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Financial Times (UK)
20 December 2001
Russia's oil barons feel a shift in power:
The way cuts in output were agreed shows how the oligarchs are adjusting to life under President Putin

When Mikhail Khodorkovsky, the head of Russia's second largest oil company, attended a high-profile meeting with his competitors and senior government officials in early December, his relaxed choice of clothing sent out a strong signal.

Dressed in a casual shirt with no tie, he exuded confidence that his outspoken views would prevail. A few hours later the wider world knew that Russia would cut oil exports in an effort to prop up falling world prices; while insiders understood Russia's contribution would be only modest.

The public statements of the previous few weeks had implied tensions among the oil companies, and between them and the government. The outcome provided an insight into the interplay of the state and business.

Domestically, the government was torn between the competitive boost that lower oil prices could give to many of its companies; the extra budget revenues and export earnings of higher prices; and the hope of being able to "freeload" on cuts in other countries without any Russian contribution.

Abroad, it wanted to remain friendly with its traditional Middle Eastern allies in the Organisation of Petroleum Exporting Countries, while not contributing to substantial price increases that might trigger a further global economic downturn and alienate its new allies in the US.

Some leading Russian oil companies - notably Mr Khodorkovsky's Yukos and Roman Abramovich's Sibneft - openly opposed cuts, having committed considerable sums to new investment programmes designed to boost production.

They had significant cash reserves and low operating costs, allowing them to be able to sit out a price war over several months, after which they believed Opec would cave in and cut production unilaterally.

They were also hostile to the Arab oil producers, and shared with the government an enthusiasm for building up Russia as a significant alternative long-term supplier for Europe and the US.

Rival producers - such as Lukoil and Tatneft - were less concerned. They had more modest domestic expansion plans and higher debts. Cuts would do little harm to their own business, while helping to ensure global oil price increases. A price war, on the other hand, with its immediate depressing effect on revenues, would be detrimental.

When Mikhail Kasyanov, the prime minister, had first announced on November 9 that the oil companies were set to announce "voluntary" cuts, they expressed surprise, and even some anger, at an apparent government diktat. Russia's raw capitalist phase in the 1990s had left most oil production in private hands. Those oil barons controlled output and, under President Boris Yeltsin, had determined much government policy too.

Yet Mr Khodorkovsky argues that the government still has the power both to limit exports and to withdraw production licences - not to mention applying indirect pressure via tax inspections or other bureaucratic means. Under President Vladimir Putin, there has also been a loosening of the grip of big business on the state.

"Putin runs the country now, not the oligarchs," says one western oil industry expert. "He listens and takes their views into account, but there is a more normal process of discussion. If the oil companies had had it their own way there would not have been any cuts at all."

Simon Kukes, the chief executive of the oil group TNK, says the government in the past made decisions based on "relations" with the oil barons. Now, they are the result "of business, of what makes sense". Agreement about export cuts in the December meeting was possible "not because of common love but because there was some basic economic sense", he says.

Another participant at the meetings says consensus had already been achieved during November. But the government wanted a climate of economic uncertainty while it pressed parliament into approving discretionary spending cuts of Rbs68bn (Dollars 2.3bn, Pounds 1.5bn) for this year's budget. Once that was voted through, oil cuts could be more openly discussed.

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