Window on Eurasia: Putin’s Failure to Develop Industry Limiting Russia’s Ability to Rely on Exports of Oil and Gas

Paul Goble

                Staunton, June 26 – Because of Vladimir Putin’s neglect of Russia’s machine tool sector and his failure to develop domestic producers of machinery needed for the operation of the oil and gas sector, Russia may soon lose much of its ability to export petroleum products and thus one of Moscow’s primary sources of income.

            As Russian experts have pointed out in recent days, Russia does not produce the equipment it needs to keep the oil and gas sector operating, especially as the country exhausts easily accessible deposits and must use new technology to extract more from those that are harder to mine (ej.ru/?a=note&id=25402 and km.ru/economics/2014/06/18/partiya-kprf/742733-unichtozhenie-otechestvennogo-mashinostroeniya-rezultat-soz).

            That makes negotiations on the imposition and especially coordination of sanctions in this area all the more important because in the short term at least Moscow cannot maintain production levels if it does not have access to American or European technology but will shift from one to the other if a common set of sanctions is not applied. 

                In Moscow’s “Yezhednevny zhurnal” yesterday, Vladimir Volkov says directly that “the imposition of harsher Western sanctions may cut off Russia from contemporary technology” in the oil and gas sector and cost it access in the future to nearly 10 trillion dollars of reserves. That is because Russian companies have not developed such technology but rely on its importation.

            One measure of Russia’s increasing technological backwardness in this area, Volkov says, is that in 2011, the US company Shlumberger registered 7500 patents and EXXON registered another 6500.  Meanwhile, Gazprom, Russia’s prime player in this sector, registered “fewer than 250.”

            That of course means that Russia will not be in a position to go on its own in this sector anytime soon. As a result, some Russian officials have argued that oil and gas are so strategically important to the world economy that they must not be subject to any sanctions, an argument that has some traction among Western companies who are profiting from Russian production.

            But it also means that sanctions in this area will hit the Russian economy and the political system based on “the pipeline” hard, as Russians say. And Moscow’s ability to respond will be extremely limited at least in the short term because its domestic machine tool industry out of which such technology might come is in deep trouble.

            According to an article in KM.ru with the provocative title “The Destruction of Domestic Machine Building is the Result of a Conscious Policy,”  the Russian government has pulled resources out of this sector in order to spend them on other, more immediate needs and thus been left without the foundation for future development.

            According to Vyacheslav Tetekin, a member of the Duma defense committee, despite the policies of recent years, Russia “still has everything” it needs to reverse this situation if it acts soon.  It has the science the engineers the workers, and the production base. The single thing we don’t have is government will.”

            That judgment makes possible sanctions in this area especially important because they would highlight for Russians involved in this key sector as well as Russians more generally another of Vladimir Putin’s personal political failings and thus put more pressure on the Kremlin leader than perhaps any others could.