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Putin Finding Power in The Pump

As the Russian state launched its legal campaign against oil tycoon Mikhail Khodorkovsky last summer, many allies and enemies of the government saw the fingerprints of a mysterious Kremlin aide, Igor Sechin.

A reputed former KGB agent who followed President Vladimir Putin to Moscow, Sechin led a powerful Kremlin faction that, according to insiders, resented Khodorkovsky's defiance of authority. The Sechin clan bristled, for instance, when Khodorkovsky publicly implied that a deal involving the state-owned Rosneft oil company was a corrupt scheme to benefit powerful insiders.

A year later, Khodorkovsky is in prison, awaiting the outcome of a trial on charges of fraud and tax evasion, and the state is preparing to dismember his company, Yukos, Russia's largest oil producer. Among those ready to snap up the pieces at a state-run fire sale is aggrieved rival Rosneft. The chairman of Rosneft, as of two weeks ago, is Igor Sechin.

Putin's allies portray his assault on Khodorkovsky as a crackdown on the men known as oligarchs, who became rich overnight through the often-rigged sale of state assets in the 1990s. But the assault may actually be creating a new generation of oligarchs loyal to Putin, according to analysts, politicians, business leaders and former aides.

Now that oil has replaced military might as the source of Russian power, Putin is using it to assert himself on the global stage while picking winners and losers at home, these sources said.

"At first, when they started, it seemed there had been some personal conflict between Putin and Khodorkovsky that started the affair," Vladimir Milov, deputy energy minister under Putin until 2002, said in an interview. "Now it seems it may be connected to efforts to redistribute property that was privatized in the '90s."

"There are two groups of oligarchs, the old and the new ones," Mikhail Delyagin, an economic adviser to Putin's first prime minister, said at a briefing last week. "The new oligarchs have beaten the old ones," and the Yukos case has been prosecuted "only in order to take resources away from one group of oligarchs and give them to another group."

"It will be crony privatization like in the 1990s," Delyagin added, "the only difference being that in the 1990s they privatized state property and in this case they will privatize former state, now private property."

Oil's Importance Grows

Putin appears to be restructuring Russia's oil industry at a time when it has reestablished the country as a major international player.

Daily production has soared from 6 million barrels to a new post-Soviet record of 9.3 million barrels last month, according to government figures. Russia now rivals Saudi Arabia as the largest producer in the world. Its importance to world markets became increasingly clear last week when the Yukos turmoil sent oil prices to record highs.

The power of the pump has enhanced Putin's influence abroad. China and Japan have been trying to outbid each other for Russian oil as Putin weighs where to build a multibillion-dollar pipeline to supply one of the Asian giants. The United States has sought to persuade Putin to build a new terminal in the northern city of Murmansk to ship crude to U.S. companies, but so far it has been snubbed.

Putin appears intent first on consolidating power over the oil industry. Russian officials point out that Saudi Arabia and other major exporters retain state control over their oil industries, while Russia's was largely sold off in the 1990s. Today the state controls 7 percent of the oil industry. If the government seizes Yukos's primary production unit as planned to satisfy a back-tax claim and sells it to a state company such as Rosneft, the share of production in state hands would rise to 18 percent.

Rosneft is not the only potential beneficiary. Other possibilities include state-controlled Gazprom, the country's natural gas monopoly, and Surgutneftegaz, a private company run by a veteran Soviet oil executive loyal to the state. But Sechin's appointment as chairman of Rosneft confirmed the company as the front-runner.

"The fact that Rosneft got such an influential guy means that it looks that Rosneft will play a more political role and a more important role in the economy," said Sergei Markov, a political consultant who has worked with the Kremlin. "This is a signal."

Putin has also stepped into the oil sector by increasing its taxes. In recent months, the government eliminated loopholes used by Yukos and raised tax rates on production. Last week it pushed another production tax increase through parliament and approved an increase in oil export duties. Putin is also stripping local governors of influence over energy resources in their provinces with a new regulatory plan endorsed by parliament last week.

Putin has tamed private oil companies by making Yukos an example. The tax service hit Yukos with nearly $7 billion in bills for back taxes, with more to come, for employing previously unchallenged tax shelters. Sibneft, an oil company controlled by an oligarch on good terms with the Kremlin, used the same shelters but has been spared similar treatment. In fact, state auditors examining Sibneft last month declared the tax shelters legal.

Lukoil, the main Yukos rival, voluntarily paid $200 million to compensate for use of the same tax shelters without being billed by the government, a move hailed by Putin allies as an example for others. "If it's aimed at minimizing taxes, it's not legitimate," Leonid Fedun, vice president and part-owner of Lukoil, said of the shelters. "There are such tricks in almost all tax codes in all countries. So we decided to abandon all these schemes for tax minimization."

In an interview, Fedun did not dispute the characterization of Lukoil as Kremlin-friendly. "We think the fact that the state is domineering now is good," he said. "Oil is a strategic thing, and of course the state should participate . . . [because] oil is the basis for the economy."

Foreign Firms Look Ahead

As Putin moves against Yukos, he has tried to reassure foreign investors that he does not want to renationalize the industry. Last month he met with ConocoPhillips President James J. Mulva on the same day the government announced it would sell its remaining 7.59 percent share in Lukoil. Last week, officials set a minimum $1.26 billion price for the stake, and ConocoPhillips is widely considered the state's favorite.

Other foreign companies have watched the Yukos saga warily, uncomfortable with making further investments in Russia yet unwilling to abandon some of the world's largest oil reserves.

"Are there concerns about Yukos? Sure," said Robert Dudley, president of TNK-BP oil company. "But the Yukos situation appears to be a special set of circumstances and has not impacted how we intend to do business."

TNK-BP was forged last year as a 50-50 joint venture between Russia's Tyumen Oil Co. and Britain's BP, which poured $7.5 billion into the newly merged company, the largest foreign investment in Russian history. Russia desperately needs more foreign capital to develop new fields -- investments Dudley and other oil executives worry may be deterred by the Yukos case.

"It hasn't discouraged BP," said Dudley. "You can see we're going to continue to invest large amounts each year through TNK-BP. But it's for these capital-intensive, long-term payouts that people have to have a lot of confidence before they invest, and it remains to be seen whether the Yukos situation will discourage that."

Others doubt that foreign investors would want to take that chance. "How do you know what happens next?" asked Stephen O'Sullivan, an analyst at United Financial Group, a Moscow brokerage house. "Do they go after somebody else?"

Milov, the former energy official who now heads the nonprofit Institute of Energy Policy, said the Yukos case jeopardizes Russia's comeback. "It's a very dangerous thing for the Russian economy," he said. "Yukos was one of the leaders of the Russian recovery. . . . The people who are leading the attack against Yukos, maybe they don't understand what they're doing to the oil sector and the economy in general -- or if they understand, they don't care."

The 'Yukos Effect'

Troika Dialog, an investment firm, termed the new post-Yukos industry "people's oil" and predicted in a report last week that it would "end up less cost-efficient, more highly taxed, prone to higher capital spending and less transparent for minority shareholders." The report lowered long-term Russian oil growth projections by 3 percent because of the "Yukos effect."

Private enterprise has powered the growth in Russian oil. Output by the three largest private oil companies rose 90 percent from 1998 to 2003, compared with marginal growth by state firms, according to a report by the Organization for Economic Cooperation and Development, a multinational agency. Private oil accounted for up to one-quarter of Russia's recent economic growth, the report said.

Rosneft's new chairman has no oil experience. Sechin, 43, studied French and Portuguese at Leningrad State University, and Russian news media have reported that he was recruited by the KGB. He went to Africa as an interpreter for a Soviet equipment export company, returning to work in city government in Leningrad, since renamed St. Petersburg. In 1991, he became an aide to Putin, then a city official, and has followed his boss's rise.

Now Kremlin deputy chief of staff, Sechin has rarely appeared in public and does not give interviews. Along with fellow deputy chief Viktor Ivanov, another KGB veteran, he leads the clan of hard-liners called the siloviki, or men of power. He has an inside line to the prosecutors pursuing Khodorkovsky, since Sechin's daughter last year reportedly married the son of Prosecutor General Vladimir Ustinov.

The rise of the siloviki has inspired fear. When NTV television asked Arkady Volsky, president of the Russian Union of Industrialists and Entrepreneurs, who he thought was behind the moves against Yukos, he refused to say. "I am very scared to name names now," he said. "I am simply scared. I have six grandchildren, after all, and I want them to live."

By Peter Baker
Washington Post Foreign Service
Wednesday, August 11, 2004; Page A01

Editorial Notes: If indeed "the state controls 7 percent of the oil industry", it is no wonder Putin is moving to increase control. -LJ Registration reqd for Washington Post article (use "fedup@mailinator.com" & "fedup", courtesy of www.bugmenot.com) or see scoop.agonist.org/story/2004/8/11/102344/796

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