Putin’s Team in Disarray Over Oil Money

Yet another quarrel between Gazprom and Rosneft, Russian state-owned energy companies that are due to merge but cannot agree on conditions, hardly qualifies as news (Financial Times, March 16). Their respective CEOs — Alexei Miller and Sergei Bogdanchikov — have been at odds since the “friendly takeover” was announced in September 2004 and their joint TV appearance on March 2 has only brought a new stream of contradictory statements and wild speculations (Wall Street Journal, March 4; Vedomosti, March 9; Nezavisimaya gazeta, March 16). Rather unusually, there is no personal animosity between Miller and Bogdanchikov and no hidden political agenda, since both are devoted Putin-loyalists, so it is entirely a mix of business strategies and clan politics that drives the scandalous conflict.

For an outsider, it might look like a hopeless attempt by David to stop Goliath, since the gas monopolist Gazprom by every parameter is more then ten times larger than Rosneft and has a clear interest in the deal. Swallowing this relatively small oil company would increase the share of direct state control over Gazprom’s vast empire to slightly more than 50%, and that would make it possible to lift old and unnecessary restrictions on trading its shares. Such experts as Vladimir Milov, director of the Institute of Energy Research, question the rationale for the merger, since the company would not benefit in any meaningful way from the “liberalization” that would allow foreign investors to buy and sell its shares legally (Gazeta.ru, March 14). Gazprom management, however, expects a significant growth in the company’s capitalization and has invested millions of dollars of their personal money in the shares (Vedomosti, February 15). Turning this rather dirty page, Miller also hopes to find more international support for his pet project of a new huge pipeline across the Baltic Sea to Germany, and maybe even to Britain (Kommersant, Nezavisimaya gazeta, March 16).

Rosneft, however, is playing a very different game where the stakes are infinitely higher. The company volunteered to be the vehicle for the presidential administration in the destruction of Yukos and has indeed grabbed — through fake intermediaries in a staged auction — its main production unit, Yuganskneftegaz. This triumph, however, has brought many headaches and caused delays in the merger, which Miller had sought to close initially by January, and more recently — by the end of March (Gazeta.ru, March 3).

It is no secret that the relentless attack on Yukos has been masterminded by Viktor Sechin, deputy head of the presidential administration, who also happens to be the chairman of Rosneft’s board (Ekho Moskvy, March 12). He has made sure that the president was with him every step of the way by sticking to the message that jailed billionaire Mikhail Khodorkovsky, the owner of Yukos, was an “enemy of the state.”

Putin duly covered all the clumsy moves of his lieutenants — but has recently turned suspicious that they manipulate him and waste his valuable reputation in order to secure control over thick flows of oil money (Ezhednevny zhurnal, March 14). Now, as an “unbiased arbiter,” he watches how the head of his administration, Dmitry Medvedev, who has taken the side of and a cozy chair in Gazprom, wrestles with Sechin and Bogdanchikov. Fighting tooth and nail for keeping Yuganskneftegaz under their control, the latter pair are also obviously at a loss about how to make this company profitable and so continue to claim other bits and pieces of Yukos (Vedomosti, March 15).

One direct consequence of these squabbles is the significant and quite possibly irreversible deterioration of production capacity in the dismembered Yukos, which may be one of the factors that keep driving world oil prices to new heights. Another consequence is the continuing uncertainty about Gazprom’s investment plans and overall business strategy, which even the government feels obliged to note critically (Rosbalt, March 3). German partners gently advise Miller to stay away from tainted assets, and government-appointed board members, while setting the final deadline for the merger in June, are less than thrilled about accepting Rosneft’s newly made debt (Vedomosti, March 15).

There is, however, one more consequence and of more a general character. Putin’s unnaturally small, handpicked team of courtiers appears to be bitterly divided over and entirely engrossed by dividing the oil dividends. Nobody bothers to do any serious homework about the Kremlin’s political defeat in Ukraine, while the repercussions from this revolution might turn out to be much greater than the Kremlin anticipates. Ukraine’s President Viktor Yushchenko held a serious meeting with key Russian entrepreneurs and his main message was: “Have no fear” (Kommersant, March 15; Gazeta.ru, March 16; EDM, March 18). Putin’s team has responded by sending them invitations to a group therapy session with the boss, because they need to make sure that the fear factor would continue to work. Businessmen are easy to scare since they have a lot to lose, but they may grow tired of living dangerously.

It is true that absolute power corrupts absolutely, but when this power is mixed with enormous quantities of free-flowing petrodollars, the process acquires truly grotesque forms. The negative impact on the economy of too easily earned energy rent is known as the “Dutch disease.” Quite possibly, the corrosive impact of unaccountable oil money on state governance may become be labeled the “Kremlin cancer.”