December 28, 2004

December 28, 2004 | Commentary on Europe

The Yukos Affair

After so much promise, a political winter has descended upon Mother Russia. Last week's murky, forced sell-off of parts of Russia's $40 billion oil giant, Yukos, at the bargain basement price of $9.4 billion is just the latest proof. After all, Russia's slide into the darkness of soft authoritarianism already included President Vladimir Putin's media crackdown, political power grabs, international meddling and free enterprise rollbacks.

The situation has regressed so far that freedom monitors have dubbed Russia politically "not free" (Freedom House), and economically "mostly unfree" (The Heritage Foundation) in their annual rankings.

But looking more closely at the dismemberment of Yukos, (the world's 21st largest energy company, once pumping nearly 2 million barrels of oil daily) is instructive in understanding Czar Vlad's stewardship of Russia since his 2000 election.

The Yukos affair started in October 2003 with the arrest of (and imprisonment) of Yukos' chief executive, Mikhail Khodorkovsky, for alleged tax evasion and fraud. The Kremlin claims that Yukos, a western-style company with American investors, owes $28 billion in back taxes.

But Khodorkovsky's plight isn't about purported economic malfeasance. It's a political power play by Putin against a potentially more popular rival.

A young, flashy billionaire, Khodorkovsky stoked Putin's ire by bankrolling pols and political parties that pushed his agenda in the Russian Duma. Czar Vlad had to do something to rein in the growing clout of Russia's nouveau riche - the "oligarchs."

The Yukos affair is also an attempt by Putin to reassert state control over the economy. The oligarchs made billions off the early-to-mid '90s fire sale of Soviet national assets, such as oil.

Reversing this trend last week, in a limited bidder auction, a Russian front company, Baikal Finance Group, bought Yukos' oil production unit, Yuganskneftegas. Within days, the Russian state oil company, Rosneft, swallowed Baikal Finance Group.

It's now expected that the state-owned gas monopoly, Gazprom, will merge with Rosneft in January. Russia is the world's largest gas producer and second biggest oil manufacturer. And Gazprom is already the world's third-largest energy concern, after Saudi Aramco and National Iranian Oil.

Unfortunately, it's not clear whether the sale of Yukos' oil production subsidiary is the end - or just the start - of Putin's wresting of Russian strategic assets back from the oligarchs.

It's not just that the Kremlin would undoubtedly like to see the profits from Russian natural resources flow more directly into state coffers. High energy prices have provided Russia an alternative to achieving true economic growth, eliminating the need for reform.

The implications stretch far beyond Russia's borders. De facto direct Kremlin control of Russian oil and gas will allow Putin to wield energy supplies as a powerful foreign-policy club against Russia's fuel-hungry Eurasian neighbors.

No wonder German Chancellor Gerhard Schroeder was all smiles (and declined comment on Yukos) during Putin's recent visit to Germany. Berlin knows it needs a steady supply of Russian energy, especially natural gas.

During the Cold War, arms made Russia a superpower; today, energy is key. Oil and gas sustain the Russian economy, fund the government and national defense and turbocharge Moscow's influence.

During his European "let's kiss and make up" swing in late February, President Bush will summit with Putin in the Slovak Republic. Bush should lay it on the line with Putin: Russian political and economic freedoms - and the rule of law - count with America.

But Bush has to be careful. The consolidation of the media under the Kremlin's control has left Putin wildly popular, and more nationalistic politicians wait in the wings. Russia's also a key international player - we don't need a defiant Moscow playing even more of a spoiler to American interests.

A frosting of U.S/Russian relations could: a) drive Russia into the arms of China; b) lead to continued aiding of the Iranian nuclear weapons program; c) thwart terrorism cooperation, or d) create Russian opposition in the U.N. Security Council on issues such as Iraq or North Korea.

After his 2001 summit with Putin, President Bush said he had looked into Putin's soul and found him to be straightforward and trustworthy. Fair enough - but that was then, this is now. Russia's recent political and economic trajectories are a real concern.

The president should use the upcoming meeting to look again into Putin's soul and ask what he sees: friend or foe, autocrat or democrat?

Peter Brookes is a Heritage Foundation senior fellow. E-mail: peterbrookes@heritage.org

About the Author

Peter Brookes Senior Fellow, National Security Affairs
Douglas and Sarah Allison Center for Foreign and National Security Policy

Related Issues: Europe

First appeared in the New York Post