- The Washington Times - Wednesday, August 4, 2004

The faltering of Russian oil giant Yukos has been felt around the world, through its impact on already soaring global oil prices. To a large degree, the Yukos-related jitters may be unfounded, since production at the company isn’t expected to be significantly interrupted, even if Yukos’ tax debts force it into bankruptcy. Still, should Yukos come under the Russian government’s control, the company may produce less oil than it has in the past. Given tight market conditions, a decrease in Yukos’ production could have a global impact.

Oil prices have risen more than a third since the end of 2003, pushed higher by feverish demand, concerns over Iraq and — to a lesser degree — concerns about Yukos and political instability in other countries, such as Saudi Arabia. Russian authorities claim Yukos owes billions of dollars in back taxes. For 2000 alone, Yukos owes about $3.4 billion, and some analysts estimate the company’s total tax debt could reach up to $10 billion. Unless authorities allow Yukos to restructure its debt to the state, the company will likely be forced into bankruptcy and the Kremlin could control it for an indefinite period of time.

The problem with such a scenario, according to one analyst, is that some former Soviet apparatchiks have antiquated ideas about safe production levels. They view Yukos’ Western-style production as a threat to healthy, long-term development. Yukos is Russia’s largest oil exporter, and Russia, in turn, is the world’s second-largest oil exporter. A new bias in favor of decreased production at Yukos could therefore have an international impact.

Since any move to temper Yukos’ production would foreseeably be a Russian government decision, U.S. officials should try to impart modern and technical strategies about oil production to their Russian counterparts. The Kremlin is expected to jealously guard its sovereign decisions regarding the Yukos affair, but may be open to technical advice.

As a major, non-OPEC producer, Russia is central to President Bush’s vision of diversifying sources of foreign oil. Russia has a large resource base that potentially could be developed for a long period of time and will be a critical supply source as demand continues to rise.

Western oil majors are therefore expected to continue investing in Russia, despite Yukos’ troubles. Hopefully, they will influence the institutional ideas some Russian officials still have about the oil sector. For now, though, that task could fall to U.S. officials.

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