Putin's Energy Empire Grows

The IHT reports that Russia has succeeded in winning a contract to build a natural gas pipeline to important Caspian resources in Turkmenistan. The deal reflects a triumph of sorts for economic pragmatism and Russia's control over the energy sphere in its own backyard. The United States had been aggressively pushing an alternative pipeline that would have run away from Russia in an attempt to loosen Russia's grip on Europe's energy markets.

Of course, American diplomats and the assorted multinationals behind the alternative proposal were operating from something of a disadvantage. Russia claims the pipeline it plans to build will cost $1 billion. The American pipeline would have cost $10 billion. Turkmenistan was nonetheless willing to look at the American proposal because of its potential to get the country out from under Russia's thumb.

In particular, Russia's current energy needs are met by buying approximately 80% of Turkmenistan's natural gas for about $100 per 1000 cubic meters. The problem from Turkmenistan's point of view is that Russia is simultaneously selling its own natural gas for $255 to Europe.

Turkmenistan's president will no doubt attempt to use the spectre of an alternate pipeline to encourage Russia to pay more for the energy, but ultimately the only economically viable proposal involved a pipeline to Russia.

At the same time, Putin continues his brutal energy diplomacy with Europe. The world watched with baited breath when Russia cut off supplies to Europe through Ukraine when Ukraine siphoned off some of the natural gas to run its economy. But Russia also shut down a pipeline to Lithuania in July and hasn't turned it back on. Lithuania's continued energy insecurity could spark a confrontation between the EU and Russia the next time Putin tries to raise rates.

Russia's Consumption Boom

Forbes reports that a combination of factors including a booming energy sector, low income taxes, and continuing government subsidies have resulted in dramatically increased consumption. The real wage has been growing around 10% a year, and per capita consumption has doubled in the last decade. In dollar terms, consumption grew 27% in 2006 and shows no signs of slowing. Imports have grown 30% over the same period.

Russia is still a poor nation by Western standards, but the spending spree is allowing Russians access to goods like televisions that even the poor have come to expect in the United States. One startling revelation is that the cell phone penetration rate is over 100%. This means the average Russian household has more than one cell phone. And at least one anecdotal account suggests that cell phone service is superior to Eastern Europe.

Russia's booming, consumption driven economy is a stark contrast to the slowing American consumer and China's tight-fisted legions. Russia is also experiencing comparative political stability. Although Putin's recent decision to require 50% positive news in the media is disturbing from the perspective of political freedom, his administration is wildly popular and the prospect of a revolution seems remote. The average Russian will experience a rapidly growing quality of life over the next few years, even if the price of oil were to fall back significantly.

Russia's improving prospects are reflected in the increasing interest from foreign corporations. Nestle has recently invested half a billion dollars in the country and Coca-Cola spent $600 million for Multon, a juice maker.

While rapidly rising standards of living are always something to be welcomed, Russia's recent growth will not return the nation to its previous stature. As long as the political system remains within the iron grip of Putin, the country will not receive maximal access to global financial markets. Many of the revenue streams that Russia is capitalizing on will not be replicable, either elsewhere or even in Russia ten years from now. Carbon credits derived from the economic collapse of the Soviet Union represent a one-time windfall and economies based on exporting national resources are notoriously given to corruption and free-riding.

An old joke from the end of the Soviet Union suggests that three quarters of the men who died in Russia were drunk - no matter how they died. Russia's rising standard of living is a true blessing, but as long as the deep problems illustrated by this dark humor exist the country will still have a long road to recovery.

Russia's Floating Nuclear Power Plants

Reuters reports that Russia has begun construction of the world's first floating nuclear power plant. The idea is to create a 70 megawatt nuclear reactor that literally floats in the ocean as it produces power and desalinates seawater.

Russian officials are already talking about the potential for export. They say their idea is a good way to power much of the third world without spreading nuclear knowledge.

Anti-Nuclear forces are alarmed. If Russia turns nuclear power into a commodity like commercial airplanes, the potential for accidents like Chernobyl dramatically increases. The notion of a floating reactor is exceedingly alarming in particular. The spectre of a nuclear power plant being hit by an iceberg or capsizing in a fierce storm has been totally unknown until now.

The environmental record of nuclear reactors at sea is surprisingly good. The United States and Russia both employed fleets of nuclear powered submarines without incident. In fact, the Russian sub Kursk suffered an explosion and sank without causing appreciable damage to its reactor. Specialists suggest that the reactor could have been immediately restarted after the disaster.

Nuclear powered icebreakers have also been forging northern sea lanes for years without iceberg troubles.

But the Russian government is likely to move ahead anyway. Look for heavily government influenced companies like Gazprom to be peddling floating nuclear power stations to India and other countries within just a few years.

Japan looks to Kazakhstan for Uranium Supply

The IHT reports that Japan is trying to purchase stakes in uranium mines in Kazakhstan and Russia in order to protect itself from surging uranium prices driven by higher Chinese energy demand. In contrast to the United States, Japan already derives 30% of its power from nuclear energy. But a plan to curb carbon dioxide emissions has Japan planning to increase its reliance on atomic energy to approximately 40%.

Uranium prices are currently at a record $113 a pound, and even without an increase in demand, prices are likely to rise further due to problems with mines in Australia and Canada. A global effort to address greenhouse gas emissions will only exacerbate an annoying supply bottleneck.

As a practical matter, uranium production will never run up against the natural limits that face fossil fuels both because there is plenty in the ground and because uranium is so energy dense. But uranium mines have been floundering for decades because they simply weren't terribly profitable investments if no one in the richest country on earth wanted to buy any.

Now that companies like TXU are considering expanding nuclear power again within the United States, the prospect for higher margins for uranium mines looks good. Take a look at this chart from The UxC Consulting Company, LLC:

Will the World's Most Valuable Company be a Wholly Owned Subsidiary of The Kremlin?

General Electric and Exxon Mobil are likely to fend off any hostile bids out of Russia, but according to the IHT, Gazprom plans to be worth more than $1 trillion within a decade. It might seem unlikely for one Russian company to exceed the size of Russia's entire economy for 2006, but Gazprom has the inside track to success.

When Putin took power just a few short years ago, Gazprom was worth only $25 billion and suffered from severe mismanagement. The management of the company didn't get any better, and may in fact have gotten worse due to political meddling in company affairs. But the company achieved a market value of $250 billion because Putin's government essentially outlawed doing business with anyone else in Russia. Shell and other big oil companies played ball because they let the potential of Russia's massive energy reserves blind them, and Gazprom prospered.

It's probably no longer possible to strong arm the West into any more favorable terms of trade, at least over the short term. But Gazprom still has significant room to grow. Gazprom's proven oil reserves in the ground are valued by financial markets at about $5.50 a barrel. In contrast, Exxon Mobil's reserves in the ground are valued at around $20 a barrel. The reason for the big difference is that investors fear the Kremlin will just seize the 50% of the company it does not already own.

If Putin and his eventual successor convince financial markets that Russia won't nationalize the company, it would be a trivial accomplishment for Gazprom to become the world's most valuable company. And even if Putin just outright nationalizes the company, it would still be true that the underlying assets represent the most valuable company on earth.

All those "No More Blood for Oil" folks should take a good long look at Russia. Exxon Mobil is hardly the most innocent company in America, but Gazprom makes America's oil lobby look like a bunch of sissies.