Russia to nationalize?

ChrisD(RJ) chrisd at russiajournal.com
Tue Jul 30 05:50:30 PDT 2002


Wall Street Journal July 30, 2002 Specter of Nationalization Spooks Investors in Russia By JEANNE WHALEN Staff Reporter of THE WALL STREET JOURNAL

MOSCOW -- A word most investors thought the Kremlin had expunged from its vocabulary -- nationalization -- crept back to the fore last week as the presidential administration floated a puzzling proposal for the state to retake greater control of oil reserves and other natural resources now in private hands.

Analysts were disturbed by the proposal, but the government suggested it had little chance of being adopted into law.

President Vladimir Putin's administration proposed amendments to Russian legislation that would cancel license agreements that give companies the right to produce and sell oil and other minerals. Instead, the state would own the minerals and pay companies a "commission" for producing them, according to a copy of the proposal given to the government.

Investors called the plan a form of nationalization and said its adoption would decimate the world's second-biggest oil industry, along with Russia's wider market reforms. Dmitri Kozak, deputy chief of the presidential administration, said the proposal had been vaguely written and was therefore being misinterpreted. In an interview, he said the Kremlin merely wanted to give the state greater control of oil at the wellhead in order to ensure that taxes are paid in full.

"We are not talking at all about nationalization ... we aren't talking about taking away oil," he said.

A spokesman for the government, which often receives suggestions from the Kremlin on legislation, said the government felt that the existing legal regime for extracting minerals should be preserved. Prime Minister Mikhail Kasyanov ordered the government to study the Kremlin's proposal and rule on its worthiness by November.

Russia sold its vast oil reserves on the cheap to a clique of powerful businessmen in the mid 1990s in auctions widely believed to have been rigged. When Mr. Putin came to power two years ago, he promised the newly minted oil tycoons that they could keep the property, a promise that has spurred investment and boosted Russia's oil production dramatically. Some analysts said the new proposal appears to backpedal on two years of relatively successful market reforms.

Foreign investors were the most vocally concerned about the proposal. "I think it's very unlikely that it passes .... but the fact that it exists at all is negative," said David Herne, portfolio manager in Moscow for Brunswick Capital Management, which has $350 million (Ђ355 million) under management in Russia .

He said the proposal had probably come from Kremlin conservatives unhappy that private businessmen -- and not the state -- are reaping huge profits from the oil sector.

Russian oil companies, whose assets analysts say could be transferred to the state, were opposed to the Kremlin's proposal but treated it with relative calm. "We believe its implementation would disorganize the entire oil industry ... [but] we expect that reason will prevail," said a spokesman for OAO Yukos, the country's second-biggest oil producer. A spokesman for OAO Lukoil, the biggest producer, said the company was "still studying the document." The government is preparing to sell a 6% stake in Lukoil to the market later this week.

Mr. Kozak, the Kremlin official, said the current legal system regulating oil production left companies too much leeway to evade taxes. "Our position is that right after oil is mined [the state] should determine its volume and price [for tax purposes] and then it will become ... the property of the investor," who will be free to sell it, he said.

But the proposal itself says that mined natural resources should "remain in federal property" and that after their sale, "producers should be compensated for technologically justified expenses tied to production ... and also a normal profit, the size of which would be set in a contract."

Analysts said that suggested the state would handle the sale of the oil. "The amendments say you are no longer the owner of what you produce. You are merely a contractor," said Jane Trassova, a lawyer who handles energy issues at Salans Hertzfeld & Heilbronn in Moscow.



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