Russians pick Dmitry Medvedev -- Expect high gas prices

April 3, 2008

In May, current Russian Prime Minister Dmitry Medvedev will be inaugurated as President of Russia, while his mentor, current President Vladimir Putin, will become Prime Minister. Clearly, Russians are happy with Putin's eight-year term, which brought a restoration of pride in Russia and a quadrupling of GDP growth from $250 billion to $1 trillion.

It also brought more state control to Gazprom, Russia’s state-owned gas company,which was headed by Medvedev. In 2006, Gazprom bought majority ownership in the Sakhalin-2 energy project, which is the largest integrated gas-and-oil drilling project in the world and, at $20 billion, the largest Foreign Direct Investment (FDI) in Russia. The Sakhalin Shelf is estimated to contain 1.2 billion barrels of oil and 17.1 trillion cubic feet of natural gas.

What Dmitry Medvedev's election means:

Most analysts believe that Medvedev's election means a continuation of the status quo, which includes Putin's policy of using Russia’s oil and gas reserves to increase its political power in the world. Russia has close to one-third of the world's proven natural gas reserves, but controls only 20% through Gazprom. Part of Putin's unstated plan is to control and profit from more of Russia's natural resources.

However, Medvedev is a little more liberal than Putin. He has said that Gazprom should not hold a total monopoly on Russian gas, so that is doesn't become the ministry of energy. He promised that foreign companies will continue to have a claim in developing Russia's natural resources.

Despite this, Russia will still be part of an increasing shift of power worldwide from U.S. and European-based oil companies to state-owned companies in the oil-producing nations. This global shift of power means that these countries, especially Saudi Arabia, Venezuela and Iran, are also furthering their control of the price of oil and now natural gas. (Source: Russia Profile.org, Who is Dmitry Medvedev?;  BBC News, Resurgent Russia, April 3, 2008; The Economist, A Putin-Shaped Throne, March 6, 2008)

Action steps:
This trend means that oil and natural gas prices will continue to be high, and that U.S. and European oil and gas companies will profit less. If you have had these companies as part of the natural resources portion of your portfolio, now may be a good time to shift towards pure commodities index funds. Talk to your financial planner about which specific funds would be good investments.

For more background information, see the WorldMoneyWatch Special Reports: Oil's Hidden Threat and Global Peak Oil.

For related articles, see Russia and Central Asia Economies.

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