Analysis: Putin pulls strings in Yugansk deal

By Martin Sieff
UPI Senior News Analyst


Washington, DC, Dec. 23 (UPI) -- The revelation that Rosneft is behind the Yugansk takeover confirms that Vladimir Putin is determined to establish strong state control over the Russian oil industry and its huge revenues to strengthen the Russian state. And contrary to conventional wisdom, his strategy may well work.


The Rosneft oil company revealed Wednesday that it was behind the mysterious Baikal Finans Group that conveniently emerged from nowhere to win the state-controlled auction Sunday of Yuganskneftegaz, also known as Yugansk, the core production unit of the Yukos oil corporation.

Rosneft has been the Russian oil company most favored by Putin and his siloviki -- his inner circle of advisers and policymakers from, or with strong links to, the state security services. Earlier this year, the Kremlin approved the merger of Rosneft with Gazprom, the largest natural gas producer and exporter in the world, to create a corporate colossus that would dominate the Russian energy industry.

Gazprom itself was Putin's first choice to buy Yugansk after its owner Yukos was shattered by a barrage of staggering claims in unpaid back taxes and other charges from Russian federal authorities. But Yukos lawyers won a court ruling in Houston, Texas, on Dec. 16 that granted an injunction against Sunday's auction and the companies, including Gazprom that had already entered into it.

That victory was short-lived. Baikal Finans Group and ultimately Rosneft were able to buy Yugansk for a song with Kremlin approval. Yugansk's value has been estimated at prices varying from $14 billion to $22 billion. Given the still enormously high global oil prices of $46 a barrel, 50 percent higher than they were eight months ago, the latter estimation is probably much nearer the mark. Yet Baikal Finans Group was able to pick up Yugansk for a song. They had to pay only $9.35 billion, for 76.6 percent of its shares.

With the Rosneft-Gazprom merger still looking as certain as an unstoppable juggernaut, Putin's strategy to smash the power of the most independent and disruptive billionaire oligarchs who seized control of most of the Russian economy after the collapse of communism appears close to fruition.

The destruction of Yukos, the largest oil corporation in Russia and one of the largest in the world, was the key battle in that economic war.

Yukos had won repeated plaudits in the West for seeking to make itself a model of accountability and transparency in contrast to so many other huge, oligarch-run Russian enterprises. But the Kremlin hit it with everything short of the Ten Plagues. And with Yugansk, an operating unit whose annual oil output was greater than that of the entire nation of Indonesia, now moving into safe, Kremlin-approved Rosneft control, all that remains of Yukos will be a hollow shell.

The Kremlin had to pay a considerable price for its victory. Projections of oil output for next year are somewhat down from previous hopes and this above all reflects the turmoil that Yukos and Yugansk have gone through this year.

Also, the drive to destroy Yukos created a huge disincentive for other major Russian corporations to adopt transparency and accountability. Even worse, the onslaught appears to have played the main role in triggering a new flight of capital from Russia this year. And while not enough to be ruinous or comparable with the negative capital flows of the 1990s, it represents a significant blow to Putin's hopes of stabilizing the economy and cutting poverty rates in half over the next decade.

However, Putin clearly deemed the costs acceptable of dismembering Yukos, and preferable by far that destruction to the alternative of letting the largest energy corporation in Russia remain in the hands of controllers who opposed his basic policies and were prepared to enter the political arena to try and undermine them.

Yukos' founder Mikhail Khodorkovksy, now on trial in a Moscow court charged with fraud and tax evasion, was Yukos' creator -- and the cause of problems. A financial and organizational genius, he made the elementary political mistake of bankrolling and trying to boost political opponents against Putin. He has now had 14 months sitting in a Moscow jail to realize the error of his ways.

Many Western accounts play down the political significance of Khodorkovsky's challenge to Putin last year. But there appears ample evidence that he did indeed harbor ambitions of funding a movement and a candidate who could either topple Putin in 2004 or succeed him in 2008. However, politics in Russia is a zero-sum game and control of the commanding heights of the new free-market economy cannot be separated from it.

The bottom line is that global oil prices remain today at around $46 a barrel. That is significantly down from the unprecedented $54 a barrel they reached a few weeks ago, but it is still an amazingly high price by anyone's standards, and the worse the guerrilla war in Iraq gets, the higher they will go.

As a result, foreign capital and currency continues to flood into Russia and Putin has been able to negotiate lucrative oil-export deals with the great energy-hungry economies of China and South Korea on his own terms. The destruction of Yukos certainly does not appear to have deterred the French. It has not deterred the British either. British Petroleum appears unfazed -- indeed it is grateful and relieved for its continued involvement in the Russian oil industry.

The idea that divesting Khodorkovsky of control of Yukos would plunge the management of its resources back to the dark ages appears to be wishful thinking, too, as unfounded as the many Western pundits in the mid-1950s who predicted that Egyptian officials would be unable to maintain the Suez Canal after President Gamal Abdel Nasser nationalized it in 1956. Instead, they ran it just fine.

As long as global oil prices remain above $30 a barrel, Russia will never want for foreign partners to pour in investment and know-how and help develop its oil. And if prices remain above $40 a barrel, as we correctly predicted in these columns back in April, Russia's current welcome flood of petrodollars will remain a tidal wave.

Saudi Arabia in the 1970s makes 21st century Russia look like a model of transparency, accountability and responsibility in its financial dealings. But the Saudis never lacked Western and East Asian investors ready to invest untold scores of billions of dollars into their country. And it is extremely unlikely that the Russians will either.

Putin has been systematically underestimated since rising to eminence, not merely for his toughness and ruthlessness, but also for his administrative and economic skills. Yet he reversed the centrifugal disintegration of the Russian state and the cataclysmic collapse in living standards that he inherited. Being underestimated now as he completes his far-reaching restructuring of the Russian energy industry will not bother or deter him either.

(UPI, via The Washington Times, 12.23.2004)