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Putin Finding Power in the Pump

Putin has also stepped into the oil sector by increasing its taxes. In recent months, the government eliminated loopholes used by Yukos and raised tax rates on production. Last week it pushed another production tax increase through parliament and approved an increase in oil export duties. Putin is also stripping local governors of influence over energy resources in their provinces with a new regulatory plan endorsed by parliament last week.

Putin has tamed private oil companies by making Yukos an example. The tax service hit Yukos with nearly $7 billion in bills for back taxes, with more to come, for employing previously unchallenged tax shelters. Sibneft, an oil company controlled by an oligarch on good terms with the Kremlin, used the same shelters but has been spared similar treatment. In fact, state auditors examining Sibneft last month declared the tax shelters legal.

_____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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Lukoil, the main Yukos rival, voluntarily paid $200 million to compensate for use of the same tax shelters without being billed by the government, a move hailed by Putin allies as an example for others. "If it's aimed at minimizing taxes, it's not legitimate," Leonid Fedun, vice president and part-owner of Lukoil, said of the shelters. "There are such tricks in almost all tax codes in all countries. So we decided to abandon all these schemes for tax minimization."

In an interview, Fedun did not dispute the characterization of Lukoil as Kremlin-friendly. "We think the fact that the state is domineering now is good," he said. "Oil is a strategic thing, and of course the state should participate . . . [because] oil is the basis for the economy."

Foreign Firms Look Ahead

As Putin moves against Yukos, he has tried to reassure foreign investors that he does not want to renationalize the industry. Last month he met with ConocoPhillips President James J. Mulva on the same day the government announced it would sell its remaining 7.59 percent share in Lukoil. Last week, officials set a minimum $1.26 billion price for the stake, and ConocoPhillips is widely considered the state's favorite.

Other foreign companies have watched the Yukos saga warily, uncomfortable with making further investments in Russia yet unwilling to abandon some of the world's largest oil reserves.

"Are there concerns about Yukos? Sure," said Robert Dudley, president of TNK-BP oil company. "But the Yukos situation appears to be a special set of circumstances and has not impacted how we intend to do business."

TNK-BP was forged last year as a 50-50 joint venture between Russia's Tyumen Oil Co. and Britain's BP, which poured $7.5 billion into the newly merged company, the largest foreign investment in Russian history. Russia desperately needs more foreign capital to develop new fields -- investments Dudley and other oil executives worry may be deterred by the Yukos case.

"It hasn't discouraged BP," said Dudley. "You can see we're going to continue to invest large amounts each year through TNK-BP. But it's for these capital-intensive, long-term payouts that people have to have a lot of confidence before they invest, and it remains to be seen whether the Yukos situation will discourage that."

Others doubt that foreign investors would want to take that chance. "How do you know what happens next?" asked Stephen O'Sullivan, an analyst at United Financial Group, a Moscow brokerage house. "Do they go after somebody else?"

Milov, the former energy official who now heads the nonprofit Institute of Energy Policy, said the Yukos case jeopardizes Russia's comeback. "It's a very dangerous thing for the Russian economy," he said. "Yukos was one of the leaders of the Russian recovery. . . . The people who are leading the attack against Yukos, maybe they don't understand what they're doing to the oil sector and the economy in general -- or if they understand, they don't care."

The 'Yukos Effect'

Troika Dialog, an investment firm, termed the new post-Yukos industry "people's oil" and predicted in a report last week that it would "end up less cost-efficient, more highly taxed, prone to higher capital spending and less transparent for minority shareholders." The report lowered long-term Russian oil growth projections by 3 percent because of the "Yukos effect."

Private enterprise has powered the growth in Russian oil. Output by the three largest private oil companies rose 90 percent from 1998 to 2003, compared with marginal growth by state firms, according to a report by the Organization for Economic Cooperation and Development, a multinational agency. Private oil accounted for up to one-quarter of Russia's recent economic growth, the report said.

Rosneft's new chairman has no oil experience. Sechin, 43, studied French and Portuguese at Leningrad State University, and Russian news media have reported that he was recruited by the KGB. He went to Africa as an interpreter for a Soviet equipment export company, returning to work in city government in Leningrad, since renamed St. Petersburg. In 1991, he became an aide to Putin, then a city official, and has followed his boss's rise.

Now Kremlin deputy chief of staff, Sechin has rarely appeared in public and does not give interviews. Along with fellow deputy chief Viktor Ivanov, another KGB veteran, he leads the clan of hard-liners called the siloviki, or men of power. He has an inside line to the prosecutors pursuing Khodorkovsky, since Sechin's daughter last year reportedly married the son of Prosecutor General Vladimir Ustinov.

The rise of the siloviki has inspired fear. When NTV television asked Arkady Volsky, president of the Russian Union of Industrialists and Entrepreneurs, who he thought was behind the moves against Yukos, he refused to say. "I am very scared to name names now," he said. "I am simply scared. I have six grandchildren, after all, and I want them to live."


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