#6041
[Second Issue of the Day]
#3
Baltimore Sun
January 26, 2002
Soviet spirit, but with cash
Success: Russian oil giant Lukoil blends capitalism with job security and
benefits evoking an earlier generation.
By Douglas Birch
Sun Foreign Staff
USINSK, Russia - On the stage of the House of Culture, a 20-something couple in business attire raps to a karaoke beat, while a gang of other young professionals gyrates around them. "Lukoil is reliable and stable!" a blond oil specialist shouts into her microphone.
"Lukoil has the biggest tanker fleet in Russia!" declares Dmitri Nikolayev, a mining engineer.
"One hundred twenty million rubles went to social programs in the past year!" his partner proclaims.
Not so long ago, these ambitious university graduates in this remote oil town on the edge of the Arctic Circle would have been singing the praises of the Communist Party during their holiday bash. Instead, they were publicly declaring their love of their new capitalist bosses - precisely the people their parents would have been expected to despise.
It's not that Lukoil's latest crop of engineers and economists are dewy-eyed idealists. After the performance, Nikolayev explained what he really likes about Lukoil. "First of all, I have a job," he said. "And the salary is good, and it's paid on time. Also, I expect to get an apartment."
But the company, which produces one-fifth of all Russian oil, seems to expect an unswerving loyalty reminiscent of what Communist ideology once demanded. Russians, in turn, seem to want their employers to provide the kind of job security and social benefits that the state used to offer.
Lukoil President Vagit Alekperov, estimated by Fortune magazine to have a personal fortune of $1.3 billion, says he considers Lukoil's 90,000 employees as members of a big family. That family is expanding, with Lukoil purchasing Getty Petroleum of Jericho, N.Y., for $71 million last January - giving it operating rights to 1,300 gas stations in the United States.
And Alekperov probably won't stop there. He boasts that Lukoil will one day buy Exxon, and become the world's biggest oil company.
The question is, what might the world expect from Lukoil?
When the company roared into Usinsk two years ago, the town of 60,000 was desperately poor and demoralized. Eager to exploit rising petroleum prices, Lukoil poured money into operations - exploring for new oil deposits, repairing broken-down equipment and tripling the local work force. And it seemed determined to make Usinsk a company town.
First came a Lukoil service station, its red-and-white sign blazing in the sable sub-Arctic night. Then came Lukoil's corporate offices, its lobby furnished with leather couches, marble floors and a gushing fountain.
The company built Children's City, a lavish playground that features a mothballed jet plane and transport helicopter, both outfitted with rows of computers. It bankrolled the reconstruction of the town's Orthodox church and its mosque, cleared land for a new municipal park, built a bus station and started work on a 50-room luxury hotel. It runs an orphanage here and is constructing housing for its workers.
Company executives call their approach a "social partnership" with employees and the residents of the 30 regions of Russia where Lukoil operates. And they acknowledge that they are trying, to some extent, to replace some of the benefits workers lost after the fall of the Soviet Union. "Lukoil," says Vladimir Mulyak, first vice president of Lukoil's local subsidiary, "preserves the best traditions of the Soviet oil school."
Critics say Lukoil has also preserved some of the worst aspects of the Soviet era. Oganes Targulan, special project coordinator of Greenpeace in Russia, says that when his group visited the town last year to survey Lukoil sites, they were kept under surveillance and barred from visiting the sites with the worst environmental damage.
When the group tried to arrange a follow-up visit this summer, Targulan found his reservation at the town's only hotel mysteriously canceled. He suspects that word of his visit leaked to Lukoil. "It's like the Soviet times, with KGB following you everywhere," he says.
Lukoil didn't hire local oil industry veterans to top positions - they had, after all, presided over the near death of the local oil industry in the 1990s, as well as a 1994 oil pipeline spill that dwarfed the 1989 Exxon Valdez disaster. Native Usinskites also grumble that Lukoil officials, most of whom migrated from the company's home turf in western Siberia, are taking over local government.
To win over suspicious residents, Lukoil established a small media empire - including a radio station and a company-owned weekly newspaper, Northern News. In the next few months, it hopes to create the area's first local television station. Its main aim, company officials say, is to spread its corporate message - that what's good for Lukoil is good for the Usinsk region. "We wanted to promote the image of the company," said Yuri Pochtamtsev, the public relations executive who doubles as editor of Northern News.
Does the company use its media holdings to criticize rival oil companies? "We never throw mud in this town," Pochtamtsev says. "All we do is protect ourselves."
Yevgeny Rochev, editor of the rival New Usinsk, says Lukoil executives refuse to talk to him and pressure their employees to subscribe to the 5,100-circulation Northern News. "They won't allow us to get information about the oil industry here," Rochev complains. (Pochtamtsev denies that anyone is required to subscribe to the Lukoil paper, though employees are "encouraged" to do so.)
But the town's vastly improved economy has muzzled most critics. A few years ago, small apartments were selling for the equivalent of about $160. Today, a two-bedroom unit may cost $40,000.
In the last two years, Lukoil has tripled base pay for employees, to about $300 a month from about $100. It plans to raise the figure to about $500 in 2002, company officials say, but the recent slide in oil prices may alter those plans.
Employees say they expect to have their jobs for life. Salaries have always been paid on time, which is not the case at other Russian companies. Medical treatment and vacations are company-subsidized. Lukoil even organizes trips for the children of workers to Black Sea resorts.
"Lukoil has worked persistently to restore the oil industry here," says Yuri Grebnov, who has lived in the region 16 years and is chief engineer of Lukoil's pump renovation facility. "With Lukoil coming to town, we have hope for the future, hope for the next day."
While Lukoil honors many Soviet traditions, it is far from a typical Russian company. Alekperov, the president, graduated from the Oil and Chemical Institute and worked his way up the ranks of the Soviet Union's energy bureaucracy before being put in charge of a state-owned energy company called Kogalymneftegaz in Siberia in 1984.
As deputy minister of oil and gas during the last days of the Soviet empire, he helped plan the privatization of the industry. Alekperov founded Lukoil in 1991, merging Kogalymneftegaz with two other Siberian companies - using their initials plus the English word "oil" to form "Lukoil."
From the start, he was ambitious. Lukoil became Russia's first vertically integrated oil producer: It pumps oil, refines it and sells it in service stations. And Alekperov wanted Lukoil to operate like an American or European corporation, which means making money through profits, rather than investor fraud or money laundering.
The company expanded rapidly, both here and abroad. In addition to its Getty stations in the United States, it operates 1,000 retail gasoline outlets in Russia and other former Soviet republics.
That doesn't mean that Lukoil ignores the rules of Russian business - especially when it comes to retaining the favor of Kremlin leaders. It played a major role in financing former President Boris S. Yeltsin's 1996 re-election campaign. Recently, Lukoil's pension fund won a controversial court battle to force the dissolution of TV-6, the last Russian television network that operated independently of Kremlin control.
Most shares in TV-6 are controlled by Boris Berezovsky, a onetime Kremlin insider turned strident critic of Russian President Vladimir V. Putin. Lukoil's effort to close TV-6 was widely seen as a favor to Putin. TV-6 was spared at the last minute when it won an appeal to a higher court, but Lukoil had made its point.
Some Lukoil executives say that the company's social policies were inspired by the example of the high wages paid by Western corporations. "I traveled abroad in 1991 and was in the United States, and it was a strong psychological blow to me," recalls Mulyak, chief of Lukoil's local subsidiary. He saw that ordinary workers could afford many luxuries beyond the reach of even well-educated Russians.
Since Lukoil can't afford to pay Western-level wages, Mulyak says, it tries to raise living standards by providing social services.
Whatever their inspiration, Lukoil's paternalistic policies seem to have won over the people of Usinsk. "After people said all those negative things about Lukoil coming here," says Rochev, the newspaper editor, "they all went to work for Lukoil."
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