BACKGROUND: The spectacular arrest of Khodorkovsky by a large detachment of special forces has led to a protracted court case where the prosecution faces embarrassing setbacks in making its case. In parallel, an avalanche of claims on underpaid taxes for 2000-2002 has swept Yukos, so that its most valued asset, Yuganskneftegaz, is now undergoing pre-sale evaluations accompanied by loud scandals. It is quite clear that the original plan designed somewhere in the Kremlin corridors that the corrupt ‘oligarch’ would give up his ‘energy jewels’ for a one-way ticket from Russia has failed because Khodorkovsky refused to play along. What is also evident is that the Yukos drama has developed its own inertia and brought not only a general deterioration of the investment climate in Russia but also a sustained expansion of the state control over the oil sector. The Kremlin has monopolized not only strategic decisions, for instance about channeling oil exports to China or to Japan, but also most managerial decisions about investment priorities or choice of foreign partners. What is less evident is the sharp decline in efficiency of management of the oil industry, which is mostly covered by the even sharper rise of the world oil prices. Putin’s lieutenants and mandarins have engaged in bitter infighting for controlling the most profitable companies and contracts, so the quality of decision-making in both strategic and tactical terms has slipped below average. The few remaining economic liberals in the presidential ‘team’ have recently voiced concerns about expanding state interference in the energy business, citing the Yukos case as an example of political drive against economic rationale. This ‘politicization’ of the energy industry determines the prevalence of short-term (and often corrupt) group interests over mid-term state interests centered on channeling abundant (and even redundant) ‘petrodollars’ towards Russia’s modernization.

IMPLICATIONS: One direct consequence of the Kremlin’s tightening grip over the oil business has been the concentration of attention on asserting control over the truly enormous hydrocarbon riches of Siberia. The confiscation of Yuganskneftegaz and its de-facto re-nationalization is probably the main focus of this attention, and the ‘friendly takeover’ of Rosneft by Gazprom (accompanied by embarrassing squabbles inside the Kremlin) was in fact a result of related calculations. Seeking to become a dominant force across the Siberian oil provinces, Gazprom has been also putting pressure on BP/TNT and Shell, demanding a share in their projects in Kovykta and Sakhalin, respectively. It is possible to note that some promising Yukos-led projects, such as the construction of a large oil terminal in Murmansk, have been abandoned just because they are associated with Khodorkovsky, but the main point here is a different one. The focus on Siberia has led to a visible de-prioritization of the Caspian direction in Russia’s energy policy and, by extension, foreign and security policies as well. Some confirmation of that can be found in the official general overviews produced by the Ministry of Industry and Energy, which by and large skip the Caspian projects, mentioning only the plans for expanding the capacity of pipelines linked to the Novorossiisk terminal and the projects for shortcuts around the Bosporus bottleneck. Even more symptomatic has been the behavior of LUKOil, which used to be the main driving force behind the Caspian expansion. In the second half of the 1990s, this company was not shy to challenge the Russian Foreign Ministry position on the Caspian problems, entering into major deals with international oil ‘majors’. Since the start of the attack on Yukos, however, it has preferred to keep a low profile. Even with such vital matters as the sale of the last package of its own shares held by the state (the not insignificant 7,5% of the stock), the LUKOil management left it entirely to the Kremlin to decide about the buyer – and has expressed undiluted enthusiasm about the choice for ConocoPhillips. The most recent assessments presented by LUKOil and its announcements concerning plans for investments are uncharacteristically reserved in the Caspian direction, with the maximum figure of 18% of the company’s total hydrocarbon production by the year 2020. In its press-releases, there is no mention of the Caspian Oil Company, formed back in 2000 together by LUKOil, Yukos and GAZPROM, for integrating their activities in the region. Overall, LUKOil is obviously eager to follow the Siberian guidelines drawn by the Kremlin and is not going to take any initiative in the politically sensitive Caspian region.

CONCLUSIONS: Rigidly centralizing political and economic decision-making, Putin’s team inevitably experiences problems with attention span and currently the Caspian problems, demanding as they are, are mostly disappearing from the Kremlin’s radar screens. Kazakhstan has clearly been selected as the key ally and business partner, so considerable efforts are periodically invested into upholding these ties and making sure that the forthcoming ‘big oil’ from Kazakhstan would be exported through the Russian pipeline system. No need in backing these cordial relations with raw power is currently seen, so the large-scale military exercises staged in the Caspian waters in summer 2002 were not repeated either last year or this year. The only political opportunity in this direction that is actively explored at the moment is a complex nuclear-hydrocarbon deal with Iran. This country is facing a potentially grave international crisis focused on its nuclear program, and Putin would love to steal a triumph of resolving it through an agreement securing the exclusively civilian character of this program and guaranteeing the return of spent fuel to Russia. Foreign Minister Sergei Lavrov tried his best to prepare such an agreement for a possible Putin’s visit before the IAEA deadline of 25 November, but the signals he has received in Tehran are lukewarm at best. The foreseeable ‘no-deal’ would probably accentuate Moscow’s disengagement from the Caspian, and many actors doing business in the region would not mind at all the absence of Russian meddling and bulling. Nevertheless, the lack of sustained attention from Moscow and the centrally-planned diversion of economic interests increase the unpredictability of Russia’s reactions in the possible crisis situations. Caspian security and development depends upon Russia becoming a major stakeholder, but Russian companies, with Yukos in mind, are not investing. AUTHOR’S BIO: Dr. Pavel K. Baev is a Senior Researcher at the International Peace Research Institute, Oslo (PRIO).