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Russian State-Owned Oil Company Buys Private Firm Yukos

Russian oil company Yukos lost its most valuable oil production subsidiary to a state-owned firm. Jeffrey Brown looks at the re-nationalization of the company with Marshall Goldman, associate director of the Davis Center for Russian studies at Harvard University, and J. Robinson West, founder of PFC Energy, a consulting group.

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    It's a story of oil, power, and intrigue; the high drama included the arrest at gunpoint of Mikhail Khodorkovsky, the billionaire head of Yukos Oil.

    He'd built Yukos into a major international business, but he had also emerged as a very public political opponent of Russian President Vladimir Putin.

    In October 2003, Khodorkovsky was charged with tax evasion and fraud; he's been in jail ever since. His company was levied with a $27 billion bill for alleged tax evasion, and spun toward financial ruin.

    Last Sunday, the company's most valuable asset, a subsidiary called Yuganskneftegas, which produces a million barrels of oil a day, was auctioned off by the Russian government.

    A winning bid of $9.35 billion, considered only half its value, was submitted by the previously unknown Baikal Finans group.

    Then yesterday, the mysterious Baikal was itself purchased by a prominent state-run oil concern called Rosneft. To add to the intrigue, Rosneft has plans to merge next month with Gazprom, an even bigger, government-controlled energy conglomerate.

  • The apparent impact:

    Yukos, once a leader of the move towards privatization in Russia, has now been renationalized. At a Moscow press conference today, President Putin said the outcome is completely legitimate.

    PRESIDENT VLADIMIR PUTIN (Translated): State-owned companies, or to be more precise, companies with 100 percent ownership by the state, have a full right to bid for it, as well as all other market players.

    And, as we see, they exercised that right. Today the state, using absolutely legal market mechanisms, is ensuring its interests. I consider this perfectly normal.


    The case is further complicated by actions taken in a Houston courtroom last week, when Yukos executives, one of whom lives in Houston, won a court order blocking the auction.

    Company officials now say they'll continue legal challenges to the takeover of Yukos. Also this week, the Bush administration made clear that it's watching the Yukos situation carefully.


    We have communicated to the Russian government repeatedly that its handling of the Yukos matter could have a chilling effect on the foreign investment in Russia and affect its role in the global economy.


    Though Mikhail Khodorkovsky was not mentioned by name, President Putin today criticized the way many private businessmen, known as oligarchs, had bought state properties at bargain prices after the breakup of the Soviet Union.

    PRESIDENT VLADIMIR PUTIN (Translated): You know very well what privatization was like in the early 1990s. At that time, some market participants got multibillion- dollar state assets using different tricks.


    Putin said by contrast, the buyout of the Yukos subsidiary "was done in absolute conformity with market means."


    We get some help in following all this now. It comes from Marshall Goldman, an economist and associate director of the Davis Center for Russian Studies at Harvard University.

    And J. Robinson West, founder of PFC Energy, a consulting group. He served as assistant secretary of the interior in the Reagan administration. Welcome to you both.

    Starting with you, Professor Goldman, first there's a mystery buyer in the auction, then there is the state-owned conglomerate. How do you explain what's happened here?


    I think they were very frightened by that Houston court decision. The implication was that anybody who helped them, the banks who were going to help finance it or any other companies, would have their assets attached.

    This has happened before. There was a company in Switzerland that felt it was owed money by the Russian government and they seized the Paris embassy, they seized the Russian bank and they even tried to seize the sailing ships.

    So I think the people were worried in Moscow that this would happen, and so they disguised it in these various entities they created overnight.


    When you say the people, are you referring to the government? What made Yukos so valuable to the government that it wanted to act this way?


    Well, the Russians and President Putin has said that other countries in the world for the most part own their own natural resources, and the privatization that took place in the early '90s broke that pattern, and they want it back.

    And they're mad at Khodorkovsky, they're mad at some of the other companies that have not yet been assessed with overdue taxes as well, but they wanted to bring it back and they wanted to make it a part of Gazprom, which is really controlled by the Russian government, so that you will have in effect what we used to regard as the Ministry of Energy in the old Soviet Union days.


    Robin West, tell us a little more about Yukos' and its history. Very strong leader, well-run company?


    Well, Yukos was taken over by Khodorkovsky during privatization using very unconventional and rather shadowy means.

    But he was a very efficient manager, he was tough and ruthless in everything including the way he ran Yukos.

    He built it into the gem of the Russian oil industry, producing over a million barrels a day, and it was a very profitable effective company, almost uniquely so in Russia.


    Now what will Rosneft then Gazprom, these state owned conglomerates, what will they do with it, what happens now?


    They're going to take it over — as Professor Goldman pointed out, the state wants to reassert control over the oil sector.

    But more importantly, in the old days of the Soviet Union they had a huge military establishment. They don't have that anymore. So oil is going to be a lever of the state.

    They want it to be — already the Russian state controls the gas business, now with Yukos and Rosneft they'll control a big piece of the oil business.

    But one of the problems is that state enterprises are not very efficient. So, there's gong to be a real challenge as to whether they'll be able to sustain this production.


    Professor Goldman, I just want to be clear about the Houston situation, because the legal case will go on, I understand. But is there the power in a court in Houston to overturn what the Russian government has done?


    Well, that's part of what makes it so fascinating. We don't know.

    There has never been a case where a foreign company this way was declared bankrupt in an American court. So there's a struggle. And the Russians are saying, "Well, we don't recognize that."

    But at the same time, the court and Yukos is saying, "We'll see and we'll threaten you."

    It was frightening enough so that a conglomeration of banks that were going to finance this, including Deutsche Bank and J.P. Morgan Chase, backed away because they were frightened that it would not only sully their reputation but lead to attachment of their assets.


    Do you see some legal goings-on in Houston that can affect the outcome here?


    I think in the end, the Russian government is going to get Yukos and keep Yukos.

    I think the Houston litigation affected, as Professor Goldman said, tended to affect the international banks which were originally going to finance Gazprom's bid for Yukos.

    When the court order came out, then the banks pulled back, Gazprom pulled back and this other player Baikal Finance, which no one ever heard of before, emerged as a front.


    Professor Goldman you, you heard the comments from President Putin where he was criticizing what had happened in the '90s in the privatization.

    Does the Yukos situation have implications for his power or for the power of the government there vis-à-vis private industry?


    Well, I think what we can see is that he's going to challenge now some of the other oligarchs and some of the other businesses already.

    There have been a series of lawsuits and charges that some of the other companies have not paid their bills.

    There was also a government entity which released a report in December which said that the whole privatization process was so faulty we have to go back and reexamine it and mention some of the other oil companies that have been privately held.

    You know, what you had here was these oligarchs came along and for a pittance managed to obtain assets that were worth billions of dollars. This is what Putin is addressing.


    So Robin West, in that context then, what happens to foreign investment for outsiders looking in, who's looking in at the Russian oil industry for possible investment, and what do they do now?


    Well, the big international oil companies are eager to invest everywhere in the world. They can't get into the Middle East, the governments control all that.

    North America, Northwest Europe, the North Sea, the traditional places, they are what's called mature and declining.

    So they're trying to reinvest, they want to get into Russia, there are very large reserves in Russia. But the problem is that now — what is the role of the state; is there contract sanctity?

    They'd like continue to invest, but there's no legal basis which gives them confidence to invest billions and billions of dollars.


    And how important is a Gazprom or a Yukos or the Russian oil industry for that matter in the larger, in the global oil market?


    Well, it's very important. We did an analysis, to our understanding the Kremlin did the same analysis, which showed that Russian production which is now over eight million barrels, will get to be about ten million barrels a day in 2008, will be then mature and start declining.

    The world is going to need more and more oil, with growing Chinese demand and Indian demand and a constant demand from the United States, we need more oil.

    And the fact is that Russia, if there isn't this investment, both internal investment and external investment coming in, we're not going to be able to sustain this production, and this is very serious to the world markets; the markets will be tighter than ever.


    Professor Goldman, how do you see the future of the Russian oil industry vis-à-vis the world market?


    Well, I would agree. Already there, Russia is now leading oil producer more than even Saudi Arabia.

    But what has happened is that in this chaos, I called it a fiasco in many ways, Yukos in particular but some of the other oil companies are no longer drilling as many wells as they had planned to drill, and production is beginning to drop right now.

    At one point last year, oil production was growing at rates of 10 to 12, to 13 percent, now it's below 7 percent.

    That in turn effects Russia's economic growth, industrial production, and Putin is causing himself some problem.

    I would agree that he'll probably work out of it, but in the meantime it does have to cause a certain amount of worry from foreign investors.

    I should say one other thing, by the way, that the chief executive officer, the chief financial officer of Yukos were both Americans and they are out of country now for fear that if they go back to Russia they'll be arrested.


    And, Robin West, let me ask you briefly about the U.S.-Russia relations here. The State Department said it was disappointed with the way the Kremlin had handled the purchase of Yukos. Is this a potential strain?


    It's a potential strain, but this is essentially it is an internal matter but it has external implications.

    The Khodorkovsky issue and his rights, that's one issue, but then there's the world economy and its dependence on oil in the role of Russia. In the long term, this is a big deal.


    All right. Robin West and Marshall Goldman, thank you both very much.


    Thank you.


    Thank you.

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