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Global Politician, NY
May 23 2005
Russia's Energy Sector
Sam Vaknin, Ph.D. - 5/24/2005
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), forced, in February 2002,
the closure of this television station on legal grounds. Thus was
fired the opening shot in the re-politicization of the lucrative (and
economically pivotal) energy sector in Russia.
Gazprom (Russia's natural gas monopoly) has done the same to another
television station, NTV, in 2001 (and then proceeded to expropriate
it from its owner, Vladimir Gusinsky).
Gazprom is forced to sell natural gas to Russian consumers at 10% the
world price and to turn a blind eye to debts owed it by Kremlin
favorites.
But the sector is still in flux, reflecting the shifting fortunes of
oligarchs and bureaucrats in Putin's Byzantine court.
On May 15, 2005 Gazprom surprisingly announced that it is calling off
a Kremiln-supported proposed merger between itself and another
Russian oil giant, Rosneft.
The fate of Yuganskneftegaz, the prime subsidiary of the now
bankrupted Yukos, is also still undecided - though technically, it
was purchased by Rosneft in a pretend "auction".
Mikhail Khodorkovsky, erstwhile oil magnate and largest
shareholder-cum-CEO of Yukos, is largely out of the picture, his
punishment for having dared to challenge President Putin, however
obliquely. But members of President Putin's St. Petersburgh "clan"
(clique and camerilla), Gazprom CEO Alexei Miller and Rosneft CEO
Sergei Bogdanchikov, are at each others' throats.
It is, therefore, clear that Lukoil and Gazprom are used by the
Kremlin as instruments of domestic policy - and by political
factions, both pro and anti-Putin as pawns on an ever-shifting
chessboard.
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 230 million rubles have been transferred to the
federal Ministry of Energy. A new refinery is in the works.
Three years ago, Russia 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. Originally, Itera has agreed to postpone its planned
reduction in gas supplies to the struggling republic to February 11,
2002. Then it became a rather permanent arrangement, at the Kremlin's
behest.
In January 2002, President 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 their dependence
on Russian oil transportation infrastructure. These efforts largely
failed (though a new $4 billion pipeline from Kazakhstan to the Black
Sea through Russian territory is in the works, having been
inaugurated in early 2002). Russia is now on a charm offensive.
Its PR 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
put together. 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 in face
value, have been bought in 2002 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 strictures
have ruled out a direct transaction between Russia (a member of the
Club) and the Czech Republic (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 (and, indirectly, the security services, the siloviki)
maintain a tight grip over the energy sector by selectively applying
Russia's tangle of hopelessly arcane laws. This strategy first saw
light in January-February 2002, when the Prosecutor General's office
charged the president and vice president of Sibur (a Gazprom
subsidiary) with embezzlement. They have been detained for "abuse of
office".
Another oil giant, Yukos, long before its systematic looting
commenced, was forced to disclose documents regarding its (real)
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) incessantly.
Gazprom is now run by a Putin political appointee, its former
chairman, the oligarch Vyakhirev, ousted in a Kremlin-instigated
boardroom coup. But Miller's relationship with Putin is under strain.
Miller's natural (and rapacious) competitors are all Russian - his
potential investors and clients all Western. This alignment runs
counter to Putin's emphasis on autarky and the unprofitable
leveraging of economic assets for political and global purposes.
Gazprom defied Putin, for instance, by brawling over natural gas
contracts with Turkmenistan, one of the only remaining Central Asian
allies of a geopolitically-dilapidated Russia. With 1.45 million bpd
(barrels-per-day) in combined output, Rosneft is emerging as a more
reliable - and equally weighty - policy tool.
Media stories to the contrary notwithstanding, foreign (including
portfolio) 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.
Khodorkovskyu, the robber-baron, many whisper, had it coming.
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% 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%). The issue was
oversubscribed.
The (probably temporary) cooling of Russia's relationship with the
USA is counter-balanced by Russia's acceptance (however belated and
reluctant) of its technological and financial dependence on the West.
All said and done, the Russian market is an attractive target.
Commercial activity is more focused and often channeled through
American diplomatic missions. The watershed year was, again, 2002.
The U.S. Consul General in Vladivostok and the Senior Commercial
Officer in Moscow have announced in 2002 that they will "lead an oil
and gas equipment and services and related construction sectors trade
mission to Sakhalin, Russia from March 11-13, 2002." The oil and gas
fields in Sakhalin attract 25% of all FDI in Russia and more than $35
billion in additional investments is expected.
Other regions of interest are the Arctic and Eastern Siberia.
Americans compete here with Japanese, Korean, Royal Dutch/Shell,
French, and Canadian firms, among others. Even oil multinationals
scorched in Russia's pre-Putin incarnation - like British Petroleum
which lost $200 million in Sidanco in 11 months in 1997-8 - are back.
Despite Putin's newly-discovered nationalist "Great Peter" streak,
takeovers of major Russian players (with their proven reserves) by
foreign oil firms have not abated. Russian firms are seriously
undervalued - their shares being priced at one third to one tenth
their Western counterparts'.
Some Russian oil firms (like Yukos and Sibneft) have growth rates
among the highest and production costs among the lowest in the
industry. The boards of the likes of Lukoil are packed with American
fund managers and British investment bankers. The forthcoming
liberalization of the natural gas market (the outcome of an
oft-heralded and much needed Gazprom divestiture) is a major
opportunity for new - possibly foreign - players.
This gold rush is the result of Russia's prominence as an oil
producer, second only to Saudi Arabia. Russia dumps on the world
markets c. 4.5 million barrels daily (about 10% of the global trade
in oil). It is the world's largest exporter of natural gas (and has
the largest known natural gas reserves). It is also the world's
second largest energy consumer. In 1992, it produced 8 million bpd
and consumed half as much. In 2001, it produced 7 million bpd and
consumed 2 million bpd.
Russia has c. 50 billion oil barrels in proven reserves but decrepit
exploration and extraction equipment. Its crumbling oil transport
infrastructure is in need of total replacement. More than 5% of the
oil produced in Russia is stolen by tapping the leaking pipelines. An
unknown quantity is lost in oil spills and leakage.
Transneft, the state's oil pipelines monopoly, is committed to an
ambitious plan to construct new export pipelines to the Baltic and to
China. The market potential for Western equipment manufacturers,
building contractors, and oil firms is evidently there.
But this serendipity may be a curse in disguise. Russia is
chronically suffering from an oil glut induced by over-production,
excess refining capacity, and subsidized domestic prices (oil sold
inside Russia costs one third to one half the world price). Russian
oil companies are planning to increase production even further.
Rosneft plans to double its crude output. Yukos (Russia's second
largest oil firm) was planning to increase output by 20% a year when
it was decimated and devoured by Rosneft. Surgut will raise its
production by 14%.
In early 2002, Russia halved export duties on fuel oil. Export duties
on lighter energy products, including gas, were cut in January 2002.
As opposed to previous years, no new export quotas were set since
then. Clearly, Russia is worried about its surplus and wishes to
amortize it through enhanced exports.
Russia also squandered its oil windfall and used it to postpone the
much needed restructuring of other sectors in the economy - notably
the wasteful industrial sector and the corrupt and archaic financial
system. Even the much vaunted plans to break apart the venal and
inefficient natural gas and electricity monopolies and to come up
with a new production sharing regime have gone nowhere (though some
pipeline capacity has been made available to Gazprom's competitors).
Both Russia's tax revenues and its export proceeds (and hence its
foreign exchange reserves and its ability to service its monstrous
and oft-rescheduled $158 billion in foreign debt) are heavily
dependent on income from the sale of energy products in global
markets.
More than 40% of all its tax intake is energy-related (compared to
double this figure in Saudi Arabia). Gazprom alone accounts for 25%
of all federal tax revenues. Almost 40% of Russia's exports are
energy products as are 13% of its GDP. Domestically refined oil is
also smuggled and otherwise sold unofficially, "off the books".
But, as opposed to Saudi Arabia's or Venezuela's, Russia's budget is
always based on a far more realistic price range ($14-18 per barrel
in fiscal year 2002/3, for instance). Hence Russia's frequent clashes
with OPEC (of which it is not a member) and its decision to cut oil
production by only 150,000 bpd in the first quarter of 2002 (having
increased it by more than 400,000 bpd in 2001). It cannot afford a
larger cut and it can increase its production to compensate for
almost any price drop.
Russia's energy minister told the Federation Council, Russia's upper
house of parliament, that Russia "should switch from cutting oil
output to boosting it considerably to dominate world markets and push
out Arab competitors". The Prime Minister told the US-Russia Business
Council that Russia should "increase oil production and its presence
in the international marketplace".
It may even be that Russia is spoiling for a bloodbath which it hopes
to survive as a near monopoly in the energy markets. Russia already
supplies more than 25% of all natural gas consumed by Europe and is
building or considering to construct pipelines to Turkey, China, and
Ukraine. Russia also has sizable coal and electricity exports, mainly
to CIS and NIS countries. Should it succeed in its quest to
dramatically increase its market share, it will be in the position to
tackle the USA and the EU as an equal, a major foreign policy
priority of both Putin and all his predecessors alike.
Sam Vaknin, Ph.D. is the author of Malignant Self Love - Narcissism
Revisited and After the Rain - How the West Lost the East. He served
as a columnist for Central Europe Review, PopMatters, Bellaonline,
and eBookWeb, a United Press International (UPI) Senior Business
Correspondent, and the editor of mental health and Central East
Europe categories in The Open Directory and Suite101.
Until recently, he served as the Economic Advisor to the Government
of Macedonia. Sam Vaknin's Web site is at http://samvak.tripod.com
May 23 2005
Russia's Energy Sector
Sam Vaknin, Ph.D. - 5/24/2005
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), forced, in February 2002,
the closure of this television station on legal grounds. Thus was
fired the opening shot in the re-politicization of the lucrative (and
economically pivotal) energy sector in Russia.
Gazprom (Russia's natural gas monopoly) has done the same to another
television station, NTV, in 2001 (and then proceeded to expropriate
it from its owner, Vladimir Gusinsky).
Gazprom is forced to sell natural gas to Russian consumers at 10% the
world price and to turn a blind eye to debts owed it by Kremlin
favorites.
But the sector is still in flux, reflecting the shifting fortunes of
oligarchs and bureaucrats in Putin's Byzantine court.
On May 15, 2005 Gazprom surprisingly announced that it is calling off
a Kremiln-supported proposed merger between itself and another
Russian oil giant, Rosneft.
The fate of Yuganskneftegaz, the prime subsidiary of the now
bankrupted Yukos, is also still undecided - though technically, it
was purchased by Rosneft in a pretend "auction".
Mikhail Khodorkovsky, erstwhile oil magnate and largest
shareholder-cum-CEO of Yukos, is largely out of the picture, his
punishment for having dared to challenge President Putin, however
obliquely. But members of President Putin's St. Petersburgh "clan"
(clique and camerilla), Gazprom CEO Alexei Miller and Rosneft CEO
Sergei Bogdanchikov, are at each others' throats.
It is, therefore, clear that Lukoil and Gazprom are used by the
Kremlin as instruments of domestic policy - and by political
factions, both pro and anti-Putin as pawns on an ever-shifting
chessboard.
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 230 million rubles have been transferred to the
federal Ministry of Energy. A new refinery is in the works.
Three years ago, Russia 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. Originally, Itera has agreed to postpone its planned
reduction in gas supplies to the struggling republic to February 11,
2002. Then it became a rather permanent arrangement, at the Kremlin's
behest.
In January 2002, President 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 their dependence
on Russian oil transportation infrastructure. These efforts largely
failed (though a new $4 billion pipeline from Kazakhstan to the Black
Sea through Russian territory is in the works, having been
inaugurated in early 2002). Russia is now on a charm offensive.
Its PR 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
put together. 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 in face
value, have been bought in 2002 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 strictures
have ruled out a direct transaction between Russia (a member of the
Club) and the Czech Republic (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 (and, indirectly, the security services, the siloviki)
maintain a tight grip over the energy sector by selectively applying
Russia's tangle of hopelessly arcane laws. This strategy first saw
light in January-February 2002, when the Prosecutor General's office
charged the president and vice president of Sibur (a Gazprom
subsidiary) with embezzlement. They have been detained for "abuse of
office".
Another oil giant, Yukos, long before its systematic looting
commenced, was forced to disclose documents regarding its (real)
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) incessantly.
Gazprom is now run by a Putin political appointee, its former
chairman, the oligarch Vyakhirev, ousted in a Kremlin-instigated
boardroom coup. But Miller's relationship with Putin is under strain.
Miller's natural (and rapacious) competitors are all Russian - his
potential investors and clients all Western. This alignment runs
counter to Putin's emphasis on autarky and the unprofitable
leveraging of economic assets for political and global purposes.
Gazprom defied Putin, for instance, by brawling over natural gas
contracts with Turkmenistan, one of the only remaining Central Asian
allies of a geopolitically-dilapidated Russia. With 1.45 million bpd
(barrels-per-day) in combined output, Rosneft is emerging as a more
reliable - and equally weighty - policy tool.
Media stories to the contrary notwithstanding, foreign (including
portfolio) 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.
Khodorkovskyu, the robber-baron, many whisper, had it coming.
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% 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%). The issue was
oversubscribed.
The (probably temporary) cooling of Russia's relationship with the
USA is counter-balanced by Russia's acceptance (however belated and
reluctant) of its technological and financial dependence on the West.
All said and done, the Russian market is an attractive target.
Commercial activity is more focused and often channeled through
American diplomatic missions. The watershed year was, again, 2002.
The U.S. Consul General in Vladivostok and the Senior Commercial
Officer in Moscow have announced in 2002 that they will "lead an oil
and gas equipment and services and related construction sectors trade
mission to Sakhalin, Russia from March 11-13, 2002." The oil and gas
fields in Sakhalin attract 25% of all FDI in Russia and more than $35
billion in additional investments is expected.
Other regions of interest are the Arctic and Eastern Siberia.
Americans compete here with Japanese, Korean, Royal Dutch/Shell,
French, and Canadian firms, among others. Even oil multinationals
scorched in Russia's pre-Putin incarnation - like British Petroleum
which lost $200 million in Sidanco in 11 months in 1997-8 - are back.
Despite Putin's newly-discovered nationalist "Great Peter" streak,
takeovers of major Russian players (with their proven reserves) by
foreign oil firms have not abated. Russian firms are seriously
undervalued - their shares being priced at one third to one tenth
their Western counterparts'.
Some Russian oil firms (like Yukos and Sibneft) have growth rates
among the highest and production costs among the lowest in the
industry. The boards of the likes of Lukoil are packed with American
fund managers and British investment bankers. The forthcoming
liberalization of the natural gas market (the outcome of an
oft-heralded and much needed Gazprom divestiture) is a major
opportunity for new - possibly foreign - players.
This gold rush is the result of Russia's prominence as an oil
producer, second only to Saudi Arabia. Russia dumps on the world
markets c. 4.5 million barrels daily (about 10% of the global trade
in oil). It is the world's largest exporter of natural gas (and has
the largest known natural gas reserves). It is also the world's
second largest energy consumer. In 1992, it produced 8 million bpd
and consumed half as much. In 2001, it produced 7 million bpd and
consumed 2 million bpd.
Russia has c. 50 billion oil barrels in proven reserves but decrepit
exploration and extraction equipment. Its crumbling oil transport
infrastructure is in need of total replacement. More than 5% of the
oil produced in Russia is stolen by tapping the leaking pipelines. An
unknown quantity is lost in oil spills and leakage.
Transneft, the state's oil pipelines monopoly, is committed to an
ambitious plan to construct new export pipelines to the Baltic and to
China. The market potential for Western equipment manufacturers,
building contractors, and oil firms is evidently there.
But this serendipity may be a curse in disguise. Russia is
chronically suffering from an oil glut induced by over-production,
excess refining capacity, and subsidized domestic prices (oil sold
inside Russia costs one third to one half the world price). Russian
oil companies are planning to increase production even further.
Rosneft plans to double its crude output. Yukos (Russia's second
largest oil firm) was planning to increase output by 20% a year when
it was decimated and devoured by Rosneft. Surgut will raise its
production by 14%.
In early 2002, Russia halved export duties on fuel oil. Export duties
on lighter energy products, including gas, were cut in January 2002.
As opposed to previous years, no new export quotas were set since
then. Clearly, Russia is worried about its surplus and wishes to
amortize it through enhanced exports.
Russia also squandered its oil windfall and used it to postpone the
much needed restructuring of other sectors in the economy - notably
the wasteful industrial sector and the corrupt and archaic financial
system. Even the much vaunted plans to break apart the venal and
inefficient natural gas and electricity monopolies and to come up
with a new production sharing regime have gone nowhere (though some
pipeline capacity has been made available to Gazprom's competitors).
Both Russia's tax revenues and its export proceeds (and hence its
foreign exchange reserves and its ability to service its monstrous
and oft-rescheduled $158 billion in foreign debt) are heavily
dependent on income from the sale of energy products in global
markets.
More than 40% of all its tax intake is energy-related (compared to
double this figure in Saudi Arabia). Gazprom alone accounts for 25%
of all federal tax revenues. Almost 40% of Russia's exports are
energy products as are 13% of its GDP. Domestically refined oil is
also smuggled and otherwise sold unofficially, "off the books".
But, as opposed to Saudi Arabia's or Venezuela's, Russia's budget is
always based on a far more realistic price range ($14-18 per barrel
in fiscal year 2002/3, for instance). Hence Russia's frequent clashes
with OPEC (of which it is not a member) and its decision to cut oil
production by only 150,000 bpd in the first quarter of 2002 (having
increased it by more than 400,000 bpd in 2001). It cannot afford a
larger cut and it can increase its production to compensate for
almost any price drop.
Russia's energy minister told the Federation Council, Russia's upper
house of parliament, that Russia "should switch from cutting oil
output to boosting it considerably to dominate world markets and push
out Arab competitors". The Prime Minister told the US-Russia Business
Council that Russia should "increase oil production and its presence
in the international marketplace".
It may even be that Russia is spoiling for a bloodbath which it hopes
to survive as a near monopoly in the energy markets. Russia already
supplies more than 25% of all natural gas consumed by Europe and is
building or considering to construct pipelines to Turkey, China, and
Ukraine. Russia also has sizable coal and electricity exports, mainly
to CIS and NIS countries. Should it succeed in its quest to
dramatically increase its market share, it will be in the position to
tackle the USA and the EU as an equal, a major foreign policy
priority of both Putin and all his predecessors alike.
Sam Vaknin, Ph.D. is the author of Malignant Self Love - Narcissism
Revisited and After the Rain - How the West Lost the East. He served
as a columnist for Central Europe Review, PopMatters, Bellaonline,
and eBookWeb, a United Press International (UPI) Senior Business
Correspondent, and the editor of mental health and Central East
Europe categories in The Open Directory and Suite101.
Until recently, he served as the Economic Advisor to the Government
of Macedonia. Sam Vaknin's Web site is at http://samvak.tripod.com