Picking a fight

August 05, 2004

SPOT PRICES for crude oil hit a record in the United States this week, and may shoot still higher -- thanks to uneasiness over terrorism, the continuing war in Iraq, growing Chinese demand, stagnant refinery capacity, and an especially nerve-racking game of chicken a la Russe.

In Moscow, the government is bearing down on Yukos, Russia's second-biggest oil company, over tax evasion and assorted other offenses. When the company said it might have to halt its exports, traders from Singapore to New York went hopping. Yukos owes $3.4 billion for the year 2000, and a similar amount for 2001, the government says, and the bill for more recent years has yet to be calculated. That comes to a whole lot of money, but the government won't blink -- even if it means destroying the company.

This matters -- even though Yukos rose to the top through the shadiest of dealings, and even though (on the other hand) the government's prosecution of it is entirely selective and politically motivated. It matters because oil is turning into the next big story worldwide. One OPEC official this week said that current prices are "crazy."

There's no slack in the system -- and it's a system of which such countries as Russia and Iraq are very much a part. What happens in Kremlin political strategy sessions could affect how much we pay at the pump -- but more important, it could affect the course of the wavering American and global economy, and ditto for the success or failure of the insurgency in Iraq.

Say this for the insurgents: At least they intend to do damage. The motivations in Russia are considerably murkier.

From one perspective, who could fault the government of President Vladimir V. Putin for going after the oligarchs who helped themselves to large portions of Russia's wealth in the chaotic days following the Soviet collapse? And of course even if Yukos is broken up, its physical assets won't be destroyed -- just redistributed.

But that's not the whole picture. The Kremlin has apparently decided that it can't give an inch in its struggle with Yukos and its creator, Mikhail B. Khodorkovsky, or it would lose face. That would be a more credible stand if prosecutors weren't at the same time ignoring the flagrant depredations of other tycoons. The attack on the company also raises the question of what rights minority shareholders (that is, foreign investors) might have, and how willing they might be to do business in Russia again. And if Yukos is, in the end, crushed, it will be interesting to see if its holdings are sold off in a fair and transparent manner, or subject once again to crony capitalism at its worst.

The Yukos crackup could happen before the month is out. Short-term disruptions, at the very least, are likely, and could hardly come at a worse time. The consequences for Russia will be huge; for the rest of the world, they'll be big enough. A deal to keep the oil flowing would be smelly -- but it might be better than the alternative.

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