Previous: The Gas Industry in Russia

3. The Oil Industry


Oil production in the world.

Oil production in top producing countries is given in the chart. In 2009 Russia produced 494 million tons of oil, thus taking 2nd place in the world in oil production.

Is the oil industry in Russia publicly, or privately owned? According to Wikipedia, in 1990's the oil industry of Russia was mostly auctioned off. In 2003 the government of Russia took steps towards making the biggest private Russian oil company, "Yukos", a bankrupt, and sold its assets to a state company, "Rosneft". In 2005 "Gazprom", also a state-company, bought a private oil company "Sibneft". And thus, in the oil industry, as in the electrical industry and the gas industry, we see that a campaign of privatization is followed by a campaign of "nationalization", i.e. we see an on-going re-division of state property.


State and private companies in the oil sector of Russia

According to an article in "Commersant" (a Russian equivalent of"The Economist"), we observe a growth of state companies in the oil industry of Russia.

The magazine observes that by the end of 1997 we have seen the end of primary privatization in the oil industry. The state controlled as many oil assets as the private companies, but the state resources were of inferior quality. At the forefront were 4 private companies: "Lukoil", "Yukos", TNK-BP, and "SurgutNefteGas". Then, there was "Sibneft", and finally the state "remainders". However, in 2004, "Yukos" as "eaten up" by "Rosneft" (a state company), and in 2005 "Gazprom" "asked" Roman Abramovich to sell it "Sibneft" (most likely, this was another case of extortion). The result is that the 2state companies - "Rosneft" and "Gazprom" - have become "the key players" on the market, capable of dictating terms to private companies. They do it using both the market mechanisms and their access tothe state apparatus, such as threats of administrative checks, recall of licenses, etc.

An interesting detail towards characterization of the modern Russian state is the fate of Mikhail Khodorkovsky, the former owner of "Yukos". 


Khodorkovsky in court.

Immediately after Khodorkovsky was arrested on November 25, 2003, an influential Russian Union of Industrialists and Entrepreneurs, including such figures as A. Chubais, have conducted a meeting and made an address to Pres. Putin. They said that this arrest was a "blunt mistake" and has undermined trust in president's assertions on impermissibility of reviewing the results of privatizations in Russia. The social climate has become "negative" for capital in Russia.

The reasons for Putin persecuting Khodorkovsky may be in part political. According to M. Brudno, one of the top managers of "Yukos", Khodorkovsky was supporting the right-wing parties, believing that they should possess 30% of vote in the parliament. Moreover, there were fears that the biggest capitalists in Russia were preparing a coup d'etat against Putin. 

Khodorkovsky said that the reasons for his arrest were both political and economic. The political goal was to advance the "United Russia" party of V. Putin. The economic reason was the personal interest of some of the bureaucrats around Putin in the property which Khodorkovsky owned. This reason has become dominant in the course of persecution of Khodorkovsky.

According to the "Last word" of Khodorkovsky at the 2010 trial, the rights of private property and capital in Russia are not respected: "The power structure can do anything. There are no rights for private property. A person has no rights in collision with this system". The power structure that ruled the country 20 or 50 years ago still remains intact.

Let's now proceed to analyze the 2 biggest state companies ("Rosneft" and "Gazprom"), and the 4 biggest private companies ("Lukoil", TNK-BP, "Surgutnefegas" and "Tatneft").

a. "Rosneft"

According to Wikipedia, "Rosneft" employs 74 thousand people and has made a profit of 10.7 billion dollars in 2010. The profit is ensured by the huge gap that exists between the price of producing one barrel of oil in Russia (around 2.5 U.S. dollars), and the price per barrel on the external market (more than 100 U.S. dollars). What is curious is that the price of gas in Russia is the same as on the foreign market. Thus, the oil companies make huge profits both at home and abroad.

Do we have a "market economy" in Russia? "According to 'Vedomosti', the 'Yukos' assets which 'Rosneft' bought at auctions, were discounted at 43.4% of their market price. In 2007, the assets of 'Yukos' made for 72.6% of oil production and 74.2% of oil processing of 'Rosneft'." Thus, we can say that the major part of "Rosneft" consists of the former assets of "Yukos", which it has obtained through political influence, not using the "market mechanisms".

Timchenko plakat

Gennady Timchenko

The main foreign traders for "Rosneft" are "Gunvor" and "Vitol". 50% of "Gunvor" is owned by Gennady Timchenko, a former colleague and friend of V. Putin in KGB.

G. Timchenko has such an influence in the world financial spheres that when "The Economist" wrote an article in 2008 implying that a successful business of Timchenko may be due to his relationship to Putin, Timchenko has threatened to take the magazine to court. "The Economist" was forced to print the following apology:

"In a section of our special report on Russia entitled 'Grease my palm' (November 29th 2008) we referred to Gunvor and its cofounder, Gennady Timchenko. We are happy to make it clear that when we referred to the new corruption' in today’s Russia, we did not intend to suggest that either Gunvor or Mr Timchenko obtained their Russian oil business as a result of payment by them of bribes or like corrupt inducements. Rosneft sells only 30-40% of its oil through Gunvor rather than the “bulk” of Rosneft’s oil (as we described it). We accept Gunvor’s assurances that neither Vladimir Putin nor other senior Russian political figures have any ownership interest in Gunvor. We regret if any contrary impression was given."

After Putin has announced in 2011 that he desires to obtain the third presidential term, Timchenko offered an idea of building an energy empire. For this purpose, the state companies "Rosneft" and "Gazpromneft" are to be transferred under the control of Timchenko (see the poster below). However, this implies a conflict between G. Timchenko and I. Sechin, who presently controls the state oil industry, and "Rosneft" in particular.


Ihor Sechin

But let's return to "Rosneft". "In May 2008 in an interview with a British newspaper The Times M. B. Khodorkovky accused the former KGB officer Igor Sechin of being an organizer of the first and the second criminal trials against him: the first out of "greed", and the second out of "cowardice". In July 2008 Victor Geraschenko also named Sechin as the person responsible for the break up of 'Yukos'."

Who is Igor Sechin? According to Wikipedia, Igor Sechin was a deputy chairman of the government of Russia and a chairman of "Rosneft" from 2009 to 2011.

n 1 December, 2010, Wikileaks wrote about Sechin as the ringleader of high level officials engaging in large-scale corruption schemes. Sechin is in charge of the business empire in Russia, protected by Putin, ruling it with the help of bribes, fear and compromising materials.

The administrative apparatus of Igor Sechin is the most corrupt in Russia. According to one article, it costs $300,000 to have a business meeting with Sechin. $250 thousand is the price of being admitted into the cabinet of a director of FSB (Federal Security Agency) Alexander Bortnikov, and the same amount will cost you an appointment with the Minister of the Interior Rashid Nurgaliev. Same price goes for the General Attorney Yuri Chaika.


1962 Soviet cartoon.

Compare what has been described here with a 1962 caricature from a Soviet humor magazine "Crocodile"The title of the cartoon is "A grafter has made use of technology". This cartoon implies that the relationships now in Russia are the same as in the Soviet Union. There is a "tariff table" for different officials, and the only thing that has changed is the scale of corruption. For example, according to the article mentioned above, the most corrupt official in the 1990's was V. Chernomyrdin, who charged "only" $100,000 for a business meeting. 

b. "Gazpromneft"

The second largest state oil company in Russia is "Gazpromneft". According to Wikipedia, initially the company belonged to Boris Berezovsky, then it was controlled by Roman Abramovich. In October 2005, 75% of shares of the company were sold to "Gazpromneft", for 13.1 billion dollars. The main owner of "Gazpromneft" is "Gazprom" (see above, the gas industry), which owns more than 95% of shares in the company.

Here is a little episode which reveals us something about Roman Abramovich, the former owner of the company. As a common soldier in an army platoon, Abramovich divided up the forest which his platoon had to cut (an assignment before discharge) into equal squares, each of which he sold to the peasants of the nearby village for cash; the money made in this fashion he divided up among the members of his platoon. The same kind of activity he continues today, thriving on the stupidity of the former Soviet system, only this time he divides up oil wells, coal fields and steel plants.


D. Zhukova

As a personality of a person is illuminated by his friends and girlfriends, it is curious to look at the girlfriend of Roman Abramovich, Daria ZhukovaOn this photo, we see a young woman who lives in the "glamour" style. Daria, according to one account, is a representative of "the gilded youth".

c. "Lukoil"

Now, let's take a look at the "private" oil companies. The largest of them is "Lukoil". According to its origin, it's a state company that has been privatized during the reign of Yeltsin.

The highest government officials have an interest in privatization of "Lukoil". Wikipedia writes that in 2004 the state sold the final 7.59% of shares in the company to ConocoPhillips for $1.988 billion. According to an opinion of observers, the price of the shares was defined before the auction, in the course of a private meeting between the President of Russia Vladimir Putin and ConocoPhillips President James Mulva.

Who are the owners of "Lukoil"? The top managers hold more than 30% of shares in the company, including 20.6% which belong to Vagit Alekperov. ConocoPhillips used to own 19.21%, but by February 2011 the company has sold its shares, and in part to "Lukoil" itself.

Who is Vagit Alekperov? According to a magazine Alekperov is a former Soviet minister who created the company "Lukoil" and is a friend of V. Putin.


Lukoil headquarters

The name of Alekperov is mentioned in the article "The Golden Cage for the Insiders". According to the article, the former Soviet oligarchs and top officials prefer to live separately from the people, in "elite reservations". For example, the oligarchs from "Lukoil" live in this house in Moscow, on Sretensky boulevard 6/1. 

Also on the Sretesnky Boulevard is the headquarters of the company itself.

There were two recent incidents in which the name of "Lukoil" was involved. In one incident in October 2005 we learn that the wife of the former prime-minister of Lithuania Algirdas Brazauskas became an owner of an elite hotel in the capital of Lithuania, Vilnus, called «The Crowne Plaza», in exchange for giving to "Lukoil" a control over the largest oil-processing plant of Lithuania "Mažeikių nafta". In the Soviet times, both the oil-processing plant and the hotel used to be a state property, then they became a property of the Cabinet of Ministers of this republic and the Central Committee of the Communist Party of Lithuania. Finally, they were privatized in the interests of the people at the very top, the very people who now rule the former Soviet republics. So, has the regime changed?

In another incident, the Mercedez-Benz of the vice-president of "Lukoil" Anatoly Barkov crashed into a "Citroen" in which there were two women doctors. As a result of the accident, both women died. The road patrol police has advanced a version of the incident according to which the driver of the "Citroen" was named as guilty. However, this version has met a strong protest in the society, as the people have seen that it was the driver of the "Mercedez" who has occupied the opposite lane. Later, the police officer who filed the report was partially disqualified. A rap song has appeared which discusses the incident. According to the song, a friendship with V. Putin is enough to make a person not guilty. (In a similar incident, in March 2012, a young woman was raped and then set on fire by a group of 3 young men in Ukraine. By miracle, she survived and identified the men. 2 of them were let go by the police because they were from families of high officials.) 


The second largest private oil company in Russia is "TNK-BP". The company was created in 2003 through merger of the British "BP" and Russian "TNK". "TNK" was formerly a part of "Rosneft", from which it separated in 1995, and was privatized in 1997.

"The Guardian" writes that TNK-BP “provides BP with a quarter of its global oil and gas production but only a 10th of its profits”.

In 2008 the company made 4.7 billion dollars of profits. Let's notice that BP paid in 2003 less than 2 billion dollars for 50% shares of TNK. Such disparity between the profits of the company and what was paid for it implies huge kickbacks which BP paid to the Russian bureaucracy.

Mikhail Fridman by Anton Nossik

M. Friedman

In 2008 we notice a conflict between Russian shareholders (a group of campanies called "AAR") and BP. Both sides of the conflict own 50% of shares in the company. Mikhail Fridman, who represents the Russian shareholders, explained the conflict to "The Guardian":

"The conflict between AAR and BP is about control of TNK-BP. We want the company to be managed as an independent oil company in the interest of all shareholders, including the 5% of minority shareholders. BP wants to operate our joint venture like a BP subsidiary".

Russian and British shareholders have different interests. "The Guardian writes on 2nd July, 2008:

"The AAR document claimed that BP had turned down suggestions proposed by Russian company executives that TNK-BP take advantage of opportunities in Kazakhstan, Kurdistan and Poland. It said 'BP has blocked every move' and 'our patience is wearing thin'."

Russian shareholders use their access to Russian government officials to win the tug of war inside the company. For example, BP wanted to obtain visas for 146 of their employees, but was able to obtain only for 71. Later, a visa was denied to the head of BP, Robert Dudley. Foreign capital does not fare well in Russia. "The Guardian" writes in 2008:

"The company has spent the past year fighting off claims from the tax, environmental and immigration authorities in what has been seen by some industry specialists as a rerun of the kind of problems that afflicted Shell until it sold part of its shareholding in Sakhalin to Russian state-owned Gazprom".

In the course of this tug of war inside TNK-BP, we notice two important aspects of the present social order in Russia. First, foreign capital inside Russia is not safe (just like the Russian capital). Second,TNK-BP has promised to Kremlin to do all its export business through the company "Gunvor", which is controlled by the friend of V. Putin G. Timchenko (see above). Hence, Kremlin makes money out of the conflict inside the company.

One more act from the same drama: in 2011 "Rosneft" was looking for a partner for oil production in the Antarctica. "BP" offered to be such a partner, but the Russian shareholders of "TNK-BP" demanded that the partner should be "TNK-BP", as they also wanted to grab a part of the profit. So, "Rosneft" turned down the "BP" offer, and instead made an agreement with "ExxonMobil".

e. "Surgutneftegas"

The third largest private oil company in Russia is "Surgutneftegas". According to Russian-language Wikipedia, the management of the company is not concerned with increasing the price of the shares of the company, and it does not care for the dividends. That is a strange way for a capitalist company to operate.

"Surgut" keeps a very large amount of cash in the Russian state bank, "Sberbank" (not known for its high interest rate). In 2010, they had $19.9 billion dollars in cash in the bank. Compare this to "ExxonMobil", one of the largest world oil companies, which keeps only $7.8 billion in a bank (and it is more than $15 billion in debt). The value of "ExxonMobil" is $398 billion, while the value of "Surgut" is $37 billion.

This oil company, just like the others, is connected with the name of Putin. One of the minority shareholders, Alexey Naval'ny, has protested against the fact that the export activity of "Surgutneftegas" is done through "Gunvor" (see above). Thus, according to A. Naval'ny, part of the profit which "Surgut" could make, flows over to "Gunvor", i.e. Gennady Timchenko. The management of "Surgut" has not explained to the shareholder why it does business through this particular trader.

"Surgut" is also connected to the group of people around Putin through buying 24% of shares in the "National Media Group" (which includes newspapers such as "Izvestia"). It is well known that controlling shares in the "National Media Group" belong to the bank "Russia", and behind this bank stand the people related to Putin through the co-op "The Lake" (also known as "Ozero").

In 2009 "Surgut" bought 20% of shares in a Hungarian energy company "MOL" for 1.4 billion euro. This was disapproved by the Hungarian authorities, and they refused to list "Surgut" as one of the shareholders of "MOL". Representatives of "Surgut" were denied access to a shareholders' meeting in April 2009.

In May 2011 the Hungarian government announced that they plan to buy the shares in "MOL" held by "Surgut" for 1.8 billion euro, using the money provided by IMF.

This shows that "a private" energy company in Hungary is also ultimately controlled by the Hungarian state.

f. "Tatneft"

The fourth largest "private" oil company in Russia is "Tatneft". The main shareholder in the company is a state holding "Svyazinvestneftehim". A chairman of "Tatneft" is a President of Tatarstan.

"Svyazinvestneftehim" is owned by the Republic of Tatarstan. This holding owns 18 of the largest enterprises in Tatarstan, including "Tatneft".

According to one article, the management of "Tatneft" is involved in dividing up and stealing the assets of "Tatneft". This is strange way for a "private" company to operate.

g. Oil Refineries and Oil Transportation

The largest refineries in Russia are: 1) Omsk refinery, 2) Kirishi refinery.

The Omsk refinery belongs to "Gazpromneft", which, as we have seen, belongs to the state. In 2008, the Omsk refinery processed 18.4 million tons of oil. In 2010 there was an accident at the plant. The cause of the accident was an outage.

The Kirishi refinery belongs to "Surgutneftegas". In 2008 at the plant there was an accident, as a result of which 5 people died from fire.


The oil pipeline linking Russia to China, built and operated by "Transneft"

Most other refineries in Russia belong to "Rosneft", which is a state company. A complete list of oil refineries in Russia, and their controlling shareholders, can be found at Wikipedia. Our conclusion: oil refineries in Russia are controlled by state or "semi-private" companies.

93% of the transportation of the oil is done through "Transneft", a state company. The company builds and controls the major pipelines, as well as oil terminals and sea ports.

Next: The Coal Industry in Russia

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