Ariel Cohen in St Petersburg -

This year's St Petersburg Economic Forum provided the backdrop for a deep division in the Russian leadership between those who, whether for pragmatic or ideological reasons, want integration with the West, and those who want to continue Russia's trajectory as a petro-state. Unfortunately, the latter seem to be winning.

Clearly, the vice premier and chairman of Rosneft, Igor Sechin, Putin's overseer of the energy sector, isn't among the champions of US-Russian relations. His speech stole President Dmitry Medvedev's thunder, causing some to speculate whether Putin deliberately sent Sechin to upstage the Russian president. Moreover, Putin himself did not deign to show up in the forum, preferring instead to berate the once richest man in Russia and uber-oligarch, Oleg Deripaska, on national TV. This makes for much better national politics and brings more popularity than any wonky speech at the Forum.

Back to the Sechin speech, though. He lamented that the international financial crisis isn't over; blamed the US for causing it - and for spending too much money on stimulus packages. He rhetorically asked when the US economy would start growing again, pulling the rest of the world behind it. On the other hand, he warned that the lack of investment in oil and gas exploration could trigger an oil shortage, quoting Saudi oil minister, Ali Al Naimi, who predicted the oil price back at $150 in 2011.

Sechin pointed an accusatory finger at the markets for extreme price fluctuations; he lambasted the influx of global capital into oil futures, calling it the "Weapons of Mass Destruction" of oil trading. He called for a ban on oil futures trading, pointing out that while 86m barrels are physically traded, some 10bn barrels are traded in the markets, inflating the price. He criticized those like Russia's own Gazprom chief Alexei Miller, another Sechin nemesis, who were predicting a $200-250 per barrel oil price less than a year ago. He blamed them for the massive influx of spare liquidity into commodities, specifically oil.

Sechin's panacea is more government intervention. He favours a government-to-government trading arrangement for oil, with highly restricted access for new members. Moreover, he advocated cutting out traders and intermediaries "who don't provide an economic benefit." Sechin also called for the creation of a Global Oil Agency, to be launched at a specially convened international oil conference involving both consumer and supplier countries. Sechin wants to abandon spot markets. He envisions an international oil trading system limited to long-term contracts with a compulsory delivery mechanism. He also stipulates that there be a "unified" payment/contract system and that the agency's member states would strictly control the participants.

He also criticized the dollar's dominance of the oil market, calling the market a "hostage of one currency." Pointing out that private debt in the US is at 300% of gross domestic product - 1.5 times higher than before Great Depression - Sechin called for a number of steps to counter that phenomenon, including:

--Abandoning the dollar as the primary currency of energy trade,

--Establishing a multicurrency oil trade,

--Developing new, high-quality Russian oil brands, in addition to today's heavy, high sulfur Urals, which trades at a discount.

Oligarch support

Commenting on Sechin's speech, Victor Vekselberg, a prominent Russian oligarch, pointed out that without ample investment, even such market leaders as TNK-BP will suffer a production decline in seven to eight years. TNK-BP, responsible for one quarter of all BP's crude, is currently under more Russian control than ever, despite the initial 50-50 set-up. BP lost the struggle to nominate the CEO of this joint venture, and the Russian Government, including Sechin, actively supported TNK investors led by Michael Fridman in their effort to bring the venture under Russian control. Fridman is now chairman and acting CEO of TNK-BP. Vekselberg was full of praise toward Sechin. He said "the future has not been cancelled," as hundreds of millions of people in China, India and the developing world are joining the middle class and will demand oil and gasoline for their cars, appliances production, apartments, etc.

Other oligarchs, such as Lukoil CEO Vagit Alekperov, also supported Sechin and forecast that oil prices will be in the $80-90 range in the next year. This was also the result of the electronic vote of the audience: oil industry leaders indicated that oil would reach the $80-90 a barrel corridor within a year, while the general audience thought it will be only $70-80 a barrel.

Either way, Russia (and Sechin) wins; Medvedev and reformers lose. With ample oil revenue, there's very little incentive for reform in Russia remain, and we are likely to see more of the same: the growth of an anti-Western, opaque petro-state, rapprochement with China and Iran, and growing tension between Russia and her neighbours.

Ariel Cohen, Ph.D., participated in St. Petersburg Economic Forum. He is a Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Davis Institute for International Studies at the Heritage Foundation.

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