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Kremlin oil control drive could backfire
September 27, 2012 / 5:31 PM / in 5 years

Kremlin oil control drive could backfire

MOSCOW (Reuters) - The Kremlin is close to winning yet another battle to bring more oil assets under state control, a strategy that critics say could backfire in the long-term by crippling industry, straining budget resources and even sparking social unrest.

Officials, businessmen and economists told the Reuters Russia Investment Summit they had little doubt that Igor Sechin, Russia’s most powerful oil boss and confidant of President Vladimir Putin, would soon succeed in folding new assets into the state-controlled behemoth Rosneft (ROSN.MM) that he runs.

But the ultimate price may be too high for the Russian economy and taxpayers, warned Sergei Guriyev, a liberal economist and one of many informal advisers to Prime Minister Dmitry Medvedev.

“If Putin wants to stay in power for the next six years, he needs a lot of cash and he needs a lot of productivity gains,” Guriev said in an interview.

“And those are not feasible under a scenario when you are buying more and more. You need to find cash somewhere and these state companies are destroying a lot of value.”

Russia privatized its oil industry, the world’s largest, under late President Boris Yeltsin in the 1990s but regained 40 percent back under Putin last decade, nationalizing top firm YUKOS and jailing its politically active co-owner Mikhail Khodorkovsky for tax evasion.

The Kremlin also limited the access of private firms to big fields and passed investment legislation that subjected large transactions to state approval.


The state’s share in the oil industry would rise to over 50 percent if Rosneft buys out oil major BP (BP.L) from its troubled TNK-BP TNBP.MM joint venture with a group of Soviet-born tycoons.

The $20 billion-plus deal is widely expected to be followed by a transaction of a similar size in which Rosneft buys out the rest of TNK-BP owned by billionaires Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik.

Putin’s critics have repeatedly accused the Kremlin of creating inefficient state monsters over the past decade and now even some of Putin’s close allies question the strategy.

“Sechin’s line is probably a bit too tough. If we return all assets to the state, it will be a road back to socialism,” said chief executive of private metals giant Norilsk Nickel (GMKN.MM), Vladimir Strzhalkovsky, whose ties with Putin go back to their days in the KGB.

One of Russia’s richest men, metals tycoon Vladimir Potanin, said the growing role of the state was spurring capital outflows from the country and was making it less competitive.

“It becomes increasingly difficult to find where to invest. The field for business activity is shrinking,” said Potanin, Russia’s fourth richest man with a fortune estimated at more than $14 billion.

Capital outflows from Russia topped $80 billion last year and are continuing this year despite high oil prices, strong budget performance and relatively low public debt levels.


The debate on the future role of the state in the oil sector and other industries is heated in government, where Medvedev, seen as more liberal than Putin, and a number of ministers are challenging Sechin’s stance and are proposing to privatize some national champions.

Key among them is Arkady Dvorkovich, deputy prime minister in charge of energy, a post held by Sechin until May, when Putin appointed him as CEO at Rosneft.

Dvorkovich told the Summit the government will want to see Rosneft’s justifications for buying out BP. [ID:nL5E8KPC4W]

“As a matter of principle we are against increasing the share of the state,” he said.

But he quickly backtracked to signal the battle may not even begin: “It doesn’t mean that companies (BP) cannot have their own thoughts and ideas about consolidation and about commercially-based transactions.”

Energy Minister Alexander Novak echoed Dvorkovich.

“It is a wrong trend to increase the role of the state,” he said but soon added: “It is a matter for the two companies - BP and Rosneft - to decide”.

Guriyev said he found it hard to believe Sechin could lose the battle. “He plays a very important role as an adviser to Putin. He is present in many meetings. He is definitely not just one of the equals,” he said.

(Reporting by Dmitry Zhdannikov, Polina Devitt and Melissa Akin; Editing by Douglas Busvine)

For other news from Reuters Russia Investment Summit, click here

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