Russia: The Greatest Threat to the Energy Markets

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As Yogi Berra aptly put it, It's deja vu all over again.

The Soviet gulag state is coming back and this time it could wreak havoc on the world's energy markets.

I began my energy career in Russia. Back then it was part of a sprawling Soviet Union. For the past 23 years there have been 15 independent countries in its place.

But these days it sure feels like the Beatles song from the late 1960s, "Back in the USSR."

You see, many governments aren't able to work out how to plot the global energy sector because it becomes too wrapped up in local political machinations.

And the bigger the energy producer, the bigger the impact is on the global picture.

Now the specter of repression is again moving across the Russian landscape – a huge energy producer – in a way not seen since the events I witnessed over there more than 30 years ago.

What's more, the political developments unfolding in Moscow are about to hit the energy markets. And the impact will be significant.

One People, One Voice

First, what's taking place inside Russia has all the earmarks of a Soviet-era consolidation of power. Vladimir Putin has been biding his time when it comes to political dissidents and opponents. But the increasingly heavy-handed moves to silence them are apparent.

The latest victim is somebody I happen to know personally. Sergei Guriyev is a well-known, articulate, and respected economist, director of the New Economic School in Moscow, an advisor to now Prime Minister (and past President) Dmitri Medvedev, and a frequent commentator in the foreign media.

Recently, Sergei was interrogated for several hours, had his office ransacked, and is now "vacationing" with his family in France. His crime was to provide an expert opinion for the defense in the ongoing persecution of Mikhail Khodorkovsky. 

In 2004, Khodorkovsky – then the head of YUKOS, Russia's largest oil company – was the richest man in the country and among the 20 wealthiest in the world.

By May 2005, he had been sentenced to nine years on tax charges. Subsequent charges filed by the state while he was in prison have extended that prison term until 2017.

There now seems little doubt that the Kremlin is orchestrating yet another series of charges against Khodorkovsky. And that put Sergei's testimony, claiming that the initial trials were politically motivated, squarely in the crosshairs of the siloviki, Putin's comrades from the old KGB. They're intelligence service veterans who have been solidifying the president's administrative control ever since his reelection.    

Meanwhile, YUKOS was also gutted, declared bankrupt and dismembered. Most of its assets ended up as part of Rosneft (OTC: RNFTF), now the dominant oil major in the country. Rosneft conducted an IPO on the London Stock Exchange several years ago, and about 25% of its shares now are in free trade.

But don't be misled. Despite now being the world's largest publicly-traded company, Rosneft is a state-controlled behemoth, and it guards the entrance to Russian oil projects like Cerberus guards the gates to Hades. Gazprom (OTC: OGZPY), also trading in the markets — but firmly under state majority control — serves the same function in natural gas.    

New Money in Russian Energy Patch

And that brings us back to what will occupy much of my time beginning next week.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. Richard Weymer | June 3, 2013

    Where is lncgy headed? Pricewise

  2. Richard Weymer | June 3, 2013

    Where is the price going with China in decline and Russia being bad boy?

  3. Paul | June 3, 2013

    Thanks for this. Do you know what is happening with Russian Coal importation? I believe Russia is attempting to secure its coal logistic supply chain (for energy production) particularly in the eastern part of Russia; noting that Vladivostok Entry Point could be economically tied up by China as well as the border region with China. Specifically is/has Russia done a deal for a Coal Railway in East Kalimantan (Indonesia) secure a new coal logistics supply chain. Indonesia of course is the largest coal supplier for energy needs in the world….

  4. Curtis Edmark | June 3, 2013

    The most interesting part of this story to me is regarding Mikhail Khodorkovsky. Is he guilty, is he being framed, or is it a combination of both?

  5. enthusceptic | June 3, 2013

    Why do you bother to publish company-specific questions?

  6. Greg Czora | June 3, 2013

    This is an excellent article by Dr. Moors. However, he should not be surprised at the behavior of capitalists shooting themselves in the foot so to speak, as the following comment seems to indicate: "To me, it seems ludicrous that corporate bastions of a free market end up being weapons in that market's undoing."

    There was once Russian who became a great American philosopher named Ayn Rand. In her book "Capitalism the Unknown Ideal" and many other publications (such as "Why Businessmen Need Philosophy) she pointed out that more often than not it is the so-called capitalists THEMSELVES who bring tyranny down on everyone's head by helping to destroy the very liberties that capitalism depends on to exist.

    Instead of winning markets and business by the consistent excellence of their own work product, as opposed to their competition, these so-called "robber barons" essentially cheat by asking for government help against their competitors with laws enforce by the police, and then stupidly think they can get away with making a deal with the Devil. Once the government is invited into the economy it never leaves, and everyone's liberty and individual rights are destroyed in the process. Witness the history of US government intervention with the railroads in the 19th century and the subsequent the slow slide of the USA toward fascism. This tread has recently accelerated with the advent of the IRS scandal, the attacks of the Justice Dept. on the press, and the mounds of regulations that is Obamacare. These things do not happen by accident. They come because the fake capitalists do not take their own beliefs seriously enough to apply the consistently by their own choice and their own long-term benefit.

    Dr. Leonard Peikoff, who is an expert on the philosophy of Ayn Rand, made a prediction in an article he wrote around the time the USSR collapsed and everyone was predicting a free Russia would soon follow. Dr. Peikoff said that he was predicting the return of dictatorship to Russia, eventually. He said he did not know how long it would take, but it was unlikely the Russians would succeed with a government that would protect individual rights and thereby support a capitalist economy because, unlike the West, Russia did not have the philosophical traditions necessary to protect individual rights.

    It is clear that even in the West we have difficulty fending off tyranny. Now his prediction is coming too pass in Russia. Dr. Peikoff also wrote a book called "Ominous Parallels" that predicted fascism would eventually come to America if we did not challenge the moral and philosophical premises of what has come to be called the "nanny state."

    Both trends have the SAME CAUSE: The idea that it is OK for citizens and corporations to leverage the power of government to sacrifice the individual rights of some citizens for the sake of others. In the US, the Democrats routinely pass laws to do just that in the economy, while protecting individual rights for immigrants and in the bedroom. The Republicans tend to pass legislation that does just the opposite. No one wants to defend the individual rights of everyone!

    We need a political party that is willing to CONSISTENTLY defend the individual rights of EVERYONE equally under the law, and stop the Marxist-like class warfare that has become so popular.

    • Brian | June 4, 2013

      I concur!

      • Peter David Hunter | June 8, 2013

        I concur. I was only 9 years old in 1944 when Charles DeGaulle marched into Nazi occupied Paris at the head of a column of free Fench soldiers to liberate Paris. I remember what he said when a French reporter ran up beside him and said, "General DeGaulle! Are you a liberal or a conservative?" I can clearly remember his response in French, which in Engilsh was "DeGaulle is neither left nor right nor middle. DeGaulle is above."

  7. John M. | June 3, 2013

    Russia is very shortly going to reduce/end? the sale of uanium to the USA that will further increase the price of oil/gas and severly effect the nuclear power plants in the USA.

  8. Anonymole | June 3, 2013

    Dr. Moors,
    Have you heard of any scuttlebutt regarding divestiture of oil and gas producing properties in light of recent developments and announcements regarding LENR (low energy nuclear reaction)?

    I realize that LENR is still considered fringe science and is the epitome of controversial "discovery" but there do seem to be important parties coming online who lend credence to this phenomena. What, if any, are your ideas and interpretations on this technology and how it may affect the fossil fuel industry in the future?

  9. Paulo HOC | June 4, 2013

    Dr. Kent I have always admired your articles, however this one seems the work of a ghost-witer, I don't believe the Exxon's greedy boys were forced to sign the contract…

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