Russian Oil: The Plot Thickens

Back on 12/05/04 I wrote a piece What Are We Headed for? Look to Russia, which looked at the theft of the Russian economy in its transition to capitlaism. In that article I discussed the process that was detailed in "Crossing the Rubicon: The Decline of the American Empire at the End of the Age of Oil (see supporting note at end of this article). Since that time I have been very interested in the struggle for Yukos Oil in Russia.

The short story of the theft of Russia's wealth was, in part, the "privatization" of Russia's natural resources and the creation of oligarchs and elites who benefited heavily from the wealth transfer. Mikhail Khodorkovsky was one of those oligarchs.

Khodorkovsky is (was) considered the richest man in Russia, and at one point the 16th richest man in the world. Unfortunately for him, he got in a power struggle with Putin. He decided to fund the opposition party against Putin, and Putin had him arrested and thrown in jail for fraud, embezzlement and tax evasion charges. Putin then went after Yukos for back taxes. Ultimately this placed Yuganskneftegaz (a major petroleum holding of Yukos) up for auction by the state. In an effort to save at least part of its assets, Yukos filed for bankruptcy protection in the federal bankruptcy court in Houston (yes Texas). On December 16th, 2004, that court ruled in favor of Yukos.

A ruling late Thursday in a federal bankruptcy court in Houston, however, raised some questions about the participation in the auction of banks that were expected to finance the deal. A federal bankruptcy judge in Houston, Letitia Z. Clark, issued a temporary restraining order intended to block the participation of lenders and Gazprom. The banks, analysts said, have extensive operations in the United States and might be concerned about ignoring the restraining order, which could put them in contempt of court. (Kremlin Reasserts Hold on Russia's Oil and Gas

On Sunday 12/19/04, a newly formed and unknown company - Baikal Finance Group - won the auction for Yukos. The expected winner had been another newly formed group called "Gazprom," but that failed when Baikal came from the shadows. Surprise, surprise, no one knows anything about who Baikal is. (See the following articles for more information: Yukos auction raises political stakes, Gazprom to acquire Yuganskneftegaz buyer, Unknown Russian Company Buys Yukos Unit.)

This is all a fascinating set of events, and I have been struggling to put it in some sort of context. First, we have Putin who has busily been consolidating his power, and restricting democracy through such actions as appointing governors rather than electing them. He has also been flexing his muscle internationally with intervention in the Ukraine elections, and his budding relationship with China (China, Russia Will Hold First War Games). The examples above indicate a challenge (or warning) to US/Bush dreams of hegemony despite the purportedly friendly relationship between Putin and Bush.

However, there is a different kind of power play than simply political that seems to be woven into going after Khodorkovsky and seizing Yuganskneftegaz. Was the first stripping of Russian wealth so successful that it is being played out again with a twist?

In this scenario, Putin rises to power and wants to rearrange the power structure under him. Dissident oligarchs from the previous coup are unseated. Khodorkovsky, would certainly be an excellent object lesson for others. The "government" (actually Putin) gets access to Khodorkovsky's wealth. This would be a tidy sum to negotiate with. But to reorder oligarchs and move wealth again, Putin (and whoever else) needs more than Khodorkovsky. He/they decide to start the scheme all over again.

Yuganskneftegaz, which had been held by the state prior to the capitalization of Russia, is brought back into state control (purportedly seized for unpaid taxes of about $27 billion). The estimated value of Yuganskneftegaz is $18 billion. It is purchased by a Johnny-come-lately unknown company - Baikal Finances Group for $9.3 billion. A bargain, and one that comes far from either the back taxes or the value of the company. However, $9.3 billion is not chicken feed.

So the state gets $9.3 billion to play with, and whoever is behind Baikal gets a petroleum reserve that is guaranteed to go up in value as oil becomes scarcer and scarcer. If this scheme works, then seizing other resources that were privatized during the great heist could be repeated. This could become the new model for concentrating both power and wealth. Of course, the losers will be largely the same - the Russian people, the US taxpayer, and the small stockholders in these corporations.

[Aside: It will be interesting to see how the stay on the sale by the Houston bankruptcy court plays out since Russia went ahead and sold Yuganskneftegaz anyway.]

[UPDATE 12/23/04 - NEW NEWS
12/23/04 Finn, Wa. Post, Russian Oil Firm Buys Mysterious Bid Winner
12/23/04 BBC, Putin backs state grab for Yukos
12/23/04 Arvedlund & Romero, NYT, State Company Buys Winner in Yukos Deal]

Sources
Michael Ruppert, 2004, "Crossing the Rubicon: The Decline of the American Empire at the End of the Age of Oil

12/20/04 Belton, Guardian/UK, Yukos auction raises political stakes

12/20/04 Gateway to Russia, Gazprom to acquire Yuganskneftegaz buyer

12/20/04 AP, Unknown Russian Company Buys Yukos Unit

12/20/04 MosNews.com, Ex-Yukos Boss Khodorkovsky Says Authorities Destroyed Russia's Most Effective Company

12/17/04 Arvedlund & Romero, NYT, Kremlin Reasserts Hold on Russia's Oil and Gas

12/15/04 AP, Yukos Files for Bankruptcy in U.S. Court

12/13/04 AP via FTW, China, Russia Will Hold First War Games

11/25/04 Tran, Guardian/UK, Yukos bosses flee Russia

WikiPedia, Mikhail Khodorkovsky

6/16/04 BBC, Profile: Mikhail Khodorkovsky

[Note: See this quote from 12/17/04 Arvedlund & Romero, NYT, Kremlin Reasserts Hold on Russia's Oil and Gas]:

Yukos was created under questionable circumstances from the remains of state oil assets in the early and mid-1990's. On its face, the Russian government is trying to sell Yukos's largest production subsidiary, Yuganskneftegaz, to pay back a tax claim of more than $27 billion. But the startlingly low opening bid of $8.65 billion, which the government set, was expected to tip the scales toward a state-friendly bidder like Gazprom.

Posted by rowan at December 20, 2004 7:37 AM | TrackBack | [eMail this article!] |