Today I saw this interesting article in Kommersant, which gives an overview of the Russian government’s unlawful takeover of the oil sector. The reporters don’t provide any new information, but for readers who are not familiar with this process, it is a good primer.
One thing I would dispute in this article however is the authors argue that the public felt that it was “justified” for the state to seize back properties from these oil companies. Such a characterization is entirely misleading in these recent expropriation cases – including the Kremlin’s strong-arming of its foreign partners at Sakhalin and Kovykta to achieve partial expropriations (resulting in controlling stakes in production joint ventures). If the Russian government were in any way able to point to the ways in which these thefts actually benefited their citizens, that would be one thing. But in fact, the theft of Yukos was largely the transfer of assets from one set of private hands to another set of private hands. (sorry to sound like a broken record – blogger Vilhelm Konnander and I had an exchange over Russian nationalization some months ago). The article also glosses over the abuse of authority by the Russian prosecutors in the destruction of Yukos – it was not “refinement” of law, but rather outright violation, not to mention that Yukos was the country’s largest taxpayer, contributing far more to state coffers than Gazprom (this is precisely why we are seeking discovery of Chevron’s due diligence studies of Yukos – if such financial misconduct existed as the Kremlin claims, then surely the American multinationals would not have advanced so far in their acquisition negotiations). Furthermore, it is essential to note that Yuganskneftegas, the most critical Yukos production asset, was delivered into the hands of Igor Sechin’s Rosneft through a rigged auction that was in and of itself a violation of Russian law (to sell a core asset first was in direct contravention to clear rules set forth by the Russian Federal Law on Executory Process). Kommersant: How Russia is Nationalized: The Oil Sector
By the second half of 2003 three tendancies had merged together: a desire by the officials to strengthen the state’s role in the oil industry, resentment towards Yukos and societal confidence in the justice of nationalizing profitable industries. A radical decision was made: to return Yukos to state property. The means was found immediately: unpaid taxes. Formally, Yukos had been using tax minimization as allowed by current law. And they were not alone in doing so. The judges had to apply maximum flexibility and refinement in order to legally validate the political decision. No one doubted that realizing this decision would be a long and hard process. One can’t just take a controlling packet as payment for debt: the threat of trials by foreign owners or their heirs would hang over the deal like the sword of Damacles. It was decided to take the main oil-producing subsidiary, Yuganskneftegas, as payment for the debt. Without Yuganskneftegas Yukos wouldn’t be able to manage with the rest of its back tax claims and eventually go bankrupt and have to be liquidated. Completing the task took four years. Yuganskneftegas was sold in late 2004 and Yukos was liquidated in August of 2007. All significant shares were purchased by Rosneft, which turned into the undisputed industry leader by all volume indicators (reserves, production, processing). Its important to point out that … In 2004 not only Rosneft was competing for Yuganskneftegas, but Gazprom as well. Gazprom, however, was denied. The reason (or the excuse) is perfectly respectable. Gazprom has too many shares abroad; lawsuits by upset American stockholders of Yukos could put them under attack. On the other hand Rosneft had no foreign shares and therefore any lawsuits against it would stand little chance. After this defeat the gas monopolist became even more insistent on acquiring oil shares. Their explanation is logical: all large energy companies in the world (ExxonMobil, BP, Shell) have both gas and oil production units. Its general knowledge that at one time Gazprom was looking to Rosneft to be its “second leg”. Chairman of Gazprom’s board Dmitry Medvedev voiced a suggestion to merge, paying the state in shares of a supposed additional placement and thereby increase the state’s stake up to a control figure. This option never materialized. The complaints of Gazprom were, in our opinion, justifiably considered excessive. Fortunately for Gazprom, its decision to acquire oil assets coincided with the wishes of Sibneft’s owner Roman Abramovich to leave the oil business. Perhaps they consulted with him. But whatever happened, the purchase of Sibneft by Gazprom please everyone. This took place in the middle of 2005 by real market prices – about $13 billion. With a Rosneft drunk from Yukos and a Gazrpom beefed up on oil, the state has become the key player in the domestic oil industry, able to dictate its conditions to private traders by way of the market, without resorting to state regulation, which is frowned upon by developed countries.