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Russia: Moscow's Rift Widens With OPEC

A Russian oil baron has called on the government to spurn OPEC's request for an extension of export curbs to prop up oil prices. The stand reflects the growing power of independent producers as Russia seeks to recapture the Soviet share of the world oil market.

Boston, 13 March 2002 (RFE/RL) -- Russia's top private oil executive yesterday called for a public break with the Organization of Petroleum Exporting Countries (OPEC) over demands that the country continue to limit its exports of oil.

Writing in the London-based "Financial Times," Mikhail Khodorkovsky, head of Russia's Yukos oil company, said the government "should act with determination and decisiveness and say no to OPEC's demands." The statement by the chief executive of Russia's second-largest oil company appeared to mark a new level of open conflict with OPEC, as well as assertiveness by independent producers.

Russia's biggest oil company, LUKoil, has supported first-quarter export cuts announced by the government, which controls 15.5 percent of the firm. But Yukos, which has grown far faster than LUKoil, has already announced plans to boost output by over 24 percent in 2002. Those plans, made public in December, were a sign that Russia's pledge to lower exports by 150,000 barrels per day would not be honored for long, if at all. The Yukos increase is nearly double the amount of the promised reduction, even before other producers are taken into account.

Reuters reported this week that Russian companies have increased their rail and ocean exports to get around the pipelines that were the only subject of the government pledge. Huge rises have also been reported in refined-product exports.

In recent days, top OPEC officials have renewed their frequent visits to Moscow in hopes that the government will extend its pledge past March to keep oil prices firm. An OPEC meeting on 15 March in Vienna is likely to decide that the 11 participating nations in the cartel cannot take more cuts on their own.

Venezuelan Energy Minister Alvaro Silva Calderon was received yesterday by his Russian counterpart, Igor Yusufov, but he left with nothing concrete. Khodorkovsky suggested that if OPEC had gone beyond polite requests, it would have been shown the door.

Khodorkovsky wrote: "OPEC and Russia have so far avoided a dispute. But we shall surely not be able to prevent one for long. It will remain like this as long as OPEC assumes that it can continue to act as producer, exporter and global regulator all in one."

While calling for cooperation and coordination with OPEC, Khodorkovsky openly blasted the cartel, saying, "Its market-rigging tactics have resulted in volatility, not price stability."

As an independent, Khodorkovsky appears to be saying what the government will not. Russia has kept up the fiction of cooperation with OPEC for years. A declared conflict could have consequences in the Middle East, where every oil dollar that goes to Russia may come out of government revenues.

But Russia has now invested a big part of the proceeds of its economic recovery in future oil production and the prospect of taking back the world market share that the Soviet Union once held.

Khodorkovsky made clear that his investments in Siberia cannot be turned on and off like a tap. He said, "It is impossible simply to close the pipelines and wait 18 months until the price changes -- the dormant wells would freeze up and be completely destroyed in the bitter cold of the Russian winter."

But Khodorkovsky's logic seems to turn naive when he calls for cooperation with OPEC "to develop procedures for regulating production in the medium term." Khodorkovsky said, "Production levels should be established for a period of between three to five years, helping supplies to become more predictable and giving consumers and producers greater protection against external shocks." In other words, he would like to reduce his investment risk.

That goal is understandable, considering Russia's catastrophic experience with plunging oil prices and the ruble crash of 1998. But after the latest crisis, the September attacks on the United States, few analysts were able to predict whether oil prices would rise or fall.

While fear of war pushed prices up, fear of recession pulled them down even more. When the threat to oil supplies failed to materialize, prices fell again.

In the past week, worry about a possible war with Iraq has driven prices up over $23 per barrel once more. But figures from the International Energy Agency indicate that worldwide demand has been flat for the past year. Even though prices have risen, OPEC fears another drop.

In the end, there is no way to keep outside forces from upsetting the market and the best-laid plans. Whether it breaks with OPEC or not, the market will not be Russia's to control.