A Russianist Who Cares: Thane Gustafson’s “Wheel of Fortune”

It is a rare day to find an American-authored work on modern Russian history which meets the simple criteria of deep knowledge of the chosen topic, the author’s readiness to call things as he sees them without sideways glance at the prevailing wisdom and a basic affinity for the people and culture. In his latest monograph, Thane Gustafson meets these desiderata with ease. Read on…

A Russianist Who Cares: Thane Gustafson’s “Wheel of Fortune”

by Gilbert Doctorow, Ph.D.

“Wheel of Fortune: The Battle for Oil and Power in Russia” (Harvard University Press, 2012) is a master work and inescapable reading for anyone who seeks to understand contemporary Russia.

Gustafson is one of the best known American academics specializing in Russia’s oil and gas industry. He was long a principal in a business consultancy providing detailed analyses of the sector. He has several leading books on the subject to his credit, and his opinion is regularly sought by the financial press whenever some major development concerning the energy industry in Russia occurs. Gustafson is now a professor of political science at Georgetown University in Washington, D.C.

Upon opening “Wheel of Fortune,” the first tip-off that the author operates on another plane from the vast majority of American political scientists writing about Russia is the book’s dedication to the memory of a Russian academician, whom he calls his ‘mentor, colleague, friend.’ And from everything which follows, it is clear the author is someone who has penetrated deeply into Russian society. Over the course of thirty years, he traveled extensively around the country, visiting its most remote locations and inhospitable climatic conditions, where the oil and gas industry operates. That had to mean a lot of bonding with his fellow travelers and hosts. Gustafson tries to understand why the Russians do things the way they do, even if it is often 180 degrees at variance with what he knows back home and he is not judgmental.

The book focuses on Russia’s single most important industry, one which largely finances the state budget, which underpins the national prosperity, and which both shapes and is shaped by the national political structure. While the issues of democracy versus autocracy, defense of human rights, opening up and rollback of liberty may take all top of mind space in most Western literature on Russia, 1991-2012, these are off the table in Gustafson’s work. Instead our attention is drawn to how economics is the social and political driver, and to how the legacies of the Soviet past, both material and immaterial, continue to influence Russian behavior. The effect, whether intended or not, is to reveal the shallowness of what we usually read about Russia both in the mass media and in the academic domain. This is the great virtue of the book, because Russia is a complex society and merits study in its many different aspects, not just the democracy passion play.

“Wheel of Fortune” tells the story of the Russian oil industry from Perestroika to the present day. But given the importance of the oil industry to the Russian economy and to the finances of the state, and given the high level of state intervention both to deconstruct the industry in the 1990s and to renationalize the industry in the 2000s under Vladimir Putin, it is also a history of the Russian state in the period covered.

As an historian, Gustafson combines two important virtues: appreciation of the big forces driving history, the underwater currents, and appreciation of the contingent factors, including personalities with their unfathomable and unpredictable elements that can at given periods have decisive importance.

His delineation of the economic and technical factors has admirable sophistication. I think in particular of his breakdown of future prospects for the Russian oil industry into the brownfields, the green fields and the blue fields, each with its own very different requirements in terms of skills and scale of the operators, as well as capital demands. In this way he reveals the difficulties of plotting how and whether the Russian government will be able to face up to its challenges: propping up lagging production in the Soviet-era resources of Western Siberia and/or adding new capacity in Eastern Siberia and on the continental shelf either on their own or with international participation.

His mastery of the interplay of underlying drivers and contingency is shown to great advantage in his treatment of the Yukos Affair, which is the central event in the book. The setting for the Yukos Affair is taken straight back to the first days of the post-Soviet period and the 1992 energy law, which stated clearly that mineral wealth in the soil belonged to the state. That right and the regulatory framework controlling the industry, including the field development plans, may have been dead letter during the 1990s, when the central government was weak. But they remained in place and were ready for immediate implementation to reinstate effective state controls early in the new millennium when the government of Vladimir Putin acted to restore the federal administration and to tap the rapidly growing oil rents to finance a national revival.

And the consequences of the Yukos Affair were, as Gustafson makes clear, of decisive importance for the evolution of the whole economic strategy of the Russian government under Putin, from the mixture of neo-liberal and social market ideas before the Yukos challenge to predominantly dirigiste policies of state capitalism in Putin’s second term and beyond. It is one of the major achievements of this book that Gustafson shows how Putin came to power with no particular plan for the energy industry but developed one in a pragmatic manner in response to the challenges and opportunities before him.

The single greatest challenge on the domestic economic front was posed by Yukos and its arrogant boss, Mikhail Khodorkovsky who, Gustafson tells us, ‘stepped on the third rail’ and misjudged both his strength and his vulnerability when directly flaunting the conventions of the industry and denying the leading role of the central government. Whether Yukos violated Russian law by its aggressive tax optimization may be debatable (though such debates with a sovereign state usually do not play out well); however, we learn that the company also acted in such manner as to be perceived by the industry establishment as engaging in ‘rape and pillage’ of the state assets over which it was merely custodian under law, and so invited destruction.

In Gustafson’s words, the actions taken against Khodorkovsky were in accordance with the beliefs of Russia’s business as well as political elites. This interpretation, which is manifestly persuasive, runs directly against the myths of a victimized private entrepreneur emblematic of a new style of transparent corporate management and seeking autonomy from a corrupt and incompetent state leadership, the view promoted by Russia’s pro-democracy opposition movements with the active encouragement of official Washington.

Indeed, from the scenario Gustafson presents, one may understand that by his imprudent and baiting behavior Mikhail Khodorkovsky summoned not only a personal tragedy and the destruction of Yukos as a company, but also brought about the ascendancy of the most conservative elements in the Kremlin for several years following the Yukos Affair, to the detriment of the general investment climate. It also led to a multi-year rejection of foreign involvement in the oil and gas industry, a hiatus which compromised Russia’s access to the very quickly changing world technologies it needs to stay competitive and continue to produce rents for the state.

Gustafson tells us that confiscation of the wealth generated by Yukos was not the objective of the government’s action against Khodorkovsky; rather it was a result, an unplanned byproduct of the decapitation of his company. Moreover, the usual headline issue in accounts of the Yukos Affair, a clash between the siloviki and the presidential ambitions of an oligarch turns out to be only one of many factors in the conflict. Besides the already mentioned tax optimization and flagrant departure from the officially approved field development plans, there was interference in Russia’s foreign policy in the form of Khodorkovsky’s bid to do a deal with the Chinese which would bypass the state pipeline monopoly, and his plans to sell the nation’s crown jewels to International Oil, either Exxon or Chevron, among other factors.

Another major contribution of this book is to deepen our understanding of the shares-for-loans scheme of 1995-96, which both in the West and in Russia is used as shorthand for the takeover of the natural resource wealth of Russia by the oligarchs under the weak Russian presidency of Boris Yeltsin. Gustafson says the oil firms were already under the control of financial engineers like Khodorkovsky even before title changed hands; that the oil generals were not quick enough in mastering the market levers and had lost control both of oil flows and cash flows before the fateful auctions.

Having issued this very interesting insight, it is regrettable that the constraints of his subject focus keep Gustafson from delving further into the ostensible result of the auctions: how they provided money for Yeltsin’s reelection campaign, which seemed in jeopardy. Indeed, there seems to be a taboo among historians to decipher what contribution exactly the oligarchs made to the reelection. Aside from money, we know they made available to the Yeltsin campaign the strong support of the media assets which they controlled. But where did the money itself go: was there vote-buying, rigging of vote counting or other hanky-panky with oligarch connivance? Logic would suggest, yes. Otherwise it is hard to see how Yeltsin was able to win the run-off vote when, by the words of Gustafson elsewhere in the book, we are given to understand that even today Russians lean heavily towards a socialist kind of economy rather than towards the neo-liberalism which Yeltsin stood for.

The following overview of the Russian social and political scene from “Wheel of Fortune” may seem unexceptional to the casual reader, but it provides substantive explanation for why Vladimir Putin may be said to represent Russia’s political mood ever since the time he won his first presidential election:

“The real driver of events in Russia…is the unresolved conflict among Russians over the principles by which society and the economy should be run. There is no consensus among Russians about the most basic issues in economic and political life. There is no common view that capitalism is better; on the contrary, two decades on, many Russians – although not all – prefer a Russian brand of populist socialism largely unchanged from Soviet times. There is no agreement over who should own and run the essential assets of the country, or which goods should be public or private. There is no unanimity among Russians about their place in the world or their relationship to the global economy and international players in it. At most there is a vague nostalgia for the Soviet past – not for communism as an ideology but rather for an era in which Russia was powerful and the central state provided.” (page 482)

Gustafson shows how Putin was from the beginning able to appeal to both left and right, to traditionalists and modernizers in the Russian political arena. And even when, as after the Yukos Affair, he leaned heavily on the siloviki, he eventually bounced back and re-occupied a position of balancer between the Kremlin clans representing both interests and political philosophies.

One particularly interesting chapter in “Wheel of Fortune” is devoted to the ‘brothers of Saint Petersburg,’ the mixed team of lawyers and economists, military officers and intelligence operatives whom Putin brought with him to Moscow when he assumed the presidency. He takes the time to delineate relationships and acknowledges the merits of individuals which go well beyond being in the right place at the right time.

However, Gustafson also holds to the conventional view that the ‘brothers’ are something specific to Russia, the personalization of politics which is pre-modern. I beg to differ: what we have here is just a Russian version of the ‘old school tie’ that was, and in some places still is, the bond of elites everywhere. And, if I recall, newly elected American presidents including the incumbent, are known to arrive in the District of Columbia with more than one loyal retainer from their home town.

At one point in “Wheel of Fortune” Gustafson acknowledges that the ‘best and the brightest’ whom Putin recruited to restore order after the chaotic 90s were to be found among the security services and army. That was true for the Kremlin HR services. He also points out that it was true for entrepreneurs like Alekperov of Lukoil when he was selecting his own two top assistants. And yet, in somewhat contradictory fashion, when describing how Putin established his ‘vertical of power’ and staffed the seven federal okrugs, Gustafson reverts to the notion commonly held among American political scientists,  that taking on such personnel was tantamount to reinstating KGB control over the country.

I agree that the distinction between human resources and the institution candidates come from is subtle, but it is essential and should be respected. The FSB was not placed over society. Moreover, a predisposition to coercion is not the same as coercion.

Finally, I would call attention to Gustafson’s deft handling of the issue of corruption and incompetence with which the neo-liberal opposition has sought to tar and feather the government. Gustafson demonstrates clearly that the explanation for mediocre performance of the Russian bureaucracy is much more complicated than what the loudmouths in the street want us to believe. And he does so on the basis of his extensive contacts on the ground with a great many decent and hard-working state servants.

The book will bitterly disappoint those who are seeking cloak and dagger material, puppet masters from the Lubyanka who control the Kremlin and other sensationalism. It will also disappoint the great many peddlers of alarmism over how the Kremlin allegedly uses its energy resources for political purposes to punish former satellites or Soviet republics or to apply a policy of divide and conquer within and between Member States of the European Union.

Among the most valuable statements about Russian energy policy which Gustafson drops in a matter of fact way is the following:

“Russia’s influence in global energy matters is modest compared with the scale of its energy resources. In oil markets it is a passive price taker, and it has shown little desire to join with other oil producers to influence output levels or prices. In gas markets it has leverage only in Europe, and even that is limited by the high degree of interconnectedness of the European gas market and the availability of storage, together with the growing role of LNG. The only real sense in which Russia is a great power in energy is in its ability to put pressure on its near neighbors, and even there, as the examples of Azerbaijan, Kazakhstan and Turkmenistan show, there is little that Russia can do when those countries decide to diversify their outlets.”

This statement from page 487 is entirely true and reasonable, though it contradicts the universally disseminated view in America that Russia has an energy monopoly in Europe, or, at the very least, that Europe is over-dependent on Russian gas and oil supplies, an issue that I have explored extensively on these pages.

For this and many other reasons, I say ‘kudos’ to Thane Gustafson for his integrity and human understanding, both of which are in short supply in the profession of Russia-watchers.

Having tossed the author a well-deserved bouquet, I would like to point out now that Gustafson cannot totally escape the conceptual limitations of his own milieu in the American elite of higher education. In this he is no more successful than the Russians have been in escaping from the value system of their Soviet past. The political, or ideological preference of the author is neo-liberal, in favor of small government and balanced budgets, all of which is supposed to allow private entrepreneurship and innovation to flourish as it has in recent years in the US oil industry, resulting in the rising production and reserves of both oil and gas, to everyone’s astonishment.

Like the vast majority of American Russianists, though with more justification given his specialization in the oil industry, where the global tune is called from Houston, Gustafson tends to describe and judge Russia in a head-to-head with America, ignoring the broader Continental traditions, of which Russia always was and remains a part. It is the Old Continent, and not merely Russia which has enduring traditions of statism and dirigisme, in contrast to the Anglo-Saxon traditions of laissez-faire.

In this context, it might have amused Professor Gustafson to attend a recent talk by the outgoing American ambassador to the Kingdom of Belgium, Howard Gutman, in which he spoke admiringly of Russians for their job flexibility, for operating 24 hour food catering and retail stores in Moscow and other cities, demonstrating an entrepreneurial oomph which is lacking in tired and socialist-minded Belgium, where labor costs are too high.

Another of Gustafson’s shortcomings is the direct consequence of his strengths as a scholarly researcher and teacher. Although his chosen area is the oil industry, in particular, private enterprise in that industry, he clearly has not worked inside corporations. If he had, he would be less severe with Russian oil companies, including Yukos, for their rough command structures. Open space office configuration does not a democracy make. We should not be fooled by our own public relations. A great many large U.S. corporations are run in an autocratic manner through their own ‘vertical of power.’ And the oxymoron of elections to the board of directors comes to mind.

In the same spirit, it is somewhat naïve for Gustafson to find anything striking in the recruitment of Russians in epaulettes and chevrons to run the state-owned companies, or to run the country itself. Examination of American corporate hierarchies from after the Second World War, from after the Korean War, and even more recently shows that military discipline and loyalty always received preference in the civilian economy. Why should it be different in Russia, all the more so after a ten year run when academic economists heading the government left the country in chaos, with both business and regional administrations in the hands of common criminals.

Before closing this review, let us consider how Gustafson’s sophisticated master work is being presented to the foreign policy community. In the November-December 2012 issue of ‘Foreign Affairs’ magazine, we find a sampler article drawn largely from the last chapter of his book, which is where most political scientists begin and possibly also end their examination of new works by their peers. This is where it is customary to present the forecast, the prognosis of future developments based on the foregoing. Gustafson’s final chapter of the book “Oil and the Future of Russia” has now been personalized to suit the expectations of FA’s readership into “Putin’s Petroleum Problem.” This, in turn, is given the teaser title “Oil’s Well That Ends Well for Russia” on the front cover of the magazine.

Comparing the journal article to the book proper, the noteworthy change in content is a slimming down of complexities. For example, the all-important Yukos Affair now is attributed firstly to Khodorkovsky’s political ambitions, which were in conflict with Putin. However, the greater issue is that futurology is probably the least important contribution of the book.

Those readers who are seeking certitudes of the way forward in Russia from Gustafson will be disappointed. Perhaps for that reason, the review article on “Wheel of Fortune” by Robert Legvold that appeared in the January-February issue of “Foreign Affairs” twists the message from Gustafson to suit those expecting outcomes in Russia more to their liking than a cautious ‘watch and see’ how the Russians handle their sectorial dilemma. Legvold raises the question of ‘a grim future.’ He also gives a finality which is lacking in Gustafson: “the system cannot be maintained.” Which system? Gustafson was primarily addressing a number of different though inter-related issues surrounding Russian fiscal policy and regulatory policy as they affect the oil industry.From Legvold’s review, one might suppose it is the entire Russian political system that will collapse like a deck of cards.

Moreover, in the book Gustafson left open the possibility that the Russians would, selectively, find solutions to their industrial problems though partnership with IOCs. In fact, we read in the daily press how this is proceeding with remarkable speed and scope. Today’s financial news reported on the frame agreement signed between Gazprom and Royal Dutch Shell yesterday in Amsterdam in which a one-third stake in important new offshore licenses will be ceded to the Dutch and under which the much needed international exposure of Russian companies will be furthered by Gazprom taking one-third positions in new and promising offshore prospects of Shell, as in South Africa. This latest announcement is just a new variation on the deal which Rosneft holds with ExxonMobil.

We also see that the Russian monopolies and national champion status are not permanent and unchanging. The Gazprom monopoly on gas exports is likely to be punctured, at least as regards LNG. The respective champions of gas and oil are encroaching on one another’s sector. In a word, nothing can be taken for granted in an area that the Kremlin leadership recognizes, no less than Gustafson, to be of critical importance to the nation.

Considering the close-minded intermediaries responsible for promoting Gustafson, I have to express all the more admiration for his soldiering on and producing as worthy a work as “Wheel of Fortune” proves to be.

© Gilbert Doctorow, 2013

G. Doctorow is an occasional guest lecturer at St. Petersburg State University and Research Fellow of the American University in Moscow. His latest book, “Stepping Out of Line: Collected (Nonconformist) Essays on Russian-American Relations, 2008-12,” is available in paperback and e-book from Amazon.com and affiliated websites worldwide. Also on sale in Sterling and Waterstone’s booksellers, Brussels.