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Russia: The Economics Behind The Yukos Crisis

What is the future of Russia's largely privately held oil sector? That question has been at the forefront of many political discussions since the start of the Yukos scandal. This week, Russia's defense minister spoke out in favor of state control of not only revenues but companies as well. RFE/RL talks to French economist Jacques Sapir.

Moscow, 20 November 2003 (RFE/RL) -- Is the Kremlin planning to become Russia's latest oil major?

An unlikely source -- Russian Defense Minister Sergei Ivanov -- suggests the answer is "yes." In an interview with "Kommersant" newspaper published on 17 November, Ivanov said the state "shouldn't lose control of strategic economic sectors."

The defense minister said there would be no review of the 1990s privatizations that landed much of the country's oil wealth in the hands of private businessmen like Mikhail Khodorkovskii, the former head of Yukos, the energy giant that is currently the target of a full-scale government attack.

But Ivanov did say that only the state should have the right to decide on long-term plans for oil exploration. "The underground and its resources are state property and not private, so the state has the full-fledged right to control this process and manage it in the interest of the development of the whole country," Ivanov said. He also stressed the importance of the state's ability to "control the situation and know which way the [company] is going."

Why is the Russian defense minister speaking out on matters that appear to fall far outside his mandate? Jacques Sapir, who teaches economics at the Paris Higher School of Social Sciences, says Ivanov's remarks are probably meant to float an idea on behalf of Russian President Vladimir Putin.

Indeed, Putin himself gave a softer rendition of Ivanov's remarks, calling for increased government regulation over the export of oil products.

Ivanov is reputed to be one of Putin's closest allies. Like Putin, he is also a former security service officer. Under his leadership in 2000, the advisory but influential Security Council was made to focus increasingly on issues of "economic security." Sapir explains why Ivanov is concerned about oil reserves and their exploration being brought back under state control.

"The extraction processes are purely short-term -- for example, injecting water under the oil pockets in order to increase pressure. It's a phenomenon that is known to be very damaging to production but that allows for production peaks that of course are very profitable when the prices are beyond a certain level," Sapir said.

Some analysts say the state's concern about the fate of Russia's oil reserves is partly justified. Oil and gas analyst Valerii Nesterov told "The Moscow Times" that Ivanov's statements reflect a "pessimistic view."

Current reserves are sufficient for 26 years of extraction, but are the result of mostly Soviet-era exploration. So far, most Russian oil companies, when faced with dwindling reserves, have bought up a neighboring firm rather than finance their own exploration.

But many private companies say that after the wild 1990s, when accumulation was the name of the game, they are now ready to pursue long-term strategies -- something in which the Kremlin appears eager to intervene.

Sapir says the Kremlin's interest in regulating both reserves and exports is meant to counter the natural tendency of oil companies to make the best of high energy prices, possibly at the expense of the country's long-term interests. "The state also wants to take advantage of the high yields," he says.

In fact, some steps have already been taken in that direction. The State Duma (lower house) yesterday approved in a second reading two amendments giving the state more control over oil revenue.

The first liquidates the internal offshore zones favored by many oil companies registering "daughter" companies in Chukotka, Mordovia, or Kalmykia for tax breaks.

The other increases the government's powers to regulate the export of oil products by manipulating export taxes.

Formally, the amendments still need to pass a final reading and be adopted by the Federation Council (upper house), but the measures are widely expected to pass.

Sapir himself appears to favor the change, saying examples elsewhere in the world show that private oil companies looking for a quick and easy profit rarely succeed at long-term development strategies that would benefit the entire country.

"Countries where the scheme for developing natural resources was not [state] controlled are countries whose manufacturing sector was disintegrated and which became producers of pure natural resources. One classic example of this type of de-industrialization is Argentina," Sapir said.

But Sapir also compares Russia to the dying Roman Empire, where the heads of faraway provinces exploited their region's riches without state control.

More optimistic analysts compare Russia to the United States during its period of emerging capitalism, when robber barons like John Rockefeller gradually evolved into productive economic players. They say Russia's own energy barons have reached a "second stage" of development wherein they provide a boost to the economy by modernizing their industries, raising salaries, and investing in long-term projects.

But Sapir prefers to compare it to another chapter in American history -- namely, the Civil War, when the manufacturing North was pushing for more control over the South and its high-profit cotton economy.

But with Russia still suffering from institutional weakness, Sapir say's Ivanov's failure to detail the Kremlin's true intentions is "cause for concern." On the one hand he talks about stepping up general control, and on the other dismisses schemes like a privatization review.

But the economist says there are still several additional options ranging from radical to moderate: "Will these companies be re-nationalized? Will they be re-nationalized in order to be re-privatized under more transparent and legal conditions? Will [they] go in the direction of state holding companies, which European experience shows is compatible with good company management? Can we imagine mixed[-ownership] companies, state and private?"

Echoing common views about the state's relative weakness and corrupt civil structure, Sapir says reforming the natural resources sector will go nowhere if state-building does not take place as well.

"The fiscal ability of the state to ensure a certain level of social security in terms of health and education, in particular -- isn't this the basis for repairing the legitimacy of Russia's political system? We know by experience that when a regime quickly re-establishes its legitimacy, it also becomes capable of controlling its civil servants and administration," Sapir said.

Mikhail Delyagin, a Russian economist and former advisor to Prime Minister Mikhail Kasyanov, put it this way: Without state-building, Russia is headed toward "privatization of the state" by officials and bureaucrats looking only to serve their own interests.