Russia: Putin's Coming Concession to the Oligarchs
Summary
On Sept. 19, the Russian government will put up for auction
majority control of the ONAKO oil company, one of the country's
most profitable energy companies. Because foreigners are barred
from holding more than a fraction of any Russian oil company, the
government will likely be forced to hand over control to the
powerful businessmen once known as oligarchs, the men that Putin
has publicly campaigned against.
Analysis
After months of trying to rein in Russia's oligarchs, Russian
President Vladimir Putin will soon have to hand over to them a
piece of the country's most profitable industry: oil production.
The government plans to privatize the ONAKO oil company, the 11th
largest oil company in the country, selling off 85 percent of its
shares.
The only true contenders for buying up control of the company - to
be auctioned off Sept. 19 with bids starting at $425 million - are
members of the wealthy, but allegedly corrupt, oligarchy. The
president has staked much of his presidency on diminishing the
power of these men, holdovers from the Yeltsin era. The Putin
government will soon be forced to pick one group of oligarchs over
another, to control ONAKO. The ONAKO auction may also set a
precedent: It is the first of four energy companies to be
privatized.
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Russian law limits the amount of equity that foreign investors can
control in the country's oil companies, capping ownership at no
more than 15 percent, according to a June edition of the St.
Petersburg Times. The shares in ONAKO will be auctioned off to the
highest bidder.
More than 20 groups have submitted an offer, but only two are true
contenders: LUKoil, the largest oil producer in Russia, and an
alliance of three smaller companies, Yukos, Sibneft and
Surgutneftgaz. Two oligarchs direct LUKoil, Rem Vyakhirev and Vagit
Alekperov, although these two men are largely under Kremlin
control.
In contrast, the three oligarchs behind the alliance behind the
other companies - Yukos, Sibneft and Surgutneftgaz - are Mikhail
Khodorkovsky, Boris Berezovsky and Roman Abramovich. Putin has
publicly sought their power since taking office. They largely
bought their way into power under former President Boris Yeltsin,
amassing fortunes and increasing their political influence.
Abramovich, widely considered Berezovsky's protege, is a Duma
member, as Berezovsky himself was until recently.
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Though not Russia's largest companies, ONAKO is one of the most
profitable. The average Russian oil company makes less than 30
percent of its profits from exports; ONAKO exports 40 percent of
its product, enabling it to reap the benefits of the higher oil
prices outside Russia. Last year ONAKO earned as much money as some
other companies by pumping less oil, according to Russica
Information on Aug. 16.
Allowing Berezovsky or Khodorkovsky to control the company would be
a dangerous risk for the Kremlin, considering the pasts of the two.
Both oligarchs were linked to the 1998 IMF money laundering
scandal; both have been targets of tax police raids or
investigations in the past three months according to articles in
The Moscow Times in late August. Berezovsky was notably absent from
the late-July summit between Putin and the oligarchs, while
Khodorkovsky has links to businessmen recently expelled from
Bulgaria on corruption and money laundering allegations.
For ONAKO to remain profitable so that the government can take its
share of revenues and taxes, the government needs LUKoil to win the
bid for ONAKO. Putin has already won a battle with Gazprom's Rem
Vyakirev. Second, the government owns 15 percent of LUKoil's stock
and plays a controlling role behind the scenes of the company.
But the fact is that former oligarchs remain the only ones
financially stable enough to contend in the bidding. Unless Putin
can get laws passed that favor foreign investment in strategically
important industries, he will be stuck doing business with the
oligarchs.
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