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Putin Finding Power in the Pump

Oil Seen as Creating New Oligarch Class

By Peter Baker
Washington Post Foreign Service
Wednesday, August 11, 2004; Page A01

MOSCOW -- As the Russian state launched its legal campaign against oil tycoon Mikhail Khodorkovsky last summer, many allies and enemies of the government saw the fingerprints of a mysterious Kremlin aide, Igor Sechin.

A reputed former KGB agent who followed President Vladimir Putin to Moscow, Sechin led a powerful Kremlin faction that, according to insiders, resented Khodorkovsky's defiance of authority. The Sechin clan bristled, for instance, when Khodorkovsky publicly implied that a deal involving the state-owned Rosneft oil company was a corrupt scheme to benefit powerful insiders.

_____Case Against Yukos_____
Mikhail Khodorkovsky Circumventing Court, Russia Seizes Yukos Unit (The Washington Post, Aug 10, 2004)
Ruling Blocks Seizure of Yukos Oil Unit (The Washington Post, Aug 7, 2004)
Russian Reversal Pushes Yukos Closer to Shutdown (The Washington Post, Aug 6, 2004)
Kansan in the Land of Kremlin Hardball (The Washington Post, Jul 30, 2004)
Yukos Executive Says Oil Still Being Pumped (The Washington Post, Jul 29, 2004)
Oil Price Hits Record Over Yukos Troubles (The Washington Post, Jul 29, 2004)
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Putin and the Oligarchs
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A year later, Khodorkovsky is in prison, awaiting the outcome of a trial on charges of fraud and tax evasion, and the state is preparing to dismember his company, Yukos, Russia's largest oil producer. Among those ready to snap up the pieces at a state-run fire sale is aggrieved rival Rosneft. The chairman of Rosneft, as of two weeks ago, is Igor Sechin.

Putin's allies portray his assault on Khodorkovsky as a crackdown on the men known as oligarchs, who became rich overnight through the often-rigged sale of state assets in the 1990s. But the assault may actually be creating a new generation of oligarchs loyal to Putin, according to analysts, politicians, business leaders and former aides.

Now that oil has replaced military might as the source of Russian power, Putin is using it to assert himself on the global stage while picking winners and losers at home, these sources said.

"At first, when they started, it seemed there had been some personal conflict between Putin and Khodorkovsky that started the affair," Vladimir Milov, deputy energy minister under Putin until 2002, said in an interview. "Now it seems it may be connected to efforts to redistribute property that was privatized in the '90s."

"There are two groups of oligarchs, the old and the new ones," Mikhail Delyagin, an economic adviser to Putin's first prime minister, said at a briefing last week. "The new oligarchs have beaten the old ones," and the Yukos case has been prosecuted "only in order to take resources away from one group of oligarchs and give them to another group."

"It will be crony privatization like in the 1990s," Delyagin added, "the only difference being that in the 1990s they privatized state property and in this case they will privatize former state, now private property."

Oil's Importance Grows

Putin appears to be restructuring Russia's oil industry at a time when it has reestablished the country as a major international player.

Daily production has soared from 6 million barrels to a new post-Soviet record of 9.3 million barrels last month, according to government figures. Russia now rivals Saudi Arabia as the largest producer in the world. Its importance to world markets became increasingly clear last week when the Yukos turmoil sent oil prices to record highs.

The power of the pump has enhanced Putin's influence abroad. China and Japan have been trying to outbid each other for Russian oil as Putin weighs where to build a multibillion-dollar pipeline to supply one of the Asian giants. The United States has sought to persuade Putin to build a new terminal in the northern city of Murmansk to ship crude to U.S. companies, but so far it has been snubbed.

Putin appears intent first on consolidating power over the oil industry. Russian officials point out that Saudi Arabia and other major exporters retain state control over their oil industries, while Russia's was largely sold off in the 1990s. Today the state controls 7 percent of the oil industry. If the government seizes Yukos's primary production unit as planned to satisfy a back-tax claim and sells it to a state company such as Rosneft, the share of production in state hands would rise to 18 percent.

Rosneft is not the only potential beneficiary. Other possibilities include state-controlled Gazprom, the country's natural gas monopoly, and Surgutneftegaz, a private company run by a veteran Soviet oil executive loyal to the state. But Sechin's appointment as chairman of Rosneft confirmed the company as the front-runner.

"The fact that Rosneft got such an influential guy means that it looks that Rosneft will play a more political role and a more important role in the economy," said Sergei Markov, a political consultant who has worked with the Kremlin. "This is a signal."

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