Analysis: Russian roulette: Energy Part 1

By SAM VAKNIN, UPI Business Correspondent  |  Feb. 4, 2002 at 1:17 PM
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SKOPJE, Macedonia, Feb. 4 (UPI) -- The pension fund of the Russian oil giant, Lukoil, a minority shareholder in TV-6, owned by a discredited and self-exiled Yeltsin-era oligarch, Boris Berezovsky, last week forced the closure of this television station on legal grounds.

Gazprom, Russia's natural gas monopoly, has done the same to another television station, NTV, last year.

Gazprom is forced to sell natural gas to Russian consumers at 10 percent of the world price and to turn a blind eye to debts owed it by Kremlin favorites. Both Lukoil and Gazprom are, therefore, used by the Kremlin as instruments of domestic policy.

But Russian energy companies are also used as instruments of foreign policy.

A few examples:

Russia has resumed oil drilling and exploration in war-ravaged Chechnya. About $7.5 million have been transferred to the federal Ministry of Energy. A new refinery is in the works.

Russia lately signed a production agreement to develop oilfields in central Sudan in return for Sudanese arms purchases.

Armenia owes Itera, a Florida based, Gazprom related, oil concern, $35 million. Itera has agreed to postpone its planned reduction in gas supplies to the struggling republic to next Monday.

Last month, President Vladimir Putin called for the establishment of a "Eurasian alliance of gas producers" -- probably to counter growing American presence, both economic and military, in Central Asia and the much-disputed oil-rich Caspian basin. The countries of Central Asia have done their best to construct alternative oil pipelines through China, Turkey or Iran in order to reduce dependence on Russian oil transportation infrastructure. These efforts largely failed, although a new $4 billion pipeline from Kazakhstan to the Black Sea through Russian territory has just been inaugurated, and Russia is now on a charm offensive.

Its public relations efforts are characteristically coupled with extortion. Gazprom owns the pipelines. Russia exports 7 trillion cubic feet of gas a year -- six times the combined output of all other regional producers. Gazprom actually competes with its own clients, the pipelines' users, in export markets. It is owed money by all these countries and is not above leveraging it to political or economic gain.

Lukoil is heavily invested in exploration for new oil fields in Iraq, Algeria, Sudan, and Libya.

Russian debts to the Czech Republic, worth $2.5 billion, have been bought by UES, the Russian electricity monopoly, for a fraction of their value and through an offshore intermediary. UES then transferred the notes to the Russian government against the writing off of $1.35 billion in UES debts to the federal budget. The Russians claim that Paris Club rules have ruled out a direct transaction between Russia, a member of the club, and the Czech Republic, which is not a member.

In the last decade, Russia has been transformed from an industrial and military power into a developing country with an overwhelming dependence on a single category of commodities: energy products. Russia's energy monopolies -- whether state owned or private -- serve as potent long arms of the Kremlin and the security services and implement their policies faithfully.

The Kremlin maintains a tight grip over the energy sector by selectively applying Russia's tangle of hopelessly arcane laws. In the last week, the Prosecutor General's office charged the president and vice president of Sibur, a Gazprom subsidiary, with embezzlement. They are being detained for "abuse of office."

Another oil giant, Yukos, was forced to disclose documents regarding its ownership structure and activities to the State Property Fund in connection with an investigation regarding asset stripping through a series of offshore entities and a Siberian subsidiary.

Intermittently, questions are raised about the curious relationship between Gazprom's directors and Itera, upon which they shower contracts with Gazprom and what amounts to multi-million dollar gifts in the from of ridiculously priced Gazprom assets.

Gazprom is run by a Putin political appointee, its former chairman, the oligarch Rem Vyakhirev, ousted in a Kremlin-instigated boardroom coup.

Foreign investors seem to be happy. Putin's pervasive micromanagement of the energy titans assures them of relative stability and predictability and of a reformist, businesslike mindset. Following a phase of shameless robbery by their new owners, Russian oil firms now seem to be leading Russia -- albeit haltingly -- into a new age of good governance, respect for property rights, efficacious management, and access to Western capital markets.

The patently dubious UES foray into sovereign debt speculation, for instance, drew surprisingly little criticism from foreign shareholders and board members. "Capital Group," an international portfolio manager, is rumored to have invested close to $700 million in accumulating 10 percent of Lukoil, probably for some of its clients. Sibneft has successfully floated a $250 million eurobond redeemable in 2007, with a lenient coupon of 11.5 percent. The issue was oversubscribed.

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