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The Russian oil industry—which vies with Saudi Arabia as the world’s largest producer and exporter of oil, providing nearly 12 percent of the global supply—is facing mounting problems that could send shock waves through the Russian economy and worldwide. Wheel of Fortune provides an authoritative account of this vital industry from the last years of communism to its uncertain future. Tracking the interdependence among Russia’s oil industry, politics, and economy, Thane Gustafson shows how the stakes extend beyond international energy security to include the potential threat of a destabilized Russia.
Gustafson, a leading consultant and analyst of the politics of energy in the former Soviet Union, draws on interviews with key players over the course of two decades to provide a detailed history of the oil industry’s evolution since the breakup of the Soviet Union. At its center is the complex and fraught relationship between the oil industry and the state, which loosened its grip under Yeltsin only to tighten it again under Putin. As oil becomes harder to find and more expensive to produce and deliver, Gustafson warns, Russia’s growing dependence on revenue from oil exports, along with its inefficient and often-corrupt management of the industry, is unsustainable.
A rich but troubled Soviet legacy, the conflicting ambitions of politicians and industry oligarchs, and the excesses of capitalism Russian-style threaten to lead Russia to an impasse. Involving the oil industry in the country’s modernization agenda and remaking its relationship to the state, Gustafson argues, is Russia’s best path toward a stable economy and a safer world.
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Read an Excerpt
From Chapter Four: Worlds in Collision: The Foreigners Arrive in Russia
Early on a winter morning in Calgary in 1995 I joined a planeload of Canadian drillers on their way to north Russia. Our chartered Boeing 737 had never been built to fly so far—its main virtue was that it was cheap—and it made five refueling stops as it lumbered its way across the Canadian north and over Iceland, landing in Murmansk on the Russian Kola Peninsula. There we cleared passport control and customs before flying the last leg to our destination, Usinsk, an isolated oil town in the Russian northwest, where we finally disembarked, twenty-four hours after takeoff. This is the daily life of the itinerant roughnecks and roustabouts, the foot-soldiers of the oil business, who like migrating birds, fly across half the globe to work their shifts, typically one month on and one month off, in remote places with even remoter languages and customs.
The oil industry in Alberta was still recovering from the oil-price collapse of 1986, and there were plenty of underemployed oilworkers and companies looking for new opportunities. Even before the Iron Curtain came down they had discovered Russia. As early as 1988, as Gorbachev’s reforms pried open the closed Soviet world, Western oilmen began arriving, attracted by the prospect of forming joint ventures, which Gorbachev had first authorized in 1987 as a means of attracting foreign technology. To the Albertans northern Russia looked like familiar territory: instead of muskeg the locals called it tundra, but it was the same swampy stuff, the temperature oppressively hot in summer and properly frigid in winter. The Russians played a decent game of ice hockey, held their liquor pretty well by Alberta standards, and the mosquitoes were Canadian-size. The Russian oilmen were also, as the Albertans came to recognize, men who knew their oil.
But beneath the apparent similarities lay worlds of difference, and finding common ground would turn out to be far more difficult than either side imagined. This chapter, the first of two on the foreign oil companies in Russia, tells the story of their initial arrival and difficult relations during the years of the Russian oil industry’s decline and gradual stabilization, up to the 1997-98 crash. What did the foreign oilmen contribute during those years of crisis, and what roles did they play in the rise of the new Russian oil industry?
When they entered Russia, the Western companies embodied, so to speak, modern capitalism in action. They brought with them far more efficient management and advanced technology, and radically higher standards of execution, job safety, and environmental protection, than anything seen in the Soviet Union. Along with the large international oil companies arrived a phalanx of service companies and equipment suppliers and smaller operators, not to mention law firms, financial advisors, management consultants, and other modern missionaries, who promptly set up shop in Moscow, to the fascinated amazement of the Russians, for whom all of this was wholly new.
Given the importance of oil to the prostrate economy of Russia of the early 1990s and the deep crisis in the Russian oil industry itself, one might have expected the foreign oil companies to carve out major roles, both as partners and as models, in the post-Soviet adaptation and recovery of the oil sector. But except for a handful of exceptions they have not. The same broad observation holds also for the foreign oil companies’ larger impact on Russian oil policy and legislation: they have had only minor roles in the key issues that have shaped the Russian oil industry over the last twenty years. For the most part foreign companies have been bystanders, hardly more than bit players—typically in the roles of pretexts or prizes—in a Russian passion play they could only partly follow, and over which they have had hardly any influence. The broad drivers that have shaped the post-Soviet evolution of the oil industry—the cycle of state collapse and recovery, the battle for control of the oil sector and oil rents, and the evolving relationship between the state and the industry—have hardly involved foreign players at all.
On the face of it, this is surprising. After three generations of near-complete isolation from the West, Russia had reopened itself to the outside world. Russia’s overthrow of the communist system and the end of the Iron Curtain made Russia initially quite receptive to new ideas. Rejoining the global mainstream had a powerful appeal: one of the phrases heard most often from Russians in those years was that Russia would at last become “civilized” (tsivilizovanno), a “normal country,” by which they meant, among other things, a two-way open street.
Table of Contents
1 The Breakup: The Soviet Oil Industry Disintegrates 30
2 Riding Chaos: The Battle for Ownership, Money, and Power 63
3 The Birth of the Russian Majors: LUKoil, Surgutneftegaz, and Yukos 98
4 Worlds in Collision: The Foreigners Arrive in Russia 145
5 The Russian "Oil Miracle": 1999-2004 185
6 The Brothers from Saint Petersburg: The Origins of Putin's State Capitalism 231
7 "Chudo" Meets "Russian Bear": The Yukos Affair 272
8 Russia's Accidental Oil Champion: The Rise of Rosneft 319
9 Krizis: The Rude Awakening of 2008-2009 and the Russian Oil-Tax Dilemma 359
10 Strong Thumbs, Weak Fingers: How the State Regulates the Oil Industry 382
11 The Half-Raised Curtain: The Foreign Companies as Agents of Change 411
12 Three Colors of Oil: The Coming Crisis of Oil Rents 449
13 Looking Ahead: Oil and the Future of Russia; Russia and the Future of Oil 480