Selling the Family Jewels

March 13, 2015
Photo: Rosneft

Among Boris Nemtsov’s many charges against Vladimir Putin was the often voiced complaint that Putin was selling off valuable Russian assets to China at bargain basement prices. Recent events only confirm Nemtsov’s apprehensions which were not unique to him but are often voiced across the spectrum of Russian political literature. The increasingly visible selling off of some of Russia’s most critical assets owes much to the consequences of its war with Ukraine but it was already visible before that adventure. This trend already began in 2009 when China loaned Rosneft and Transneft $25 billion basically to force them to construct the oil pipeline that is known as ESPO (East Siberia Pacific Ocean pipeline). Thus the interest payments on that loan offset the price of oil agreed to then and in subsequent litigation between the parties and framed a deal that was clearly to China’s advantage. In 2012-13 Rosneft sold major equity shares in its Arctic holdings to CNPC in return for huge subsidies of at least a hundred billion dollars in the form of loans and prepayments.

This trend is getting stronger. The terms of the May 2014 gas deal between Russia and China remain a secret and it is widely believed that China successfully imposed a price for the gas that is basically at cost for Russia. China may also have advanced a loan in the form of prepayment. The recent announcement that a second gas deal will be signed later this year raises the possibility that China will again be able to dictate terms.[1. 1) Lucy Hornby, “Russia Set to Cement China energy Ties With Siberian Gas Deal,” Financial Times, March 8, 2015, p. 2,] Similarly, on February 27, 2015, Deputy Prime Minister Arkady Dvorkovich said Russia may consider allowing Chinese investors more than 50 percent stakes in its strategic oil and gas fields. He told the Krasnoyarsk Economic Forum that there were no political obstacles to selling China over 50% of equity in key energy assets and there is also no longer a psychological barrier to doing so because we have a strategic partnership with China and decisions are made faster than before.[2. 2) “No Political Obstacles’ to Grant China 50% Stake in Russian Oil and Gas Fields – Deputy PM,”, February 27, 2015,]

Dvorkovich’s remarks reinforce the sense that such decisions have now become a general policy line that has been forced upon Russia due to its war in Ukraine. The Ministry of Natural Resources and Ecology has forwarded proposals to the government that would drastically reform foreign investment regimes particularly as they pertain to strategic oil and gas deposits. These proposals are explicitly intended to attract Asian, especially Chinese, investors. The new proposals allow foreign firms to acquire up to 25% of those assets without approval of the government commission chaired by Prime Minister Medvedev.[3. 3) Colin Chilcoat, ”Russia Prepared to Sell Strategic Deposits, But Who’s Buying,?”, March 2, 2015] But other Asian investors are also welcome. Moscow has long sought to attract India’s ONGC and Southeast Asian investment in Northeast Asian and even Arctic oil and gas fields. Undoubtedly it would certainly welcome any interest from these or other Asian investors.

But this fire sale does not extend only to critical energy assets e.g. the Vankor field where CNPC seeks to expand its 3.5% stake.[4. 4) Ibid.] Putin now supports a “homeland act” that will offer free land to anyone who wants to move to the Russian Far East. The idea evidently originated with Deputy Prime Minister Yuri Trutnev who is also Moscow’s plenipotentiary for the Far East. His plan is to provide one hectare (2.5 acres) “to every resident of the Far East and to anyone who is willing to come and live in the region so that they could start a private business in farming, forestry, game hunting or some other enterprise.”[5. 5) Shannon Tiezzi,, “China Eyes Land Giveaway Program in Russia’s Far East,” The, January 28, 2015,] Chinese media have indicated that a growing number of potential Chinese migrants are interested in taking advantage of the program. Of course, this program raises nationalist suspicions in Russia. For example, the Federal Migration Service warned that Chinese migrants might become the largest ethnic group in the RFE by 2025-30. And in 2014 a border official warned that from January 2013-June 2014 1.5 million illegal Chinese immigrants entered the RFE. So this new program might actually be an effort to regulate and channel migration to only legal Chinese migrants.[6. 6) Ibid.]

To be sure Russia would dearly love to attract other investors an migrants from Asia but that is not happening. Chinese and Japanese experts concur that the RFE (apart possibly form energy assets) is not an attractive site for investment in a production base due to its small population, lack of a sizable internal market and high labor costs.[7. 7) Alexander Gabuev, “Russia Still Struggling to Connect With Asian Markets,” Russia Beyond the Headlines, March 10, 2015,] And these features do not even mention the fundamentally predatory and rent-seeking patrimonialism that characterizes the entire economy.

Therefore it is clear that the costs of Ukraine are now rolling in, not least in the most strategic sectors of the Russian economy where Moscow must sell off “the family jewels” to promote the façade of a major Asian and major energy power. But even if Ukraine had not occurred this inability to sustain Russia’s own assets would have manifested itself due to he nature of he economy and the absence of any idea how to reform the structural problems that make it perennially vulnerable to either directed or general external market pressure. Even if Putin should, by some miracle, return Ukraine’s territory to it, Russia’s economy remains not ready for prime time. Until property rights in law and legal accountability of the government and its officials become realities all the reforms and temporary expedients that the state can dream up – and they are many in number – will only quick fixes on a patient that is steadily becoming sicker. While undoubtedly Putin’s land grab has made him more popular and more fear it has won Russia nothing but more burdens and costs on top of those that it is already can hardly bear. The ultimate denouement of such a process is not hard to predict even if we cannot be sure how why or when the curtain comes down on this epoch in Russian history.