew the Russian navy’s lease to use the port at Sevastopol. After tense negotiations the Ukrainians relented and agreed to a five year extension. In 2022 Ukraine steadfastly refuses to continue the lease and forces Black Sea Fleet to relocate to other smaller Black Sea ports and to be reassigned to other regions.

Military is also absorbed in supporting the armed forces of the “stans” in order to maintain the integrity of their borders against the persistent conflict in Afghanistan and Pakistan.

Moscow has managed to successfully, through tax breaks and generous family subsidies, to slow population decline to a trickle. Although the number of babies being born has increased substantially, they will not join the workforce for at least two decades.

Inequality, both regional and social, reaches new highs. There are more Russian millionaires than ever before, however, there are also more Russians living in poverty than at ever before. The disparity is greatest in regions rich in oil and gas, whereas regions without oil or gas tend to simply be poor. In particular, wealth is concentrated in Moscow, which maintains for years on end its position as the most expensive city in the world.

Period of 2020 - 2025

Persistent mismanagement of resource revenues, together with preoccupation with regional conflicts, helps to perpetuate the chronic lack of investment in health/education/infrastructure. Russia is still the key global supplier of energy, however, its customers are successfully able to diversify their energy supplies such that none of them is reliant on Russia for more than 20% of its energy needs. This limits Russia’s ability to leverage its energy resources to strategic advantage. Russia also becomes increasingly dependent on foreign partners to provide the technology, capital and skilled labor necessary to extract its resources.

The effects of climate change are becoming more severe around the globe. The negative effects are felt in dramatic fashion in Asia, to Russia’s south, including Iran, Pakistan, Afghanistan, India, Bangladesh, and China. These countries are experiencing frequent floods, droughts, food shortages and massive internal population displacements. However the effects of climate change are generally quite good for Russia. Exploration of the arctic for resources is in full swing, it has become easier to operate in Siberia and the far east during the winter, and the amount of agriculturally productive land in Russia increases substantially. However, Russia lacks the manpower to work the fields. Foreign companies are able to address this by leasing productive land from Russia and importing agricultural workers from countries like Bangladesh, India and Pakistan. The foreign workers generally live in company towns, outside of urban centers, due to high incidence of racially/ethnically motivated attacks due to popular resentment of foreigners taking Russian jobs.

The Chinese have been present in the far east of Russia for decades. As long ago as the 1980’s it was estimated that there were 80,000 Chinese living in Russia (legally and illegally). Through the 1990’s and 2000’s this population rose to a couple hundred thousand, as Chinese migrant workers and traders supplied Russians with manufactured goods and increasingly services (e.g. financial, IT and telecom services). At the same time, by 2020 the Chinese presence in Mongolia had increased to the point where Mongolia was only nominally an independent country. By 2027 it was estimated that there at least 4 million Chinese in the Russian far east, while at the same time the number of Russians in the same region had dropped to 4 million (from 6.7 million in 2000). At that time Northeast China alone had a population of 150 million, more than all of Russia. Moscow finds it has minimal influence in the region and that both the Chinese businesses and government (both regional and national) are becoming more assertive in the region.