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Toni Schönfelder
A lifetime of innovation

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Toni Schönfelder
A lifetime of innovation

Russia Formulates a Hybrid Economy Summary Over the past week the Kremlin has announced a series of impending privatizations across the Russian oil industry, including a 4 percent share in Russia's largest oil firm, Lukoil. On the surface, it seems that Russia under President Vladimir Putin is moving boldly in the direction of Western style economic reforms, but this is a misconception. While Putin's economic reform plans indeed call for liberalizing and reducing central control over large sections of the Russian economy, the petroleum industry will experience a different type of reform. Market forces will be allowed to play a greater role in Russia's petroleum industry, but Moscow will maintain firm central control. Paradoxically, Russia's move to "privatize" conceals steps toward nationalization, steps that will create a hybrid economy. Analysis Market analysts are hailing Russia's new oil industry privatization scheme as a Western oriented reform. The privatization plans should raise $0.9 billion to $1.4 billion for the federal government - more than triple last year's total - and include sales of stakes in Russia's largest oil firm, Lukoil. But this is not the pro-market action many Western observers believe. Moscow is not giving up control. Foreign investors will be allowed to invest cash and technology in Russia's petroleum infrastructure, increasing its viability and productivity. But Moscow will maintain a chokehold on the political decisions of which company will export what oil to what market. For example, Moscow plans to sell the entirety of its 85 percent stake in the small oil firm Onako. But the Russian oil firms that have expressed an interest in purchasing it - Lukoil, Yukos and Sibneft - are partially government owned. Onako's most valuable holding is a refinery on the border with Kazakstan - far too strategically valuable to be allowed into foreign hands. ___________________________________________________________________ Would you like to see full text, graphics and accompanying articles?" TARGET="_new">"> ___________________________________________________________________ Other privatizations, while allowing the possibility of foreign ownership, are not nearly as comprehensive as the Onako sale. Russia plans to privatize 19.68 percent of Slavneft, and 25 percent of Rosneft - both oil firms. The sales still leave the government with majority control. These partial privatizations will bring in needed capital and perhaps even some new technology, but Moscow has no intention of giving up its grasp on its lucrative petroleum sector. In fact, decisions regarding the rumored privatizations of Russia's single largest company - and source of tax income - Gazprom, have been delayed until next year, according to State Property Minister Farit Gazizullin. In fact, rather than relaxing its grip on the petroleum industry, Russia is consolidating the industry under a firmer hand. All of Russia's oil must reach Russia's oil pipeline network before it can be exported. Putin recently transferred the power from the oil companies to the Fuel and Energy Ministry to coordinate exports on these pipelines. This grants the federal government direct control over the amount of oil each firm can export; thus the government controls the income of each firm. Once completed, the Fuel and Energy Ministry can easily funnel foreign investors to the handful of firms it dominates. ___________________________________________________________________ For more information on Russia, see:" TARGET="_new">"> For more information on Kazakstan, see:" TARGET="_new">"> _______________________________________________________________ This is part of a coordinated effort to lock down control of the energy sector. On May 11 the Russian Tax Ministry initiated proceedings against 27 smaller Russian oil firms for tax arrears. If the Tax Ministry - which is cooperating with the Fuel and Energy Ministry - gets its way, those firms will lose the ability to export until the back taxes are paid. But Russia's oil companies - especially those with no foreign connections - are cash-poor. Most of the boom from the recent high oil prices has flowed directly into the Kremlin's coffers as export taxes. Many of these smaller firms will be unable to come up with approximately $125 million they collectively owe the government. Like Onako, they will be snapped up by the larger oil concerns bound by an increasingly tight government leash. This manipulation of tax policy and export quotas casts the government in a gate- keeping role. Market forces and investors handle the industry's day-to-day operation, but Moscow keeps the hammer poised. This wave of privatization and nationalization is coming at an opportune time for Russia. Kazak Prime Minsiter Kasymzhomart Tokayev announced May 10 that his country located a new oil field in the Caspian, reported Reuters. This east Kashagan field could hold as many as 30 billion barrels of oil - by far the largest discovery of the post-Soviet period. Currently, almost all Kazak oil is transported through Russia. Once the massive export pipeline from Tengiz, Kazakstan, to Novorossiysk, Russia, is completed next year - a pipeline that Russian interests dominate - this trend will be further entrenched. Beyond the oil industry, the Russian government will have a more market-oriented approach - but not totally. Privatizations will sweep through most of the 30,000 state-run companies as the government partially withdraws from the economy, but there is little danger of them ever being fully privatized. According to Igor Shuvalov, head of the Federal Property Fund that oversees privatization efforts, "We propose selling small packages of shares in those companies while keeping control in the state's hands," reported the Moscow Times. However, Russia has no such plans to relinquish its grip on the oil industry.

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