Funny things are happening around the Russian oil industry. Following discussions at the Bush-Putin summit about an energy dialogue between the two nations, Russian oil concerns have started shipping oil to the US. But instead of a hearty welcome they are encountering court procedures about multimillion debts allegedly incurred in previous years. This is hardly surprising. In the early days of Russian privatisation, the domestic oligarchs grabbed whatever oil fields they could and prevented US companies from getting their share. The methods used were hardly civilised, and today
foreign competitors are taking their revenge, This is private capitalism at its worst (or best, whatever word one prefers), and decisions made at summits can hardly change the rules of that game.
These little dramas come at an unfortunate time. Russian oil companies want to start selling their securities in US markets to bolster their capitalisation. To comply with American legislation, they have to publish more information about themselves. For instance, “LUKOIL” just let it be known that its CEO Vagit Alekperov owns 10 percent of the company’s shares worth $1.3 billion at current prices. He also gets an annual salary of $1 million plus $2.25 million in bonuses. This is but a drop in his total annual earnings, which are about $30 million. Other top people at “LUKOIL” are also fabulously rich by Russian and international standards. Sharing this and similar information with the public is long overdue. But claims of unpaid debts can spoil company images all the same.
The funny part of the picture starts at a different point. Small parts of the Russian oil industry remain state owned, and Kasyanov’s government wants to sell them off. This creates incidents like the “family”-Putin squabble around the proposed privatisation of “Slavneft”, Another case was the expected sale of 6 percent of “LUKOIL” belonging to the state. The initial idea was to sell it in international markets for close to $1 billion. With the current slump, it now costs about $700 million. Doubts were raised as to the wisdom of rushing with the sale. But to the last day the government was keen on going ahead. Then it suddenly called the deal off to the displeasure of international financiers.
Selling government property at a loss is certainly a bargain for any Russian or foreign tycoon who wishes to buy. The lower the price the larger the eventual profit and the share of government officials for their troubles. Had the deal gone through it would have been just another illustration of pirate-like Russian capitalism. Nothing to be surprised about.
Really surprising is that at practically the same time Putin’s administration has sent to the government a new piece of draft legislation that oil companies call nationalisation. The document claims that not only all mineral deposits belong to the state, but also the products of their exploitation. If this document is adopted, oil companies will loose their current licenses for oil fields and will have to sign concession agreements, under which they would be compensated for costs plus a “normal profit”, but the remaining revenue would belong to the government.
It is no secret that oil companies reap an enormous super profit from their low production costs and the much higher world prices. Last year, Putin suggested taxing away most of that mineral rent and using it to finance manufacturing, particularly high-tech industries. Due to sabotage from the Kasyanov cabinet, nothing came out of this idea. Today the president has returned to his old plan and put it into an extreme form that is close to de facto nationalisation.
So far, there is little panic among the oligarchs. For one, government ministers expressed surprise that the Kremlin has not gone through the procedure of consulting the state ministries and agencies concerned, particularly since this is what they qualify as an “extreme initiative”. Indeed, the disagreement is a matter of principle: Putin proposes nationalisation while Kasyanov presses for further privatisation.
Business is more outspoken. As Sergei Alexashenko, vice-president of Vladimir Potanin’s “Interross” conglomerate puts it, the Kremlin proposal “goes far beyond suggestions by Russian communists”. David Hearne of Brunswik Capital Management is forecasting a massive flight of capital if Putin tries to push the plan through.
In view of the expected opposition in the Kasyanov cabinet, it is very likely that the concession plan will be either buried or emasculated on the way to Parliament. This could be another test of strength between the president and the prime-minister with the oligarchs taking Kasyanov’s side this time around. That is if Vladimir Putin is indeed serious. But is he?
It is quite possible that his new proposal is made for tactical reasons. First, he may want to show the oil barons once again who is boss in the country. Their recent boosting of gasoline prices is seen in the Kremlin as a revolt against Putin’s efforts to beat inflation. Second, and more importantly, the president could be up to his own pre-election blackmail in order to subdue the oligarchs into providing financial and other support for his own and his party’s coming campaign.
Dancing with the oil and nickel wolves is dangerous business. Who wins is anybody’s guess.