Mikhail Krutikhin: "It's all about Russia's incompetence"

These are hard times for Russia: falling oil prices, weak rouble and western sanctions push the country into recession. In addition to this, Vladimir Putin surprised the world with ambiguous geopolitical moves. 

Two classic Russian questions appear: who is to blame and what is to be done? Mikhail Krutikhin, a partner of RusEnergy, a Russian consulting company specializing in monitoring and analysis of tendencies in oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine gave his perspective on the current situation in Russia.

Natural Gas Europe: On Monday, Vladimir Putin announced the cancellation of South Stream and presented a new deal with Turkey. On Tuesday, the Turks clarified that there was no 'deal' with Russia as the specifics need to be negotiated. Is the cancellation of South Stream and the unclear arrangement with the Turks a major failure for Gazprom and the Kremlin?

Mikhail Krutikhin: Yes, we can consider it as a great disaster for the plans of Vladimir Putin. The tremendously expensive South Stream project is off for the time being. The Turkish suggestion of Mr. Putin and the alleged agreement with Turkey is very long way off because it was not an agreement but just a memorandum of understanding. That means that it is nonbinding for the parties and a lot of negotiations are needed to give this project a push to go ahead.

NGE: Would integrating South Stream infrastructure into TANAP be difficult to execute?

MK: No I don’t think so. I believe that the project wasn’t practical from the very beginning and the Third Energy Package of the European Union was in existence long before the sanctions were initiated. So, the main problem for the project was the intention of the EU to introduce a competitive environment in the energy trade business and to prevent monopolism.

NGE:  Your article about the China-Russia deal being nothing but pageantry made a splash in Russia. Can deals with China can be made to work?  Or, are we looking again at another major strategy failure profitable only for pipe-manufacturers?

MK: Well, really the project is not commercial. If we consider the price of natural gas that Gazprom allegedly got from the Chinese buyers it is oil-indexed and the price of oil went down significantly, then the price of the Russian gas according to that contract is also very low. It doesn’t justify the construction of grid infrastructure such as the Power of Siberia which is estimated to be worth about $100 billion (if it’s completed). The project isn’t economical but I believe the Russian government can go ahead with that because it’s political. Mr. Putin has said on many occasions that Gazprom would export as much gas to Asia as it exported to Europe. It is arithmetically senseless but it shows what sort of political ambition the Kremlin has been nurturing.

NGE: Rosneft sold Chinese state-owned CNPC a 10% of stake in the Vankor gas field located in northern Siberia.  Is China the one to have “have no limits” in Russia (as Putin said) and will this cooperation help us in light of recent sanctions?

MK: Well, I believe when the Chinese want something in Russia they get it. They have a special strategy, I can call it “sitting in ambush and waiting for a convenient moment” – an opportunity when the Russian government can’t perform and can’t fulfill its promises to the Russian people. Then the Chinese can pave their way in with proposals of cash and get very lucrative pieces of the Russian economy such as half of Udmurtneft or a big stake in the Vankor project and other projects. They have already appropriated most of the oil Rosneft is going to produce in Eastern Siberia in exchange for cash loans.

NGE:  It appears that Russia has suddenly awoken to the reality that oil is trading below $70 with an exchange rate of 50 roubles to the dollar. Who should we blame and how do we how adapt to the changing reality?

MK: Well, I guess we have missed that opportunity since Vladimir Putin was appointed president in the year 2000. That time the Russian Federal budget was dependent on oil and gas revenues only to the extent of less than 9%. Today it is 52%. It means that the government just disregarded all other industries in favor of producing oil and getting rich with that money. When the price went down, they started to understand that there is no foundation to build other industries on. This is a very difficult situation. I believe this could be a catastrophe.

NGE: Do you think the US is to blame for falling prices of oil prices and the rouble?

MK: (laughs) No. The U.S. administration had nothing to do with turning Russia into an addict of oil and gas revenues.

NGE: It seems like Russia is all about anti-American propaganda these days...

MK: It’s all about incompetence and greed of the current government.

Marina Zvonareva

Marina Zvonareva is a Natural Gas Europe analyst focused on Russia’s international energy relations. Follow her on Twitter: @ZvonarevaMar1na