Category Archives: nationalization

Ill Neo-Soviet Winds Blowing in Russia’s Telecom Market

Eugene Iladi, writing on Prime Tass:

A new storm is brewing in the fiercely competitive, but lucrative, Russian telecommunications market, threatening the stakes of established operators and the stability of the sector.

The granting of new LTE licenses (Long Term Evolution or 4G technology) is shaping to become a potential battleground between Russia’s so-called “big three” mobile telecom operators, Mobile TeleSystems (MTS), VimpelCom and MegaFon, and two newly established start-up competitors, Osnova Telecom and Red Telecom.

The Russian State Radio Spectrum Committee and the Ministry of Telecommunications are in charge of disposing of the licenses and have come under tremendous pressure to grant the new LTE technology spectrum to newcomer start-ups, such as Osnova and Red, without a public tender. How transparent and fair this process unfolds will determine the shape of the Russian telecom industry and the future of foreign investment in the country. Estimated at nearly $40 billion for last year alone, and expected to grow to $48.5 billion by 2013 according to a Pyramid Research survey, Russia boasts Europe’s largest and fastest-growing telecom market.

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EDITORIAL: Another Black Eye for Russia


Another Black Eye for Russia

Russia got another black eye on the international stage last week when British Petroleum appointed Bob Dudley to oversee the cleanup of its infamous oil spill in the Gulf of Mexico.  He’s the same fellow who got kicked out of Russia for daring to stand up to the Kremlin in 2008. And now the international press is placing that event before the eyes of a slack-jawed world.  What goes around, comes around, you see Mr. Putin.

Talking Points Memo reports:

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EDITORIAL: The End of Political Parties in Putin’s Russia


The End of Political Parties in Putin’s Russia

Russia lost not one but three political parties last week.  With none to spare, it was not a loss civil society in Russia could afford to incur. We view it as yet another sign of the apocalypse, and when combined with the Kremlin’s growing threat to bring back KGB spy Vladimir Putin as “president” for life, a truly terrifying one.  We urge the leaders of the Western democracies to realize that the political situtation in Russia today has reached a tipping point, and to take immediate and drastic action before they see a fully-realized neo-Soviet monstrosity materialize once again before their gaping eyes.

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Nationalizing the Neo-Soviet Economy

Streetwise Professor illustrates the neo-Soviet nationalization of Russia’s economy. So much for capitalism!

Recent weeks have seen the continuation of the methodical march of Putinism and Russian resource nationalism. BP surrenders Kovytka. Gazprom and the Russian government (is there a difference?) begin making noises about elbowing their way into ExxonMobil’s Sakhalin I project (heretofore largely thought immune to predation). And in today’s Eurasian Daily Monitor, Vlad Socor reports that Transneft–Russia’s oil pipeline monopoly–is squeezing the Caspian Pipeline Consortium through demands for renegotiation of existing deals and demands for new capital, with demands backed up by the old standby–outrageous bills for back taxes.

The craven behavior of BP and Shell in the face of Putin’s predations at their expense has undoubtedly emboldened the Russians to take additional steps. Similarly, the sotto voce responses of the Eurowimps are also music to Putin’s ears. When will Europe awaken to the tightening grip of the Russian python?

The losers here are not just the shareholders of integrated oil majors, or American or European consumers of gasoline and natural gas. Though they may not realize it now, it will soon become apparent to the Russian people that they will be the biggest losers. I have been reading every political economy book that discusses the role of a nation’s resource endowment on its political structure that I can get my hands on. This research emphasizes a theme that I have explored before on SWP, namely that rent intensive economies (notably those with outsized endowments of natural resources) are prone to authoritarianism and dictatorship, and that increasing economic inequality and the suppression of commercial and political activity go hand in hand with growing state control over the natural resource sector. Thus, though the energy boom (and the nickel boom and the copper boom and the aluminum boom and the gold boom) will enrich the “elite” (though referring in that way to the thuggish siloviki who rule Russia sounds discordant) with access to the rents, it will condemn most Russians to a penurious economic future and a deprivation of their civil and political liberties.

To follow Putinism is to watch these theories in action. They describe Russian political developments post-2000 to a “T.” The most depressing thing is that inasmuch as these models characterize stable equilibria as a function of underlying endowments, it is unlikely that Russia will leave this trajectory. Revolution and violence are possible, but the likely results of such an explosion would mainly be (a) much death and destruction, and (b) a replacement of the old set of rent parasites with a new set. So, it is well to wish the destruction of Putinism, it is far harder even to imagine how that can be accomplished.

This is particularly true because Putin is doing the basic blocking and tackling needed to secure an authoritarian regime. The moves to revise the history textbooks provided to Russian primary and secondary students and Putin’s historical revisionism (e.g., his assertions that Russia and the USSR have a pristine record as compared to those blood-stained Americans) represent classical authoritarian moves to control the future by controlling the past. Presenting a unifying historical narrative congenial to the regime and suppressing the voicing of any alternative, more discordant, narrative reduces the costs of maintaining control. Similarly, the harassment and sometimes suppression of any non-state organization that could serve as a focal point for collective action directed against the regime is a traditional means of retaining and strengthening control. The atomization of Russian society, and the replacement of myriad spontaneous and organic links of individuals and groups across society with managed vertical relations intermediated by the state and its creatures (a wheel and spoke vs. a network model of society) cripple the formation of alternative sources of power and influence that can challenge the regime.

Not a happy vision, indeed. But Western nations need to develop a Russian policy based on a sober assessment of current realities, and likely future developments. Happy talk in Kennebunkport, or pitiful plaints about the desire for normal relations with Russia, or craven energy executives opening their wallets just after Putin took their watches, are all manifestations of denial. A denial of the reality of “modern” Russia (which is oh-so-much like not-so-modern Russia, and pre-modern Russia). Until the scales drop from European and American eyes, and they devise policies that deal with realities rather than deny them, Putin will march from triumph to triumph. It is unlikely that Putinsim–which is just a latter-day Russian version of natural resource sustained authoritarianism–can be quashed completely, and Russia transformed into a liberal (in the classical sense) modern state and civil society. However, unified resistance can mitigate its more deleterious consequences (at least for non-Russians.) As long as short sighted, commercial interests drive European policy in particular, however, such resistance is unlikely to arise.

Collective action is needed, but collective action is always difficult due to free riding and rent seeking. The entire justification for a European Union is its purported ability to facilitate collective action on matters of common interest and concern. Insofar as Russia policy is concerned, it has failed miserably in this task. The “interests” of individual states, and more shockingly, individual companies within these states (most notably German and Italian), have precluded any robust collective response to Putin’s march. Until that changes, Putin wins, and Russians (and myriad others) lose.

Communism by Any Other Name Would Still Stink to High Heaven

An editorial from Vedomosti, by way of the Moscow Times. How neo-Soviet can you get?

The problems created for the country’s investment climate by the Kovykta gas field have now been resolved. The delay in rendering a decision on the revocation of the TNK-BP license to exploit the field had provided cause for hope that some kind of unexpected resolution to the conflict between the state and the energy company could be found, but the result was in line with what had long been expected by most analysts. Control over Rusia Petroleum, which holds the license to operate the field, was transferred to Gazprom.

TNK-BP representatives are trying to present the deal in a positive light, and they maintain that the development of the field would have been impossible without the participation of Gazprom. For TNK-BP, the result of the deal can doubtless be considered a success: Bringing Gazprom on board is better than losing its license and the money it has already sunk into the project. The company had already invested more than $400 million. TNK-BP maintains an option to buy a 25 percent, plus one share, blocking stake in Rusia Petroleum, and there is talk of plans for the creation of a joint global venture between BP and Gazprom.

One interesting question is the discount on the value of the assets that Gazprom is enjoying when buying into the project. The controlling stake the company bought in Sakhalin Energy at the end of last year cost $7.45 billion, a price that various analysts said represented a 20 percent to 34 percent discount over the likely market price for the assets. The value of the Kovykta deal is still not clear. What is clear is that the price of strategic deals of this type has very little to do with market factors. Any field that is having problems with environmental regulators, as the experience with the Sakhalin project demonstrated, is going to end up changing hands for a much lower price than one not facing prospect of environmental charges.

The Kovykta deal underlines yet another important tendency. On June 15, without bothering to wait for a decision about the fate of the field’s license, the Industry and Energy Ministry went ahead and issued a statement outlining its ideas for the future of field. Deputy Industry and Energy Minister Andrei Dementiyev said the field would go into production at some point after 2017. That date also occupies an important place in Gazprom’s preliminary plans for the future. In fact, a number of state officials have acknowledged that there is no need to develop the field quickly. All of this comes, of course, after one of the main complaints against Rusia Petroleum’s work at Kovykta was that the development of the field was coming along too slowly.

In another interesting announcement, after the new agreement had been reached, Gazprom deputy head Alexander Medvedev said gas from the Kovykta field could ultimately be destined for China. This was the very same strategy that TNK-BP had proposed to follow, but the company was unable to turn this into a reality — Gazprom holds a monopoly on the right to export gas. Characteristically, the Natural Resources Ministry has also expressed its willingness to work for compromise: After the discussions on the agreement between TNK-BP and Gazprom, the ministry’s press service announced it was expecting an offer from the new owner within the next two weeks. It said it would decide whether to revoke the license for the development of the field after receiving the new proposal.

It was the same case with Sakhalin-2. The international shareholder and operator of the project, Sakhalin Energy, had to step aside and hand a controlling stake to Gazprom as a result of environmental charges that were serious enough to threaten the suspension of the project. The deputy head of the Natural Resource Ministry’s environmental watchdog estimated that the cost of repairing the environmental damage caused by the project was $50 billion. Japan’s Ministry of Economy, Trade and Industry then announced that, as a result of the inspections, the shareholders in Sakhalin Energy would have to spend an additional $20 billion on environmental protection measures. After Gazprom bought its way into the project, the state approved an environmental protection plan that it said would eliminate all of the environmental risks. No one, of course, is talking about multibillion-dollar payments anymore. The sharp criticism over environmental concerns leveled at Yuganskneftegaz, formerly the main production unit at now-bankrupt Yukos, also disappeared immediately after it was bought by state-owned Rosneft.

The manipulation of prices for oil and gas assets by way of pressure from state regulatory agencies has become part of the standard mechanism for the transfer of property and ownership in Russia.


ZAXI blog offers the following penetrating commentary (as usual) regarding the recent ejection of the BP oil concern from the Russian market by the malignant nationalizing forces of the Kremlin:

It matters not if you spent ages preparing for the final exam. You will still fail without a pencil. And the teacher not only failed to provide a pencil in this case – he threatened to kick the groveling student out of the room for taking too long with the test.

Russian justice has turned so twisted that BP was feigning delirious joy at its handover to Gazprom of the ill-fated Kovykta gas field. BP’s new chief executive called it both “historic” and “powerful.” A host of Western oil analysts in Moscow said BP should feel grateful. Indeed BP and its Russian partner TNK faced the option of simply getting stripped of Kovykta’s license under pretext that the two could not market its gas in time to meet a fictitious deadline. They first needed permission to access pipelines – and the Russian state refused to hook up the stranded field to nearby China by claiming this was not in its plans. TNK-BP may have crammed all it wanted but it was about to go home with a failing grade and snot running down its quivering lip.

So Roland Nash of the Renaissance Capital investment house was nearly right to say the deal “is almost a billion dollars more than they might have otherwise gotten.” TNK-BP did get almost double its Kovykta investment in an actual legal agreement with Gazprom. And it now has the hilarious option of buying back a quarter stake at an “independently verified market price” or by swapping some of its European assets.

But of course Nash was not right. Gazprom could and did steal Sakhalin-2 from Royal Dutch Shell. It is about to illegally bar ExxonMobil from selling Sakhalin-1 gas to China – it wants that right for itself. Yet Gazprom could not simply pinch Kovykta because the B in BP once stood for “British.”

The Kremlin seems to abhor all things Albion except for its gas. Centrica may not have made any of the stories about Friday’s deal but the British Gas owner – seeking buyers because its fields are running dry – is the only reason why BP got any cash here at all. The prospect of Gazprom owning their gas has left Brits feeling understandably queasy. Parliament has proposed legislation blocking a potential deal. Centrica has put out hopeful feelers to gas firms stretching from France to Norway. The Kremlin knows it is not being welcomed with open arms. But Gazprom wants a foothold in Western Europe – perhaps as much for its prestige as its bottom line – and Centrica’s 16 million customers are a start. A small sacrifice on Kovykta in exchange for some whooping endorsements from BP mangers was a bargain in Kremlin eyes.

And has BP whooped. The company has waged war on Tony Blair for suggesting that British business calm its courtship of a Russia that looks to have donned its 1930s garb. It sunk one billion dollars in a Rosneft initial public offering that came up against stern analysts’ warnings. It placed a ceremonial bid in a staged auction for Yukos assets. BP has now offered Gazprom new joint ventures abroad. All this fine work has left BP with the right to still do business in Russia. Vladimir Potanin on the other hand just twiddled his thumbs. And all the Interros boss now has is a 26 percent stake in a Kovykta project that is suddenly worth tens of billions of dollars because of its imminent access to China.

The “baby billionaire” – a title Potanin earned from a fawning Fred Hiatt of The Washington Post in 1998 – learned quickly that silence is golden in President Vladimir Putin’s Russia. He kept everything pilfered under Boris Yeltsin and remains one of the few standing oligarchs without training in the KGB. The Kremlin’s wrath has spared him again. His Kovykta stake was untouched by its campaign against the Russian partners in TNK-BP – confirming that Putin will let the select few who came before him enjoy their wealth.

Not all of it. It seems that Potanin’s Norilsk Nickel has the misfortune of holding rights to a titanium mine that looks just right to Putin’s old Dresden spy partner Sergei Chemezov. He now runs the state military industrial complex conglomerate being forged from the arms exporter Rosoboronexport. Potanin’s titanium mine fits nicely into Chemezov’s plans and the local governor has already blessed the whispered handover – perhaps citing the watertight legal argument that Putin would otherwise sack him.

Potanin’s team has also suddenly discovered that it will have a tough time digging through the titanium mine without Chemezov’s help. It told Kommersant it was willing to “discuss cooperation.” And who would not be after finding themselves sitting on top of enough gas to keep Asia – rather than some impoverished Siberian customers – running for over a year?

Interros will likely be booted from Kovykta in the long run if BP is ever allowed back in. Gazprom would not stand losing its majority stake and considering Potanin’s chumminess with Putin he can expect another handsome reward. But the future of TNK-BP itself looks grim. Putin has made clear his displeasure with the Russians involved in the arrangement – “I am not even going to talk about how they obtained the permit” for Kovykta in the early 1990s – if not with Potanin. And all the Kremlin really needs is BP’s technology rather than the remnants of a joint venture that Putin blessed in 2003. That fall Kremlin ceremony marked the apex for Western involvement in Russia. Pages of ink were spilled hailing the country’s rise to prominence almost five years to the day after an economic implosion saw investors stampede for safer shores. Those articles reversed course weeks later when the arrest of Mikhail Khodorkovsky sounded the starting gun to the Yukos campaign.

One may now frown at BP’s naive enthusiasm at spotting a potential cash cow standing untended off the upper-left coast of Lake Baikal. A super-giant gas field that maps place just inches from China – the temptation was there. And BP could argue that others have also looked into Putin’s eyes and claimed to see something warm and fuzzy. Now energy analysts use stock phrases to insist that the Kremlin has done its work – the old deals have been “renegotiated” and all Western firms now operate under defined if subservient terms. It is safe to bet on Russia again.

Perhaps. But someone should first report the good news to ExxonMobil.

Economist: YUKOS Was Beginning of End for Russia

The Economist says that the creation and seizure of Mikhail Khodorkovsky’s “Yukos” oil firm represented the beginning and the end of freedom and democracy in Russia:

IT WAS the first “smart” office building in Russia, self-sufficient and stuffed with the latest technology, a showcase of Russian capitalism and built to serve as the headquarters of Yukos, the country’s biggest oil company at the time. The pearl-tinged tower was insured against earthquakes, storms and floods. It was even insured against police raids—but, alas, not against political change. In April 2003, when the company moved in, someone counted the steps between landings: 13, an unlucky number. A few months later things started to go wrong.

This week Yukos’s office building was the last of the company’s main assets, after its production units, refineries and petrol stations, to be sold in a series of staged bankruptcy auctions. Most of Yukos has ended up with state-controlled Rosneft, now Russia’s largest oil company, run from a low-rise office within shouting distance of the Kremlin. All that now remains of Yukos is a number of lawsuits filed by disgruntled shareholders demanding compensation from the Russian state. In a few weeks a clerk will cross out Yukos’s name from an official register and Russia’s first-ever private oil company will cease to exist as a legal entity. Rubbing out the stain that the destruction of Yukos has left on Russia’s political and economic landscape, however, will take a lot longer.

At the very least, the Yukos affair changed the shape of the Russian oil industry, giving the state control over energy resources and doubling its share of crude output to more than 50%. But the legacy of Yukos’s destruction goes beyond oil. If the emergence of Yukos epitomised Russia’s transition from a planned economy to the wild capitalism of the 1990s, which for all its excesses thrived on private initiative, its destruction was a turning-point towards an authoritarian, corporatist state.

What triggered the attack on Yukos and its main shareholder, Mikhail Khodorkovsky, is still a matter of argument. Was it Mr Khodorkovsky’s political ambitions, or his plans to sell a large chunk of the company to Exxon Mobil? Was it his intention to build private pipelines, or the cupidity of the new elite? It was probably all of the above. But what has become clear over the past four years is that Yukos’s fate was sealed once Vladimir Putin became Russia’s president in 2000.

“If the Yukos case had not happened, it would have to have been invented,” says Rory MacFarquhar, an executive director at Goldman Sachs in Moscow. The case partly reversed the legacy of the 1990s during which, through a series of mostly rigged auctions, control of natural resources passed from the discredited Communist party to a group of oligarchs supportive of Boris Yeltsin’s regime. It was unusual by any country’s standards. Mr Khodorkovsky, a businessman and former Young Communist League activist, was one of the prime beneficiaries. His bank arranged the auction of Yukos and ended up as the sole bidder. Any potential rivals had been warned to stay clear and he got the majority of Yukos for a song.

The privatisations successfully dislodged the Communists from the commanding heights of the economy, but also created a lasting sense of injustice in Russia. So when Mr Khodorkovsky began to behave like an independent and legitimate owner of Yukos, negotiating its sale and financing the political opposition, Mr Putin was furious.

The president’s desire to curtail the political and economic influence of the oligarchs was understandable. Mr Putin could have levied a windfall tax on the oligarchs, or renationalised the energy companies and compensated shareholders. Instead, he used the legal and tax systems to bankrupt a healthy company and pass the prize from one elite to another—this time, a group closely tied to the KGB, the Soviet Union’s former security service.

Russian tsars often banished disloyal aristocrats who prospered under a previous reign and expropriated their wealth. What was new with Yukos was Mr Putin’s pretence that all this was legal. That eroded democratic institutions and further discredited the law by using it as a political instrument. An attack late last year on Royal Dutch Shell (allegedly on environmental grounds) and an earlier economic blockade of Georgia, which was attributed to health regulations, were part of a pattern that began with Yukos.

After a bogus trial conducted by servile judges, Mr Khodorkovsky was sent to a Siberian prison camp and Yukos was broken up and pushed into bankruptcy through ever mounting back-tax claims. The figures did not add up. In December 2004 Yuganskneftegaz, the main production unit of Yukos, was sold in a rigged auction for $9.4 billion to a front company registered in a grocery shop in a provincial town, which was then bought by Rosneft. (When Rosneft came to float its shares on the London Stock Exchange, the same asset was valued at close to $60 billion.) The sums kept changing, but the formula stayed the same: the tax bill always ended up exceeding the value of Yukos’s assets.

By the time Yukos’s last assets were auctioned (undervalued by about 25%, says Al Breach of UBS, a Swiss bank) there was a sense of inevitability rather than outrage. Russian and foreign energy companies such as TNK-BP and Italy’s Eni and Enel took part to ingratiate themselves with Rosneft and Gazprom, the gatekeepers of Russian resources. Big foreign banks bent over backwards to earn the Kremlin’s favour. The government “left enough crumbs on the table” to keep foreign businesses happy, says Mr MacFarquhar.

High oil prices kept everyone quiet. They also meant that Russia felt no immediate pain from the destruction of Yukos. The management of state oil companies may be less efficient and less transparent than that of private firms, but when prices are high they still make a lot of money. Shareholders have filed lawsuits in international courts, claiming that Russia has violated the European energy charter to which it had signed up. Russia retorts that it never ratified the document.

Yevgeny Yasin, Russia’s former liberal economics minister, argues that the Yukos affair has done enduring damage to Russia’s long-term prosperity because it is harder to create wealth without property rights and the supremacy of law. The affair broke the rule of the oligarchs but resulted in a fusion of political and economic power, concentrated in the hands of the Kremlin. Its chiefs must think they are invulnerable. But so did the oligarchs and the Communists before them