To ensure the continuation of the privatization process, Potanin along with most of the other oligarchs used his bank to finance Yeltsin’s presidential campaign effort. They all worked together to defeat Yeltsin’s main rival and critic of the privatization process, Gennady Zyuganov, head of the Communist Party. As a reward for his support, in August 1996, after the election, Yeltsin appointed Potanin first deputy prime minister. After a short time, however, Potanin left office in March 1997 to go back full time into business. He did not return empty-handed. With the help of his Loans for Shares program, Potanin ended up owning twenty former state enterprises. These included not only the petroleum company Sidanko, which in late 1997 joined in a partnership with the British firm BP, but in an equally good deal, he won ownership of Norilsk Nickel, a company that produces one-fifth of the world’s nickel, two-thirds of its palladium, and one-fifth of its platinum. As the profits of his company INTERROS began to grow, he expanded it into foreign markets, including the United States. There it bought up the QM Group, a nickel-producing company in Cleveland, and Stillwater Mining, a palladium and platinum producer in Montana.14
Given how low the price of petroleum and ferrous and nonferrous metals was in the 1990s, ownership of these Russian companies did not always look like the bargain it would become once commodity prices began to rise and oil prices hit $30 a barrel or more. Yet even in the mid-1990s, when prices were low, there was a growing awareness that the Loans for Shares scheme benefited an opportunistic and unscrupulous few at the expense of the state. More than that, the victors frequently quarreled among themselves and on occasion settled their disputes with mayhem and occasionally murder.
PLAYING HARDBALL
None of the oil oligarchs was willing to give a potential challenger the benefit of any doubt. TNK (Tyumen Oil) was particularly aggressive. In one instance that was not widely publicized, NOREX Petroleum of Canada charged that in June 2001, TNK and its parent bank, Alfa, sent in “machine gun-toting guards” to seize the production facilities of Yugraneft in Siberia. NOREX insists that at the time, it owned 60 percent of the shares of the company and that it, not TNK, was the governing partner in their joint venture.15 TNK has justified its decision to send in its armed guards by claiming “that NOREX’s capital contribution in the form of ‘know how’ had been improperly valued.” In other words, NOREX did not own as large a share of the joint venture’s capital as it claimed. Using that as a justification, TNK argued that NOREX was obligated to surrender its operating control of Yugraneft.16 Since NOREX refused to yield control, TNK says it had no choice but to send in its armed persuaders.
In much the same spirit and in another equally brazen move, TNK also decided to take over ownership of the Chernogorneft oil fields in West Siberia. TNK wanted these fields because they were adjacent to TNK’s big Samotlor Field. It made sense to combine these two fields to prevent one company from attempting to draw oil from underneath its neighbor’s reservoirs. When that happens, the pressure is reduced and output in both fields is less than it otherwise would be. At the time Chernogorneft was owned by Potanin’s Sidanko and Potanin’s new junior partner, the U.S. oil company, Amoco, to which he had sold a 10 percent interest. Amoco in turn was purchased a short time later by BP.17
To gain control of Sidanco and its Chernogorneft fields, in October 1998 TNK arranged for a minor creditor to sue Chernogorneft in a provincial court for an unpaid bill of only $50,000. Two months later the local bankruptcy judge declared that because it had not paid this bill, even if a trifle, Chernogorneft was indeed bankrupt. (Once a company is declared bankrupt, it is too late for the parent company to try to pay off the debt.) The judge then assigned its assets (which were more than adequate to pay off the rather trivial $50,000) to a creditor who turned out to be a front—surprise, surprise—for TNK. The suit did nothing to enhance Russia’s reputation for adherence to honest and ethical business codes, especially when it became known that the bankruptcy judge was an appointee of Leonid Roketsky, who at the time was governor of the Tyumen Region. That was not the problem. The problem was that in his off hours, Roketsky also just happened to be the chairman of TNK. Simultaneously, a straw subsidiary of TNK bought up 60 percent of Chernogorneft’s debt. By the time the judge was finished, TNK had become Chernogorneft’s effective owner. As a result, BP had to write off $200 million of its investment in Sidanco.
Seeking revenge, BP launched an attack on TNK that eventually involved both Madeleine Albright, then the secretary of state, and Dick Cheney, then the CEO of Halliburton, the petroleum service company. In an effort to enhance its productivity in its oil fields, TNK signed a $198 million contract with Halliburton for the purchase of its services and access to more advanced technology. To finance this, Halliburton and TNK applied for a loan from the U.S. Export-Import Bank in Washington. Angry that an official agency of the U.S. government had agreed to underwrite what it viewed as the theft of its property, BP protested to Secretary of State Albright, who found a way to abort the loan. After some bitter recriminations on both sides, however, BP and TNK kissed and made up, and in August 2003, in the presence of Vladimir Putin and British Prime Minister Tony Blair, the heads of both companies agreed to form a TNK-BP 50/50 partnership that would operate TNK’s assets under BP management within Russia. BP later encountered some problems as the Russian government adopted a more hostile attitude toward foreign involvement in the Russian energy sector, especially in cases where foreigners own as much as 50 percent of the venture. Despite occasional statements to the contrary, Putin made it very clear that while he was happy to have foreign investors put their money in Russian energy companies, he did not want foreigners running them. In September 2007, he made it explicit, complaining that too many foreigners were managing Russian companies. Reflecting that same xenophobia, there were widespread rumors that Putin would arrange for the state to buy out TNK-BP’s Russian partners.18 Then once it owned 50 percent of the TNK-BP venture, the state would move to reduce BP’s share to below 50 percent or push it out completely. Dick Cheney, of course, went on to become vice president under George W. Bush. Before long, he found himself being blamed because the United States had become mired in Iraq, so neither TNKBP or Cheney has lived happily ever after.
PETROLEUM OUTPUT DECLINES
Such infighting did nothing to advance the interests of the state or petroleum production. For eight years oil production continued to decline. By 1998 it was about 60 percent of what it had been at its peak. In desperation to break out of the yearly decline and in an effort to spark new output, just as it had seventy years earlier, the Russian government grudgingly allowed foreign companies such as BP to acquire an equity in Russian energy ventures, especially as it sought to develop some of the more remote offshore and Arctic locations. To make it worthwhile for Western companies to tackle the very difficult working conditions offshore near the island of Sakhalin and in northern Siberia, fields that required technology that Russians companies lacked, the Russian government agreed to sign three Production Sharing Agreements (PSA) with foreign companies, something it had been reluctant to do earlier. A PSA is more attractive to an oil company than a regular operating agreement because it allows the oil company to recoup all of its costs before it has to share any profits with the state. For the same reason, states do not like to make such concessions because they feel they should share immediately in the resulting revenue.