Thursday, October 05, 2017

Is Russia's domestic ONG distribution network critical to its political survival?

We know that Russia relies on ONG exports to shore up its GDP. Based on GovRU figures, these exports account about 20% of the GDP.

The general sense among Russia watchers is that profits from these exports go towards shoring up the RU political system - specifically
  1. lining the pockets of the oligarchs (including Putin), 
  2. keeping the RU Military-Industrial complex happy, and 
  3. subsidizing the internal distribution of essential commodities. 
Traditionally political analysis of RU has focused on the first two stabilization mechanisms. I propose we think carefully about the third item on that list.

Geographically speaking Russia is unique - no other country matches it in terms of climate and length of East-West logistical chains. You might be tempted to thing that Canada or Scandinavian countries are similar - but they really do not have the anywhere near the logistical problems. To get a sense of this compare photos of RU at night with other countries. You can see a cluster of lights at the eastern edge of the Northern European plain (where the Grand Duchy of Moscow historically resided) and you can see a small belt of lights lining the Sea of Okhotsk but in between the two (across the expanse of Siberia) you only see a few thin strands of light. One of these is the Trans Siberian railway and the others are the extremely few roads in Siberia. This image reinforces the critical nature of Siberia to Russia. 

I find it helps to think of Russia as an ocean dotted with islands big and small. The islands are connected mainly by railway lines and roads. Under Russian climatic conditions there is a significant amount of thermal cycling which tends to rip up the road and cause railway tracks to become mis-aligned. This raises the cost to maintain each mile of road or railway. The weather also does a number on the rolling stock and vehicle fleets. It appears that the GovRU bears most of the costs associated with the road and rail maintenance and the Russian people bear the cost of maintenance in terms of fuel costs and vehicle repair.

It is no surprise to me that the despite being a major global ONG producer, the average Russian pays 5-10x more than the average Canadian or American for a gallon of gas and that the vehicle repair industry is one of the biggest contributors to the Services portion of the Russian GDP.  

Another point of interest is that while Russia has a GDP that is 5x smaller than the US in PPP terms, its GHG emissions per capita are only 60% of US numbers. This strongly points to the fact that the average Russian consumes much more carbon per unit of productivity than the average American. Add that to the fact that RU life expectancy is much lower than US life expectancy and one realizes that despite burning so much carbon - the Russians don't get a whole lot out of it. 

These subtle comparisons reflect the true scale of the Russian internal distribution problem. Russian ONG is more expensive to mine and more expensive to distribute *within* Russia. As the price of gas finds its way into the cost of every commodity, we see that everything that is derived from ONG is more expensive in RU. As Russian lifestyles evolve to a much higher energy intensive variants we are likely to see the domestic pressures rise. 

I think this sets up some interesting thoughts

1)  The notion that a low international oil price is "something Russia can live with" is not really sustainable. A high international oil price makes it much easier for Russia to transfer the high costs of its own internal distribution on to international buyers. The Russians will be happiest when selling the tiniest possible amount of oil internationally will be enough for them to supply it at a much lower price at the pump locally. 

2) Historically Russia has always managed to keep its populations satisfied by dumping relatively small quantities of ONG, food and coal on the domestic market. But as peoples' expectations of lifestyles change, Moscow will have to dole out more to keep people happy. It is not clear if Moscow's distribution system can keep up with the extra demand. It is also not clear if Moscow can scavenge enough resources to keep this going without a dramatic increase in the exploitation of Siberian reserves. 

3) It may no longer be possible to view Siberia as a place where nothing really happens. Given the resources it possesses and the fact that it sits right in the middle of the East-West supply chain - Siberia will most likely make or break modern Russia. The economics of exploiting Siberian reserves is challenging. You have to put a lot in to get even a little bit out. It is not clear if Russia can raise the capital needed for an economically viable exploitation of Siberia. 

It may be worthwhile to take a closer look at the distribution network for essential commodities inside Russia. It may inform us about the shape of things to come.* 

* I am not discounting the traditional measures like the political temperature of the cities, the shifts in vodka consumption but I suspect risk leaving out a rich vein of knowledge if we completely ignore the economics of internal distribution inside Russia. 


At 6:54 AM, Blogger Ralphy said...

I think the russians remain highly suspicious of adam smith's invisible hand. they still crave top down directed economic measures. this encourages greater corruption that what exists in more free market economies. thus you get gem encrusted personal vehicles for the top director of russia's newest space port in siberia.

I have known petroleum engineers who went to russia and fled in consternation of the corruption they encountered. and these were people who have worked many years in places like saudia arabia.

the russians love of strong man leadership and distrust vague promises of enlightened self interest of more relatively free markets, especially when compared to government program dole outs. thus, they are condemned to a second class existence by their own cultural ox yoke.

At 10:14 AM, Blogger maverick said...

The restoration and continuation of Russian prosperity seems to be deeply linked to the exploitation of the Siberian reserves.

But this exploitation is complicated and expensive. It takes a lot of resources to get a raw material out of Siberia. The entire region is littered with the debris of the Cold War where all sorts of unsustainable forays were made into this vast region.

People who say "but Russia has done it before" are correct, but they are glossing over the extraordinarily high cost of "doing it before". The cost was counted in Russian and non-Russian lives and it is truly staggering.

The populations east of the Urals depend on Moscow to supply them with coal, POL, natural gas and food. They do not produce sufficient quantities of either of those to sustain their populations. Most of the refineries are along the western and southern edges of Siberia.

In exchange for this "dole", these places offer their loyalty to the Moscow government and permit the free transit of goods across the Siberian region. The farther you get from the Trans Siberian Railroad - the longer it takes for that dole to reach you. A vast number of the ONG finds that are key to Russia's economic revival are in this far flung places.

I am not an expert on Russia, but JMHO that Russia has a lot of food in its mouth, it is likely going to choke.

At 1:47 PM, Blogger Ralphy said...

major plans are being laid by ford and gm to move away from the internal combustion engine. thus more downward pressure on the price of oil. oil is very valuable however for the things you can make from it. but you have to be inventive.

At 1:48 PM, Blogger Ralphy said...

elon musk is making ford and gm very aware of the future of internal combustion engines.

At 11:42 AM, Blogger maverick said...

The current recommendation from ARPA-E is to explore hybrid systems comprised of a BEV and either an Adv.CE or a H2E as a range extender.

So I imagine that ICEs are going to remain active as range extenders for the forseeable future.

There appear to be advantages to letting the price of oil rise as soon as possible.

If the price of oil was allowed to rise naturally, then I think we might see Russian enthusiasm for aggressive behavior decline.

That being said - if the price of oil remains low - Russian ability to pursue aggressive behavior would decline also.


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