WORLD’S LEADING OIL COMPANY IS CREATED IN RUSSIA.

On January 19, in a ceremony attended by Prime Minister Viktor Chernomyrdin, the Russian oil companies Yukos and Sibneft signed a letter of intent to merge and form a new conglomerate, Yuksi. The agreement was signed by Yukos head Mikhail Khodorkovsky and Sibneft first vice-president Yevgeny Shvidler. Khodorkovsky claims that Yuksi will be the largest oil company in the world, as measured by proven reserves, and the third largest by output (after Exxon and Shell). Yuksi will thus edge out LUKoil from its current status as Russia’s largest single oil producer. Khodorkovsky said he wants to expand Yuksi’s output from its current level of 65 million tons (22 percent of total Russian output in 1997) to 100 million tons, by acquiring such additional companies as Rosneft, Onako and Slavneft. They are to be sold off later this year. Khodorkovsky’s rivals in the Rosneft auction are a consortium of Gazprom, Shell, and LUKoil on one side, and Oneksimbank-BP on the other. (Nezavisimaya gazeta, January 19)

The merger has important political and economic implications. Chernomyrdin’s attendance graphically signaled his endorsement of Yuksi, and must augment the new company’s chances in the Rosneft auction. Chernomyrdin described the Yuksi merger as a "reliable and optimal" way to strengthen Russia’s oil industry, adding that "Russian companies must compete on the outside [market] but within the country they should cooperate." In a show of political solidarity, three leading financiers also attended the signing: Boris Berezovsky, MOST Group President Vladimir Gusinsky, and SBS Agro president Aleksandr Smolensky. Berezovsky’s Financial Oil Company bought a controlling packet of Sibneft in May 1997, and fought off a court challenge from Oneksimbank’s Vladimir Poltoranin, who claimed the auction was unfair. As was made clear in an interview with Khodorkovsky, the merger with Yukos means Poltoranin will abandon his efforts to challenge the ownership of Sibneft. Berezovsky triumphantly observed that "at last Russia has rejected the idea of demonopolization, which no longer suits the spirit of the times." (Kommersant-daily, January 20)

Politics aside, the merger makes economic sense. In 1992, the Russian oil industry was broken up along regional lines into 16 separate companies, largely in deference to the interests of regional politicians and ministry bureaucrats who wanted a piece of the action. Most of the companies were poorly managed and never developed a cohesive internal structure. Many of the government’s problems with collecting taxes stemmed from the inability of the holding companies to establish rigorous control over the income of their subsidiaries. Chernomyrdin said he sees the Yuksi merger as a step towards the creation of four or five large vertically integrated oil majors in Russia, capable of competing and cooperating with Western giants on equal terms.

Russia’s oil industry desperately needs some sort of new orientation. The fragmentation of the industry led to a standstill in investment, causing production to fall by 45 percent from its peak in 1988. Last year, for the first time in a decade, Russian oil production grew — by 1.3 percent, to 287 million tons. ( Itar-Tass, January 20)

Yukos and Sibneft make good partners. Their production operations are in adjacent areas (the Volga and west Siberia), and Yukos needed the additional refining capacity of Sibneft. Yuksi will include the two oil companies Eastern Oil (VSK) and East Siberian (VSNK), bought last year by Yukos and Sibneft, respectively. Khodorkovsky said he hopes to merge the companies’ operations fully within a year. Khodorkovsky will be the president of Yuksi, and its shares will be split between Yukos and Sibneft in the ratio 60:40. The companies entering Yuksi control 3.2 billion tons of proven deposits and in 1997 their sales totaled around $10.2 billion.

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