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Russia: Trouble In Fuel Sector Leaves Doubts About Economic Upswing

Despite glowing reviews of Russia's economic progress at the recent World Economic Forum in Moscow, troubling questions persist about investigations and corporate governance. Few answers have been forthcoming about controversies at petroleum giants Gazprom and Sibneft, as reports of infighting and huge transfers mar the country's new reform-minded image.

Boston, 31 October 2001 (RFE/RL) -- Shadows of scandal have contrasted sharply with bright assessments of Russia this week as the economic record of President Vladimir Putin continues to draw praise.

Speaking yesterday at a meeting of the World Economic Forum in Moscow, Putin pointed to Russia's remarkable turnaround since the ruble crisis of August 1998, saying the country is now on track to join the World Trade Organization. Putin said, "We have taken a firm decision to join the WTO, and we shall see this through." Finance Minister Aleksei Kudrin said it is realistic for Russia to expect membership by 2004.

Russia's economic progress was supported by new figures from the State Statistics Committee that showed a 5.4 percent growth in gross domestic product for the first nine months of this year. Putin cited major steps to reform Russia's tax system. Kudrin estimated that the total tax burden would decline by about 2 percent of GDP this year and a similar amount in 2002.

In an editorial on 30 October, the London-based "Financial Times" said that "the Russian economy has changed and the government deserves the credit for its revival." Such appraisals have become common in recent weeks, thanks in part to real economic improvement but also to political hopes prompted by Russia's solidarity with the United States since the terrorist attacks of 11 September.

More good news came on 29 October in an announcement by the U.S.-based ExxonMobil oil company that it will proceed with a mammoth project to develop Sakhalin Island resources in Russia's Far East with possible investments reaching $12 billion.

Similar positive reviews are expected when Russian and U.S. officials meet at an upcoming annual Harvard University investment conference in Boston.

But the trend has been marred by a series of troubling reports. On 30 October, the Interfax news agency said Russian prosecutors are "pursuing criminal investigations against numerous highly placed officials" in several ministries and agencies. The story follows contradictory accounts of searches at the Emergency Situations Ministry and a fraud case launched recently against Railways Minister Nikolai Aksenenko. Until the dust settles, it seems impossible to tell whether the moves are part of a new push for government reform or a purge. At the least, the reports may sound a note of caution in what has otherwise been a chorus of praise.

Mystery also surrounds the absence of Aleksei Miller, the new chief executive of gas monopoly Gazprom, from a board meeting earlier in October at which his deputy, Pyotr Rodionov, reportedly resigned. Miller was said to be ill. Foreign shares in Gazprom dropped sharply on 29 October due to the uncertainty. The company is locked in a struggle over whether it will break its questionable ties to the private gas trader Itera and demand the return of cheaply sold assets. The outcome is critical to Gazprom's ability to attract needed investment. But Miller's low profile suggests that he may be losing a test of wills.

Russia is also likely to be challenged by falling oil prices and OPEC's demands that it help by cutting production. Kudrin said recently, "We are prepared for any scenario," even if oil prices fall to $18.50 per barrel. But as he spoke, Urals crude stood perilously close at $19.62.

More recently, events at Russia's sixth-largest oil company Sibneft also raised doubts about whether real progress has been made.

In its editorial, the "Financial Times" wrote that "Putin's ruthless strengthening of central government has improved corporate governance; the rule of law has forced Russian companies to stop simply stealing from shareholders or bankers."

But reports of huge transfers involving Sibneft's majority shareholders have not supported that view. The company recently disclosed that it sold a 27 percent block of shares to its privileged shareholders for $542 million last December. The group is said to include Chukotka Governor Roman Abramovich.

After first refusing to provide any details, the company said on 29 October that it bought back the shares in July for $568 million, giving it a profit. But minority shareholders were furious about being kept in the dark about the enormous shifting of funds and the use of the apparent loan. "The Moscow Times" daily quoted Sibneft spokesman Nick Halliwell as saying, "We will not comment anymore on this transaction."

Despite Russia's economic progress, many questions may remain about its transparency and accountability.