Kremlin squeeze of Yukos bullish for oil prices

Nov. 10, 2003
Kremlin squeeze of Yukos bullish for oil prices There's a possible new wild card in play that's supportive of higher prices in the near to middle term.

There's a possible new wild card in play that's supportive of higher prices in the near to middle term. And it comes from a player hitherto thought to be one of the biggest near to middle term threats to the Organization of Petroleum Exporting Countries' efforts to defend oil prices: Russia.

The squeeze by the administration of Russian President Vladimir Putin on OAO Yukos last week startled market-watchers. The arrest of Yukos Chairman and CEO Mikhail Khodorkovsky on fraud and income tax evasion charges was a little less surprising, as the animosity the former KGB boss has displayed toward the politically ambitious head of Russia's most dynamic and Western-oriented giant oil company was well-known. Khodorkovsky's colleagues at Yukos previously had been targeted in criminal investigations widely seen as politically motivated.

But when Russian government prosecutors seized the oil magnate's 44% share of Yukos stock as "collateral" against the indictments, it sent shock waves through the country's stock market and led to expressions of "deep concern" by Prime Minister Mikhail Kasyanov and the resignation in protest by Putin's Chief of Staff Alexander Voloshin. Both are champions of Western-style economic reforms and foreign investment in Russia.

Repercussions

The government's actions could not have had a salutary effect on the consideration by ExxonMobil Corp. and possibly ChevronTexaco Corp. of acquiring a major stake in Yukos. Nor does it bode well for major capital commitments in Russia by current or prospective new investors in Russian oil companies. The US and other western governments similarly have voiced concern over the chilling effect of the Kremlin's moves.

Despite the political schisms and ominous overtones for foreign investment in Russia of the Kremlin's actions, they were sure to be applauded in a country where there is widespread dislike for the immensely wealthy Russian oil "oligarchs."

And there no doubt are some smiling faces among OPEC oil ministers who had worried about the growing market clout of the Russian oil giants. The recent decision by OPEC to cut production quotas by 900,000 b/d, effective Nov. 1, was spurred as much by concerns over projected Russian production gains next year as it was by Iraq's recovering oil output. Putin has promoted solidarity with OPEC efforts to defend oil prices; his accommodation of OPEC cuts last year chafed the Russian oil companies, with their bent for production growth.

(A conspiracy theorist might even try to connect the dots between the Kremlin's push to rein in Russia's oil giants and its recent courting of Saudi investment in Russia's oil sector.)

At the least, it is likely that Yukos's own ambitious production growth plans will be stymied in the near term.

Venezuela redux?

It remains to be seen how effective Putin is in assuring prospective foreign investors that his government's actions toward Russia's oil giants are not steps toward greater government control of the country's oil sector—perhaps, it's been speculated, even renationalization of Russian oil and gas assets.

Venezuelan President Hugo Chávez offered similar assurances upon taking office after targeting his country's "oil oligarchs" at state oil company Petroleos de Venezuela SA during a successful election campaign. And yet investment in Venezuela's oil sector and ambitious productive capacity growth plans there have been hobbled. Apart from the war in Iraq, Venezuela's civil strife and consequent collapse in oil production was the biggest factor in sustaining high oil prices in the past year.

The erratic, embattled Chávez and the wily, politically savvy Putin are worlds apart. And no one expects to see the kind of upheaval in Russia that has occurred in Venezuela. But what has derailed investment in Venezuela's oil sector is uncertainty over future government actions targeting businesses. A similar uncertainty has been created in Russia's oil sector.

It might be Putin's eventual goal to rip control of Russia's vast petroleum resources from the handful of oligarchs, which in turn could create new opportunities for foreign investment in Russian oil and gas. But for the near term, uncertainty reigns.

Putin cannot help but notice that Chávez has become politically strengthened of late—the beneficiary of high oil prices allowing him to distribute more of the country's oil revenue largesse and thus bolster his political base. Both men favor solidarity with OPEC and have placed in their political crosshairs dynamic oil companies with ambitious oil production growth plans.

Just as with Venezuela in 1999, the Kremlin's actions add up to another plank shoring up oil prices next year from a country hitherto deemed a threat to them.

(Online Nov. 3; author's e-mail: [email protected])