Russian ripples

October 31, 2003

THE KREMLIN'S shocking and fascinating persecution of the Russian oil giant Yukos dramatically ups the stakes - in Iraq. Who'd want to commit to crucial long-term oil deals with a country that enforces its own draconian laws as capriciously and cavalierly as Russia does? No one. Does Russia still offer the possibility of taking over from the Middle East any time soon as principal supplier of the world's petroleum? No way.

The whole sordid, and still unfolding, episode shows that there cannot be any reliable, predictable alternative to Middle East oil for the foreseeable future. There's just one problem - the United States has poked a stick into a hornets' nest with its attack on Iraq.

Here's a quick review: There have been months recently when Russian oil exports rivaled Saudi Arabia's. Russian oilmen hoped to take advantage of American disenchantment with the Middle East by pushing their own country forward as the new chief source of supply (although reserves still in the ground are much smaller in Russia than in Arabia, and extracting oil there is more expensive). President Vladimir V. Putin endorsed the idea. The Bush administration was never overwhelmed by the notion, though; who wants to be beholden to the Russians, even in the best of times?

Still, Russia seemed to offer an intriguing way to weaken the Saudis' hold on the world oil market. Despite a decade of false starts, Western oil companies are still knocking on Russia's door. ExxonMobil and ChevronTexaco were each in talks with Yukos to see about taking a big minority share of the company - and maybe that was the problem, or maybe it was just politics.

In any case, police have arrested Mikhail B. Khodorkovsky, the Yukos chairman, and yesterday the prosecutor's office froze about $12 billion worth of the company's shares. Mr. Khodorkovsky did indeed help himself to a large portion of the state's assets in the 1990s, though he's gone more legit recently. But the arrest appears to have everything to do with a battle for power between the KGB veterans known as siloviki who surround Mr. Putin and those who would like to steer Russia into a more recognizably free-enterprise future. And guess which side is winning? It has nothing to do with the rule of law.

There's one clear message: Buyer beware.

And unfortunately that probably should apply as well to the vast oilfields to the south, around the Caspian Sea, because the newly independent countries there are so clearly in Russia's back yard. Western companies are investing heavily in that despot-ridden region, but Moscow looms close by.

So, back to Arabia? One of the first things the United States did after the occupation of Iraq was to pull its troops out of the Desert Kingdom, where they had been such an irritant to Islamic militants. They won't be going back except under extraordinary circumstances. Iraq is now the key to the Middle East. If the United States prevails there, the Saudis will fall into line. If not - that's a lot of eggs to put into one broken basket.

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