From pump to Putin

Wheel of Fortune: The Battle for Oil and Power in Russia, by Thane Gustafson, Belknap Press, RRP£29.95/$39.95, 672 pages

In no other big economy do oil and gas play such a vital role as in Russia. They account for two-thirds of its exports, half its budget revenues and nearly one-third of economic output. In a real sense, the history of Russia’s oil industry since the collapse of communism is the history of the country itself.

There can be few better guides to this terrain than Thane Gustafson, a professor of government at Georgetown University who has been studying Russia and global oil for more than three decades. His Wheel of Fortune stands out amid a series of recent books on Russia, combining meticulous research with a storyteller’s gift. It bears comparisons with The Prize, the monumental history of the global oil industry by Daniel Yergin, a colleague of Gustafson’s at the consultancy IHS Cera and a sometime co-author.

Wheel of Fortune is, in reality, several books in one. It describes the Soviet-era oil “generals” who, in Gustafson’s phrase, pulled the industry up by its bootstraps, building the world’s biggest oil producer. It recounts the clash of cultures as these generals were confronted, after the collapse of communism, with western oilmen and their lawyers, PR men and bankers. It recalls vividly the sometimes bloody scramble for assets between these oil generals, western companies, Russia’s embryonic “oligarchs” and the mafia. The backdrop was weak governance and laws that could change overnight.

Some Soviet oilmen, such as Vagit Alekperov at Lukoil and Vladimir Bogdanov at Surgutneftegaz, were quick to adapt, carving out oil companies that are still Russia’s second and third-largest producers. Others were outsmarted by post-Soviet moneymen such as Mikhail Khodorkovsky at Yukos and Roman Abramovich at Sibneft.

Here, too, is one of the best accounts of Khodorkovsky’s transformation of Yukos. A swashbuckling cameo is played by Oklahoman oil veteran Joe Mach, who used computer wizardry and techniques such as “fracking” to boost underperforming wells. He helped double Yukos’s production in five years.

But as Gustafson notes, Khodorkovsky’s insight was that the way to make real money was not by selling oil but by boosting the Yukos stock price. He turned it into Russia’s first company run on broadly western lines – and himself into Russia’s richest man. Shredding the Soviet-era rule book made Khodorkovsky a dangerous maverick long before he clashed with President Vladimir Putin over his political ambitions.

Khodorkovsky’s imprisonment in 2003 ushered in a new stage. Most of Yukos was absorbed by what was once the runt of Russia’s oil industry, state-controlled Rosneft, and Sibneft – with Abramovich’s compliance – by state gas monopoly Gazprom. This reconsolidation has, however, left Russia’s oil industry ill-shaped for its coming challenges.

Perhaps the book’s most powerful element is a warning on the outlook. Russia has for too long relied on running down Soviet-era “giant” fields in western Siberia. Without reform, Gustafson says, oil output could start falling by 2015, and with it the “rents” that underpin the whole system of “Putinism”.

Avoiding that decline will mean rethinking taxes that act as a disincentive to invest in new fields. It means venturing into the depths of the Russian Arctic and opening up the industry to the innovative companies that can crack open Russia’s plentiful reserves of shale oil and gas.

That should make Gustafson’s book required reading for Russia’s leaders, too; a Russian edition is forthcoming. Sadly, given the state of US-Russian relations more than two decades after those Soviet-era oil generals first downed vodka shots with their western counterparts, it seems unlikely that his expert advice will reach those who need it most.

Neil Buckley is the FT’s eastern Europe editor

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