ISSUE 2-2006
Ондржей Соукуп Валентина Люля
Владимир Воронов Emil Souleimanov
Jakub Kulhanek
Отар Довженко
Pavel Vitek
Vaclav Pravda

Disclaimer: The views and opinions expressed in the articles and/or discussions are those of the respective authors and do not necessarily reflect the official views or positions of the publisher.

By Vaclav Pravda | Economist, the Czech Republic | Issue 2, 2006

Economic Safety
     Not many people probably have any problem with the term “economic safety” – except the actual economists. The term is not present anywhere throughout the one thousand fifty one pages of the most commonly used economic textbook - Economics by Samuelson and Nordhaus. The reason being that the authors probably have no knowledge of the term “economic problem”. Indeed, economically safe can be only fully autarkic economy or such a region or city. Economically safe are apparently Eskimos. Economically safe were supposed to be individual communities and regions in China under the Great Wheelman. Economically safe were medieval towns with their surroundings. These “safe” areas have always been stagnant, uneconomical, poor, and primitive. The term itself probably dates back to the beginnings of Soviet Russia surrounded by hostile capitalism. This Russia wanted to be economically safe or, in other words, autarkic and, indeed, it more or less was. However, the consequence of this desire has been poverty of its population that has outlasted until today.

Energy Safety
     Similarly, when discussing the term energy safety, economists (not to mention physicists) have problem to understand what this term is supposed to mean, especially since it was somehow automatically assumed and it is still assumed that it is, most of all, an economic problem. But from the economic point of view, it is completely indifferent what kind of inputs, energy or other, are in the beginning of the given industrial process. And, what may surprise some people, even the absolute prices of these inputs – i.e. how much one pays for oil, gas, nuclear energy, coal, or any other kind of energy - are indifferent. The only significant indicator is the mutual relation of their respective prices. In other words, an economist does not care if the energy source is gas, sugar cane, or bubbles from soda water. Economists therefore have nothing to say when it comes to the problem of “energy safety” – again, not to even mention physicists.
     The term “energy safety” is therefore unclear or even misleading.

Market Gas Price
     There is yet another economic misunderstanding when it comes to characterizing energy prices. For example, Russian producers operate with a “market gas price” – and the consumers accept that. In reality, however, there is no gas market and therefore no market price can exist either. Indeed, the price of Russian gas represents a typical oligopoly price, i.e., from its definition, a market price of a market with a small number of sellers – and even that rather with a monopoly character. In any case, gas producers as well as consumers should not make the mistake and think that Russia has unlimited possibilities of price manipulations because there is – in the horizon of only one or two years – a limit beyond which it is more convenient to use alternative energy sources rather than gas. Another alternative is abandoning all relatively non-essential energy consumption – for example, the Eiffel Tower or Prague Castle do not need to be alight at night and your room can have only twenty degrees during the winter, not twenty two.

Practical Consequences
     When applied to today’s situation, let us particularly consider Russian gas and oil on one side and the European Union as a Russian customer on the other side. If, at a given moment, Russia significantly reduces its supplies of energy, the customers would react immediately. This reaction would, without a doubt, manifest itself at first in a serious economic crisis. However, at the same time, all available reserves would be immediately used and the consumption structure would almost immediately change. Also, relation among prices of individual energy sources would significantly change and those that were expensive yesterday would become relatively cheap. It could even come to a point that the old European coal mines would be reopen. Within three or four years – and maybe even earlier – the economies would start growing again and, from the medium term point of view, it would not therefore represent any unsolvable problem. Europe is more or less dependent on Russian gas only because it thinks it is dependent on Russian gas – indeed, facts and numbers about a forty-percent contribution of Russian gas to the gas consumption in Western Europe do not make this statement an empty wisecrack because Western Europe really does have a choice – it can use alternatives while Russian producers of oil and gas can not. In reality, they (the producers) are not trying to solve the classic economic question “what, how, and to whom?” but only the question “how?” Cutting down on supplies would therefore cause a disaster, but in Russia itself. That is why Russia should not be kept under the wrong impression – and Europe should realize that too – that its energy supplies are irreplaceable.
     The existing perception of the situation can be possibly explained in to ways. First of all, it may be some kind of a strategic game – see the bizarre story of the so-called Putin’s dissertation that, even though it allegedly dates back to 1997, came to light much later; the document proclaims, with an amazing frankness, the doctrine of achieving Russian geopolitical objectives with the help of directing and dispensing its energy sources. The goal of this unusual openness can be to persuade Russian partners that Russia can achieve these objectives in this manner. If we realize the significant limitations of Russian ability to really apply this, let us call it Putin’s, doctrine, it would mean its end. However, if the Russian European partners are convinced that Russia can be achieving its political objectives with the help of its energy sources, then, indeed, Russia will be achieving them.
     Or, that is the second option, hysteria about the Russian energy policies is stirred by the European and American press – as Putin declared on June 6th, 2006.
     The first variant is sophisticated, the second one is very simple. So, let us then assume that the second one is the real one even though it means that we have to admit that even Putin can sometimes describe reality in a recognizable way.

Chinese Fiction
     There is yet another myth present in the gas game, this time a Chinese one, which is based on a notion that due to an ever-more powerful Chinese economy with its practically unlimited development opportunities, the consumption of energies and importantly also trade balance surpluses, Russia can simply redirect most of its energy flows to the East. China is considered to be the future, and sometimes even already current, economic superpower. However, the reality is somewhat different1 . First of all, Chinese statistical data raise many suspicions already by the fact that they are internally contradictory and therefore the pace of the Chinese economy growth is in reality probably slower than the official figures suggest. But the most critical problem is the economy structure where the flourishing and growing developed areas fueled by western investments – and where profits from these areas normally also end up in the West - exist next to the mass of state owned and semi-state owned companies. Enormous unpaid loans to the four biggest Chinese state banks prove that these state and semi-state companies are inefficient, unprofitable, and uncompetitive. Nevertheless, the banks continue to provide these loans and their losses are being covered by trade surpluses. But this development can not be sustainable indefinitely. It means that the only miraculous thing on the Chinese economic miracle is the fact that it has not collapsed yet. “Chinese economy is showing all the same signs that the American economy was showing just before the Great Depression in the end of the 1920’s,” (quoted from the book by economist Kassimir Petrov, The Great Chinese Depression). Let us add that the Chinese energy consumption per one unit of GDP in comparison with Japan is seven times larger. When the Chinese bubble bursts – even though it will not result in social cataclysms (the masses of semi-state companies serve simultaneously, or mainly, as “social buffer” for their employees and their families) – the new Chinese economy will have to be rebuilt on significantly healthier and more modest foundations. The monumental wasting of energies and raw materials will have to be abandon and the huge trade surpluses will deflate or disappear – so even if the appetite for energy remains the same, there will simply be no money to pay for it any more. The author in the quoted publication comes to a well-founded conclusion (we can not present here all his arguments) that “it will take decades before China reaches the level of developed countries” . And it can get even worse, as Kassimir Petrov says in his even grimmer forecast. He reasons that “the credit expansion in China lasting several years will cause an inevitable crash”.

In other words.
     The term “economic safety” most probably does not make any sense.
     The problem of energy safety is mainly a political problem (political problem from international or security point of view) and it is not economic problem; that is why it has to be solved by political means.
     Russia is more or less condemned to supply Europe with energy sources; playing the Eastern card is more or less just like playing with a blank – or even black - card.
     Evaluating energy safety can probably be characterized as slightly hysterical – and besides that, it provides politicians with alibi for unpredictable moments and it also increases importance of all those who have something to say about this problem.
     This entire situation suits Russia very well.

1 Used facts and conclusions are based on the publication by P. Kohout: Investment Strategy for the Third Millennium, Grada, Prague 2006.
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Pavel Vitek
Ондржей Соукуп
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