Russian Roulette | Page 4

favorites.
Both Lukoil and Gazprom are, therefore, used by the Kremlin as
instruments of domestic policy.
But Russian energy companies are also used as instruments of foreign
policy.
A few examples:
Russia has resumed oil drilling and exploration in war ravaged
Chechnya. About 230 million rubles have been transferred to the
federal Ministry of Energy. A new refinery is in the works.
Russia lately signed a production agreement to develop oilfields in
central Sudan in return for Sudanese arms purchases.
Armenia owes Itera, a Florida based, Gazprom related, oil concern, $35
million. Itera has agreed to postpone its planned reduction in gas
supplies to the struggling republic to February 11.
Last month, President Putin called for the establishment of a "Eurasian
alliance of gas producers" - probably to counter growing American
presence, both economic and military, in Central Asia and the much
disputed oil rich Caspian basin. The countries of Central Asia have
done their best to construct alternative oil pipelines (through China,
Turkey, or Iran) in order to reduce their dependence on Russian oil
transportation infrastructure. These efforts largely failed (a new $4
billion pipeline from Kazakhstan to the Black Sea through Russian
territory has just been inaugurated) and Russia is now on a charm
offensive.
Its PR efforts are characteristically coupled with extortion. Gazprom
owns the pipelines. Russia exports 7 trillion cubic feet of gas a year -
six times the combined output of all other regional producers put
together. Gazprom actually competes with its own clients, the pipelines'
users, in export markets. It is owed money by all these countries and is

not above leveraging it to political or economic gain.
Lukoil is heavily invested in exploration for new oil fields in Iraq,
Algeria, Sudan, and Libya.
Russian debts to the Czech Republic, worth $2.5 billion in face value,
have just been bought by UES, the Russian electricity monopoly, for a
fraction of their value and through an offshore intermediary. UES then
transferred the notes to the Russian government against the writing off
of $1.35 billion in UES debts to the federal budget. The Russians claim
that Paris Club rules have ruled out a direct transaction between Russia
(a member of the Club) and the Czech Republic (not a member).
In the last decade, Russia has been transformed from an industrial and
military power into a developing country with an overwhelming
dependence on a single category of commodities: energy products.
Russia's energy monopolies - whether state owned or private - serve as
potent long arms of the Kremlin and the security services and
implement their policies faithfully.
The Kremlin (and, indirectly, the security services) maintain a tight
grip over the energy sector by selectively applying Russia's tangle of
hopelessly arcane laws. In the last week alone, the Prosecutor General's
office charged the president and vice president of Sibur (a Gazprom
subsidiary) with embezzlement. They are currently being detained for
"abuse of office".
Another oil giant, Yukos, was forced to disclose documents regarding
its (real) ownership structure and activities to the State Property Fund
in connection with an investigation regarding asset stripping through a
series of offshore entities and a Siberian subsidiary.
Intermittently, questions are raised about the curious relationship
between Gazprom's directors and Itera, upon which they shower
contracts with Gazprom and what amounts to multi-million dollar gifts
(in the from of ridiculously priced Gazprom assets) incessantly.
Gazprom is now run by a Putin political appointee, its former chairman,
the oligarch Vyakhirev, ousted in a Kremlin-instigated boardroom
coup.
Foreign (including portfolio) investors seem to be happy. Putin's
pervasive micromanagement of the energy titans assures them of
(relative) stability and predictability and of a reformist, businesslike,
mindset. Following a phase of shameless robbery by their new owners,

Russian oil firms now seem to be leading Russia - albeit haltingly - into
a new age of good governance, respect for property rights, efficacious
management, and access to Western capital markets.
The patently dubious UES foray into sovereign debt speculation, for
instance, drew surprisingly little criticism from foreign shareholders
and board members. "Capital Group", an international portfolio
manager, is rumored to have invested close to $700 million in
accumulating 10% of Lukoil, probably for some of its clients. Sibneft
has successfully floated a $250 million Eurobond (redeemable in 2007
with a lenient coupon of 11.5%). The issue was oversubscribed.
The (probably temporary) warming of Russia's relationship with the
USA and Russia's acceptance (however belated and reluctant) of its
technological and financial dependence on the West - have transformed
the Russian market into an attractive target. Commercial activity is
more focused and often channeled through American diplomatic
missions.
The U.S. Consul General in Vladivostok and the Senior Commercial
Officer in Moscow have announced that they will "lead an oil and gas
equipment and services and related construction sectors trade mission
to Sakhalin, Russia