Sanctions, economic woes hammer Russia’s oil heartland

Ordinarily, winter is the "golden time" for Victor Fedosenko. He works the oil patch in western Siberia, home to 60 per cent of  Russia’s vast oil production. His two drilling machines pierce the frozen tundra, opening up holes big enough for the larger oil rigs to operate.

But this year is anything but normal.

For the first time, one of Fedosenko’s drills sits idle, covered with snow.

• Ruble's dramatic drop inflicts economic pain in Russia

"Usually at this time of year in February, both my machines are out, and on top of it there’s a queue for more work," he says.

Russia is a highly dependent petro-economy. More than half of the state’s revenue comes from oil and gas taxes.

President Vladimir Putin had enjoyed flush years, with a high oil price and the resulting high cash flow. But now with a near perfect storm of depressed prices and Western sanctions, the government is cutting budgets and chewing through reserves.

Large oil producers will be insulated for a while by the lower valuation of the ruble, but contractors and suppliers like Fedosenko are already feeling the bite.

"Sanctions because of Russia’s politics, well, they only hurt the common people," he says resentfully. "The wealthy won’t suffer."

Pressure on Russia

In his workshop, standing underneath the hammer and sickle flag of the former Soviet Union stuck on his wall, Fedosenko says, "I’m not experiencing feelings of hate and anger against my own government. The more pressure there is on Russia, the more I will suffer, the more upset I am against the West than my own government."

Russian prime minister Dimitry Medvedev said in December that Russia needed to "get off the oil needle," but the addiction runs deep.

Many of Fedosenko’s neighbours in Khanty-Mansiysk live off oil. The crude and gas industry has built a glittering administrative capital; gone are the gulags of the 1930s through ‘60s, so too are the traditional wooden huts. In their place,  gleaming office towers, golden coloured spires, concert halls and Russia’s chess academy where children scramble in after school — future chess masters.

People don’t bite the hand that feeds them, and state-owned companies like Rosneft and Gazprom sponsor almost everything, right down to the winter ice sculptures. Talk of an oil crisis is almost heresy, no matter the looming economic storm clouds.

The powerful regional governor —  Natalia Komarova, nicknamed Siberia’s "Iron Lady" — is trying to realign an economy tied to a vastly higher oil price. None of her administrative team would agree to be interviewed by a foreign reporter.

Oil production

In the financial heart of Moscow, energy analysts are more candid.

"You feel depressed sometimes that things are getting worse and worse," says Renaissance Capital’s oil and gas analyst Ildar Davletshin.

"But oil production in Russia is surprisingly, relatively robust, it’s not suffering as much as you’d expect."

It’s partly because the weaker ruble is reducing costs domestically, and lower oil prices also mean lower taxes paid by the energy companies to the government.

"The biggest loser is the Russian budget," he says. "It will take maybe six, 12, 18 months before inflation will really accelerate. Taking a longer term view, definitely things will get worse."

Even so, debt obligations are dragging at Russia’s largest oil company, Rosneft. It owes about $20 billion US this year, and sanctions bar it from raising capital in much of the West.

Exxon has had to shelve its partnership with Rosneft to explore in Russia’s Kara Sea until the sanctions are lifted.

Canada extended sanctions to Rosneft in mid-February. The company owns a 30 per cent stake in the Cardium tight-oil project in Alberta, and the sanctions complicate investments to develop the Canadian installation.

"There’s a lot of hysteria around Russia," said Rosneft spokesman Mikhail Leontiev.

"At the root of it is the Ukrainian lobby groups in Canada."

He calls the sanctions ridiculous and suggests it is Canada’s oil industry, particularly the oilsands, which is "near dead."

"Canada pinned all its hope on high oil prices."

Sanctions have made business tougher for Canadian companies, too. Trican Well Services Ltd., based in Calgary, has a large footprint in Siberia. Since the fall it’s had to work around sanctions prohibiting both financing and purchasing some technologies for its Siberian operations, and the company’s stock has dropped 70 per cent since the summer.

Trican’s executives in Moscow and Calgary refused CBC’s requests for interviews. CBC News found one of Trican’s trucks, broken down, on the highway near Nefteyugansk, Siberia. The driver was reluctant to speak, but said business had slowed.

'The system has broken'

The wistful predictions that oil might soon return to its pre-summer highs are all but gone now. President Putin is asking the country to prepare for a lengthier downturn. Economists concur inflation will rise in the spring upward of 13 per cent, and big job losses are still looming for the months ahead.

"In one year the system has broken," says Vladimir Samborski, a businessman in Surgut, Siberia.

"Visitors, tourism, business, broken down and it will be worse later," he says, as low oil prices and sanctions continue to dig into Russia’s economy.

Samborski, born in western Ukraine, was lured to Siberia 45 years ago when fortunes were yet to be made. "I was young, I was romantic, I wanted a car — a "Moskivitch" — but it was very expensive."

Samborski has prospered here in real estate and other business, but recently his tenants have demanded  breaks on rents.

He’s frustrated with the politics which have exacerbated the economic crisis.

"The situation is so serious, so impossible to understand. I understand Quebec and Canada, I understand Scotland and England, I understand western Samara and eastern Samara, and Pakistan and India. But I don’t understand Ukraine against Russia or Russia against Ukraine," he says.

A few blocks from Samborski’s office, is the headquarters of  Russia’s large privately owned oil and gas company, Surgutneftgas. It overlooks a  bus hub where thousands of oil workers and staff are transferred in and out of the oil fields.

At the evening shift change when CBC visited, almost no one was willing to talk about the future. One man stopped briefly, admitting only that they are being asked to watch spending.

"Where are you from?" he asks.

"Canada."

"Canada? That’s crazy! Make sure wherever this is shown, there isn’t anything negative against our government and our people", he warns. Then he hurries off into the cold and a darkening horizon.