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. Last Updated: 07/27/2016

Oil for Sugar: Hot Fight for A Sweet Deal

Nearly two weeks ago, the results of a meeting of the Tender Committee, which decided who would be allowed to supply sugar to the Russian market in exchange for Russian oil, were placed on the desk of Prime Minister Viktor Chernomyrdin. And with this report ended -- or nearly ended -- a months-long battle for control of this extremely lucrative contract of "oil for sugar."

Russia has traditionally been a major purchaser of sugar on the world market. After the collapse of the Soviet Union, the growing regions of sugar beets ended up in Ukraine. Also, the major supplier of cane sugar, Cuba, was given an unfavorable trading status as a country that was hostile to the new, democratic Russia. But this was a very ill-considered move for a country like Russia that had an annual domestic sugar shortage of nearly 2 million tons. As a result, in 1992-93, Russia experienced something like "sugar shock": First, it disappeared from store shelves altogether, and then, when it reappeared, it was several times more expensive.

Having learned from this bitter experience, the Russian government in 1994 decided to resume supplying oil to Cuba in exchange for sugar. The contract was awarded to Menatep-impeks, which enthusiastically began work.

It soon became evident that buying sugar for state needs is a very profitable business. When it became known that the Russian government had set aside 3 million tons of oil for the purchase of 1 million tons of Cuban sugar in 1995, about a dozen private and state companies decided that they had to try to get a piece of the action.

Simple arithmetic calculations of the difference between domestic oil prices and world oil prices show that whoever gets the contract stands to make from $50 million to $100 million. One might naturally think that the government would announce an open tender in order to get the maximum benefits for the state budget.

However, in April a draft government order appeared which stated that the contract would be awarded by the Agriculture and Energy Ministries. Of course, it is much simpler to find highly placed supporters in the government than it is to compete openly with other firms.

However, competition makes the country more democratic and its bureaucrats more honest -- if only a little bit and reluctantly. Interested firms created such a noisy scandal that the draft order was never signed by Chernomyrdin.

Instead, the scandal produced another decision: to go ahead with an open tender. Twelve firms received the documentation and six made official bids. But this did not mark the end of the hidden struggle. Even after a decision was made, the Tender Committee refused to announce it to the eagerly waiting companies.

Obviously, in view of the sharp battle surrounding the contract, the committee was reluctant to make an announcement, just in case some force within the government was strong enough to prompt a "reconsideration."

Unofficial sources have revealed that two major commercial structures, Menatep-impeks and Alfa-eks, have won the contract. However, the Tender Committee's decision has sat unsigned on Chernomyrdin's desk for quite a while now. Most likely, the struggle for influence and hidden pressure continues. After all, $100 million is a lot of money.

Mikhail Berger is economics editor for Izvestia.