New breed of 'Kremlin capitalism'

As the battle over oil-giant Yukos ends, the state tightens its grip on an industry once dominated by private firms.

As the end heaves into sight for Russia's beleaguered oil giant Yukos, experts say the year-long battle over its fate has squelched market forces and put the Kremlin firmly in charge of the economy's commanding heights.

But there is little agreement over what the Kremlin intends to do with its new economic clout. The impending merger of state-owned oil company Rosneft with the natural-gas giant Gazprom will create a huge government-run player in a field once dominated by private firms.

The likely sell-off of Yukos's assets to a state-owned or Kremlin-friendly firm will complete the takeover of Russia's lucrative oil and gas industry. The question, observers say, is whether the model may be extended to other branches of the economy, creating a new breed of Kremlin capitalism.

"I'm not sure the Kremlin had any longterm strategy" a year ago when former Yukos CEO Mikhail Khodorkovsky was arrested and Russia's most profitable company pushed toward bankruptcy, says Ksenia Yudayeva, an expert with the Carnegie Center in Moscow. "But the state has effectively killed competition and is regaining its monopoly, not only in production but in the shaping of ideas for development," she says.

Bringing to an end the bitter battle over Yukos - which once produced 1.8 million barrels daily, more than some OPEC countries - may do little to dispel international worries generated by the Kremlin's arbitrary use of police, courts, and tax inspectors in its bid to crush the company. "There is no longer anyone naive enough to believe the action against Yukos is anything other than ... part of a redistribution of big property," says Vladimir Ryzhkov, an independent parliamentarian.

The Yukos saga began in earnest last Oct. 25, when Russia's richest man, Mr. Khodorkovsky, was seized and charged with fraud and embezzlement in connection with the decade-old privatization of a state fertilizer company. Most experts say he was singled out because of his political opposition to President Vladimir Putin. His trial, which could net him a 10-year jail term, continues.

Yukos has been hit with tax bills totaling more than $8 billion, and seems on the verge of dismantlement. The State Property Fund said this week that Yukos's main production unit, Yuganskneftegaz, which accounts for more than 60 percent of the company's output, could be auctioned next month. An independent assessor has valued the company at between $15 and $17 billion. Officials have said they will dispose of the unit for about $10 billion or less.

"There are indications Yuganskneftegaz may be sold on the cheap, for as little as $4 billion," says Oleg Maximov, an analyst with Troika Dialogue, a Moscow-based investment firm. "I'm very pessimistic about Yukos's ability to survive once it has lost Yugansknefte- gaz." Mr. Maximov says the unit's buyer has probably been chosen, "and it will certainly be an oil company that is either state-owned or one that has the absolute trust of the Kremlin."

Russian Economy Minister German Gref estimated this week that capital flight from Russia will soar to $12 billion in 2004, up from $2 billion last year. Kremlin economic adviser Andrei Illaryonov fingers the Yukos affair. "The most dangerous thing is a climate of fear, [which] we didn't have a few years ago," he said in an interview with Kommersant newspaper. "This is the result of many actions, including the case against Yukos."

The Kremlin has eased its objections to foreigners entering the petroleum sector - providing they remain in a subordinate role. With oil prices spiking over $50 per barrel, and global reserves dwindling, multinational firms are lining up to buy into Russia. A 7.6 percent government stake in Lukoil, Russia's largest oil company, was sold last month to ConocoPhillips for $2.4 billion. The Kremlin has also pledged to let outside investors buy minority stakes in Gazprom once the state has regained full control.

"Despite the fact that the state's role is growing, the place for foreign companies may also increase and become more secure," says Maximov.

The big mystery is the Kremlin intentions for its resurgent control over the industry, which accounts for more than a quarter of gross domestic product.

"The privatization of the past decade, which some call pirate-ization, deprived the state of the funds it needed to rebuild education, health care, and social services," says Oleg Bogomolov, honorary director of the official Institute of World Economy and Political Studies. "I can't understand why some people are raising such a fuss about the government reasserting control over our own natural resources." But, he adds, "I do not know who will benefit from these steps, the people or some new group of oligarchs."

The lack of clear legal accounting or transparency is the most worrisome legacy of the Yukos affair, many experts say. "In the past, we had competition between private entities, and that resulted in some flow of information to the public," says Ms. Yudayeva. "Now an inner Kremlin elite is consolidating its grip over oil, and there's no way of finding out what they intend."