- The Washington Times - Sunday, December 19, 2004

The Russian government is using its prosecution of the Yukos oil giant on tax-evasion charges as a pretext to reassert state control over Russia’s oil sector, which rivals Saudi Arabia in output, analysts say.

Coming at a time when the world is thirsty for oil and shortages loom unless resources are developed aggressively, Russia’s move to reassert influence over oil assets privatized during the 1990s is contributing to high oil prices and worldwide anxiety about the future of oil supplies.

OAO Yukos Oil Co., under the chairmanship of billionaire Mikhail Khodorkovsky during the late 1990s, was transformed from a bankrupt state-owned firm into Russia’s biggest, most Westernized and ambitious energy company, boasting ownership of one of the largest oil-producing units in Russia, Yuganskneftegaz, located in oil-rich western Siberia.

But after a debilitating year during which the government has ratcheted up past-due tax claims to unprecedented and crippling levels exceeding $24 billion, Yukos’ stock has lost most of its value.

And in a final blow, to satisfy the tax liens, today the government is scheduled to auction off a controlling interest in Yuganskneftegaz, Yukos’ crown jewel, accounting for 60 percent of its oil production.

The government intends to go ahead with its plans, despite a ruling by a U.S. District Court judge last night upholding a bankruptcy court order temporarily blocking the auction. Moscow has said U.S. courts have no jurisdiction in Russia.

While bids may come from as far away as India and China, the government already has indicated that the designated buyer will be OAO Gazprom, a state-controlled natural-gas monopoly that recently ventured into the oil business.

Michael Goldberg, a Houston lawyer representing Gazprom, planned to consult with clients in Moscow about a possible appeal.

“There is no jurisdiction in this case, and this is not the type of case that a Texas court should be deciding about Russian assets,” he said.

Gazprom had planned to take out $13 billion in loans to finance the Yukos acquisition and was expected to win with a bid just exceeding the $8.6 billion opening price set by the government — which analysts say is one-third to one-half of Yuganskneftegaz’s market value.

Yukos executives have protested the sale as an illegal confiscation of private property after trumped-up charges. But they hold out little hope of persuading Russian courts, which have sided uniformly with the government, to stop the sale.

“This isn’t about taxes. This is about takeover” of the oil business, an attorney for Yukos said. “This kind of conduct raises major questions about the rule of law. It raises questions for investors in the oil sector, or any sector of strategic importance in Russia.”

Putting Russia first

The huge Yuganskneftegaz acquisition would make Gazprom by some measures the world’s largest energy company and possibly give Russian authorities a voice equal to Saudi Arabia and other top producers in influencing world oil and gas prices.

But perhaps more importantly to Russian President Vladimir Putin, analysts say, the breakup of Yukos enables the government to regain control over Russia’s most lucrative natural asset, its vast oil reserves.

Mr. Putin has never publicly acknowledged this as his goal, insisting that he is trying to make people pay their taxes. But officials close to the government say there is no doubt he is reclaiming the family jewels. And Mr. Putin has alluded to his nationalistic aims in offhand remarks.

“The fuel and energy sector, overall, is the goose that lays the golden egg,” he said a year ago.

“We have to be driven by our own national interests,” Mr. Putin said in the fall on a visit to China, explaining why he favors a new pipeline through Siberia that not only delivers oil to China or Japan, but also contributes to the economic development of Russia’s impoverished eastern provinces.

The pipeline venture is one area where Mr. Khodorkovsky, a Putin political opponent who has been in jail for more than a year awaiting trial on fraud and tax-evasion charges, ran afoul of the powerful world leader.

Before his arrest the Yukos mogul had been close to a deal to build a pipeline to China, the world’s fastest-growing oil-consuming country.

But Mr. Putin prefers to build a pipeline nearly four times longer to the east coast port of Nakhodka that could feed shipments of oil to Japan and the United States as well as the rest of Asia. That pipeline would guarantee higher prices for Russia’s oil by ensuring that China has competitors with access to the oil.

Also to Mr. Putin’s liking, Japan has offered to pay for much of the Nakhodka pipeline, which likely would be owned and operated by the state pipeline company Transneft. Japan has offered to provide another $5 billion for the development of Russia’s far east.

Taken together with the partial government takeover of Yukos, the pipeline deal would go a long way toward putting the destiny of Russia’s most significant economic resource back in the Kremlin’s hands, analysts said.

State capitalism in Russia

“Control of the pipelines is the key for the government,” said Stanislov Song, a Russian investment specialist with J.P. Morgan investment bank — as is the state’s move to retain or regain control over Russia’s most important energy companies.

While some Putin critics charge that he is “renationalizing” energy assets, following a pattern of other major oil-producing countries that maintain national control over their energy sectors, Mr. Song believes Mr. Putin’s goals are somewhat more modest.

The state’s actions in the Yukos case, its blessing of a joint venture between Russia’s Lukoil and ConocoPhillips this summer, and other government-backed alliances with Western companies suggest that the goal is merely to retain a majority stake and prevent outside ownership of more than 49 percent of critical resources, he said.

Some analysts suggest Mr. Putin is moving toward “state capitalism” in light of the widespread belief that Russia’s experiment with an unfettered market economy during the 1990s failed to produce widespread benefits.

Mr. Putin’s actions indicate that he not only wants to derive the most potential revenue and economic advantage from exports of Russian oil, he also wants to conserve Russia’s rich oil resources as much as possible to fuel the country’s own development, Mr. Song said.

Mr. Putin has set the ambitious goal of doubling Russia’s economic output by 2010 — a move that would catapult Russia into the realm of the world’s top 10 economic powers.

But Mr. Putin would like to attain that status by developing Russia’s promising space and technology sectors, and upgrading its aging industrial sectors, rather than depleting its vast energy and natural resources as Westerners have advised.

“He’s trying to restrict exports” of oil and “make sure domestic prices remain within bounds,” Mr. Song said.

Tax compliance up

Besides wresting control of key parts of the oil sector, the government’s case against Yukos is serving its avowed purpose of increasing compliance with the tax laws, Mr. Song said.

Mr. Putin insists regularly that he is not pursuing Yukos for political reasons or to silence his well-heeled opponent, Mr. Khodorkovsky, but rather is making an example of Russia’s biggest taxpayer by throwing the book at it for tax evasion.

Since the crackdown on Yukos, “we see a trend of increasing tax contributions to the state,” Mr. Song said. “Companies have been more compliant with the letter and spirit of the tax law and are contributing more to local communities.”

Pavel M. Teplukhin, president of Troika Dailog, a Moscow investment bank, also has observed an increase in tax compliance, which was notoriously low throughout Russia before the Yukos affair.

While many in the West are startled and disturbed by Mr. Putin’s move to punish Mr. Khodorkovsky and take control of Yukos, Mr. Teplukhin said the Russian public is sympathetic because many people feel they were cheated by the Russian billionaires who benefited the most from privatization.

Only 15 years ago, nearly everything in Russia was owned and controlled by the state, he notes. Opinion polls today show that 40 percent of the public believes private property should be turned back to the state.

The polls show that Mr. Putin is well within his mandate in attempting to reserve and cultivate Russia’s oil resources primarily for the benefit of ordinary Russians, Mr. Teplukhin said.

If that means oil remains in short supply and prices stay high, so be it. The United States should learn to conserve energy rather than ask Russia to build massive pipelines across ecologically sensitive areas of Siberia to feed America’s unquenchable thirst for oil, he said.

State needs oil revenue

Mr. Putin has other important reasons to regain control over Yukos and reshape it to fit his nationalistic agenda.

Oil taxes and export duties are the main source of revenue for the Russian government. The energy sector produces about half of Russia’s economic output, Mr. Teplukhin said, and most of its tax revenue.

When oil prices are high, revenues pour in and the government prospers, as do the many pensioners and workers who depend on the government for income.

The Russian public has become acutely aware of the connection between oil prices and pensions, particularly since Mr. Putin used recent oil-generated surpluses to raise wages and pensions for retirees and health care, education and other workers.

As a result, the connection between oil prices and the public welfare has become a political factor. At a recent public forum, a pensioner asked Mr. Putin if her pension payments would drop if oil prices fell.

Natalia Gevorkyan, special correspondent for the Kommersant business newspaper, said the Yukos affair shows that Mr. Putin is trying to take over parts of the economy just as he is consolidating power over the Russian parliament and regions.

But the president’s political fortunes may depend on oil prices remaining high, she said.

“What will follow a collapse in oil prices is a collapse of the economy and a collapse of the government in power.”

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