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OIL SUPPLY NOT WHAT'S THREATENED BY YUKOS DRAMA

Bob Tippee

While there's plenty to regret in Russia's expropriation of core OAO Yukos assets, the supposed threat to security of US oil supply deserves far less worry than it receives.

To some analysts, Moscow's pillaging of Yukos annuls Russia's status as an alternative to oil supply from the Middle East. Yet Russian oil in trade isn't in jeopardy, even if Yukos and Russian modernization are.

Moscow's appalling heavy-handedness is solidifying Russia's position among nations whose needs to sell oil are as compelling as the US need to buy oil. For the US, whatever its discomfort with specific relationships in this system, supply security doesn't get much better than that.

The Yukos drama is part of an unfortunate swerve by the Russian government away from market liberalization and back toward economic domination by the state. It subordinates rule of law to political power. It raises the political risk of investment in Russia.

Apparently, the administration of President Vladimir Putin doesn't care. It's busy consolidating power, at the expense of press and other freedoms, and clumsily intruding into the politics of remnants of its shattered empire.

In October 2003, the government jailed Mikhail Khodorkovsky, the former Yukos chief executive. It then hit the company with tax-evasion charges now exceeding $26 billion. On Dec. 19, it auctioned Yuganskneftegas, which accounts for 60% of Yukos oil production, to a group promptly acquired by state-owned Rosneft, soon to be merged with Gazprom, the Russian gas monopoly. So, unless US bankruptcy legalities interfere, it will own majority interest in a world-scale energy company. With crude prices above $40/bbl, Moscow must consider this a good time to be in the oil business.

Investment will proceed in Russia�just not as vigorously as it would have if the country had committed itself to genuine modernization, which requires an institutional preference for freedom over power. By favoring power, Russia is rapidly foreclosing economic options. It will have to sell oil.

This suits the US need that producers with oil to sell do so. But it makes oil yet again the fuel of authoritarianism. That's something to regret.

(Online Dec. 23, 2004; author's e-mail: bobt@ogjonline.com)


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