Gazprom turns off the taps

Hello! This week our top story is Gazprom’s decision to shut-down its main gas pipeline into Europe. We also look at the draconian 22-year prison sentence handed down to a Russian journalist and the passing of the last Soviet leader, Mikhail Gorbachev; as controversial in death as in life. In particular, we look at Gorbachev’s economic reforms, which were intended to revitalize the Soviet economy but, instead, led to its implosion.

Gazprom shuts its main gas pipeline to Europe

It finally happened. As anticipated by European leaders and analysts all summer, Russia shut down its Nord Stream gas pipeline to Europe indefinitely. The decision appears to be a response to the G7 countries’ agreement on capping prices for Russian oil and European Commission chief Ursula von der Leyen’s proposal to impose similar measures on Russian gas. However, sooner or later, it was always going to happen. Cutting off the gas was a logical step for Moscow, which has failed to win any concessions from Europe by threats.

• Gazprom announced Friday that Nord Stream would not return to action after a planned three-day maintenance shutdown. As usual, this was blamed on technical issues caused by Western sanctions. Gazprom even published a photo of gas pumping equipment with an oil leak.
• Kremlin spokesperson Dmitry Peskov said Monday that pumping would not resume until the Western sanctions that caused the issue were lifted. “The problems pumping gas came about because of the sanctions Western countries introduced against our country and several companies,” Peskov said. “There are no other reasons that could have caused this pumping problem.”
• The complete shutdown of Nord Stream (which had previously been working at 20% of capacity) looks like an obvious response to the G7 meeting at which a price cap on Russia oil was agreed. It seems Russia takes this threat seriously, even though it will be hard to fully implement without support from China and India. Deputy Prime Minister Alexander Novak has pledged more than once that Russia will simply refuse to sell oil to countries that implement the price cap.
• Even so, it’s hard to see how a total halt in supplies to Europe could have been avoided. After starting a new gas war in the summer, Moscow’s logic is obvious: it wants to win concessions from Europe over sanctions and Western support for Ukraine. The logical next step is to try to provoke a crisis that sweeps politicians into power who are willing to make a deal with Russia. “We are already close to a situation in which exports to Europe will simply be completely halted, maybe as early as this winter. In my opinion, the most likely scenario is that Russia will try to squeeze Europe, reduce exports and finally stop them completely,” oil and gas expert Marsel Salikhov told The Bell in an interview last week.
• Intensifying the crisis in Europe also helps Russian Vladimir Putin at home. Russian TV channels enjoy telling viewers that living standards are plummeting across Europe due to the failures of European politicians. And the topic of “freezing Europe,” crippled by high inflation and rising gas prices, has been dominating the airwaves.
• However, Gazprom stands to be the biggest loser if gas supplies do not resume. Europe is Russia’s biggest and most profitable market for Russian gas: unlike oil, gas cannot simply be redirected to China — there is a lack of pipeline capacity. “Out of 135 billion cubic meters for export, Gazprom can redirect a maximum of 10-15 billion cubic meters to new markets. And prices will be lower,” Salikhov said.
• In these circumstances, Gazprom made what might be its last offer of a generous shareholder dividend. After shareholders were promised a share of 2021’s 1.2 trillion ruble profit only to have that promise rescinded, the company now wants to pay that sum for the first half of 2022. But the decision-making within Gazprom raises more and more questions — on the day when the record dividend was announced, shares in Gazprom leapt 6% a few hours before the news broke.

Why the world should care

Putin is betting heavily on his gas war. Believing that Europe is a vassal of the U.S., supporting Ukraine solely because of pressure from Washington, he clearly expects the Europeans to back down due to rising energy prices and inflation. If he is wrong, it could simply mean that Europe’s decoupling from carbon-based energy gathers pace.

Journalist Ivan Safronov jailed for 22 years on treason charges

A Moscow court sentenced journalist Ivan Safronov to 22 years in prison Monday. The sentence means that Safronov, who was arrested in 2020, will remain behind bars until 2042. Previously a defense correspondent for Russian newspapers, Kommersant and Vedomosti, did not plead guilty to any of the charges and repeatedly refused a plea bargain despite a promise that his sentence would be halved if he confessed.

Safronov’s sentence is one of the harshest handed down of any treason case tried in contemporary Russia.

Safronov was accused of passing classified information about Russia’s defense industry to foreign analysts Martin Larisch from the Czech Republic and Demuri Voronin of Germany. Russian investigators regard both as Western intelligence agents.

Safronov’s trial took place behind closed doors, but in late August journalists uncovered the indictment (prepared by investigators). From this, it is clear the case is entirely fabricated. The main evidence is analytical material Safronov wrote for Larisch and Voronin. These dossiers were compiled for modest fees (Voronin, for example, paid $248 per report) and in all seven cases they included only information that was in the public domain.

The “real reason” for Safronov’s harsh conviction is not known. The BBC Russian Service reported last week that investigations into Safronov began after his article about the supply of Russian SU-35 fighter jets to Egypt in 2019 that was based on correspondence he uncovered between Egyptian and Russian defense officials. Safronov’s report coincided with a visit by the Egyptian president’s chief of staff to the U.S. and prompted a major scandal that caused problems for Cairo. The Egyptians apparently wrote to Moscow, complaining that they suspected it of seeking to send “political messages to third countries.”

You can find out more about Safronov’s case and his sentencing in The Moscow Times here, and read The Bell’s editorial on the subject here.

The death of last Soviet leader Mikhail Gorbachev

Mikhail Gorbachev died on Aug. 30 at the age of 91 in a Moscow hospital for top state officials. He was the third leading figure of the perestroika era to die this year. In May, the first post-Soviet presidents of Ukraine and Belarus Leonid Kravchuk and Stanislav Shukevich died within a few days of each other. The two were signatories to the agreement that dissolved the Soviet Union and led to the end of Gorbachev’s time in office.

The politics of Gorbachev’s funeral

The official Russian position was ambivalent. President Vladimir Putin, who condemned the collapse of the Soviet Union as “the greatest geopolitical tragedy of the 21st century,” limited himself to a polite message of condolence to Gorbachev’s family. The verdict on Gorbachev’s legacy was, instead, handed down by Kremlin spokesman Dmitry Peskov, who said: “He was a unique, extraordinary man. Gorbachev gave the impulse to the end of the Cold War and he sincerely wished to believe that its end would herald an eternal romantic period between a new Soviet Union and the collective West. This romanticism never materialized. The bloodthirstiness of our enemies revealed itself.”

• The big intrigue around Gorbachev’s funeral was whether Putin would attend. The president found a middle path. He missed Saturday’s funeral (“his schedule doesn’t allow it,” explained Peskov), but two days before the ceremony he laid flowers at Gorbachev’s coffin. The highest-ranking official to attend the funeral was ex-president and current deputy head of Russia’s security council Dmitry Medvedev. In a post on Gorbachev’s death Medvedev wrote about how Western powers again dream of “pushing our nation to another round of disintegration.”
• This was no surprise. Putin has always been selective about state funerals. Following the death of his predecessor, Boris Yeltsin, in 2007, Putin attended the funeral and delivered a bombastic speech over his grave a year later. However, of the three former Russian prime ministers to die while Putin has been in charge, he attended the funerals of just two: Gazprom founder Viktor Chernomyrdin and former KGB operative Evgeny Primakov. Putin was not present at the funeral of the third prime minister — liberal economist and reformer Yegor Gaidar.
• Official propaganda took a tougher line — that Gorbachev was a weak leader who didn't know what he was doing. “Everything was possible only because of the weak-willed leadership of a man who in just six years destroyed our motherland,” wrote TV presenter Vladimir Solovyov. A source familiar with Putin’s views told The Bell that this is precisely the president’s own opinion of Gorbachev. Putin always regarded Gorbachev as a “weakling” who allowed his opponents to wrest away his power. Putin, apparently, fears making the same mistakes.
• Among Russia’s intelligentsia, Gorbachev’s death proved as controversial as his life. The former General Secretary’s popularity in these circles is currently far greater than in the late 1980s when his removal was enthusiastically welcomed. The most common epitaphs were “He gave us freedom” (from Yabloko leader Grigory Yavlinsky, whose political career began under Gorbachev) and “he gave Russia 30 years of peace” (Dmitry Muratov, a friend of Gorbachev and Nobel Prize-winning editor of independent newspaper Novaya Gazeta). But many others recalled how Gorbachev had to be forced into reforms and making peace with the West, and highlighted his bloody repression of protests in Lithuania and Georgia.
• Finally, the whole concept of Gorbachev having gifted freedom to Russians came under fire. “Freed slaves are not yet free people. If freedom is treated like a toy, it can be taken away as easily as it was given. Now, through tears, they remember the kind Gorbachev and curse the wicked Putin, who took away Gorbachev’s gift. They hope for a new master liberator. But here’s the thing: can liberalism ever take root in Russia among people who treat freedom as a gift bestowed by a kindly master?”, Soviet dissident Alexander Podrabinek wrote in a column on Gorbachev’s death.

Gorbachev’s economic reforms

The major complaint about Gorbachev’s reforms in the late 1980s was that they were incomplete and half-hearted. In his first years in power, Gorbachev did not understand the scale of the problems facing the Soviet economy and attempted to revive rather than reform. And, when Gorbachev’s team eventually set about genuine reforms, they only deepened the crisis. Gorbachev allowed private enterprise in Russia for the first time since the 1920s — however, he did so in such a way as to ensure corruption quickly took hold.

• Whether or not the Soviet economy could have been salvaged by 1985 is still a matter of debate, although most economists believe it was already impossible. GDP growth was falling, underlying indicators (like labor productivity) were catastrophically low, the technological gap with the West was growing and agriculture had never recovered from Stalin’s collectivization. As a result, the Soviet Union was the biggest importer of food in the world. The trigger for the final failure was a collapse in oil prices (Soviet finances were completely dependent on oil revenues).
• As Gorbachev himself acknowledged, he never fully understood the scale of the problems, nor did he have a proper plan for reform. Soviet leaders traditionally had a limited understanding of the economy and the true situation was hidden from even high officials. Gorbachev recalled how, in 1982, when already a member of the Politburo and a potential future ruler, he asked for leader Yury Andropov’s backing to “deal with the state of the budget.” General Secretary Andropov replied: “Look all you want, I won’t let you into the budget.”
• Once in power, Gorbachev’s reforming zeal was initially limited. Gaidar, who was involved in preparing the first reform proposals in 1985, remembered how a program of “moderate, step-by-step reforms” based on reforms in Hungary and China was dismissed out of hand by the leadership. “What? You want to build market socialism? Forget it! That’s beyond the realms of political possibility,” he was told.
• Gorbachev first tried to make the Soviet planned economy more efficient without changing its fundamentals. Immediately after becoming General Secretary in April 1985, he unveiled a new policy of “accelerating” economic development. The key idea was to almost double investment in engineering, closing the technological deficit and laying the foundations for GDP growth. In practice, though, inefficient management and use of resources turned this “acceleration” into imbalance and increased spending against a backdrop of falling oil revenues.
• The second step was a partially successful anti-alcohol campaign (demand for alcohol in the Soviet Union fell 40 percent and alcohol-related deaths dropped 24%). However, tax revenues associated with alcohol sales, which were up to 15% of Soviet budget revenues, fell by the equivalent of roughly 1.5 percent of GDP in both 1986 and 1987. “I would say the anti-alcohol campaign was the first fatal step towards a future financial crisis,” economist Evgeny Yasin, part of another group involved in preparing the reforms, wrote later.
• As a result, the Soviet economy was in serious crisis by 1987. The budget deficit rose sixfold between 1985 and 1988, reaching 9.2% of GDP. This was covered by printing money and external borrowing. At this point, Gorbachev and his team realized that they needed to change the whole system. In 1987, the Soviet Union approved a law “on state enterprise,” giving enterprises a measure of autonomy and the right to manage their own profits. This idea, which had been tried back in the 1960s, was considered outdated and unworkable without abandoning state regulation of prices. In reality, it weakened the existing system. However, businesses got the opportunity to sell some of their products on the market — the first step towards private business.
• Then, Gorbachev passed the 1988 law on cooperation allowing people to create cooperatives, the first private small businesses in the USSR. These were intended to complement the state sector, provide greater flexibility and overcome consumer market shortages. Unlike state enterprises, cooperatives could buy and sell goods at independently determined prices. This enabled cooperatives to build simple, mutually dependent “businesses” with the directors of state-controlled enterprises: cooperatives were created in factories, bought goods at fixed state prices and sold them at market rates. The management of the enterprises could, thus, generate huge revenues and share them with the cooperatives. This enabled these two groups to establish the first “legal” private capital in Soviet history, placing them in pole position to profit from the 1990s privatization and form the basis of the Forbes Russia list.
• None of this saved the Soviet economy. Instead, the rise of autonomous “red directors” exacerbated the crisis in public finances as the central authorities’ power declined. This undermined the mechanisms of the planned economy, while a fully-fledged market economy could not function alongside price regulation.