Russian Oil After YUKOS: Implications for the United States Ariel Cohen, Ph.D
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No. 961 February 28, 2005 Russian Oil After YUKOS: Implications for the United States Ariel Cohen, Ph.D. The Russian oil and gas sector’s new paradigm The Kremlin, not the private sector, has become can be summarized in two words: “state domina- the key decision maker in licensing oil fields, deter- tion.” The free-market paradigm has been aban- mining the location of pipelines, and approving doned. In December 2004, the tax authorities consortia for production and transportation. The bankrupted YUKOS, a major oil company, for biggest problems in the post-YUKOS Russian oil alleged tax arrears and sold its main production sector are the intrusive role of the state, overregula- unit, Yuganskneftegaz, to the state-owned oil tion, the violation of property rights, opaque trans- company Rosneft, using a straw company as an actions, and xenophobia toward foreign investors. intermediary. Chinese state Exxon and Total, a French firm, banks apparently financed the recently announced that they purchase with $6 billion in • The Russian oil and gas sector’s new would scale down involvement in paradigm can be summarized as “state loans. To top it off, Rosneft is domination.” Russia’s oil markets, and capital merging with state-owned Gaz- • The combined Gazpromneft will be a flight from Russia has increased prom, the largest natural gas major global company that will also from $2.9 billion in 2003 to $9 company in the world. become an instrument of Russian for- billion–$12 billion in 2004. eign policy in the region and around The Bush Administration and the world. Vladimir Putin’s economic U.S. oil companies need to rec- adviser Andrey Illarionov called ognize that the Russian energy the sale of Yuganskneftegaz the sector is now operating on a new model of state “swindle of the year” and warned that Russia is on domination and control. Successful U.S.–Russian its way to joining the Third World economically. energy cooperation depends on the U.S. and Rus- While Illarionov was demoted for his candor, he sia arriving at a framework agreement during was not fired. Clearly, the Russian elite is deeply President George W. Bush’s visit to Russia in May divided over energy policy. to celebrate the 60th anniversary of the Allies’ Global Ambitions. The Kremlin wants to play a victory in Europe. Washington should condition major role in Russia’s domestic and global energy U.S. agreement to Russia’s entry into the World markets while keeping foreign investors at bay. The Trade Organization (WTO) on the creation of transparent rules and investment protection for U.S. companies that invest in Russia. President This paper, in its entirety, can be found at: Bush should specifically request that U.S. compa- www.heritage.org/research/russiaandeurasia/em961.cfm Produced by the Douglas and Sarah Allison Center for nies participate in construction of the Murmansk Foreign Policy Studies pipeline and the Shtokman natural gas projects in Published by The Heritage Foundation 214 Massachusetts Avenue, NE the Barents Sea. Washington, DC 20002–4999 (202) 546-4400 • heritage.org Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress. No. 961 February 28, 2005 government-owned Gazpromneft (the combined state domination and control. All future deal- Gazprom and Rosneft) will be a major global com- ings in Russia must receive full Kremlin bless- pany, bigger than Petroleas de Venezuela (PVDSA) ings. If the U.S. wishes to maintain an interest and comparable to Saudi Arabia’s Aramco (both in Russian oil, the U.S. government must state monopolies), and will become an instrument become a participant in assuring the viability of of Russian foreign policy throughout the region future deals. and around the world. • Arrive at a framework agreement on U.S.–Rus- With anti-Americanism on the rise in Moscow, sian energy cooperation. The U.S. should insist Russia wants to use its energy muscle to develop a that such a framework include a key role for the more robust presence in the Commonwealth of private sector in developing Russian energy Independent States, Europe, and Asia. It is buying resources and infrastructure. Investment stabil- up strategic infrastructure companies, such as pipe- ity and recognition of Western investors’ prop- lines, refineries, electric grids, and ports in Georgia, erty rights need to be acknowledged at the Hungary, and Ukraine. Russian officials have highest level. implied that 20 percent of Yuganskneftegaz would • Condition U.S. agreement to Russia’s entry be sold to China. Moscow is enticing Japan to pay for into the WTO on the creation of transparent the Nakhodka pipeline—cooperation that could rules and investment protection for U.S. com- create competition between China and Japan in the panies that invest in Russia. Far East. There are hopes in some quarters that Rus- sia’s energy, supplemented by Iran and Venezuela, • Request that U.S. companies participate in can power a global coalition with China and the construction of the Murmansk pipeline and Muslim world to offset U.S. hegemony. the Shtokman natural gas projects in the Bar- ents Sea. After September 11, 2001, it was hoped that Rus- sia and Eurasia could provide a welcome addition, if Conclusion. U.S. and Russia are still “energy not an alternative, to Middle East oil, but this hope compatible.” One is an importer and the other, an seems to have been premature. Russia’s real chal- exporter. But recent events, by diminishing the lenges, beyond government renationalization, are the attractiveness of Russia’s energy investment oppor- antiquated pipeline network, which is a government tunities, will adversely affect the country’s eco- monopoly, and high production and transportation nomic development in the medium and long terms. costs. In December 2004, the Russian government In addition, Russia’s decision-making elite is split committed to building the Taishet–Nakhodka pipe- between those who view the takedown of YUKOS line, a gargantuan 4,300 kilometer project that will as a heavy-handed operation that caused unaccept- cost $12 billion and is designed to provide 80 million able collateral damage and those who believe that tons of oil per year to the Asian Pacific market, the end justified the means. Statism and opacity including up to 30 million tons to China. The Rus- conceal corruption; and nationalist rhetoric covers sian government seems to have lost interest in the up protectionism, backwardness, greed, and graft. pipeline from Western Siberia to Murmansk—the As a WTO candidate and G–8 member, Russia can- easiest way to export oil to the United States. not afford any of these. The U.S. Response. The Bush Administration —Ariel Cohen, Ph.D., is Senior Research Fellow in and U.S. companies need to push energy coopera- Russian and Eurasian Studies in the Douglas and tion issues at the highest level, beginning at the Sarah Allison Center for Foreign Policy Studies, a divi- Bush–Putin Summits in Moscow in May and fol- sion of the Kathryn and Shelby Cullom Davis Institute lowing up at the G–8 Summit in Scotland in July. for International Studies, at The Heritage Foundation. Specifically, the Administration should: • Recognize that the Russian energy sector is operating on a new model predicated on total page 2.