#5
The Russia Journal (US edition)
December 14-20, 2001
Missing the point on Russia's oil cuts
By Matt Taibbi

After all this time, Western reporters based in Russia still make - make repeatedly, as a matter of fact - the cardinal mistake of taking Russian official statements at face value. Whenever the government announces that it is going to crack down on corruption, half the papers in the world lead their "international" sections the next day with news of Russia's imminent "anti-corruption drive." Very often, Russian stocks actually rally at this news.

Two months later, of course, that same official who announced the corruption drive is occupying the top slot in the latest Interpol wanted poster, having embezzled the entire budget of the Mari El territory to Nauru island. This news always manages to escape the attention of editors, however.

The latest screw-up on this score was much more profound. It revolved around Russia's much-publicized flip-flop over the issue of cuts in crude oil exports.

When this story first came out, it should have been a sensation. Russia last month announced that, in response to requests from the OPEC cartel that it join Mexico and Norway among non-OPEC nations to cut exports by some 500,000 barrels a day, it was going to cut a mere 30,000 barrels. This was an outright slap in the face of OPEC; Russia planned to cut about that much anyway, and in any case, 30,000 was far short of the 150,000 barrels OPEC was hoping Russia alone would cut.

A major event

Russia's hesitation on the reduction matter was nothing short of a massing of tanks on the oil border - if they had actually followed through with their threat, a full-scale oil price war could have ensued. By almost any standard, this would have been one of the major events in the history of the petroleum business in the past 30 years, and might have revolutionized the world economy.

Last week, Russia backed off. Prime Minister Mikhail Kasyanov, apparently bowing to pressure from, among others, oil giant Yukos, announced that Russia was going ahead with the 150,000 cut. Oil prices were safe for the time being. The incident was widely reported in a tone that suggested that Russia, having flirted with a dangerous adventure, had finally come back to its senses.

The mistake reporters made with this story was to actually take Kasyanov at face value, and to misinterpret the meaning of the first threatened nonreduction. The fact is - and anyone associated with the Russian oil business will say the same thing -that Russia has never intended to cut crude production. And it never will. In an international community of quota cheaters, Russia is, hands-down, the biggest cheater of all. It has never once intentionally cut production in its entire history, and it doesn't intend to now.

Which is not to say that Russia's oil producers are not interested in maintaining high prices. They are. The question has been whether they want to be publicly supportive of that effort, even as they continue to overproduce, or whether they want to achieve their higher prices by breaking the OPEC nations and forcing them to take the burden of cuts on themselves.

In other words, the real story a month ago wasn't that Russia was making a policy shift by defying OPEC; it was that it was finally admitting that it was defying OPEC. Conversely, the decision last week to "go along" with the reduction did not mean that Russia was really going to go along; what it meant was that the country's leadership had decided to lie, for the sake of high prices. In describing the state of Yukos, Andrew Jack of the Financial Times actually came close to describing the hand Russia is holding in the oil arena:

"With a substantial cash pile and low production costs, many analysts believe that it [Yukos] could have sat out a price war, reaping the benefits as a "free-loader" once OPEC was ultimately forced to cut output regardless, further swelling Russia's revenues."

Face value

But Jack and other writers continued to report the announced cuts at face value, even adding the convincing caveat that Russia would have been likely to cut that much anyway, as it does every winter: "It was, as the Moscow brokerage United Financial Group dubbed it, 'a virtual cut,' allowing Russia to 'make a PR benefit out of its winter reality.' It was also the result of a broad consensus between the oil companies and the government, which do not always see eye to eye. "The output cut itself represents just 5 percent of Russia's production.

But it has also only been pledged for the first quarter of next year, and is almost identical to the likely drop in exports that happens every winter during that period. That drop reflects the impact of the severe Siberian winter weather on production levels, logistical difficulties in shipping oil abroad from stormy and frozen ports, and a rise in domestic demand for high-margin refined products."

Reporting like this completely misses the point of what happened last week. A month ago, Russia was ready for war with OPEC. That is the only possible interpretation of admitting publicly what you intended to do privately in any case - to actually cause a depreciation in prices, apparently with the hope of breaking the Saudis and the other OPEC countries. It was, as one analyst put it, Russia announcing that it was switching from an "oil producer to oil consumer economy."

Oil consumer countries, like the United States, benefit from low prices. It appeared to be a vote of confidence by the Russian government in the rest of the country's industry to openly slug it out with OPEC, banking on the hope that the rest of the economy would profit enough to keep the budget afloat until OPEC made its cuts.

But now, Russia retreated. And the obvious question is: Why? What happened in the course of the last month to sway Putin and Kasyanov from what appeared to be a monumental decision last month?

None of this was addressed anywhere in the Western press. It was as though the issue revolved solely around the willingness of the oil producers to go along with cuts that might reduce revenues - wheras in fact it was oil companies like Yukos that were most directly interested in not confronting OPEC openly. Instead of "To lie or not to lie," what we got was, "To cut or not to cut."

Though there are many people (including myself) who believe that it would be a great thing for Russia to intentionally enter into a price war, there is also the fact that it might simply happen of its own accord. That would be the result of an inability or an unwillingness among the Russian oil companies to police each other at all.

It may be that Russia's oil powers are simply so greedy and so disorganized that they would be unable to cut production even if they wanted to. If this is true, and I think it is, it could start a price war, if reporters chose to advertise the situation. But judging by their performance last week, that is never going to happen. All Russia will ever have to do is say it is going to make a cut - and with reporters like these, that will be as good as the real thing.

(Matt Taibbi is editor of the Moscow-based eXile alternative newspaper.)