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Last Updated: Tuesday, 6 July, 2004, 14:47 GMT 15:47 UK
Yukos: Russia's policy battleground
Mary Hennock
BBC News Online business reporter

Russian oil wells
Russia's growth is driven by oil revenues

Russia's policy makers have pledged to lessen its economic dependence on its oil and gas industry.

One slogan - "Take Russia off the oil needle" - speaks in terms of curing an addiction, says Maria Lipman, working as a political analyst at the Carnegie Endowment think tank in Moscow.

The growing crisis at Yukos, the country's second biggest oil group, serves to underline Russia's continuing dependence on its oil industry.

But pressure to diversify is weakened by powerful feel-good factors. Record world oil prices are bringing strong growth, a healthy trade surplus, higher wages, and even bigger pensions from fattened state coffers for some of the poorest Russians.

Russia supplied 11.4% of world oil last year, making it the biggest single source after the Opec cartel.

The official figures say oil makes up 9% of Russia's gross domestic product, but the World Bank believes that widespread corporate tax doging masks a real figure of closer to 25%.

Too big to go bust?

Yukos alone accounts for 4% of Russia's economy. With daily output of 1.7 million barrels, it supplies nearly as much as Opec has promised in extra output to cool red-hot world oil prices.

Police outside Yukos's Moscow headquarters
Tax officials are not negotiating with Yukos

The firm says a looming $3.4bn back tax bill confirmed in court last week could force it to go bust. Since then, tax ministry bailiffs have frozen its bank accounts and delivered a demand for a further $3.4bn for 2001.

Yukos' worried foreign bankers then weighed in with a bankruptcy order to recoup loans of $1bn.

Yukos's chairman last week painted a doomsday scenario, warning that it may have to halt production.

Few analysts expect anything so drastic because the economic pain for Russia and the world would be too great. But they do fear that the brinkmanship between Yukos and the government could slip out of control and tip the company into bankruptcy.

Speculation centres on which assets Yukos will be forced to sell, and whether the process will end up prising control of Yukos away from jailed ex-CEO Mikhail Khodorkovsky's investment firm Menatep Group.

One option - renationalisation - would reduce Yukos's efficiency, said Zarko Stefanovski, senior oil analyst at Aton brokerage.

Most Russians see the embattled oil giant's fate as political retribution for Mr Khodorkovksy's support for liberal opposition parties ahead of the December 2003 elections.

Stability 'at risk'

Viewed from outside, the Kremlin's pursuit of Yukos risks frightening off investors, according to the World Bank's chief economist in Russia, Christof Ruehl.

Traders at the Troika Dialog brokerage in Moscow
Investors dislike unknowable risks

"The stability which has been so successfully established is being eroded," Mr Ruehl told a recent news conference.

The World Bank's June report on Russia found the Yukos affair had left its "first visible imprints" on financial markets and capital flows.

Overall, Russians are enjoying their best boom times since the rouble crisis of 1998, which stifled the significance of foreign investment.

Stephen O'Sullivan, head of research at the United Financial Group (UFG) brokerage in Moscow, believes foreign investors are flocking take a look but "holding fire" on investment decisions.

Seeing one of Russia's biggest companies raided, and the Tax Ministry's reluctance to negotiate is making them edgy.

"The precise letter of the law does seem to being applied (to Yukos), but how it is being applied still leaves investors nervous," says Mr O'Sullivan, picking his words carefully.

"People now have a concern about property rights, and making sure their partner is not someone who's going to fall foul of the authorities."

Rolling out the barrel

Russia is enjoying heady times and high levels of investment, not least because its oil fetched 20% more per barrel in the first five months of this year than in the same period of 2003.

Russian workers protesting over unpaid wages
Protests over unpaid wages have become rarer

First quarter growth hit 7.4%, while industrial output grew by 7% from January to May, the World Bank's June 2004 report said.

"Growth is clearly spreading beyond the oil and gas sectors," it said. Expansion in machine building was the main force behind manufacturing growth, while industrial investment climbed 12.8% in the first five months of 2004.

But this glowing picture of diversification quickly cracks on inspection. Oil remains centre stage. Even gas output is stagnant, up 3.1% at state monopoly Gazprom.

The steepest growth rates in industrial production since 2000 turn out to be due to a boom in railway car building "to circumvent bottlenecks in the state-run pipeline system" for oil exports.

Populist politics

The flourishing market economy, however, has not resulted in public sympathy for Russia's so-called oligarchs - people like Mr Khodorkovsky, who made fortunes buying state assets cheap in the 1990s. Just 100 people own a quarter of Russia's wealth, according to Forbes magazine.

In fact, President Vladimir Putin's anti-oligarch campaign has proved extremely popular.

"The Russian new rich were never appreciated in the new Russian society and have always been looked upon as having enriched themselves at the expense of the Russian people," says Ms Lipman.

Mikhail Khodorkovsky (left) and Platon Lebedev in court
Russians have little sympathy for Mr Khodorkovsky

Since the anti-Yukos campaign began a year ago, big businesses have come to be "seen as sinners who need to atone, but the price is never given". Popular anger is directed at Russians rather than foreign investors.

They may have little reason to worry about picking the next Khodorkovsky as a business partner. Caution reigns.

"Big business feels very insecure," Ms Lipman says. "Nobody can be certain he can avoid the fate of Yukos...they are afraid to come together."

Meanwhile, pledges to privatise land, health and education and reorganise state monopolies go unfulfilled.

There remains a "reform gap" between the Kremlin's reform agenda and the reality, the World Bank says.

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