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Russia's Complex Situation
And Putin's Leak To The West
by Joe Duarte
January 13, 2004
Originally posted on 12-30-03 at www.joe-duarte.com

Our views on the potential for a merger between the Russian and U.S. oil industries are well known to regular readers. Since the initial research for “Successful Energy Sector Investing,” we became convinced that by some sort of necessary and fairly natural fit, the U.S. and Russia should combine oil industries, with American know how and technology serving as the perfect complement to Russia’s vast natural resources.

But, the surprising arrest and subsequent dismantling of the Russian oil industry by the Kremlin, and the arrest of major oligarch Mikhail Khodorkovsky, changed everything.

What seemed as a potential fast track deal between Exxon Mobil or Chevron Texaco, and the until recently merged Russian majors, Yukos and Sibneft, suddenly became a jumbled mess of seizures, arrests, and heated words between the White House, the U.S. State Department, Senator John Mc Cain and Russian counterparts.

With the Russian parliamentary elections also taking up President Putin’s energies, much of the news coverage also tilted in that direction.

Thus, when we noted a comprehensive article in the Moscow Times, we immediately dug in, and found a mother lode of information that will likely color our perception of U.S. Russia relations in the coming months, and perhaps years.

The Kremlin’s Leak

The Moscow Times, on 12-30-03 produced an interesting article titled “Kremlin Reloads After Shot At Yukos.” The article is so detailed, and well documented, that it is almost certainly a well crafted leak, largely influenced by the Kremlin in order to explain its position to the United States and the global oil companies with regards to the arrest of former Yukos CEO Mikhail Khodorkovsky.

Since Khodorkhovsky’s arrest, relations between the White House and the Kremlin have clearly cooled, as has the pace of mergers and potential mergers between U.S. and Russian oil companies, a fact that has the Bush administration steaming by many accounts, including the Moscow Times which describes the current situation as one in which the U.S. responded with “shock and horror.”

But, in fact, as we carefully scanned the article, we got the impression that one of our predictions for 2004, issued in this space on 12-29-03: “Russia’s Putin will attempt to move closer to Bush and the U.S. oil industry after his re-election in March,” was right on the money. In fact, it would seem that the careful attempts at explaining the complex political situation in Russia, in the article, from Putin’s point of view.

The Reason For The Arrest

In our view these are the lines that set the stage for Putin’s explanation: ["Putin's aim is to restore the state,"] said Dmitry Rogozin, a Putin envoy and co-leader of the populist-nationalist Rodina bloc, which rode an anti-oligarch platform into the State Duma earlier this month. ["The state was very weak under (former President Boris) Yeltsin. It was filled with oligarchs that dictated their will to a puppet leader, which also left Russia weak in the global arena. Now a trend has been set in motion that is making Russia more of an equal player."]

Not much need for translation, in fact Putin seems to be setting the stage to negotiate from a position of strength, and in no uncertain terms, is responding to what is being perceived by the Kremlin as an increasingly hostile tone coming out of Washington. The Times gave the following example as a sign of Washington’s frustration: “In a wide-ranging interview earlier this month with Moskovskiye Novosti, a Russian weekly owned by Khodorkovsky, U.S. Ambassador to Russia Alexander Vershbow, who has roundly criticized the handling of the Yukos affair, urged Russia to make up its mind on whether or not it would build a new pipeline to Murmansk. The project, which Khodorkovsky aggressively lobbied for, would allow Russian tankers to directly feed America with crude. {"It's time [for Russia] to make a principle decision on building a pipeline to export oil to the U.S.," Vershbow told the paper. "Otherwise you risk losing the chance of becoming a major supplier of energy resources for us." ]

The Times also noted that “Vershbow's comments followed similar remarks made by U.S. Commerce Secretary Don Evans, who told the U.S.-Russian Investment Symposium at Harvard last month that Russia ["needs to pick up the pace on making decisions"] about new pipelines.”

Which brings us to the crux of the problem. Putin is still interested in making deals with U.S. oil companies. But he wants to make the deals in his own way, following his own timeline. The U.S., which is desperately trying to diversify its oil supply away from OPEC, where terrorism risk and political instability are the rule of the day, is not interested in cloak and dagger scenarios and leftover Cold War perceptions. The U.S. just wants to make deals and move on.

But, Putin is not ready yet. If you read between the lines, Putin and the Kremlin are trying to set the record straight prior to the March 2004 presidential election. Thus, the Moscow Times article is aimed at local consumption, while at the same time airing out the Putin position for high level Western observers and players.

Diverging Points Of View

In fact, the Moscow Times article, in great detail, begins to break down the perceptions of the West with regard to Khodorkhovsky: “To hear the West tell it, the downfall of Russia's richest man was nothing more than political payback for his funding of opposition parties and blatant attempts to buy seats in parliament. But evidence suggests there is more to the story, including questions of Khodorkovsky's allegiances.”

From the Kremlin’s point of view, the article seems to intimate, that Khodorkovsky, was in a sense committing treason. Here is how Catherine Belton, the reporter who wrote the story summarized it, highlighting the role of Putin’s right hand, the siloviki faction inside the Kremlin: “Khodorkovsky has spent years pursuing what is essentially a personal, pro-American foreign policy, cultivating contacts with the most influential politicians, diplomats, bankers and public relations specialists in Washington -- actions the siloviki, a group of hawks in the Kremlin made up of former KGB men, consider reprehensible.”

Indeed, Khodorkovsky had been placed at meetings with Pentagon brass and even Vice President Cheney in the weeks prior to his arrest. If we follow the Kremlin logic, then it makes sense to have arrested Khodorkovsky, as from their point of view, he was attempting to make deals that did not include the government.

Thus, we gain further insight into Putin’s strategy, and see why, in his and the siloviki’s view, they had to act: “the siloviki see Washington's role as the world's sole superpower as a threat to Russia and are determined to reclaim the global clout once enjoyed by the Soviet Union. Compounding this perceived threat are Khodorkovsky's efforts to endear himself to the White House.”

The Clinton Connection From The Kremlin’s Viewpoint

An even more direct warning from the Kremlin could be heard in the following statement regarding Khodorkovsky’s faux pas: “The Washington Post reported last week that shortly after his arrest, Khodorkovsky bought the lobbying services of Stuart Eizenstat, a Washington lawyer who held several top posts in the U.S. government under President Bill Clinton -- deputy treasury secretary, undersecretary of state for economic affairs, undersecretary of commerce for international trade, and U.S. ambassador to the European Union. Eizenstat told the Post that he intends to build ["U.S. government support for the rule of law in Russia, specifically in connection with actions taken by Russian authorities against principals of Group Menatep and Yukos."]

The article noted that many inside Russia believe that the U.S. played a significant role in the privatization programs of the 1990s, which set up the oligarchy that Khodorkovsky was at the forefront of. Then it continues by making fairly pointed connections between Khodorkovsky and the Clinton administration by noting that former Russian key player Anatoly Chubais, “the man chiefly responsible for Khodorkovsky's vast wealth,” and “the architect of the rigged loans-for-shares scheme by which many of the state's most valuable assets were sold for a song, was a key ally of the Clinton administration.”

Next, an unnamed source told Belton that Chubais “studied under former Clinton-era Treasury Secretary Larry Summers at Harvard in the late 1980s, according to one insider who has known Chubais for years. He was also on the U.S. government's payroll via agencies like USAID that helped fund Russia's early privatization program, the source said. Although the Clinton administration eventually condemned the loans-for-shares scheme, it had come to view many of the same robber barons as the guardians of pro-market and pro-Western values by the time Russia emerged from its devastating 1998 crisis.”

By revealing to the world, through this article that Russia is not going to let the days of what it claims was Clinton White House influenced shenanigans, Putin is sending out a mixed message to the White House. Yes, I’m still interested. But no, we’re not going to let you do what your predecessors did.

Respecting The Russian Military

President Bush has not made any public comments. But according to the Times: “Bush has raised the Khodorkovsky issue with Putin in at least two phone calls this month, something Kremlin watchers in Moscow called untoward interference in what should be an internal affair.”

Thus, it seems that Mr. Putin thinks that this time is different.

Nevertheless, it may not be so different, as it all comes down to the military, which may be the reason why, at least on this issue, maybe the Bush and Clinton administrations agreed on at least one fundamental point, Russia‘s military. As the Times notes: ["The siloviki seem to want to take back control of oil revenues so that they can build up the military industrial complex as they did in Soviet times. They're saying let's go back to the good old days,"] said Marshall Goldman, associate director of the Davis Center for Russian and Eurasian Studies at Harvard University and author of ["The Piratization of Russia: Russian Reform Goes Awry."]

Conclusion

We believe that this article was carefully crafted with significant input from the Kremlin, and that its goal is to let the White House know why the Russian government has conducted itself in the manner that seems to have set Democratic reforms back.

We also believe that a key part of the message is that there is no going back to the full blown Democratic situation in Russia where the oligarchs ruled with little government intervention.

Finally, Putin knows that it will take time for all of this to be sorted out by the U.S.

It is interesting though, that Putin met with Bush envoy James Baker a few days before this article was published, suggesting that maybe, just maybe, the White House may have had a small knowledge that it was coming.

Perhaps the biggest hint that Putin is trying to move toward agreement with Bush is the blaming of the Khodorkovsky arrest on the influence of the Clinton administration. By using Clinton as a scapegoat, Bush and Putin can throw the dirt on someone else and get on with doing bidness.

© 2004 Dr. Joe Duarte
Dr. Duarte's Bio and Archive

Joe Duarte, M.D.

Joe Duarte M.D. is founder and Editor in Chief of Joe-Duarte.com. Dr. Duarte is a board certified anesthesiologist, a registered investment advisor, and President of River Willow Capital Management, where he manages individual client accounts. His latest books "Successful Energy Sector Investing" and "Successful Biotech Investing" (Prima/Random House) are available on line at amazon.com, barnesandnoble.com, borders.com, Traders Press, and all major online and brick and mortar bookstores in the U.S., U.K. Europe, and Australia. Dr. Joe Duarte’s Daily Market I.Q. is a subscriber service that provides daily intelligence, trading strategies, and technical analysis at www.joe-duarte.com.