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This article appears in the December 12, 2003 issue of Executive Intelligence Review.

Russia Moves Toward Reclaiming
Its Natural Resources Wealth

by Rachel Douglas

Will the ongoing prosecutors' offensive against Yukos Oil, and the related ouster of Alexander Voloshin as Kremlin chief of staff, foster a strategic shift in Russian economic policy and practice? That question underlies the flashier news of the moment in Russia at year's end: both the drama around Yukos' criminal troubles and its now suspended merger with the Sibneft oil company and the political skirmishes ahead of the Dec. 7 State Duma (lower house of Parliament) elections.

A reorientation of national economic policy towards national security interests, at the expense of foreign investors and domestic speculators, is consistent with President Vladimir Putin's having jettisoned Voloshin, a central figure in the so-called "Family" group that dominated Russia when Boris Yeltsin was in office.

Putin Defines 'Eurasian Nation'

Natural resources as an element of national security are the pivot of the potential change. President Putin expressed his distaste for overdoing concessions to the rules of "free trade," in a Dec. 2 address to a meeting held by Yevgeni Primakov's Russian Chamber of Commerce and Industry, with participation from the European Round Table of Industrialists and the Round Table of Industrialists of Russia and the European Union (EU). The President's press service highlighted his rejection of EU-backed demands for Russia to hike domestic fuel and energy prices, as a precondition for entering the World Trade Organization (WTO). Putin, who previously called these demands "arm-twisting," added on this occasion: "The lower prices on energy resources in Russia objectively reflect our natural competitive advantages, just as [there is] good weather in EU countries where agriculture is developed. And we do not consider it necessary to give up these natural advantages."

In the same speech, Putin stressed that he sees the efforts for Russia and Europe to share a "common economic space" as consistent with Russia's greater identity as a Eurasian power.

That Russia has already given up its natural advantages—to the fresh-baked compradors who became known as the "oligarchs" during the 1990s privatization of many industries, and to their foreign partners—is the argument made by leading patriotic economists. Among them are senior figures, like ex-Prime Minister Primakov, who have the President's ear as respected advisers.

Primakov's View

In a Nov.4 interview on Radio Ekho Moskvy, in which he assessed the departure of Voloshin as a good development, Primakov outlined what he considers some of the needed changes in economic policy.

Urging a step back from a Kremlinological way of analyzing the prosecution of Yukos ex-CEO Mikhail Khodorkovsky—the habitual national focus on "who's against whom up there at the top"—Primakov said: "Let's look at the background. There are 40 million people in the country who live in poverty, who live below the lowest subsistence level determined by the government. There are no jobs in small towns and settlements. People drink alcohol not because it's some national feature—that is nonsense—but because there is no job. Amidst all this, a small group of people has concentrated huge resources, and these resources have been going back and forth between Russia and other countries, and are not invested here in the manufacturing industry or other sectors, science, and technical progress. Instead this money gets stuck in the oil sector and doesn't really leave that sector.

"Several days ago, I read the latest issue of Forbes magazine," Primakov continued. "It listed the 100 richest people in China. Most of these people work with high technologies.... Others represent the automobile industry and construction. But in Russia it's only oil or gas.

"But why? Apparently these people have huge funds that they have acquired, not because of excellent management, but because they use resources that were given by God to all the people. And they pocket these funds. Twenty-seven percent—I have found this figure in the press—of their revenues turn into net profit in the oil sector, and 12-14% in the manufacturing industry.

"Now, this group of people; not all of them, of course—personally I think very highly of [Lukoil head] Alekperov and as a rule he does not do such things—so, this group of people uses various schemes to evade taxes. I have recently made a trip to the North, and everybody told me openly that most oil companies create subsidiaries. These subsidiaries are fully owned by these companies, but are registered either in special territorial zones where taxes are low, or in off-shore zones abroad.... Then products are sold to these enterprises at an artificially low price and these enterprises do not pay taxes to our budget at all....

"And look at the moral climate. We can't get rid of it. And the climate is as follows. I am the president of a fund that helps homeless people. This fund is a non-profit organization. We exist only on contributions from businessmen in the form of charitable support, and we extend this charitable support to children's homes not in the form of money but in the form of clothes, kitchen equipment, etc.

"All this is done under strict control of the contributors. They have a right to scrutinize everything we do to the last kopek. But the fund can raise a million dollars a year at best. At the same time everybody knows that $230 million are spent on a foreign football team [the purchase of Britain's Chelsea team, by Roman Abramovich]. So, what moral context can you talk about in this situation? ...

"I think it would now be correct to conduct some round-table discussion and ... to talk with the large entrepreneurs working, say, in the petroleum sector—not in the spirit of 'you give us back everything, and on and on.' No expropriation. And the question should not even be raised in this way.

"But there should be a serious conversation held with them. It is 27% and it is 14%. This is the lag that exists, and it is not due to management; it is due to the national wealth, due to the raw materials which are supposed to belong to the whole people.

"There are mechanisms whereby all this can be taken away."

More To Come

Primakov speaks as a senior figure outside the government or the Presidential staff; but on Nov. 17, Putin's close associate and Defense Minister Sergei Ivanov said practically the same thing. Interviewed by Kommersant-daily, Ivanov chastized Russian oil companies for not investing in exploration to identify new reserves—a practice for which Khodorkovsky's Yukos has been especially notorious.

The oil being sold today, Ivanov said, "is the result of [exploration and development] work carried out in the Soviet period." As a matter of the national interest, he said, the state should supervise production and exploration levels. "The state must not lose control of the strategic sectors of the economy."

Energy and mineral resources "belong to the state; they are not private property," said the defense minister, echoing Primakov, as well as the years-long campaign by Academician Dmitri Lvov on this point.

An array of enforcement measures is on the table, some of them announced, others rumored by government and Kremlin officials, and in the press.

In the wake of Khodorkovsky's arrest, the usually liberal Finance Minister, Aleksei Kudrin, promised to close the tax loopholes exploited by Yukos. The government went to the Duma about closing the internal low-tax zones—the ones Primakov referred to—and to lift a ceiling on oil export duties. Raw materials analyst John Helmer, in a series of articles published in November in The Russia Journal and the Asia Times, reported hints at reviving a plan circulated last year by Dmitri Kozak—who has just been promoted to first deputy chief of staff for Putin—to change the ownership of raw materials in Russia. It would keep energy resources and minerals in the status of state property until they are sold, rather than their becoming the property of the extracting company as soon as they are above ground, as is the case now. There would be a greatly expanded possibility for taxation and licensing fees.

Fraught with even farther-reaching implications was the proposal by Deputy Prosecutor General Vladimir Kolesnikov, at a Nov. 12 conference on combatting pirated goods, that Russia's Central Bank should "become a state agency, subordinate to the government or the President of the country," rather than modelled as an independent institution.

"The Central Bank ought to be supplying the circulatory system of the economy with money," said Kolesnikov, who is the point-man for the Yukos affair of the Prosecutor General's Office.

Rodina's Campaign

In the Duma elections, the question of natural resources ownership, and benefit from them, has been put center-stage by the Rodina (Homeland) bloc, led by economist Sergei Glazyev. His election billboards feature the slogan, "We shall return the country's wealth to the people."

On Nov. 24, the Chamber of Commerce and Industry hosted a roundtable discussion on "natural rent," meaning the wealth derived from the exploitation of natural resources. Co-sponsoring the event was the Committee for the Defense of Russian Citizens' Rights to National Natural Resources," founded last June by Glazyev and Academicians Lvov and Zhores Alfyorov, the Nobel Laureate in Physics. Glazyev, Lvov, and Primakov all took part, as well as other scientists, Duma members, and regional leaders.

The Committee released a new open letter to President Putin, which noted that 88% of the Russian population believes the oligarchs' fortunes were ill-got. The letter called on the President to support Glazyev's new bills in the Duma, including the Federal government's responsibility for the welfare of the citizens, and a package of measures for the taxation of oil profits and the collection of "natural rent."