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Russia: Moscow Hails Oil Merger But Pursues Probe

The Russian government has been sending mixed signals on its support for private enterprise in the oil industry. While hailing this week's $35 billion merger of oil giants Yukos and Sibneft, the government is threatening the licenses of Yukos operations in eastern Siberia, apparently for the benefit of state-owned companies.

Boston, 24 April 2003 (RFE/RL) -- Despite government praise for the merger of two Russian oil giants, one appears to be the target of a government probe aimed at blocking its expansion in Siberia.

This week, top officials hailed the announcement that Russia's second-ranked Yukos and fifth-place Sibneft would combine to form the world's fourth-biggest oil company. It is also arguably the most closely held.

Hundreds of millions of dollars worth of shares are concentrated in the hands of Yukos Chief Executive Mikhail Khodorkovsky and Sibneft's main owner, Roman Abramovich, both men under 40. Their company fortunes are believed to have multiplied more than tenfold since they were scooped up in the infamous 1995 loans-for-shares scheme.

Since then, Yukos has worked to improve its transparency and burnish an image of good corporate governance. More questions may surround Sibneft, which helped engineer a widely-condemned auction of state shares in the Slavneft oil company only four months ago.

But the birth of an all-Russian oil mammoth may mark a milestone of sorts. The merged company will produce 2.3 million barrels of oil per day, nearly 30 percent of Russia's output, according to the London-based "Financial Times."

Russian government officials were quick to point out the benefits for the entire country. Prime Minister Mikhail Kasyanov said of the $35-billion merger of Yukos and Sibneft, "Consolidation of such companies will surely result in higher competitiveness of Russia on the world's oil market. It is an important and positive event," RIA Novosti reported. Kasyanov said that "Russia will only gain from it."

Finance Minister Aleksei Kudrin also cited the merger as "an example of how privatized sectors can attain positive results."

But in recent months, Yukos has been the focus of an intense licensing review by the Natural Resources Ministry, according to the Moscow-based industry weekly "The Russian Energy."

Unlike the ministry's sweeping series of oil- and gas-licensing inspections last year, the newsletter said that in February and March "the inspections seemed to be fine-tuned, targeting mainly strategic interests [of] one company, Yukos, which is considering eastern Siberia its principal ground for expansion."

On 10 April, Deputy Minister Aleksandr Povolotsky announced that a ministry task force would recommend that 24 of Yukos' development licenses be revoked, RBC News reported.

The inspectors said they would ask the Tax Ministry to calculate how much economic damage had been caused. Povolotsky charged Yukos subsidiaries with a slew of violations, including "massive environmental damage" from open burning of gas and failure to meet production obligations.

Much of the criticism was aimed at Yukos subsidiary operations in the Tomsk and Yakutia regions, which are oil sources for a planned pipeline to China.

"The Russian Energy" weekly pointed to rival plans of state-owned Rosneft and Gazprom for the east Siberian region as a possible cause of the Yukos probe. Both companies have opposed the China pipeline, preferring a much longer and more costly project to the Far East port of Nakhodka that would primarily serve Japan.

The newsletter said, "It seems that the government is looking for a pretext to prevent Yukos expansion in that area, using all means to achieve this goal, from administrative pressure to providing red-carpet treatment to state companies that are eyeing potentially attractive assets in Eastern Siberia."

Other industry publications, including "Petroleum Argus," have been charting a struggle for control of east Siberian assets and development for months. Rosneft and Gazprom wrote to President Vladimir Putin last month proposing joint development of resources in the region which are not under their control. Gazprom has proposed that it be given charge of all the region's gas projects, reducing the role of private companies to "drafting feasibility studies," "Petroleum Argus" reported in March.

It is unclear whether the course of the conflicts will change, now that Kasyanov has designated YukosSibneft as the "flagship" of the Russian oil industry.

Last week, Energy Minister Igor Yusufov said the government had decided to allow private ownership of export pipelines for the first time as long as it could maintain other forms of state control. That decision would seem to favor the Yukos pipeline to China, while this week's praise for the merger suggests official support for a new and privately-owned national champion in the industry.

But the targeting of Yukos subsidiaries and the power struggle in Siberia point toward the opposite trend, making it uncertain whether Kasyanov was voicing the enthusiasm of the moment or a government policy.