Russia: Putin’s Coming Concession to the Oligarchs
29 August 2000
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.
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. Of the oligarchs, Vagit Alekperov directs LUKoil and Rem Vyakhirev is linked to the company, 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 protégé, is a Duma member, as Berezovsky himself was until recently.
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.
