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#15
Financial Times (UK)
7 December 2001
Export cut helps Russia out of 'winter reality'
By Andrew Jack in Moscow

Russia's most vocal opponent of oil export cuts had every reason to smile as he sipped champagne at a diplomatic reception on Wednesday evening, hours after his government had trebled its pledged reductions in the face of Opec pressure.

Mikhail Khodorkovsky, head of Yukos, the country's second biggest producer, had warned that significant cuts would be unfair, strategically unwise, and lead to job losses at his company.

But the decision announced by Mikhail Kasyanov, the Russian prime minister, to cut 150,000 barrels of crude oil a day was one that he and his competitors felt easily able to stomach.

It was, as the Moscow brokerage United Financial Group dubbed it, "a virtual cut", allowing Russia to "make a PR benefit out of its winter reality." It was also the result of a broad consensus between the oil companies and the government, which do not always see eye to eye.

The output cut itself represents just 5 per cent of Russia's production. But it has also only been pledged for the first quarter of next year, and is almost identical to the likely drop in exports that happens every winter during that period. That drop reflects the impact of the severe Siberian winter weather on production levels, logistical difficulties in shipping oil abroad from stormy and frozen ports, and a rise in domestic demand for high-margin refined products.

Furthermore, the new pledge does not include any cap on the exports of refined oil. Russian companies are as a result likely to channel more of their output into domestic refineries.

Their greatest risk, as the brokerage Renaissance Capital warned on Thursday, is depressing Russian prices as a result, although they are likely to continue to export refined product, and to store much of any remaining surplus.

Yukos could in any case have held out better than most of its competitors. With a substantial cash pile and low production costs, many analysts believe that it could have sat out a price war, reaping the benefits as a "free-loader" once Opec was ultimately forced to cut output regardless, further swelling Russia's revenues.

TNK was the only company on Thursday to express some modest concern, arguing that it would have to cut back its investment plans for next year, and stressing the importance of policing compliance with the output cuts. But a report from Renaissance argued that TNK's high debt levels in any case probably meant it would have had to scale back.

At the macro-economic level, Russia faced a similar situation to Yukos. While the country remains heavily dependent on oil income for export earnings and government revenues, it is far less so than the leading nations of the Organisation of the Petroleum Exporting Countries (Opec), and has amassed substantial reserves including a healthy budget surplus.

Furthermore, some specialists including Andrei Illarianov, President Vladimir Putin's special economic adviser, argued that lower oil prices were a good thing for Russia as a way to reduce domestic complacency and boost the competitiveness of industry.

While some Russian politicians had been cautious about offending their traditional Middle Eastern allies by resisting Opec pressure, others were more sensitive to the recession-provoking threat of a sharp increase to their new-found partners in the US and Western Europe.

When Romani Prodi, president of the European Commission, last year floated the idea of an EU-Russia energy partnership with Mr Putin to provide long-term gas, oil and electricity supplies to Europe, it appeared somewhat abstract.

Now, at a time of fresh instability in the Middle East, and a renewed Western enthusiasm towards Russia, such temporary and modest export cuts will allow companies such as Yukos to continue to invest in new production, in a way that could indeed help forge a different relationship.

Mr Khodorkovsky certainly stresses the appeal of long-term, stable contracts to Europe, and the need for a tighter partnership with Russia, compared with the Middle Eastern suppliers.

"Our interests and mentality are different," he says. "We should not join Opec."

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