Pavel Koshkin: “Why the revival of the commodity market is not good for the Kremlin”

Oil Well file photo

Subject: Why the revival of the commodity market is not good for the Kremlin
Date: Tue, 2 May 2017
From: Pavel Koshkin <pkoshkin.russia.direct@gmail.com>

Title: Why the revival of the commodity market is not good for the #Kremlin

Pavel Koshkin is a contributor for Forbes-#Russia magazine and the deputy editor of International Desk at RBC Daily, a Russian independent newspaper. He is the former editor-in-chief of Russia Direct, an English-language analytical media outlet that suspended its activity due to various challenges.

Lead:

The interest toward #oil and #gas might increase, with #Trump’s intentions to make U.S. a competitive energy power, a new shale oil boom and the increasing technology bubble. Yet the Kremlin won’t necessarily win from it.

U.S. President Donald Trump’s attempts to bolster energy projects might hurt the environment, yet it could revitalize global energy market. Together with a new shale oil boom and the increasing technology bubble, Trump’s energy policy might revive the interest toward the commodity market. This inevitably will have an impact on Russia.

Alisher Usmanov, a Russian oligarch, makes no bones about his plans to invest in commodities. He believes the market of technological startups is overheated. The tycoon made a fortune of $1.4 billion with his initial investment into Facebook. He has a stake in Uber Technologies. Today he pins new hopes on raw materials and warns about the tech bubble.

Indeed, Tesla, a major American automaker and energy storage company, based in the heart of the Silicon Valley, seems to be creating a new bubble, according to some experts. In the early April – the day when Usmanon announced about his plans to invest into commodities – Tesla’s market capitalization reached $51 billion, which exceeds the one of General Motors and Ford.

No matter how paradoxical it may sound, but does it mean that there will be another rise of commodities in a time when some blue-sky thinking about a new brave world is still prevailing among the Internet geeks and inventors? Most importantly, can Russia benefit from the trend, with its perennial economic rigidity, oil addiction, the resource curse and negligence to high-tech and innovations? This is a natural question for the Kremlin, which is supposed be interested in the revival of commodities. And any speculations about tech bubbles should be music to the ears of the Russian political elites, which has been using oil and gas as the key source of their political survival.

However, this could be a flawed strategy, at least because, the tech bubble or the investment plan of a Russian oligarch (who suddenly decided to switch from technologies to commodities) might mislead in the short-term. In the long-run, it doesn’t seems to be a good plan for a country’s economy at all. Edward Chow, the senior fellow of the Energy and National Security Program at the Center for Strategic and International Studies (CSIS), argues there are no any connections between the tech bubble and the increased interest toward commodity companies. It is just a coincidence, like it was the case during the dotcom crisis in the 2000s, which took place during the beginning of a commodity super-cycle.

“Why can’t hi-tech stocks and commodity stocks go down at the same time (or up for that matter)? There is no causal relationship between the two,” said Chow.

Likewise, Bruno Sergi, the scientific director at the Moscow-based International Center For Emerging Markets Research at The Peoples’ Friendship University of Russia (RUDN University), is skeptical about the revival of the commodity market. Today, with the Organization of the Petroleum Exporting Countries (OPEC) losing control over oil prices and the U.S. stepping in the game with fracking technologies, the oil price will fluctuate between $50 and $55.

“Such a price would not push Russia back to oil and gas bonanza status of the early 2000s, although it would easy state budget policy to some extent,” Sergi said.

However, one should admit that commodities brought stability in the country and there is no reason to relegate the oil sector to something obsolete. One should remember about the immense fortune Russia gained from oil in the past. This means that the oil and gas industry should become a tool for reshaping and resetting the economy in the long-run.

If the Kremlin cannot overcome the perennial resource curse, it could at least alleviate this burden and invest in new oil and gas technologies to make it more efficient and friendly to the environment. Fortunately, there is a great deal of demand in such technologies. And Russia would better take this into account by following the examples of Western high-tech companies, which seek to meet the goals of the 2016 Paris Climate Conference to reduce greenhouses gases in the atmosphere.

Yet this strategy could be supplemented by investing into energy producing commodities, which are also expecting a rise in demand in the future, argues Alexander Rodriguez, an expert at RUDN University’s International Center For Emerging Markets Research. The advances in cleaner energy processes like the Organic Rankine Cycle technology, which converts residual, low-grade heat into useful power, is an examplel. This technology might save 11 billion cubic meter of natural gas, raise the use and reach of commodities and decrease millions tons of CO2 in the atmosphere per year, Rodriguez estimates.

“However, just because companies create tools and processes to further energy efficiency, does not mean that there will be rapid adoption throughout the developing countries,” Rodriguez said, implying that Russia will have to work hard to innovate its energy sector.

Anyway, some investors like Usmanov pin hopes on the commodity market today. Whether their bet will bring payoffs remains to be seen, yet one thing is crystal clear: investors should not forget about the tech market despite the threats of the upcoming bubble.

“The tech market will shape the economy of the 21st century,” said Andrey Movchan, the director of the Economic Policy Program at the Carnegie Moscow Center, believes. “This market may be overvalued at the moment, however it does not contradict to the fact that it will grow over time and while short term returns may be less than the investors expect, the long-term gains promise to be high. In contrast, the commodity market is becoming secondary or supplementary, because new technologies will create many opportunities to use energy efficiently. So, commodity prices are likely to fall gradually.”

Amidst such ambiguity, the best strategy for the Kremlin is to balance between investing in technologies and commodities. However, it looks like walking a tightrope – not an easy task for the Kremlin, with its negligence to strategic thinking, narrow planning horizon and the weakening economy.