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Portfolio Magazine: Putin’s Power Grab

Portfolio Magazine Sakhalin-II

Photograph by: Donald Weber

Portfolio Magazine: Putin’s Power Grab

by James Verini  December 2007 Issue

The Russian president’s global ambitions—and his drift toward totalitarianism—hinge on the staggering energy reserves of the onetime Siberian gulag of Sakhalin Island. Royal Dutch Shell knows the drill.

Even in August, a visitor to Sakhalin Island, off the eastern shores of Russia, can detect a chill in the air. The pine and birch forests are still a brilliant green, the sky azure and cloudless, but intimations of the island’s savage Siberian winter are already here. Katerina Lekomtseva, a veteran of 28 such winters, shivers as she stands on a hill above Aniva Bay, on Sakhalin’s southern coast. When Lekomtseva was a child, during the death throes of the Soviet Union, there were constant electricity shortages, and she and her father would sit in the candlelight playing a game called In Town. He would name a city, and she would name another beginning with the last letter of the city he mentioned. After her father, who hadn’t yet given up on the U.S.S.R., would say “Moscow,” Lekomtseva, who had accepted her country’s eventual demise, would counter with “Washington.” Then she would imagine how wonderful Washington must be: no electricity shortages, no candles. “I hated that game,” she tells me.

Lekomtseva’s life has changed vastly since then. At one time, she might have fled to Western Europe—or Washington—in search of a better life. No longer. Lekomtseva now lives in a nice apartment, drives her own car, and wears designer jeans. She works for Sakhalin Energy Investment, and as we stand in the cold wind, she points, cigarette in hand, at her firm’s latest handiwork: a colossal liquefied-natural-gas plant. Its steel tanks and miles of pipes have consumed the weatherworn dachas that used to be here, and it sprawls along the bay like a monument to Russia’s new economic might. In fact, to Lekomtseva, that’s exactly what it is.

“Now you can get strawberries in the wintertime in Sakhalin,” she tells me. “I would sell my motherland for a strawberry.”

Sakhalin Energy has brought a lot more than wintertime strawberries to this far-flung redoubt of the Russian Federation. Among the island’s nearly 600,000 residents, unemployment is at only 1.5 percent. Why? Sakhalin sits above one of the largest hydrocarbon deposits in the world. An estimated 90 trillion cubic feet of untapped natural gas and 12 billion barrels of crude oil lie beneath the ocean floor here. The plant where Lekomtseva works is just one part of an oil and gas project known as Sakhalin II, which is, at more than $20 billion and counting, the largest foreign investment ever made in Russia. Indeed, it’s the most expensive project to produce and transport energy ever undertaken anywhere in the world.

But that investment has recently become a lot less foreign. Not so long ago, the majority stakeholder in Sakhalin Energy was Royal Dutch Shell, the Dutch-British energy giant that secured drilling rights in the 1990s. But in late 2006, Shell agreed to sell a controlling stake to Gazprom, the Russian-state-controlled gas conglomerate, which previously had no involvement. Shell was encouraged to do this, to put it mildly, by the Kremlin. Critics of Russian president Vladimir Putin have decried the sale, calling it a shakedown. U.S. Representative Tom Lantos, a California Democrat who is chairman of the House Committee on Foreign Affairs, says it’s an unfortunate “recentralization of all authority and property” in Russia, though there’s “not very much” the U.S. can do about it. But to the enlightened suits in Moscow, no less than the drillers on Sakhalin, Russian control of Sakhalin II seems only natural. “This is our gas. Why shouldn’t we own it?” asks one well-educated Moscow consultant who trains Russian managers for a large New York-based firm. No doubt it’s a solid argument. But beneath the strident nationalism are pangs of dire necessity: Sakhalin II and projects like it are not just strategically vital; they represent nothing short of the future of Russia’s economy.

That economy is booming. Foreign investment is pouring in, and the Kremlin is floating atop a huge budget surplus. And the reason for all this is, in a word, energy. Russia is the largest exporter of natural gas in the world, and it is the second-largest oil exporter; the two commodities account for an astounding 8 percent of the country’s gross domestic product and 40 percent of its tax revenue. When you talk about gas and oil in Russia, you’re talking about two companies: Gazprom and its state-controlled oil counterpart, Rosneft. For each $1-per-barrel rise in the price of oil, about $3.4 billion flows into the federal treasury over the course of a year, according to recent estimates. “Between the Kremlin and Gazprom, I don’t know who needs who more,” says Alexander Burgansky, an energy analyst at Renaissance Capital, in Moscow.

European leaders issued nary a peep when Shell gave in to Gazprom, and with good reason: Russia provides Western Europe with a quarter of its gas and oil. Putin could flip a switch and families from Paris to Milan would go to sleep with their coats on tonight. On New Year’s Day 2006, Gazprom chief Alexei Miller did more or less just that, cutting gas supplies to Ukraine amid a price dispute. The message to Europe was, in inimitable Kremlin fashion, at once oblique and menacing; look at a map and you can see that the gas Russia sells to Europe is routed in large part through Ukraine.

Not only Europe took note. Once Sakhalin II opens its pipelines next year, close to 20 percent of the island’s natural gas will find its way to the United States and another 20 percent will be sent to South Korea. The remaining 60 percent will go to Japan. “This is the project that’s going to make Russia an Asian power,” says Rawi Abdelal, a professor at Harvard Business School who has written a series of case studies on Sakhalin II.

Thanks to energy and the new Russian brand of “state capitalism” it supports, Putin has returned his country—not long ago considered the invalid at Europe’s doorstep—to center stage. He has revived Russia’s military, maneuvered Russia toward admittance into the World Trade Organization, blocked United Nations sanctions against Iran, and cut deals with Venezuelan president Hugo Chávez and North Korean leader Kim Jong Il, to name two of the West-irking politicians he has cozied up to. The country’s energy economy has allowed Putin to exert an ever-tightening grip on Russia, creating what some fear may become a kind of totalitarian republic. He has rendered the Russian Federal Assembly impotent, centralized control of the media, and jailed or exiled tycoons—all part of what the Kremlin, with its dependable flair for ominous understatement, calls “managed democracy.” Vast energy resources have also allowed Putin to set about making genuine governmental reforms, root out corruption, and pour money into social services.

And all of it—his despotism and benevolence alike—has left him wildly popular. While George W. Bush endures approval ratings of about 30 percent as his presidency sputters to a close, approval ratings for Putin, who is due to step down in March, hover around 70 percent.

To many observers both inside and outside Russia, the Kremlin’s dependence on energy is precisely the danger. A great deal of the country’s future is pegged to steadily rising oil and gas prices, but as history has shown, what goes up always comes down. The path the Russians are on is “a pretty risky one,” says Ed Chow, a senior fellow at the Center for Strategic and International Studies in Washington. “What else do they have to sell besides energy? There are only so many fighter planes you can sell to China.”

“There is gross inefficiency in the way the Russian energy market functions,” Burgansky, the analyst for Renaissance Capital, concedes. Inefficient or not, Russia has the advantage. The second-largest gas reserves in the world are in Iran, and those are roughly half the size of Russia’s. A Gazprom official in Moscow points this out with glee. “Who can be a bit more reliable,” he asks, the Russians or the Iranians?

Situated seven time zones east of Moscow, above Hokkaido, the northernmost island of Japan, Sakhalin’s sliver of land extends for 589 miles, nearly touching the Sikhote-Alin Mountains in Russia’s southeastern corner. Sakhalin separates the Sea of Japan to the south from the Sea of Okhotsk to the north. The treacherous moving ice of the Okhotsk sends temperatures on Sakhalin to as low as –50°F.

The island’s history has been as forbidding as its climate. Inhabited originally by fishing tribes, Sakhalin was fought over and bargained for by the Russians and Japanese for more than 100 years. In the 19th century, Russia dispatched an occupying force of convicts, and the czars later turned the island into a gulag, made notorious by Anton Chekhov in his 1895 book Sakhalin Island. During World War II, the Japanese brought Korean workers there to toil in the coal mines.

Japanese signs still hang above the fish stalls and corner beer kiosks in Yuzhno-Sakhalinsk, the loud, dusty capital, which manages to feel at once like a picaresque Soviet backwater and a boomtown. Migrant workers from every corner of Siberia and the Commonwealth of Independent States (including the so-called Stans, as in Uzbekistan) live in tumbledown shanties and khrushchoby, crumbling apartment blocks dating from the Khrushchev era. Impoverished babushkas beg for kopecks, and children in tattered clothing play along dirt roads. Boys poach salmon from the rivers, and old men sell wild mushrooms they pick in the forest.

Meanwhile, new Toyota Land Cruisers clog the intersections, and expensive hotels are popping up (the garish—and garishly named—Mega Palace being one of the latest examples), along with nightclubs and supermarkets. So are office towers, the most conspicuous of which is the new Exxon Mobil installation, a gray glass compound that looks as if it might have been imported from a Dallas business park, and the Rosneft outpost, a drab metal fortress. Exxon Mobil and Rosneft are partners in Sakhalin I, a $12 billion energy project also on the island. A few blocks off Lenin Street sits Sakhalin Energy’s more subdued headquarters. But the real work of Sakhalin II goes on in the wilds of the island, beginning in the far north, where Sakhalin Energy has installed three offshore drilling and production platforms in the Sea of Okhotsk. These platforms, battered by 90-foot waves and caked in ice from December to May, will feed the plant in Aniva Bay, where the gas is to be cooled to liquid form and then piped onto tankers for export. Impressive as those facilities are, they’re not the pièce de résistance of Sakhalin II. That honor belongs to the pipeline that runs almost the entire length of the island and to which roughly half of Sakhalin Energy’s 25,000 employees and contractors are devoted. To get a closer look, I travel to a work camp outside the town of Sokol, where one of the last unfinished spurs is being installed. The camp is set up in a pasture, behind a dinky guard post. Cows meander nearby.

“You’ve got mountains. You’ve got swamps. You’ve got landslides, mudslides, communities,” says Steve Burt, the camp’s large, gruff manager, as we sit in his makeshift office, a ceiling-high map of his portion of the pipeline hanging behind him. Burt, 54, looks and sounds uncannily like Charles Laughton, the British actor who, among other roles, played Captain Bligh to Clark Gable’s Fletcher Christian in Mutiny on the Bounty. Like all of the Sakhalin Energy higher-ups I have met, he is not Russian, but English. He started out with Shell. I ask when he’s scheduled to return home, and he says ruefully, “Eighteen months ago.”

The pipeline, he explains, crosses 1,100 waterways and 21 seismic zones. The faults are no piddling fissures, either. In early August, a series of earthquakes on Sakhalin left 3,000 people homeless, and in 2002, a volcano erupted outside Yuzhno-Sakhalinsk. Burt’s workers also contend with swarms of biting flies and, worse, brown bears (about 3,500 inhabit the island), which kill a few people every year.

All of these obstacles can be dealt with. “There are always problems,” Burt says, “but money talks.” More daunting, however, is the project’s new majority owner, Gazprom, which has been trying to flex its muscle since it acquired a controlling stake last year. Gazprom is, as one ex-member of the U.S. embassy in Moscow puts it, “almost feudal,” its upper ranks riddled, like so many of Russia’s state-run companies, with ex-Soviet managers and the beneficiaries of nepotism. “Most people don’t think that Gazprom has the technical or managerial skills to manage these projects,” the former embassy official says.

Quality control is a big problem. “We’re trying to build this to Western standards,” Burt tells me, but “the Russians don’t have any of these standards—or any standards, really. You can see, every day, pipelines blowing up in Russia. There are whole areas of Russia contaminated from leakage. They have all the regulations. They’re just not using them. We had a guy from Gazprom come in. He said to me, ‘If we were doing this, it would be done by now. The problem is you’re trying to do it legally.’ ”

Still, Russia did not hesitate to invoke regulations to muscle its way into Sakhalin II. Environmental groups had been on Sakhalin Energy’s case since it began operating in the late 1990s, but the Russian government mostly ignored them. Then in 2006, after negotiations to give Gazprom a minority stake in Sakhalin II fell apart, Russian authorities began citing Sakhalin Energy for alleged violations. One example: Excessive logging of the pipeline corridor and poor terracing of its perimeter were creating severe erosion problems all along the pipeline route. And international environmental groups, the World Wildlife Fund among them, complained bitterly that Sakhalin Energy’s construction activities in Aniva Bay, including an undersea pipeline, had disrupted fish and whale populations. Using such charges as leverage, Russian authorities revoked permits and demanded work stoppages. According to a Sakhalin Energy employee, Yuzhno-Sakhalinsk police set up shop outside the company’s headquarters and checked work visas. Shell was threatened with a $50 billion lawsuit.

It was from the Kremlin, everyone suspects, that an offer came: Sell majority control of Sakhalin II to Gazprom and the trouble will cease. So that’s exactly what Shell did. It handed over half its shares to Gazprom, which also acquired half the shares of Shell’s Japanese partners, Mitsubishi and Mitsui & Co., giving Gazprom 50 percent of Sakhalin Energy plus one share. (No one can accuse Putin of being overly greedy in this case.) Gazprom agreed to pay $7.45 billion for its stake. As part of the deal, Shell reportedly agreed to pay millions in cost overruns and will face new taxes. “I would be surprised if Shell got any cash out of Sakhalin II,” says one U.S. analyst working in Russia.

For Shell’s part, a spokesperson says, “This is an acceptable deal for us. We have a major stake in the world’s largest oil and gas export project, with Gazprom as a strong partner.” As for the environmental accusations, the spokesperson adds, “Sakhalin Energy has always stated that all environmental impacts are short-term and reversible.”

Shell’s problems, however, haven’t totally evaporated. As part of its contract, the oil giant agreed to pay for infrastructure projects and social programs on Sakhalin. According to Sakhalin Energy, Shell spent more than $390 million building and paving roads and putting in an airstrip (improvements that benefit Sakhalin Energy as much as they do Sakhalin Island). But the permanent housing Shell promised to residents of Korsakov who live near the plant hasn’t been completed, fueling further resentment among locals, many of whom were previously upset about environmental issues. The Shell spokesperson contends that Sakhalin Energy has stimulated the local economy and “provided benefits to the local community in terms of direct and indirect employment, local taxes and revenues, and social development programs.”

Perhaps part of the resentment is a feeling that Sakhalin Energy takes care of its own in lavish style. It has built a gated community south of Yuzhno-Sakhalinsk for its international executives. The mini-suburb has roads lined with colonial-knockoff homes and manicured lawns, as well as its own school. Sakhalin Energy says these amenities are necessary to attract professionals to the island and keep them safe. But the luxuries have also contributed to massive cost overruns. Sakhalin II’s original budget was $10 billion. It’s now more than double that. Shell lays much of the blame for being over its budget on the rising costs of energy and energy-related services. Many experts find this explanation laughable. For one thing, Shell never saw fit to disclose its overruns to Gazprom in the early stages of negotiation. “The Russian guys were understandably furious,” says Abdelal, the Harvard Business School professor. Perhaps even more galling to the Russians was that Shell seemed to be counting on turning a profit no matter how much it spent. This confidence stemmed from the highly favorable contract Shell had with Russia.

The Russia of the 1990s was vastly worse off than the Russia of today. Mikhail Gorbachev, in the final days of the Soviet Union, and Boris Yeltsin enacted sweeping reforms, but in their haste, they also paralyzed Russia’s economy. G.D.P. dropped by half, and unemployment was rampant. The mafia was sapping whole portions of the economy. By the middle of the decade, Yeltsin was so desperate to inject some liquidity into the system, he agreed to a veritable fire sale of state-owned properties, a plan devised by a cadre of economists and the now-notorious oligarkhi, who kept Yeltsin in power while enriching themselves and their American and European partners. Putin and many others felt humiliated—not just by Russia’s pitiable state, but by the profits foreigners were reaping from the country.

The foreign energy industry, meanwhile, had been salivating over Russia’s reserves for years. As the fields of Texas and the North Sea were drying up and the Middle East was imploding, some of Russia’s biggest deposits had not even been properly surveyed. There is enough gas and oil in the country to fuel Russia and satisfy its existing outside contracts for decades; the problem has always been getting at those resources. Beginning with Lenin, every Soviet leader had tried to figure out how to turn the Russian empire into a resource giant, but the insularity and stagnation of the Soviet system made it impossible.

So when Yeltsin finally threw open the gates, Shell, Exxon, Chevron, British Petroleum, and dozens of other firms, large and small, rushed in. Shell inked one of the sweetest deals: Not only did it secure the best Sakhalin fields, it wouldn’t have to give Russia a share of the profits before recouping its investment. Such was the situation when Putin, Yeltsin’s dark-horse successor, became president in 2000, inheriting a country in dire straits. Many foreign investors were sure that Putin—if he managed to stick around long enough—would carry on Yeltsin’s history of largesse toward business.

Gazprom headquarters aren’t in central Moscow, as one might expect, but in Cheryomushki, a bland district of huge apartment blocks and wide boulevards in the southwestern corner of this churning city of 11 million. To get there, you have to take the metro and then a bus. Once you arrive, however, there’s no question that you’re in the right place. Gazprom’s offices, hulking buildings encircling a cement-and-blue-glass skyscraper, loom like the Aniva Bay plant.

Gazprom has 430,000 employees, but only a few of them are permitted to talk to journalists. And the Gazprom official who finally agrees to meet with me isn’t one of them, so he can’t be identified. He speaks careful and labyrinthine English. Although Gazprom owns media outlets and has little need of the outside press, the representative is still polite and patient. And inscrutable.

“What will happen to Gazprom if global energy prices go down?” I ask as we sit down at a table in a sterile cafeteria.

“That is not predicted,” he answers, with a smile. What is predicted, he says, is that Gazprom’s market capitalization will reach $1 trillion not too long from now. (It recently surpassed $290 billion.)

“But what if the global credit crunch gets worse, and foreign firms decide to pull their money out of the historically volatile Russian market?”

“Right now the reality does not seem that it will be so,” he says.

“What if Europe decides to start diversifying its gas supplies?”

“Why?” he counters. Outside Russia, the biggest reserves are in Iran and Qatar. “That’s why it’s good having Gazprom fulfilling these contracts,” he adds.

His confidence is understandable. Forged from the state gas ministry in the early 1990s by Viktor Chernomyrdin, Yeltsin’s prime minister, this “natural monopoly,” as Russian officials like to call it—again, the beautiful phrasing—would be almost unthinkable in the West. Gazprom controls close to 90 percent of the Russian gas market and maintains the largest distribution system anywhere in the world—a 97,500-mile network of pipes that stretches from the Baltic Sea to the Pacific. In 2006, the Duma, the lower house of Russia’s Federal Assembly, passed a law essentially making Gazprom the only legal exporter of Russian natural gas. And what an exporter it is: Russia provides an estimated 26 percent of France’s gas, 30 percent of Italy’s, 43 percent of Germany’s, 70 percent of Austria’s, and 100 percent of Finland’s. Measured by reserves, Gazprom is the biggest energy company in the world.

Considering how natural gas is quickly becoming the fuel of choice for industry and government services, these figures seem even more significant. Natural gas is cheaper than oil and, in an increasingly carbon-conscious world, cleaner than oil or coal. Between 1990 and 2004, natural-gas demand in Europe grew 66 percent; in the Pacific, it increased 76 percent. In China and India, the world’s two fastest-growing economies, it has more than doubled.

Gazprom owns or has a stake in more than a hundred subsidiaries throughout Russia, Europe, and Central Asia. It has its own bank. It has vast holdings in manufacturing, media, real estate, electricity, and just about everything else. Gazprom also maintains a private army to guard its pipelines. Yet even as the West grows increasingly fearful of this state within a state, it is aiding Gazprom’s rise. Former German chancellor Gerhard Schröder now works for Nord Stream, a Gazprom pipeline project that will link Russia and Germany. Banks in the U.S. and Europe (particularly in Germany, where Putin, who was a K.G.B. agent in Dresden in the 1980s, has deep connections) fund its deals. The American firm Ketchum is among the companies handling Gazprom’s public relations, and Washington lobbyists work for some of its trading partners.

Then there is Gazprom’s Kremlin clout. Chairman Dmitri Medvedev also happens to be Putin’s first deputy prime minister and, until recently, was mentioned as a front-runner to succeed him as president. German Gref, Putin’s former minister for economic development and trade, sits on the board, as does Viktor Khristenko, minister for energy and industry. Igor Sechin, chairman of the Rosneft board, is Putin’s deputy chief of staff. Many of them are old Putin cronies from St. Petersburg, where Putin worked in the mayor’s office after leaving the K.G.B. It was there that Putin assembled his inner circle of siloviki, the former intelligence officers and men with military training who share his nostalgia for the Russian empire and now fill the upper ranks of the Kremlin and most of the state-controlled conglomerates. Gazprom’s Kremlin ties are also a selling point for Western banks and investors who want assurances of stability.

Gazprom claims that although half its shares are owned by the state, about 500,000 private investors own the rest. The question on many Russians’ minds is just who all those investors are. Gazprom actually consists of a mind-boggling patchwork of holding companies and subsidiaries, and speculation swirls around Moscow about suspect offshore-investment vehicles controlled by various siloviki. Putin’s own stake in the company is a matter of speculation. There is no way to determine the precise figures in Russia, where corporate governance—to say nothing of transparency—is a new and impertinent idea. “Putin is the C.E.O. of Gazprom,” a U.S. diplomat working in Russia tells me.

Carl von Clausewitz, the famed Prussian military strategist and a soldier in the Russian army for a time, said that war is politics by other means. In Putin’s Russia, the equation has been amended: Business is politics by other means. “The system here is almost medieval,” says the U.S. diplomat. “In the West, money is power. If you’re Bill Gates, you accumulate a lot of money, and then you get some power. In Russia, you get the power in order to get the money.”

In Russia, business—particularly the energy business—is often warlike too. On the day I visit Gazprom, it’s abuzz with news that police have issued an arrest warrant for oil mogul Mikhail Gutseriev, whose company, Russneft, was one of Russia’s biggest independent energy firms. Gutseriev now finds himself facing charges of fraud and tax evasion.

Gutseriev’s plight inevitably draws comparisons to that of Mikhail Khodorkovsky, the famously defiant oligarch who refused to break up his Yukos oil empire and took to blasting Putin in public. He was arrested in 2003 and soon found himself accused of trying to buy favorable votes in the Duma and cheating the Russian government out of millions—accusations, it must be noted, that didn’t even surprise some Khodorkovsky supporters. He’s currently serving an eight-year term in a Siberian prison. Yukos has been dismantled, its assets swallowed up by Rosneft and Gazprom. Those of Sibneft, the oil giant assembled by Boris Berezovsky, who got out of Russia before Putin could subject him to the same fate, now belong to Gazprom too.

If the energy business is more serious in Russia than in other countries, the reason is no secret: Many Russians see their future as dependent on it. Chief among them is Putin himself. In 1997, at the age of 44, he completed a graduate degree at St. Petersburg Mining Institute. Though his thesis is classified (and, some claim, plagiarized), he later published papers based on it. The message is simple: Russia can reassert its place in the world by leveraging its natural resources, and the way to do this is through governmental control of its petroleum industry. If exploited properly, he wrote, oil and gas could keep Russia a major global power for the next 50 years.

But for every astounding figure Gazprom boasts, there is an equally glaring chink in the company’s armor. For all its cash, it has not invested much, Sakhalin aside, in infrastructure. Some of its biggest gas fields are far past peak production, and many of its pipes and plants are old. Energy production is rising 2 percent annually—down from the heyday of Yukos and Sibneft. Gazprom controls immense reserves, but many of them are offshore, in Arctic climes in which not even the world’s premier drillers have experience working. These reserves will take years, if not decades, and many billions of dollars to tap. Work began on Sakhalin II in 1998, after all, and the project is still not online. (It is currently seeking billions more in financing from Western and Asian banks.)

Analysts say that Gazprom is also laden with debt—though no good estimates exist as to how much—after buying up everything in sight. To fulfill its contracts in Western Europe, it has increasingly had to purchase gas from Central Asia and smaller Russian firms. At the same time, Gazprom is required by law to supply Russia’s domestic market at extremely low prices, creating untold losses. Europe and Asia need Russian natural gas, but the relationship is symbiotic. Russia needs European and Asian firms that are more adept at helping it get to that gas and, more important, big European and Asian banks to finance its deals. As the international credit crunch worsens, such technical and financial aid may not continue to be a given. Still, the Kremlin has tied its budget projections to current—and many say inflated—energy prices. Ever since Putin came in, “oil prices have gone up,” says Chow, the fellow at the Center for Strategic and International Studies. “Why should he believe that they would come down?”

All of which would be manageable in a well-balanced economy. But Russia does not have such an economy. Despite boom times, poverty is still widespread. The average income on Sakhalin is only $1,000 a month, even as the cost of living skyrockets. Russia’s fate is bound with Gazprom’s to a degree that’s hard to fathom in the West. If Exxon Mobil went under, the American economy would feel the blow but get over it. If Gazprom hit the skids, it would be cataclysmic for Russia. “There are critics who say that the entire Russian economy is based on unrealistically cheap energy,” Burgansky says. Chow adds, “I think the Russian economy is more vulnerable today to external shock than it was in 1998 and 1999,” when oil prices plunged.

Abdelal believes Russia is trying to change. “Gazprom represents two possibilities,” he says. “One is the reemergence of Russia as a recognized great power of the world, undoing the indignities of the 1990s, when the West pushed Russia around and told it what to do. That’s the immediate effect they’re hoping for.” But he doesn’t think Putin wants Gazprom to be Russia’s most important company 30 years from now.

Power in Russia is fleeting, and many observers of the country say that although Putin seems to have the clout and moxie to carry out the short-term plan, he doesn’t have a protégé on the horizon who’s nearly as capable as he is. “Who could possibly get that combination of skill, timing, and luck?” the U.S. diplomat asks. The former embassy official is even more pessimistic. “Russia hasn’t been a lucky country historically,” the official says. “You’d think its luck has to run out at some point.”

This would be bad for Gazprom and the Kremlin. But it would be worse still for Sakhalin residents like Katerina Lekomtseva. She grew up in one of the poorest corners of Russia and is enjoying the benefits of its revitalization. But as Russians know better than anyone, history can turn frigid fast.

“I still remember when the government issued us water tickets,” she tells me, as we look out onto Aniva Bay. The rations were small. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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