Putin Tells the Oligarchs to Export Fewer Commodities; Given Khodorkovsky Reminder, They Listen

During President Vladimir Putin’s “friendly” meeting with the Russian Union of Industrialists and Entrepreneurs, he urged the influential leaders of the private sector (and what remains of it in energy) to do more of their production domestically and put an end to Russia’s raging case of Dutch Disease (however, as we have noted, economic diversification becomes harder when you have high oil prices). LUKoil’s Alekperov would rather ignore the market and follow the Kremlin’s instructions to avoid Khodorkovsky’s fate Here’s what Putin said:

First and foremost we need to develop our system for processing raw materials. To do so we need to significantly increase the share of high value-added processing industries. We need to learn not only how to profitably export crude oil, gas, ore minerals and wood, we also need to process natural resources within Russia and to produce full-value high-tech products for foreign markets. In other words, to maximise profits from each tonne of ore, coal, other hydrocarbons, wood, and other raw materials extracted in Russia. Russia must receive significantly greater profits from developing its truly enormous mineral reserves.

Seeking to diversify Russia’s economy away from commodity exports is certainly a good thing to strive for, however, the country has a long way to go in terms of education, training, and technical expertise in order to become competitive in these areas. President Putin’s efforts to strong-arm Russian companies, especially given the location of this meeting just days after applying new bogus charges to Mikhail Khodorkovsky, is yet another step in the wrong direction. The FT remarks on how the meeting carried a veiled threat:

Vladimir Putin’s choice of location for this week’s annual audience with Russian business leaders seemed symbolic. Whereas in recent years the event has been held in a cramped meeting room, this year it returned to the grand St Catherine’s Hall in the Kremlin, where it last took place in 2002. That meeting five years ago was marred by sharp words between the president and Mikhail Khodorkovsky, the founder of Yukos, now seen as a harbinger of the legal assault launched in 2003 on the country’s then richest man and his oil company. Mr Putin’s choice of venue this year may have been in honour of the 15th anniversary, celebrated this week, of the Russian Union of Industrialists and Entrepreneurs, the business lobby nicknamed “the oligarchs’ union”. Or it may have been a sign of the “settlement” the president has reached with Russia’s remaining, Kremlin-loyal, businessmen, even though the Yukos affair rumbles on. … But Mr Nemtsov says the Putin administration’s hyper- centralisation of control and cowing of business – particularly through the Yukos affair – has prevented the RSPP from becoming a genuine equivalent to western business lobbies. “It mainly exists for members to prove their loyalty,” Mr Nemtsov says. “I don’t think anyone really listens to them inside the [Kremlin] walls.” … Even during this week’s affable Kremlin meeting, Mr Putin had a reminder for participants, the day after new money-laundering charges were brought against Mr Khodorkovsky. “I hope you now appreciate,” he said, “the benefits of following strict rules and tax discipline.”

And, as demonstrated by Vagit Alekperov, the head of LUKoil, the threat was exceedingly effective – he practically mimicked Putin’s exact comments on the need to refine his crude in Russia:

The number one priority for Russian oil companies to refine all of the oil that they produce in Russia, Lukoil (RTS: LKOH) President Vagit Alekperov said at a meeting with Russian President Vladimir Putin on Tuesday. He said that currently 50% of the oil produced is exported and 50% of the products are refined. Russia needs 25%-27% of the refined products, he said. Refining enterprises will need to invest $5 billion to change over to the Euro-5 standard by 2015, Alekperov said. Moreover, additional resources and a concentration of worker resources are needed in order to build new petrochemical production enterprises, he said.