Medvedev to recreate Russian Superpower… and why this could be bad for Britain…

Oil hits a fresh high of £122.73... but there’s way more exciting things happening in Russia...

The new record high oil price is not the most important thing going on in the energy industry today...

In fact it’s got nothing to do with prices; it’s all down to politics.

Today Vladimir Putin moves out of the Russian president's office and Dmitry Medvedev takes his seat. Medvedev has already said that Putin will be made prime minister. As one commentator put it "This is not a father and son relationship; but there is no doubt as to who follows in whose footsteps."

This is very, very important for all European nations. We are facing an unprecedented power crisis and in the European game of energy poker, it looks like Russia has been dealt all of the aces.

Russian petroconfidence knows no bounds...

Russia is sitting on more than 20% of the world's known reserves of natural gas and has at least 75bn barrels of oil, which is about 7% of total world reserves. Rising oil and gas prices have presented the country with an unprecedented opportunity to become a world superpower yet again. The Kremlin will be at pains to make this happen.

Russia is ideally situated, having borders with the major markets of China and Europe. Chinese energy demands are soaring (the IEA expects demand in the country to rise 4.7% this year), but many European countries have failed to get a future coherent future energy strategy.

The country with the biggest energy problem is the UK. Yet again Mr Blair and Mr Brown have done us proud by ignoring one of the most important issues of their tenure: energy security.

Because of government procrastination and civil service incompetence (which led to a long court case with Greenpeace) it wasn’t until the start of this year that the government unveiled its energy strategy. The problem with this is that it could be too late.

There was a brilliant interview with E.On chief executive Wolf Bernotat in the Times over the weekend. Over the next ten years, old nuclear and coal plants will have to be replaced and much of the national grid will need to be rebuilt.

Bernotat is frustrated by politicians in Brussels and Whitehall who set what he calls "totally unrealistic" targets aimed at boosting investment in renewable energy. He reckons we have to have a coherent energy strategy that involves nuclear, gas, coal and renewables.

Our energy infrastructure is defunct...

This is a really important issue for the UK. Our infrastructure is in a real mess and we have an over-reliance on depleting North Sea gas. A third of the UK's electricity generating capacity will come offline within the next 20 years, so the government plans to build 10 new power stations by 2020.

This I fully support.

I believe that building new nuclear power stations is the key from an environmental and energy security perspective - but we need to get cracking on this immediately.

Plans are finally being discussed on the location of new nuclear power stations, but we are still nowhere near building the things. This may be a long and fraught process for a number of reasons. This is the main cause of my concern.

Bernotat believes that the British government have been underestimating the cost of building nuclear plants by as much as 50%. The government have made the unusual (ahem) move of getting its maths wrong.

Then there’s the skills issue.

Because nuclear power has been out of fashion, there is a massive shortage of engineers globally to make the new nuclear renaissance happen.

According to UK nuclear generator British Energy fewer than 6% of the estimated 100,000 people who work in the industry - including 23,500 at degree level - are under 24, while 31% are aged 45 and over. The company has also said that that a whopping 40% of its staff were set to retire within the next 10 years.

It’s not going to happen on time...

All of this means that we are going to have a dangerous reliance on Russian gas in the future.

Russia has become infamous for playing politics with its business and it could use its energy supplies as bargaining chips. The country has already famously cut off the gas to Ukraine and also threatened to cut of gas to different countries on 55 occasions.

This has caused lots of fears over Russia holding Europe to ransom over energy. There are fears that we will become as beholden to the Kremlin as we currently are to Opec. With Russia’s Communist past and opaque current political operations, there are fears that the Kremlin will use gas and oil as a political weapon.

Personally, I think these fears are overplayed. Even at the height of the Cold War the Soviet Union never disrupted energy supplies to the West. That’s because Russia needs Europe just as much as Europe needs Russia. Remember: Although Russia has world-class energy reserves, it current GDP is only equivalent to minor European countries such as Italy.

The main concern for me regarding our energy strategy is economic.

The era of expensive energy is here to stay and our economy will be crippled if we have to import significant amounts of gas and oil. I do not want future generations living in economic penury because a bunch of second-rate politicians who cannot look further than the next election messed it all up.

Russian gas... in Rubles?

Another implication of Medvedev’s ascension to the presidency is for the dollar.

Russia is the world's second-largest exporter of crude after Saudi Arabia and its coffers are now overflowing with petrodollars. With the currency on the slide this has created another dilemma.

In December, Medvedev said the country was "seriously considering" ways to trade gas prices in rubles. Russia's government changed national currency regulations in 2006 to allow the ruble to become fully convertible in local currencies in Western countries.

Selling Russian gas and oil in rubles would be yet another nail in the coffin for the dollar. However, Medvedev himself noted that the goal of ruble-denominated petroleum was not one for the short term. Although, when pressed, he said that "the world will be trading ruble-denominated petroleum in time, and maybe a little sooner."

At the moment I’m holding a really smart play on the Russian energy market... and regardless of what happens in the region... my investors and I are going to remain very happy indeed.

Even if Kremlin shenanigans managed to derail Medvedev’s major policies, his energy strategy is likely to be left alone. It is in mother Russia’s interests for this company to succeed - I just hope it is not at the expense of UK wealth in the future.

So, come on Gordon. Do something that we can be truly thankful for and get our energy strategy sorted. You owe it to the next generation of Britons.

Regards

Garry White
Smart Commodities UK

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