The mega-buyout in Russian oil announced last week will transform state-dominated Rosneft into the largest oil company in the world in terms of production, bigger than ExxonMobil. Rosneft is acquiring another profitable Russian oil major, TNK-BP, from three oligarchs and BP. Once the $56 billion deal is done, Rosneft will control 40 percent of Russias oil output, a significant consolidation of economic clout for the Kremlin. Rosneft is headed by Igor Sechin, a pal of President Vladimir Putin.
The buyout also marks a serious retreat from an idea born in the West that held immense promise when the Soviet Union imploded. That idea was that capitalism based on private ownership would do a far better job managing the vast archipelago of industrial and natural-resource assets than had creaky state-run socialism. In the 1990s, Russia carried out the largest privatization of state property ever attempted in the expectation that decisions made by the new owners would lead to modernization, efficiency and a competitive capitalism.
The oil industry sell-offs were slow, but in the first decade a dozen or so privatized companies emerged, often delivered into the hands of Russias rapacious oligarchs. The lofty ideals of privatization were sorely tested, and the results not pretty. Still, private ownership and capitalism produced results: Russia this year has hit new post-Soviet highs in crude oil production.
Rosneft once ranked eighth among the Russian oil companies and was not privatized. In 1998, the year of a currency collapse and debt default, the government tried to sell off 75 percent of Rosneft for as little as $1.6 billion. There were no takers. But the little company gained a valuable ally. After taking office in 2000, Putin decided to push back the pesky oligarchs. He threw tycoon Mikhail Khodorkovsky in prison and crushed his oil major Yukos, the assets of which were scooped up by Rosneft. Today, Rosneft has a market capitalization of $75 billion.
Putin is building state capitalism, a model in which winners and losers are not so much determined by market competition as by the state. Certainly, a national champion like Rosneft may be suited to confront the severe challenges of Arctic exploration and production – though it probably will need capital and technological aid from Western partners. But does it have to be controlled by the Kremlin? Economic history suggests that ownership matters, and private owners beat bureaucrats. In Russia, state control has often meant profits diverted or stolen, expenses bloated and modernization neglected.
We dont think Putin wants to bring back the ineptitude and inefficiency of the Soviet system. But he has a fear of competition, and competition is the oxygen of democracy and markets. The consolidation of oil and power in the hands of the Kremlin casts a shadow over the once-bright prospects of the Russian economy.