Kremlin Kills Plan To Retake Resources

The Kremlin has rescinded plans to renationalize the country's natural resources in the latest stage of an ongoing battle between oil companies and the presidential administration.

A working group led by Dmitry Kozak, deputy head of the presidential administration, revised its recommendations to amend the federal law on subsoils, local media reported Friday.

The group, comprised of Cabinet representatives and Russian Academy of Science members, floated a proposal last month to revamp the licensing system and expand the government's rights to oil and minerals. It had recommended that the government hold on to these resources even after their extraction.

Current law states that subsoil minerals are government property only until they are taken from the ground.

News of the initial plan spooked investors, who feared the specter of state-run industry had again reared its head. At the time, equity analysts were quick to reassure their clients, saying increased state control contradicted the Kremlin's policies encouraging foreign investment and economic growth.

While the revised recommendations keep the current ownership scheme in place, the nature of the struggle to define property rights underscores their precarious place in the post-Soviet economy.

"This give-and-take on nationalization is just an element of a game being played behind the scenes," said Andrei Ryabov, a political analyst at the Moscow Carnegie Center. "The concentration of power and property in these large economic and political blocks is slowing down the modernization of the economy."

Alfa Group president Mikhail Fridman and Yukos CEO Mikhail Khodorkovsky each paid separate visits to Kozak at the beginning of last week, Vedomosti reported. By Wednesday, the new version of the legislation had been sent to Deputy Prime Minister Viktor Khristenko.

The proposal, however, is not all good news for oil firms because it will increase the amount of taxes companies pay at the wellhead.

President Vladimir Putin makes no secret about his distaste for the way the nation's crown industrial jewels were privatized, but he has made uneasy peace with recent history. Shortly after assuming the presidency, he told Russia's new owners the government would not revisit privatization as long as they played by the rules.

Increasing taxes is one way of reappropriating assets without resorting to renationalization, some analysts said, and Putin might consider this a viable option as State Duma and presidential elections loom on the horizon.

Russia's budget for next year has not even been finalized, and it is already being squeezed. The decision not to privatize 5.9 percent of LUKoil on international markets means an expected $660 million to $800 million earmarked for debt payments will not materialize. In addition, it is unlikely that the government will float a sovereign Eurobond next year, leading economists to wonder how Russia will be able to make debt payments of $17 billion in 2003.

Oil sales might be part of the answer. Revenues in the draft budget are being calculated assuming that world oil prices average $21.50 per barrel next year. In the first seven months of this year, Russia's oil production increased 8.5 percent to 215 million tons.

If a budget deficit does arise, the government may be tempted to poach profits from energy and metals firms, analysts said.

"The whole story is coming down to a marginal one-off negative impact on oil company and other natural resource earnings in line with Putin's aim of increasing the state's natural resource rent," said Christopher Granville, political strategist with United Financial Group.

If the state intends to go after a bigger piece of revenues from the sale of natural resources, it will do so gradually, Ryabov said.

"Putin's popularity springs from his restoration of stability, including the stability of the elite," he said.