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The Yukos Endgame
Putin is looking for strategic control, starting with the effective renationalization of Russia's largest oil giant

What is Vladimir Putin's real game in the Yukos affair? As the tax charges against Russia's largest oil company and its jailed former CEO, Mikhail Khodorkovsky, wind through court, the government has said it simply wants to collect the billions it is owed. Others say the case is payback for Khodorkovsky's financing of election rivals to Putin. But the one clear aspect of this affair is how it is likely to end, say oil executives and attorneys close to the case. Yukos will, in essence, pay its tax bill with stock, or end up in the hands of a company friendly to the Kremlin, effectively renationalizing the firm and giving Putin better control of a strategic resource. "Putin wants to be Sheik Yamani in 1973," says a longtime American observer of the Russian market.


Sheik Ahmad Zaki Yamani was the Saudi Arabian Oil minister who leveraged oil as a political tool and was instrumental in founding the OPEC oil cartel. Putin clearly is not looking to bring the West to its knees—Yamani was seeking revenge for the 1973 Yom Kippur war—but the ways in which he has eyed oil for geostrategic gain often go overlooked. In the past year the Kremlin has been reasserting control over a sector widely privatized after the fall of the Soviet Union; Putin is making it clear that energy decisions with foreign-policy consequences are not for businessmen to make. In the Kremlin's view, one of Khodorkovsky's great sins was to push for an oil pipeline from Siberia to China—Russia's top security threat in Asia. Putin has scrapped that idea in favor of a more expensive and less commercially viable pipeline to Japan.

The Kremlin has never articulated a new policy, instead using catchphrases like "strategic natural resources" to broadcast the change and letting sympathetic think tanks explain it. "There is a strong [Kremlin] lobby to create a fully unified commercial and geopolitical approach," says Stanislav Belkovsky of the National Security Council, a think tank linked to the nationalists in Putin's inner circle. One tenet of their world view is, "If foreigners control pipelines, then they can control prices."

Oil insiders cite a pattern of government moves to rein in private firms. In November, the state-run natural-gas behemoth Gazprom approached British Petroleum's Russian subsidiary, TNK-BP, and, a BP spokes-man says, asked for a role in its planned $15 billion pipeline to gas fields in Siberia. A Gazprom spokesman denies this, saying the company is concerned only about the legitimacy of TNK-BP licenses for the fields. On another front, Russian security agencies are investigating TNK-BP's foreign staff for having access to oil-reserve figures, which is forbidden under laws on state secrets. Says Al Breach, chief economist at Brunswick UBS in Moscow, "It's all about controlling pipelines to Asia."

One of the Kremlin's strongest levers of power is Transneft, the state-owned pipeline operator. On May 24 Transneft president Semyon Vainshtok spoke openly about imposing oil-production quotas, with Transneft as the enforcer. This would give Moscow the power to control the spigot as surely as the Saudi monarchy does. Transneft does not hesitate to throw its weight around: it is demanding the right to operate a $225 million oil terminal recently built on the Gulf of Finland by the private Russian oil major, Lukoil. ''The government must regulate exports. The country's energy security depends on this," says Transneft vice president Sergei Grigoriev. Lukoil is balking, saying it built the terminal and it will operate it.

The obvious danger is that the Kremlin's hard line will scare off foreign investors. At least one Western business group is working behind the scenes to kill drafted Kremlin legislation that would forbid foreign-controlled firms from controlling oil and gas extraction licenses. ''In the past, the big risk was the oligarchs stealing our assets from us. Now the big risk is the government stealing our assets," says William Browder, head of Hermitage Capital Management, the largest investment fund in Russia, with much of its $1.5 billion portfolio in energy.

This won't end in a parting of ways with the West. Putin needs foreign investors to achieve his aim of doubling GDP by 2010, and investors aren't going to walk away from Russia's rich oil- and gas fields. But the horse-trading will get fierce. In recent weeks U.S. Energy officials have visited Moscow, pushing for a pipeline to Murmansk on the Barents Sea. The project makes commercial sense to Russia, but don't expect a green light without a political quid pro quo: perhaps U.S. support for Russia's drive to join the World Trade Organization or Lukoil's bid to develop Iraq's West Qurna oilfield, one of the world's largest. No question, President Putin may have a score to settle in the Yukos affair, but Sheik Putin has bigger aims in mind.



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