RUSSIAN RETURNS

As the Kremlin reasserts itself with Russia's huge gas and oil reserves, the world awaits its next move, writes Daniel McLaughlin.

FOR MIKHAIL Khodorkovsky, languishing in a prison cell near the border between Siberia and China, last month brought two pieces of particularly galling news.

One was that prosecutors had accused him of money laundering while leading Yukos, the oil firm that he created and which made him Russia's richest man. A guilty verdict could significantly extend his current eight-year jail term for fraud and tax evasion.

The fallen tycoon's mood would not have been lightened by a second announcement: that an oil company called Rosneft was celebrating a sevenfold increase in first-quarter profits, which leapt to $2.56 billion (€1.6 billion) from a comparatively meagre $358 million the previous year.

Record oil prices certainly helped, but the key to Rosneft's success was the acquisition last year of almost all the major assets of Khodorkovsky's Yukos, which was broken up after its founder was thrown into jail in 2003.

The destruction of what was Russia's biggest, most efficient and most transparent oil firm was a defining moment for the country and its energy industry.

Not only did it send a message to Russia's oligarchs that they test the Kremlin's patience at their peril. But after the chaos of the 1990s, it also declared that the state was back in charge of Russian business.

Russia sits atop almost one-third of all the world's gas and the seventh-largest oil reserves. These riches underpinned the economic recovery overseen by President Vladimir Putin for eight years, until he stepped sideways and became prime minister in May.

Bolstered by soaring oil prices, Putin went a long way towards achieving goals that he laid out in 1997. At the time, Boris Yeltsin's Kremlin had handed much political power to regional governors and gifted Russia's industrial powerhouses to a coterie of well-connected oligarchs like Khodorkovsky.

In his thesis, Putin argued that Russia's national interest could only be served if the state controlled key natural resources like oil and gas, rather than selling them to individuals and firms, who would reap profits rather then re-invest in the country.

The destruction of Yukos served to expand Kremlin-controlled companies like Rosneft and gas behemoth Gazprom. These are the biggest of the so-called national champions which, analysts say, will generate huge revenue for Russia's budget, while occasionally undertaking expensive public service tasks, such as connecting a remote Siberian region to the national gas network.

Putin's Kremlin also bloodied the nose of western oil majors in its drive to beef up Russia's national champions. In 2006, Shell was forced to hand Gazprom control of the huge Sakhalin 2 oil and gas project after a probe by the state environmental agency, which ended when the Russian firm took control.

A consortium led by ExxonMobil and ChevronTexaco saw its licence for the Sakhalin 3 field abruptly revoked without compensation. In addition TNK-BP, the British major's joint venture in Russia, was pushed into selling its majority stake in the vast Kovykta gas field to Gazprom at a knockdown price after a sustained attack by senior officials.

Now BP-TNK's British and Russian partners are on the brink of tearing apart their company. The €24 billion company was created at a 2003 signing ceremony between Putin and former British premier Tony Blair, during which it was hailed as proof that Russia was now a safe, predictable and transparent place to do business.

Just five years on, the company is paralysed by court cases, labour inspections, tax probes, visa problems for foreign staff, and raids by security services who have already arrested one employee on charges of industrial espionage.

The four Russian billionaires who own half of the country's third-largest oil producer accuse BP of mismanagement and want to replace many of the joint venture's top officials. Meanwhile, the British company claims the men want to take control of TNK-BP by stealth.

Many analysts believe the oligarchs are acting on Kremlin orders to weaken BP's hand before selling their own stakes to Gazprom or Rosneft. The men deny having such a plan, but it would certainly do nothing to harm their popularity with Russia's leaders. It would also follow a pattern set by the likes of Roman Abramovich, owner of Chelsea FC, who sold control of his Sibneft oil firm to Gazprom in 2005 for around €9.5 billion.

Many of the deals now being reversed by Russian firms and authorities were signed under Yeltsin, when the country was politically and financially unstable. Their terms are now seen as unfavourable or even insulting by officials led by Putin (who called some agreements "colonial") and his successor as president, Dmitry Medvedev.

As agents of a resurgent, self-confident Russia, the "national champions" have also become the Kremlin's most potent foreign policy weapon.

While Putin's Kremlin squeezed out insubordinate tycoons such as Khodorkovsky at home, with the aid of Gazprom and other firms it also put pressure on or temporarily reduced energy supplies to neighbours such as Ukraine, Belarus, Georgia, Moldova and the Baltic states during fuel price disputes.

An old Soviet-era pipeline network still binds eastern Europe's new European Union members to Moscow.

Half of the bloc's oil and gas comes from Russia, something which sends shivers through European leaders who bemoan their energy dependence on the Kremlin.

"With its natural gas and oil pipelines that tie Europe to Russia like an umbilical cord, Russia has unchecked power and influence that in a real sense exceed the military power and influence it had in the Cold War," writes economist Marshall Goldman in Petrostate, his new book on Russian energy policy.

Its economy is growing at around seven percent a year. Only China and Japan now have larger foreign currency reserves than the Kremlin. More than €90 billion in oil and gas revenue now sits in a stabilisation fund that should help Russia weather an eventual downturn in commodity prices.

But the outlook is not all rosy for Russia's oil firms. National oil output is expected to level off or even fall this year, as old fields come to the end of lives that have been prolonged by modern technology introduced by the likes of Yukos and the western firms who are feeling increasingly uncomfortable in Russia.

High taxes and costs have discouraged Russian companies from exploring and developing new fields in remote, inhospitable areas. Much of the expertise required to investigate and drill in extreme environments can only be found abroad - among the foreign oil majors who are wary of doing business with Moscow.

The International Energy Agency estimates that Russian companies need to spend $328 billion between 2001 and 2030 to maintain production levels. The likes of Rosneft and Gazprom already carry a large debt burden following recent acquisitions, so a drop in commodity prices and subsequent weakening of the rouble could hamper investment plans.

Putin has committed his government to cutting taxes for oil firms and introducing incentives for exploration. And in Medvedev, he has an ally who knows the needs of the oil and gas industry - before becoming president, he was chairman of Gazprom.

Medvedev wants Gazprom to be the world's biggest company by 2017, and Putin expects oil output to rise by almost 14 per cent by 2015.

As BP waits for the Kremlin to choose sides in its scrap with TNK's Russian co-owners, the world's oil majors watch and wonder whether the country's leaders hope to achieve their targets by stealth, co-operation or force.

Despite approving a new law in May to restrict non-Russian investment in strategic sectors such as oil and gas, Putin insisted that potential partners should not be deterred.

"The new law on foreign investment by no means prohibits (them). On the contrary, it sets up the most transparent and understandable procedures for investors," he said.

"I would like to stress that we welcome foreign investments. They have been growing annually. We are very glad about that and will do everything we can to support that process in the future."

PUTIN'S 'NATIONAL CHAMPIONS'

Igor Sechin (47)

The chairman of Russia's biggest oil firm, Rosneft, Sechin is a close ally of Prime Minister Vladimir Putin.

In the mid-1990s, Sechin worked for Putin in the mayor's office of their native St Petersburg, before following him to Moscow and serving as deputy head of the Kremlin administration during Putin's 2000-2008 presidency.

He joined Rosneft in 2004, just before it snapped up the key assets of Yukos, once Russia's biggest oil firm, which was bankrupted by huge claims for unpaid tax in a case that is widely seen as politically motivated.

Sechin is believed to have operated as a KGB agent in Africa in the 1980s.

Viktor Zubkov (66)

The chairman of Gazprom, Russia's largest company and the world's biggest extractor of natural gas.

Zubkov also worked with Putin in St Petersburg city hall, and was made prime minister by his old friend in 2007, before handing over the post to him less than a year later, when Putin stepped down as president.

A former tax and anti-money laundering official, Zubkov was elected chairman of Gazprom in June, replacing new Russian president Dmitry Medvedev.

A gruff technocrat given to publicly barking orders at stunned subordinates, he is considered utterly loyal to Putin and his vision of a strong Russia.

"I will consistently defend the interests of the state in this company," Zubkov said after taking over at Gazprom.

BILLIONAIRE AGENTS OF THE NEW RUSSIA

Viktor Vekselberg (51)

According to Forbes, Vekselberg is Russia's 14th richest man, with $11.2 billion (€7.1 billion).

Born in Ukraine, Vekselberg made his fortune through the aluminium firm, SUAL, and the TNK oil firm, which in 2003 became TNK-BP in a joint venture deal with the British oil major.

Vekselberg and three other billionaire co-owners of TNK-BP are now trying to oust BP-appointed company officials. They accuse the British firm of mismanagement, in what some analysts see as a Kremlin-orchestrated ploy to eventually win a controlling stake in the company for Gazprom or Rosneft. At a time when disloyal tycoons feared that they could be targeted by Putin's Kremlin, Vekselberg was hailed as a good patriot for buying nine Fabergé eggs for an estimated $100 million, and pledging to exhibit them in Russia.

Gennady Timchenko (55)

Perhaps the most talked-about man in Russian oil, Timchenko has been drawn from the shadows by media investigations into his oil trading firm, Gunvor, and its extraordinary growth in recent years.

Unknown when Putin became president in 2000, Geneva-based Gunvor is now believed to be the world's fourth largest oil trader. Timchenko plays down reports that he is a good friend of Putin. He also denies that he was a KGB agent and Putin is a hidden beneficiary of Gunvor.

In a recent interview with the Wall Street Journal, Timchenko insisted that his photo not be taken. In the article, a former Yukos executive said of Timchenko: "Everyone knows whose friend he is . . . People like working with people who will never be messed with."