Luong and Weinthal: Russia's Private oil Companies Headed Down A Slippery Slope

Russia's richest oilman and former head of Yukos Oil, Mikhail Khodorkovsky, sits in jail as a Moscow City Court denied him bail in January. Proponents of renationalizing Russia's oil reserves continue to rejoice, as legal proceedings have started against some of the former top executives at Yukos for tax evasion.

Those events follow December's Duma elections in which the supporters of Russia's privatization program of the 1990s were dealt a decisive blow. With Mr. Khodorkovsky behind bars since October, hopes of the Putin government reaping a larger share of windfall profits from Russia's oil companies and redistributing them among the masses continue to grow.

Yet the survival of private oil companies in Russia is critical for sustaining and pushing forward broad-based economic and energy sector reforms. A return to state ownership could lead Russia down a similar path to other oil-rich states in the developing world that are plagued by weak institutions, centralized growth and unbalanced growth.

The government's recent freezing of billions of dollars of Yukos stock sent the

Russian stock market tumbling. It may have marked the first step toward redefining business-state relations ? through either a renationalization of the oil industry or unbridled government access to the oil companies' profits ? in directions dangerous to economic stability.

Russia is unique among resource-rich countries in the developing world, since it has privatized its oil sector. The oil sector in most other developing countries, such as Nigeria, is state owned. As a result, the Russian state doesn't accrue revenue from its abundant oil reserves directly but, rather, must negotiate with private domestic owners to receive its cut.

The existence of the private oil companies is responsible for spurring economic reform in Russia. Over the last few years, they have pushed for stable property rights, transparency, corporate governance and a new tax regime ? in order to maximize their profits, attract foreign partners and secure their investments over the long term.

Yet business-state relations in Russia are at an all-time low. A power struggle between Mr. Khodorkovsky and President Vladimir Putin may lie behind Russia's private oil sector troubles. Specifically, Mr. Khodorkovsky's foray into politics challenged an unofficial agreement between Mr. Putin and Russia's powerful business elite, known as the oligarchs: If the Russian oligarchs stayed out of politics, the Russian government would stay out of their businesses. By providing financial support for opposition political parties and revealing his own presidential ambitions, Mr. Khodorkovsky overstepped the boundaries of what was considered the proper role of the Russian business community. In many ways, Russia's struggle with Yukos and Mr. Khodorkovsky is analogous to the U.S. government's battle with John D. Rockefeller at the turn of the 20th century.

The Putin administration's legal actions against Yukos are driven primarily by its desire to prevent the giant from monopolizing the oil industry and thereby amassing greater political power. The recent collapse of the merger between Yukos and Sibneft is seen as a giant step toward curtailing Yukos' power. The Roosevelt administration was motivated by similar concerns when it sued Standard Oil in 1906 for violating the Sherman Antitrust Act. In particular, it helped to define the respective roles of private business and government in the United States that have propelled its unprecedented economic growth -- the former as responsible property holders and reliable taxpayers and the latter as the chief regulator that protects property rights and ensures fair competition.

The Russian government's confrontation with Yukos is likewise a single episode in a drama that still is unfolding but ultimately could serve to bolster Russia's transition to a market economy by determining both the appropriate role of the state in the economy and of businessmen in politics.

Erica Weinthal is a visiting fellow at Stanford University's Institute for International Studies. Jones Luong is an associate professor of political science at Yale University.