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Petrostate This page intentionally left blank PETROSTATE Putin, Power, and the New Russia Marshall I. Goldman 1 2008 3 Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence in research, scholarship, and education. Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Copyright © 2008 by Marshall I. Goldman Published by Oxford University Press, Inc. 198 Madison Avenue, New York, NY 10016 www.oup.com Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Library of Congress Cataloging-in-Publication Data Goldman, Marshall I. Petrostate : Putin, power, and the new Russia / Marshall I. Goldman. p. cm. Includes bibliographical references and index. ISBN 978–0-19–534073–0 1. Energy policy—Russia (Federation) 2. Russia (Federation)—Foreign relations. 3. Putin, Vladimir Vladimirovich, 1952–. I. Title. HD9502.R82G65 2008 327.47—dc22 2007040202 1 3 5 7 9 8 6 4 2 Printed in the United States of America on acid-free paper To Merle; not the First Dedication and I Hope not the Last This page intentionally left blank Contents List of Figures and Tables viii Preface ix Introduction Russia—Once Again an Energy Superpower 1 Chapter 1 Russia as an Early Energy Superpower 17 Chapter 2 World War II to 1987: Russia Looks Inward and Outward 33 Chapter 3 Pirates Unleashed: Privatization in the Post-Soviet Era 55 Chapter 4 Post-1998 Recovery: The Petroleum Export Bonanza 73 Chapter 5 Putin Takes Over: The Return of the Czar 93 Chapter 6 Natural Gas: Russia’s New Secret Weapon 136 Chapter 7 Russia: The Unrestrained Super Energy Power 170 Notes 211 Glossary of People and Companies 225 Index 231 Figures and Tables FIGURES Figure 1 Gazprom Dispatching Center 2 Figure 2 Oil and Gas Pipeline to Europe 8 Figure 3 Proposed Far East Oil and Gas Pipeline 9 Figure 4 The Breakup and Reconsolidation of the Ministry of Petroleum and Rosneft 62 Figure 5 How Price, Not Putin, Affected Oil Production 171 TABLES Table Intro.1 Russian and American Petroleum Production and Export 4 Table 2.1 Petroleum Production 35 Table 4.1 Russian Oil Production and GDP 80 Table 4.2 Russian Exports and Imports 92 Table 5.1 Monthly Change to Industrial Production 95 Table 5.2 Putin Creates National Champions 100 Table 5.3 Yukos Senior Executives—Arrest and Exile 117 Table 5.4 Renationalization and Control by Siloviki 134 Table 6.1 Gazprom Expansion Abroad 153 Table 6.2 Europe’s Reliance on Russian Gas 166 Table 7.1 Russian Petroleum Company Expansion Abroad 175 Table 7.2 Russian Gas and Petroleum Available for Possible Export 189 Table 7.3 Siloviki in Business 193 Table 7.4 Princelings 196 Preface More than in my past writing efforts, I owe thanks to a set of enthusi- astic helpers. They provided invaluable help in preparing my manuscript. Two of them have the ability to read my handwriting, something I am not always able to do myself. Doing my best to ignore the advances of the modern computerized world, I prefer to write out the text in long- hand on legal-size yellow pads. Robert Price was able to transcribe those writings for me onto a computer, so I was devastated when he went to work at a higher calling. To my relief Sue Sypko took over and proved to be as able, and, equally important, she hasn’t frowned when I bring her yet another set of nearly incomprehensive scribbles. In fact, I have taken to awarding her Stakhanovite prizes for her efforts. The third member is Coco Downey, who offered herself as research assis- tant and eagerly agreed to chase after obscure facts and display them in a way that aids the understanding of how things work in Russia. I have come to call her “the wizard.” After reading her charts and diagrams in the chapters that follow, I suspect the readers, even those in Russia, will agree that they can now understand the previously incomprehen- sible. The fourth and most unlikely member of this quartet is Thomas Luly, a most amazing high school junior. Out of the blue he wrote an e-mail asking if I needed any assistance. To humor him, I sent him an early draft of the manuscript and to my amazement, he not only read the whole thing and made extensive notes, but he found more incon- sistencies in the text than I am embarrassed to admit should have been there. He also asked some probing questions that should help both me and I hope future readers deal with issues that are all too often skirted. I am indebted to all four of these collaborators, Robert, Sue, Coco, and Thomas. John D. Grace also deserves a special note of thanks. He read the manuscript with admirable care and made some especially valuable suggestions, almost all of which I have incorporated. Of course I am ultimately responsible for whatever mistakes remain, but he and the gang of four spared me from many others. Then there are others to whom I must also express my thanks. The RIA Novosti Press Agency provided me, as part of the Valdai Hills Discussion group, with the opportunity to meet with President Vladimir Putin on four occasions extending over an extraordinary twelve hours. They also took us out to the Priobskaia oil fields and Yuganskneftegaz and arranged a meeting at Gazprom headquarters. It was as if I had died and gone to heaven. They let me come along although invariably I asked the least respectful questions. I must also thank Kathryn Davis, whose chair I held at Wellesley College, for her interest (even at her 100th birthday party) and for her financial support. She has helped to reassure me that there was always someone out there who was as interested in Russia and its sometimes troubling ways as I was. Her son Shelby and daughter Diana share much of that same enthusiasm. Most of all, of course, I must also thank my wife, Merle. She has to put up with a lot, enough in fact to tighten anyone’s digestive system. While I often ask myself if I can withstand another of her brutal, yes, brutal, editing jobs, in the end I have to concede, but not directly, that I and the manuscript are better off for it. But after fifty-five years, it is a testimony to the strength of our marriage that we have survived a joint husband and wife writing and editing effort. There aren’t many couples I know of who can say the same thing, but Merle is special, and our children and I can never acknowledge how much we owe her. x Preface Petrostate This page intentionally left blank Introduction Russia——Once Again an Energy Superpower THE AUTHOR AS JAMES BOND At first I was puzzled. Where were they taking us? For such a big, sleek, glass Moscow high rise, Gazprom’s elevator in its headquarters building was tiny (five people could barely squeeze in) and its hall cor- ridors narrow. This was, after all, the world’s largest producer of natu- ral gas, not to mention Russia’s largest company. Following a short walk we were ushered into a darkened, silent room where nothing seemed to be happening. Strange. It was only when all the members of our group had made their way up on the elevators that the room suddenly came alive. Then for a time I felt as if I had wandered into the NASA Space Center, or was it a James Bond movie set? All that was missing was that out of body voice intoning, “Welcome, Mr. Goldman. We were expecting you.” In front of me, covering the whole 100-foot wall of the room, was a map with a spiderweb-like maze of natural gas pipelines reaching from East Siberia west to the Atlantic Ocean and from the Arctic ocean south to the Caspian and Black Seas. Manipulating this display were Gazprom dispatchers, three men controlling the flow of Gazprom’s gas to East and West European consumers of this Russian natural gas monopoly. No wonder there was tight security. There was also a sense of self-assurance. As measured by the value of its corporate stock, by summer 2006, Gazprom, this state-dominated joint stock corporation (until 1992 it was actually the Soviet Ministry of the Gas Industry), had become the world’s third-largest corporation. Only private share- holder-owned Exxon-Mobil and General Electric were larger. With a flick of a switch, those dispatchers sitting in this Moscow room could freeze—and indeed have frozen—entire countries. At the very least, they could send their citizens off in a panic in search of sweat- ers, scarves, and blankets. What an empowering feeling! Should they choose to, those Gazprom functionaries could not only cut off natural gas from the furnaces and stoves of 40 percent of Germany’s homes but also the natural gas that many German factories need for manufactur- ing a range of products from ammonia fertilizer to plastics. While Germany purchases more natural gas from Russia than any other coun- try in Europe, all of Western Europe is now also hooked up directly or indirectly to the Gazprom pipeline.