Russian oil. Thou shalt not steal

Date: 27/05/06

Western investors should not endorse the Kremlin's rapacity

THE first time the Kremlin privatised Russia's oil industry was a tragedy. Capitalism was shamed as Mikhail Khodorkovsky and other "oligarchs" grabbed giant firms in rigged auctions in the 1990s. Under Vladimir Putin history has repeated itself as farce. The Kremlin's campaign against Mr Khodorkovsky and Yukos, once Russia's leading oil firm, has been economically damaging and politically embarrassing. The final act in this sordid drama will be the listing by Rosneft, a state-owned oil company that bought most of Yuganskneftegaz, Yukos's main subsidiary, through another dodgy auction at the end of 2004. Rosneft and the Kremlin are hoping that the listing, due in July, will legitimise their tactics and their hold on the assets. Western investors should not oblige them.

The Kremlin's behaviour towards Yukos was wrong, extra-judicial and bad for Russia. There was a case for seeking some sort of compensation for the huge discounts and exorbitant profits that Mr Khodorkovsky and others had enjoyed. And there was a certain poetic justice in the way Yugansk was renationalised. But poetic justice is not real justice. If it is ever to become a democratic country with a functioning market economy, Russia needs stable property rights and an impartial legal system--just what Mr Putin promised when he came to power. Instead, he made an example of Yukos, overseeing a capricious application of the law that reversed improvements in the judiciary and fostered corruption. The pursuit of Yukos also transferred a mainstay of the economy from what had become an efficient private business to opaque state control.

As forlorn minority shareholders in Yukos can attest, western investors would also benefit from property rights and decent courts in Russia. Still, when a chunk of Rosneft comes up for sale, the temptation for them to set all that aside will be strong ()see page 73. Western involvement, some may argue, could help to clean up Rosneft--which has a history of favouring insiders over everyone else--and, eventually, Russia itself. Others may conclude Russian oil is too lucrative to ignore. Indeed, if many investors abjure the listing, those who hold their noses and take the plunge might make even more money.

Rosleft

In fact, prospective buyers inclined to heed their consciences should do so--because the listing has commercial perils as well as moral ones. Contrary to appearances, political competition does take place in Russia; but it is to be found inside the Kremlin. Although the clique of advisers allied to Rosneft is now ascendant, that may change after Mr Putin leaves office in 2008. Presidential successions can have unexpected consequences, as discovered by Mr Khodorkovsky, now suffering "accidents" in a Siberian labour camp. Rosneft may face lawsuits from assorted Yukos shareholders, something the planned London listing may make easier. Lastly, there are the risks of buying into a state-controlled Russian energy company. Rosneft now says that although it belongs to the state, its management is independent and it is more single-mindedly commercial than Gazprom, the state-controlled gas giant. But the Kremlin will almost certainly determine Rosneft's strategy.

Since the fall of communism, Russian businessmen, including Mr Khodorkovsky, have repeatedly gambled on the amnesia of foreigners--betting that the greed of investors and a bit of public relations would obscure memories of malfeasance and instability. In general, they have been vindicated. Just as in Soviet times rivals and renegades were airbrushed out of photographs, Rosneft and the Kremlin are now hoping that what they did to Yukos can be erased from history. This time, the gamble should fail.

Editorial is critical of Russia's oil policy particular over the Yukos crisis.