Russia Changes the Guard: Comment
A major political upheaval January 15 ended with Russia's longest-serving prime minister Dmitry Medvedev resigning along with the rest of his cabinet to make way for sweeping constitutional reforms.
His replacement is former tax service head Mikhail Mishustin – a technocrat who, despite keeping a low public profile, has earned respect in government circles by successfully reforming the country's fiscal system.
Russia's lower house of parliament, the State Duma, approved Mishustin's appointment on January 16. He had been proposed for the role by the president, Vladimir Putin. Mishustin is expected to make some changes when he selects a new cabinet, though details have not been disclosed.
On the other hand Medvedev, Putin's long-term ally, will take up the position of deputy chairman of the security council, a body that implements the president's decisions on national security. In terms of decision-making power, this is a demotion. After all, he will serve directly under Putin, who is the council's chair.
The disbanding of Russia's government was designed to clear a path for Putin to implement radical constitutional changes, announced just hours before Medvedev's resignation.
A nationwide referendum is due to take place on these changes, broadly aimed at strengthening the power of the Duma at the expense of the presidency. The move has been widely interpreted as an attempt by Putin to weaken the power of a potential successor, should he choose to step down at the end of his term in 2024.
Medvedev's ill-wishers
There are some in Russia's elite circles that will welcome Medvedev's departure from central government. Among them will be Igor Sechin, the powerful head of state oil giant Rosneft regarded as the informal leader of the 'siloviki' clan of nationalist, ex-security service officials that believe in a strong state role in the economy.
Sechin is suspected of orchestrating the downfall of Yukos, Russia's former largest oil producer which went bankrupt in 2003 after facing billions of dollars of tax claims. Most of Yukos' prize assets fell into the hands of Rosneft, transforming it from a collection of unwanted oilfields to the country's top producer. After taking the helm of Rosneft in 2012, his first major play was the $55bn acquisition of Anglo-Russian venture TNK-BP.
Medvedev and Sechin's long-standing rivalry is well-documented. Medvedev belongs to a rival grouping of progressives that have fought against increased nationalisation of Russia's economy.
Putin's backing of Medvedev, first as Russia's new president in 2008 and then its prime minister in 2012, was a severe blow to the Sechin clan. Medvedev initially opposed Rosneft's controversial takeover of mid-sized oil producer Bashneft in a so-called privatisation sale in 2016. That is, until Putin spoke in favour of it.
In recent years, Sechin and his allies have sought to erode Medvedev's power base. Sechin took part in a bribery sting in 2016 against ex-economy minister Alexei Ulyukayev, an economic liberal, who was sentenced for eight years in a penal colony. The arrest two years later of Russian billionaire Ziyavudin Magomedov on embezzlement charges was seen as an attack on Medvedev. Magomedov was close to deputy prime minister Arkady Dvorkovich, Medvedev's most senior aide. Former Russian minister Mikhail Abyzov, a Medvedev ally, was also detained last year in a graft case.
Impact on energy
Whether or not the overhaul of Russia's government will yield substantial political gains for Sechin and his followers is yet to be seen. Equally, it is too early to say what impact it will have on Russia's energy sector. Shares in the country's top oil and gas producers dipped slightly after the revelations, only to quickly bounce back.
Investors in Russia's oil and gas industry ultimately want stability. Though the government's mass resignation came as a shock to Russian observers – and reportedly the ministers themselves – it was no doubt carefully orchestrated by Putin and his closest confidants to avoid any serious uncertainty.
Mishustin will shortly select a new cabinet, which is unlikely to differ greatly from the last one. Long-serving ministers are unlikely to be deposed. This includes Alexander Novak, Russia's energy chief since 2012. There is no indication that the Kremlin has been dissatisfied with Novak's work over the last eight years. Furthermore, he may have to stay on to ensure Russian-Saudi relations remain on an even keel. After several years of mutual distrust, Moscow and Riyadh finally agreed to co-operate in late 2016 on attempting to rebalance global oil supply with demand, establishing the so-called Opec+ group of Opec and non-Opec producers.
Opec+
While Russia remains a lead member of the Opec+ alliance, it has not kept its commitments. In late 2018, Moscow agreed to cap production at around 11.2mn b/day – 228,000 b/day less than a baseline level of 11.42mn b/day set in October 2018. But its output totalled 506.2mn mt (11.25mn b/day) last year.
Under a revised deal struck in December, Moscow agreed to deepen cuts to 300,000 b/day. But it also secured an exemption for condensate production – which Russian authorities point to as the chief cause of the country's lack of Opec+ compliance over the past year.
Russia's energy ministry does not provide a breakdown for condensate in its overall output figure. But production of the liquid typically rises and falls in line with production of natural gas, which reached a post-Soviet record of almost 738bn m3 in 2019.
Underpinning this growth were two megaprojects in the Russian Arctic. Novatek's $27bn Yamal LNG project reached its full three-train 16.5mn mt/yr capacity in late 2018, less than a year after its launch, while Gazprom's Bovanenkovo field launched its third phase of development, to raise output to 115bn m3 from 83bn m3 in 2017.
Russia's economic development ministry forecast last August that output would reach 748.6bn m3 in 2020 and 763.6bn m3 in 2021, on the back of further growth at Bovanenkovo. But this will likely depend on European demand for Russian gas.
Russian producers have grown increasingly weary of the Opec+ cuts, and Novak confirmed in late December that Moscow could drop out of the deal this year.
"As far as the production cuts are concerned, I repeat once again, this is not an indefinite process," he told local television channel Rossiya 24. "A decision on the exit should be gradually taken in order to keep up market share and so that our companies would be able to provide and implement their future projects."
This decision could be made when Opec+ next meets for talks in early March. Russian producers enjoy low operating costs – as evidenced by the hefty profits they are earnings. As such, Moscow may be willing to accept more bearish oil prices in return for expanded market share.