CRUDE FEDERALISM: DECENTRALIZATION AND CONTROL OVER
OIL AND GAS RESOURCES IN THE RUSSIAN FEDERATION
by
Joel Alan Palmer
B.A., University of Calgary, 1993

THESIS SUBMITTED IN PARTIAL FULFILLMENT OF
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THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF ARTS
ill

POLITICAL SCIENCE

© Joel Alan Palmer, 1997
THE UNIVERSITY OF NORTHERN BRITISH COLUMBIA
April1997
All rights reserved. This work may not be
reproduced in whole or in part, by photocopy or
other means, without the permission of the author.

ABSTRACT

This thesis explores how the decentralization of control over Russia's oil and natural gas
resources is shaping Russian federalism.

A political-economic methodology is employed that

draws from literature on decentralization, federalism, intergovernmental relations in the Russian
Federation, and the Russian oil and gas sector. The study focuses on how and why some of
Russia's regions have secured relatively more autonomy from the centre. It is argued that under
Russia' s asymmetrical brand of federalism, regions with the administrative status of "autonomous
republic" and natural resource-rich regions have been able to build stronger bases of regional
power and authority because they are negotiating from positions of strength in intergovernmental
relations. Autonomous republics have been delegated legal and political-administrative powers
that the rest of Russia' s regions simply do not possess. The distribution of control over Russia's
abundant oil and gas resources has changed since the collapse of the Soviet Union and, though
there has been some decentralization in the oil and gas sector, the Russian government retains
decisive influence in these strategic industries.

The other main beneficiaries of oil and gas

development are the producing regions, a significant improvement from Soviet times to be sure.
Examinations of the Sakha Republic (Y akutia) and Tyumen' Oblast, including the autonomous
okrugs of Khanty-Mansiisk and Yamal-Nenets, demonstrate both the importance of republic
status, and the political power derived from natural resource wealth. The thesis concludes that
the push for Russian "federalization" will continue to be led by republics and resource-rich
regions, and that Russian federalism is attainable as long as asymmetries do not become overly
acute.

ii

Abstract

TABLE OF CONTENTS

ii

Table of Contents

111

List of Tables and Figures

IV

Acknowledgements

v

INTRODUCTION

1
4
5
7

Terms, Concepts, and Relevant Literature
Decentralization
Federalism
Oil and Natural Gas in a Federal State
Russian Federalism
Research Design/Methodology

14
20

Chapter Two

The Russian Oil and Gas Sector
Introduction
The Oil Industry
Legislation and Licensing
Privitization and Industrial Reorganization
Export Quotas and Access to Pipelines
Prices
Taxation and Resource R ent
The Natural Gas Industry
Conclusion

23
23
25
27
33
41
44
47
51
56

Chapter Three

Russian Federalism and Oil and Gas: Examples
of the Sakha Republic and Tyumen' Oblast
Introduction
The Sakha Republic
Background
Decentralization
The Sakha Oil and Gas Sector
Tyumen' Oblast
Background
Decentralization
The Tyumen' Oil and Gas Sector
Conclusion

58
58
59
59
62
71
80
80
80
84
86

Chapter Four

Conclusion

90

Chapter One

10

96

Bibliography

iii

LIST OF TABLES AND FIGURES
Figure 1-1

Map of Russia's Territorial-Administrative Structure and Natural
Resource Endowments

17

Table 2-1

Oil Production for Russia and West Siberia, Selected Years, 1980-1993

25

Figure 2-1

Map of Russia' s Major Oil Regions

26

Figure 2-2

Organizational Structure of the Russian Oil Industry

38

Figure 2-3

Map of Russia's Major Natural Gas Regions

52

Figure 3-1

Map of the Sakha Republic

60

Table 3-1

Sakhalnvest's Holdings By Industry

70

Figure 3-2

Organizational Structure of Sakhaneftegaz

73

Figure 3-3

Yakutian Gas Pipeline Proposals, 1968-1974

76

Figure 3-4

Planned Pipeline Routes for the "Vostok" Plan

78

iv

ACKNOWLEDGMENTS
This project would not have been possible without the unwavering support of my family: Alan
and Kathy, with constant assistance and understanding, you allow me to realize my goals; Neal, a
model of hard work and dedication, you make me push myself through difficult times; and Cheryl,
your enthusiasm is my motivation and keeps me smiling. I love you all dearly.
This project would not have been bearable without my friends. In particular, I would like to
thank the present and former members of "909" -- Rich Little, Dan Bernier, Brian Bowman, Sean
Simmons and Jon Schulli -- and all of the other great friends I have made here in Prince George.
To Jim Ackroyd who taught me how to excel in university-- and enjoy it! A special thank you to
Jim Astley who is everything a best friend should be, and then some. I will not forget your
generosity. To Lily Astley, and Ken and Yvonne Chow, who made me feel a part of their family
and who often fed this poor hungry bachelor. And to Rachelle Astley, my newest inspiration in
life.
This project would not have been as gratifying without the fraternity of my fellow graduate
students: Shannon, Sara, Steve, Don, Meryl, Shauna and Tracey; but especially Chris Ghazouly
who "survived" Russia with me. Hey Chris. Done! May you all find happiness and success in
life.
This project would not have been as rewarding without the experiences and materials gathered in
Russia. To Sheena Trimble, your hard work made the exchange program possible. Also, the trip
would not have been affordable without a research grant from the N orthem Scientific Training
Program. Most importantly, I must thank the many people in Russia who made my stay exciting,
interesting and enjoyable. To Clavdia, who arranged and scheduled many of my interviews; to
Giorgi, who interpreted many of my interviews; to my hostess, Liuda Nikolaeva, whose
hospitality and friendship will always be remembered; and to all of the friends I made in Y akutsk,
Sakha -- especially Marina and the Zhmurov family, Aleksandr and Vera, Sasha, and "professor"
Sergei.
This project would not have been defensible without the assistance of many faculty members here
at UNBC. To Dr. Edwin Black and Dr. Mary Louise McAllister, who taught me to think of
political science in a new light. To Dr. Greg Poelzer and Dr. Gail Fondahl, who provided positive
comments and guidance throughout. A special and final acknowledgment goes to my supervisor,
Dr. John Young, whose door was always open. This thesis could not have been completed
without your encouragement and sound advice.

v

INTRODUCTION

The disintegration of the Soviet Union has left the Russian Federation in a period of
extensive economic, social and political transition, from a totalitarian state to some semblance of
democratic federalism.

One of the many elements of this transition is to develop and

institutionalize a new .balance of power between the central government in Moscow and the
dozens of regional governments.1 One of the key issues in the process of establishing a new
division of powers between the centre and regions is the redistribution of control over Russia's
natural resources. This thesis focuses on the decentralization of economic and political power in
post-Soviet Russia, with specific attention to the oil and natural gas sector.

Analysis of the

Russian oil and gas industries helps to illustrate the type of federal system that is emerging in
Russia.
During its last two decades of existence, oil and gas were the Soviet Union's most
important and most valuable economic resources.

The oil and gas sector continues to be

extremely important to the post-Soviet Russian state:

it provides employment for many

thousands of people; it fuels much of Russia's highly industrial economy; it provides massive
revenues for government budgets; and oil and gas account for over half of Russia's foreign
currency earnings, for Russia presently has little else to offer.

Quite simply, the health and

stability of the Russian economy depend critically on the oil and gas industry. Russia's central,
regional and local governments are all struggling for control over the oil and gas industries as this
control is truly a form of economic and political empowerment. While not all regions in Russia

1

For the purposes of this thesis, the term "centre" refers to the central government in Moscow, while "region"
refers principally to the eighty-nine administrative units or "subjects" (sub" ekty) of the Russian Federation.
1

are endowed with oil and gas resources, oil and gas are important factors in the division of power
in post-Soviet Russia.
Decentralization and control over natural resources are considerable issues in any federally
organized state, but in Russia these are particularly relevant issues. The collapse of the Soviet
system left Russia and the other successor states with a political and economic void. Russia was
left to establish new institutions to fill this void and a power struggle between the federal centre
and the regions has coincided with this endeavour. Historically subject to strict subordination by
Moscow, Russia's regions were quick to use the period of instability to assert power within their
perceived jurisdictions, and oil and gas are valuable instruments of power in this process.
The struggle for control over natural resources has various implications for Russian
federalism. Just as Peter Rutland argues that if privatization "were really to succeed in Russia,
one would expect to see it making inroads into the oil and gas industry,"2 it is similarly argued
herein that if decentralization is really occurring in Russia, one would expect to see evidence of it
in the oil and gas sector because it is possible that the struggle for control over Russia's oil and
gas is playing a significant part in shaping post-Soviet Russian federalism. Specifically, this thesis
investigates how the distribution of control over Russia's oil and gas resources is affecting the
nature of Russian federalism. It is argued that natural resource endowment and the "status" of
republic within the Russian Federation greatly improve a region's chances of becoming more
autonomous from the centre.
This thesis investigates broadly three elements of post-Soviet Russian federalism:

(1)

decentralization and the increased power of Russia's regions; (2) asymmetrical federalism, that is,
the unequal rights and powers of Russia's four regional administrative units -- autonomous

Peter Rutland, "Privatisation in Russia: One Step Forward: Two Steps Back?", Europe-Asia Studies, Vol. 46,
No. 7, 1994,1109-1131,1119.

2

2

republics, oblasts, krais and autonomous okrugs; and (3) the redistribution of control in the
Russian oil and gas sector. Chapter one considers the concepts of decentralization and federalism
so that they may be applied to the Russian Federation. The chapter also covers oil and gas
development in federal states, with a brief discussion of oil and gas in Canada. Chapter two
examines the reorganization of the post-Soviet Russian oil and gas sector to illustrate one aspect
of decentralization -- the decentralization of economic power and resources from governments to
market, quasi-market and non-governmental organizations. At this point, it is argued that while
privatization has led to some decentralization of the oil and gas industries, the central government
still retains strategic control. Chapter three is a study of Tyumen' Oblast and the Sakha Republic.
In terms of natural resources, these are two of Russia's wealthiest regions. The chapter concludes
that republic status and natural resource endowment are two of the most valuable sources of
political power for Russia's regions. Finally, chapter four summarizes the main conclusions of the
thesis, speculates somewhat about the future of Russian federalism, and offers suggestions for
further research in this field.

3

Chapter 1
TERMS, CONCEPTS, AND RELEVANT LITERATURE

Five years have passed since the collapse of the Soviet Union and some quality literature
on Russian federalism has now emerged.3

A variety of approaches have been employed to

investigate Russian federalism. This thesis argues that the most effective approach to the study of
Russian federalism is one which examines specific issues of jurisdiction and specific cases of the
centre-regional division of powers. 4 Accordingly, a direct approach is taken here, one which
investigates the redistribution of control taking place in the Russian oil and gas sector, and
analyzes the specific cases of two regions -- the Republic of Sakha (Y akutia) and Tyumen' Oblast
-- with emphasis on the oil and gas industries of these regions.
This thesis draws from four separate but related bodies of literature: (1) literature on
decentralization; (2) general literature on federalism; (3) recent literature on post-Soviet Russian
federalism; and (4) studies of the Russian oil and gas sector. These subject areas are fused herein
to determine how the struggle for control over oil and gas resources is shaping the development
of Russian federalism. To begin, however, this chapter reviews the pertinent literature in these
fields of study.

3

Recent research includes Robert Sharlet, "The Prospects for Federalism in Russian Constitutional Politics,"

Publius, 24, Spring 1994, 115-127; Edward W. Walker, "Federalism-- Russian Style: The Federation Provisions
in Russia's New Constitution," Problems of Post-Communism, July-August 1995, 3-12; Darrell Slider,
"Federalism, Discord, and Accomodation," in Theodore H. Friedgut and Jeffrey Hahn, eds., Local Power and PostSoviet Politics (Armonk, N.Y.: M.E. Sharpe, 1994), 239-269; James Voorhees, "Russian Federalism and Reform,"
Demokratizatsiya, Vol. 2, No. 4, 1995, 549-564.
4

This argument is also made by Steven Solnick, "The Political Economy of Russian Federalism: Problems of
Measurement and Analysis," prepared for the 1995 Annual Meeting of the American Political Science Association,
Chicago, Ill., 31 August- 3 September, 1995; and Daniel R. Kempton, "The Republic of Sakba (Yakutia): The
Evolution of Centre-Periphery Relations in the Russian Federation," Europe-Asia Studies, Vol. 48, No. 4, 1996,
587-613.

4

Decentralization

Decentralization is a frequently used term in academic literature, but one which
encompasses a complex and varied set of phenomena that may be interpreted in a number of
different ways. It is a term which sparks much interest and is presently a common theme of policy
debates in almost all Western countries. Deservedly or not, the concept of decentralization seems
to have inherited the halo of efficiency and is leading to major changes in constitutional, financial
and other structures in many countries. But what is decentralization? And how, if at all, can it be
measured?
Simply, decentralization refers to the dispersal or distribution of power and authority away
from a centre. A "centre" may exist on many different levels -- global, national, regional, local, or
even within a community -- anywhere power and authority are concentrated relative to the
"periphery" of a given territory or organization.

With such a definition of decentralization,

however, a proper understanding of power and authority is necessary. Max Weber offers a useful
conceptualization of the nature of power and authority. In Weber's view, power consists of the
ability of a person or group of people to realize their own will even against the resistance of
others who are participating in the action. Authority is power acknowledged to be legitimate or
right by both superordinate and subordinate.5
Given the multitude of organizational structures that may exist, decentralization is difficult
to measure. Rousseau and Zariski (1987) view centralization and decentralization as "sensitizing
concepts" that force us to ask what the concentration or dispersion of power means in terms of
the functioning of specific organizational structures. 6 In this vein, power, in its centralized or
decentralized form, is best conceptualized as varying along a continuum rather than as a simple
5

H. H. Gerth and C. Wright Mills, eds., From Max Weber: Essays in Sociology (Boston: Routledge & Kegan
Paul Ltd., 1948).
6
Marc 0 . Rousseau and Raphael Zariski, Regionalism and Regional Devolution in Comparative Perspective
(New York: Praeger, 1987).
5

dichotomy, because structures and processes of central and regional power inevitably vary
between countries and over time.
An understanding of decentralization is essential to the study of contemporary Russia.

Since the collapse of the Soviet Union, decentralization of power and authority in Russia has
proceeded at a relatively rapid pace. This has much to do with Russia's former position as a
member of the Soviet Union.

The Soviet system was extremely centralized, a characteristic

viewed by some as the main reason behind the failure of the system. Decentralization, then, may
be considered a natural reaction to the hypercentrism of the Soviet state. Political democracy and
a market economy both require a level of decentralized power and authority that did not exist in
the Soviet Union.
This thesis pursues two principal aspects of decentralization. The first is the
decentralization of economic power and resources from governments to markets and nongovernmental organizations; and the second is intergovernmental, that is, the decentralization of
political power and authority, and administrative discretion, from the central government to
regional governments. 7 Decentralization differs from devolution which refers to the "transfer of
power or authority from a central government to a regional or local one." 8 Such a defmition of
devolution makes it inappropriate for general use in this thesis for two key reasons.

First,

devolution does not encompass the passage of power from governments to markets. Second, as a
transfer of power and authority, devolution implies a conscious effort by the centre to

decentralize, and this has often not been the case in Russia's chaotic constitutional-legal
environment where much power and authority has decentralized de facto.

7

Robert J. Bennett, "Decentralization, Intergovemmental Relations and Markets: Towards a Post-Welfare
Agenda," in Robert J. Bennett, ed., Decentralization, Local Governments, and Markets (Oxford: Clarendon Press,
1990), 1-26.
8
Peter Clancy, "Politics by Remote Control: Historical Perspectives on Devolution in Canada's North," in
Gurston Dacks, ed., Devolution and Constitutional Development in the Canadian North (Ottawa: Carleton
University Press, 1990), 13-42.
6

For the purposes of this thesis, then, decentralization remains broadly defined along both
market and governmental dimensions.

As these two forms of decentralization occur, a new

arrangement or organization of power and authority is required among different tiers of
government and between government and non-governmental organizations. In other words, both
governmental and non-governmental relationships enter a state of flux. These fluid relationships,
and the importance of oil and gas to the reorganization of power and authority in the Russian
Federation is studied here.

Federalism

Following the disintegration of the Soviet Union, the territory that comprised the former
Russian Soviet Federated Socialist Republic (RSFSR) became the Russian Federation. This new
name implies that Russia now possesses a "federal" system. But is Russia truly federal? Although
a thorough analysis of Russian federalism is beyond the scope of this thesis, the study of natural
resources in general, and oil and gas in particular, can illuminate certain dimensions of
intergovernmental relations. To do so, however, we need to question what the term federalism
represents, and how we may distinguish between federalism and regional devolution.
Federalism refers to a constitutional division of power between central and regional levels
of government, in which each of these two orders of government possesses some exclusive
jurisdiction of its own. Other conditions to be met in order for a country to be deemed federal
include (1) a constitutional guarantee of the continued existence and territorial integrity of the
regional units of government; (2) an upper house of parliament, normally elected directly or
indirectly by the people of the regions, which represents the regions and which has some power to
block or delay legislation originating in the lower house; (3) possession by the regions of some
measure of discretion in shaping and regulating their respective systems of local government; and
7

(4) the exercise of some control over centre-regional relations by a constitutional court wielding
the power of judicial review. 9
Regional devolution is evident in unitary systems where central government power is
supreme. Under a system of regional devolution, a constitution may recognize the existence of
regional governments, but the regions possess no exclusive powers and a central government
agent can intervene directly in regional affairs by blocking or repealing regional legislation. Also,
and similar to federalism, with regional devolution the regions have an elected parliament and
cabinets responsible to that parliament, both of which may not be dissolved or suspended by a
central government official.

This immunity is an important distinction between regional

devolution and a unitary prefectoral system. 10

Thus, with regional devolution, regional

governments exist, but they are highly subordinate to the central government, far more so than
with federalism.
A H. Birch identifies four approaches to the study of federalism. 11

The first is the

institutional approach stemming from K. C. Wheare's seminal book Federal Government (1946).
Wheare' s comparative study viewed federalism as a system of government in which the federal
and regional governments are both coordinate and independent. 12 However, Wheare's narrow
defmition, based on legal-juridical writings, has been challenged by other scholars who suggest
that a country may be defmed as federal not simply by what the constitution says, but how it is
employed.
Second is the sociological approach, advanced by W. H. Livingston in Federalism and
Constitutional Change (1956). For Livingston, the essence of federalism is to be found not in the

9

Rousseau and Zariski, Regionalism, 32.
Ibid., 33.
11
A. H. Birch, "Approaches to the Study of Federalism," Political Studies, February 14, 1966, 15-33.
12
K. C. Wheare, Federal Government (London: Oxford Press, 1946).

10

8

constitutional or institutional structure, but in the society itself. 13 Social diversity is said to be
reflected in political phenomena which Livingston calls "federal instrumentalities."

Perhaps

Livingston's greatest contribution was his conclusion that federalism is not an absolute, but a
relative term -- that there exists no model of federalism, rather federalism is more accurately
.
d as a spectrum. 14
vtewe

A third approach treats federalism as a process rather than as a static form of government.
It argues that federal relations are always in flux, thus a federally organized country must have

institutions that are capable of directing the periodic revision of its structure. C. J. Friedrich
champions this approach in Trends of Federalism in Theory and Practice (1968), with the
following defmition of federalism:
the process of federalizing a political community, that is to say, the process
by which a number of separate political communities enter into
arrangements for working out solutions, adopting joint policies, and
making joint decisions on joint problems, and, conversely, also the process
by which a unitary political community becomes differentiated into a
federally organized whole .... In short, we have federalism only if a set of
communities coexist and interact as autonomous entities, united in a
. h an autonomy of.1ts own. 15
common order w1t
With this approach, one must seek to identify the factors which foster or impede differentiation or
integration because federalism may operate in both directions.
The fourth approach identifies federalism as a bargain, focusing directly on political and
administrative aspects. In connection with this approach, W. H. Riker defines federalism simply,
indicating that a country' s "constitution is federal if it provides for two levels of government, each
of which has at least one area of action in which it is autonomous, and each of which has "some
guarantee (even though merely a statement in the constitution)" of its contained autonomy within

13

W. H. Livingston, Federalism and Constitutional Change (Oxford: Oxford Press, 1956).
Ibid., 4.
15
Carl J. Friedrich, Trends of Federalism in Theory and Practice (New York: Frederick A. Praeger, 1968), 7-8.
14

9

its sphere." 16 He suggests that such a constitution is always the result of a political bargain. Also,
an important distinction is made between centralized and peripheralized federal systems:
centralized if the federal centre is relatively powerful, peripheralized if the federal centre is sharply
constrained. Riker goes on to conclude that such factors as the division of governmental powers,
the extent of governmental activities, and the survival of provincial loyalties and belief in region's
rights will influence the nature and working of the federal system, but it is the structure of the
party system that determines how long the system is maintained.

17

Each of these approaches is more or less applicable to the Russian case, and each certainly
has merit and contributes to the study of federalism.

This thesis draws somewhat from each

approach in an effort to better understand Russian federalization. But it is insufficient to discuss
Russian federalism without examining specific aspects of the division of powers. Thus, much of
the focus herein is on the decentralization of powers -- generally, as they exist in the Russian
natural resources sector, and specifically the oil and gas industries. During this time of transition
and structural reform, control over oil and gas is a particularly valuable source of economic and
political power, and the struggles for this control -- between both centre and region, and public
and private -- offer excellent insights into the dynamics of Russian federalism.

Oil and Natural Gas in a Federal State

In a federal state, oil and natural gas development raiSes many questions:
develop the resources? What is the time preference for development?
resource rent 18 from development?
population?

Who will

Who will collect the

How will resource rent be distributed amongst the

And which government will have the power and authority to manage the resources?

W. H. Riker, Federalism: Origin, Operation, Significance (Boston: Little, Brown and Co., 1964).
Ibid. , 20-21.
18
Resource rent represents income generated in excess of what a producer would normally receive in terms of
returns on investment (i.e. labour and capital) and is discussed more thoroughly in Chapter 2.
16

17

10

In a federal state, these issues are normally resolved cooperatively between the central, regional
and, occasionally, local governments. Issues of resource rent and revenue redistribution are often
the most contentious and cumbersome in federal oil and gas negotiations.

However, from

questions of revenue and resource rent we must proceed to more comprehensive questions of
control over oil and gas development because the existing distribution of control over oil and gas

development in a federal state has a direct connection with the more specific questions of resource
rent and its distribution. Issues concerning control over oil and gas, such as ownership of land
and resources and the jurisdiction to manage the resources, will affect the quantity and
distribution of resource rent from oil and gas development.
Issues surrounding the collection of resource rent and its redistribution may test even the
most stable of federations. In Canada, for instance, windfall profits from oil and gas during the
late 1970s and early 1980s led to serious centre-regional conflict. In Canada, the provinces (i.e.
regions) have the authority to control oil and gas development in all its aspects: "they have the
authority to control where wells are placed; the rate of production; construction of roads,
processing plants, and local pipelines; safety for workers; pollution; accidents; noise; and impacts
on wildlife among other things." 19 The province of Alberta, producer of over 80 percent of
Canadian oil and gas and legal owner of its natural resources under the Canadian constitution,
enjoyed windfall profits as a result of the world oil price increases of the 1970s.

Alberta's

economic boom, however, skewed the existing system of federal revenue redistribution. 20 In
response to this systemic stress, the Canadian government introduced new taxes and attempted to

19

Susan Blackman, "The Powers of Canadian Provincial and Federal Governments With Respect to Management
of Oil and Gas Resources," in Energy Resources Development in Federal States (Calgary: Canadian Institute of
Resources Law, 1995), 6-11. Federal and provincial powers in natural resource industries are found mainly in
Articles 91 and 92 of the Canadian constitution, respectively.
20
See John F. Helliwell, The Distribution of Energy Revenues within Canada: Functional or Factional
Federalism ?, Resources Paper No. 48 (Vancouver: University of British Columbia Department of Economics,
February 1980).
11

restructure the existing tax regime for the oil and gas sector in order to capture a greater share of
resource rent. Alberta then reacted by restructuring its system of royalty payments. The ensuing
jurisdictional feuds did not abate until well into the 1980s.
Other than the threat posed by Quebecois nationalism, the intergovernmental dispute over
oil and gas during the late 1970s and early 1980s was arguably the strongest test of Canadian
federalism in the past thirty years. Control over oil and gas has also become a primary goal of
Canada's territorial governments in recent years as they pursue greater autonomy from the
Canadian government. 21 As Susan Blackman argues, "conflict over energy resources has been
some of the most antagonistic intergovernmental conflict in Canada.'m

Oil and gas issues have

caused similar centre-regional disputes in the United States where the regions (or states) also have
the power to control natural resource development. 23
Oil and gas issues are of even greater significance in Russia than in federations such as
Canada or the United States, both of which have relatively stable, diversified market economies.
Moscow is not about to forfeit oil and gas revenues, and the power that they bring, to the sparsely
populated oil and gas producing regions of Siberia. Thus, as with the process of federalization,
the process of redistributing control over Russian oil and gas remains very fluid.

As Dienes

(1996) explains:
The long, drawn out tug-of-war between the federal center and Russia's
factious republics and regions also has a bearing on the way the Russian oil
and gas industry is privatized and managed in the future. In turn, the
transformation of administrative, semi-feudal control into one exercised
through newly acquired ownership (essentially by the same elite) is greatly

21

For an analysis of devolution and control over oil and gas in Canada's territories see Gurston Dacks, "The Quest
for Northern Oil and Gas Accords," in Gurston Dacks, ed., Devolution and Constitutional Development in the
Canadian North (Ottawa: Carleton University Press, 1990), 225-266.
22
Susan Blackman, "Introduction to Intergovernmental Agreements," in Energy Resource Development in Federal
States (Calgary: Canadian Institute of Resources Law, 1995), 12-18.
23
See, for example, David Howard Davis, Energy Politics (New York: St. Martin's Press, 1993), chapters 3 and
4.
12

facilitated by that struggle. The unfinished legal framework is both the
result of and an instrument in that still uncompleted drive for power. 24
Governments across all of Russia are grappling with budget crises, and oil and gas
resources are important components of this problem-- for producing regions looking to increase
revenues and for regions of high consumption trying to minimize costs. Russia, like Canada,
possesses an economy dominated by raw material extraction and export. In 1994, for example,
fuel exports accounted for over half of all export earnings for the Russian Federation, with metals
and diamonds accounting for another 25 percent. 25 Who in fact controls Russia's petroleum
resources is of consequence to every region of the country and the distribution of this control is
playing a significant role in shaping Russian federalism.
The issue of control over oil and gas is still more consequential because, at present,
Russia's system of federal revenue redistribution is weak at best. For example, in 1994 the Sakha
Republic withheld all its taxes from the federal government, but financed both federal and regional
programs from its own budget?6 A similar arrangement may be appropriate for oil- and gas-rich
regions because tax collection remains unreliable and federal subsidies appear to be based more on
political motives than on the actual needs of given regions. 27 But for the sake of efficiency and
fairness, a stable centre-regional division of powers and an effective system of taxation and
collection will need to precede a concrete federal system of revenue redistribution.
The question of which level of government should have the power to capture resource
rents from Russia's oil and gas remains complex. The struggle for this power is intense and has
numerous implications for Russia's continued federalization and state-building. Clearly, control

Leslie Dienes, Corporate Russia: Privatization and Prospects in the Russian Oil and Gas Sector, Paper No.5
(University of Washington: Jackson School oflntemational Studies, 1996), 11.
25
Ibid., 43 .
26
Voorhees, "Russian Federalism and Reform."
27
For more on this see Christine I. Wallich, ed., Russia and the Challenge of Fiscal Federalism (Washington,
D.C.: The World Bank, 1994).
24

13

over oil and gas is a matter of shared jurisdiction and will require cooperation and compromise
from all levels of government. Joint authority over all mineral resources, including oil and gas, is
entrenched in Article 72 of the constitution of the Russian Federation. A central concern of this
thesis then, is how "joint authority" is actually being interpreted and practiced.

Russian Federalism
Given the size and diversity of the Russian Federation, centre-regional relations are critical
to federal state-building.

The Russian federalization process is moving in the direction of

differentiation discussed by Friedrich;28 consequently, the relationship between the centre and the
regions is changing quickly, profoundly, and often unpredictably. Nationalism is gaining strength
in some regions, making central authorities wary about the extent and pace of decentralization.
Research on centre-regional relations in the Russian Federation is emerging. Some of the
literature deals directly with the two regions studied here -- the Sakha Republic and Tyumen'
Oblast. 29 Balzer and Vinokurova take a social anthropological approach to studying Russo-Sakha
relations. Their focus is on the priorities of different political and cultural groups in Sakha, and
the ways in which these priorities are sometimes compatible and sometimes clash.

A notable

conclusion is that the "best antidote against virulent forms of nationalism is a well-managed
federalism." 30 Daniel Kempton takes a political-economic approach to Russo-Sakha relations,
one which is more congruent with this thesis. Kempton concludes that the success Sakha has had
28

Friedrich, Trends of Federalism.
Research on Sakha includes Marjorie Mandelstam Balzer and Uliana Alekseevna Vinokurova, "Nationalism,
Interethnic Relations and Federalism: The Case of the Sakha Republic (Yakutia)," Europe-Asia Studies, Vol. 48,
No. 1, 1996, 101-120; and Kempton, "The Republic of Sakha;" research on Tyumen' includes Bruce Kellison,
"Siberian Crude: Moscow, Tiumen and Political Decentralization," in Stephen Kotkin and David Wolff, eds.,
Rediscovering Russia in Asia: Siberia and the Russian Far East (Armonk, N.Y. : M.E. Sharpe, 1995), 193-206;
Alexei I. Ivandaev, "The Struggle for Power Allocation Between the Central Government in Moscow and the
Administration of the Tyumen Region," in James E. Hickey Jr. and Alexej Ugrinsky, eds., Government Structures
in the U.S.A. and the Sovereign States of the Former U.S.S.R.: Power Allocation Among Central, Regional, and
Local Governments (Westport, CT.: Greenwood Press, 1996), 222-229.
30
Balzer and Vinokurova, "Nationalism, Interethnic Relations and Federalism," 116.

29

14

in building regional autonomy stems from pursuing a "coherent strategy" to maximize its
autonomy and the close interpersonal relations between Russian president, Boris Yeltsin, and
Sak:ha president, Mikhail Nikolaev.31
As for Tyumen' Oblast, Bruce Kellison offers a comprehensive study which deals with

decentralization to Tyumen', to the autonomous okrugs within Tyumen', to the municipality of
Nizhnevartovsk, to the firm level, as well as the decentralization of Moscow's control in the oil
industry. Kellison observes that, in Tyumen', Moscow still retains much of the authority over
natural resource development that it enjoyed during the Soviet period, but that as market
mechanisms take hold, "Moscow is finding it has less control than it would like.'m

Alexei

Ivandaev' s investigation of Russo-Tyumen' relations focuses on the oil and gas sector and on
Tyumen's relationship with the Khanty-Mansiisk and Yamal-Nenets autonomous okrugs. It
analyzes some of the legislation and presidential decrees that serve to define the relationship
between Moscow and Tyumen'. lvandaev asserts that in the power struggle between Moscow
and Tyumen', "there has always existed a striving to be able to set quotas, to give out crude oil
drilling and export licenses, and to be able to draw foreign investments into the local oil and gas
industry." 33
For the most part, Russia's current federal structure was inherited from the Soviet Union.
The formal structure of the RSFSR included various types of territorial-administrative units, each
with somewhat different rights.

These included forty-nine non-ethnically defined oblasts, six

krais, and thirty-one ethnically-defined "autonomous" areas; sixteen of the latter were republics,
five were oblasts, and ten were okrugs. A significant modification was made to the RSFSR's
administrative-territorial hierarchy in 1991, shortly before the disintegration of the USSR. The

31

Kempton, "The Republic of Salcha," 608.
Kellison, "Siberian Crude," 205.
33
lvandaev, "The Struggle for Power," 225-226; these issues are discussed in detail in Chapter two.
32

15

sixteen autonomous republics and four of the five autonomous oblasts received the status of
"republic," while the rest of the subjects of the federation became grouped officially as "regions"
(see Fig. 1-1). 34 These changes were later included in the Federation Treaty of March 1992 and
the constitution ratified in December 1993.
In a state as highly centralized as the Soviet Union once was, having ethnically-defined
units was not a serious problem.

However, with decentralization, ethnic nationalism gained

momentum in many of Russia's regions. Long-pent up desires for greater regional autonomy or
outright independence burgeoned in several regions, the most notable being the Chechen
-

Republic. Many Russians supported the creation of new, non-ethnically defined regional units
modeled after Canada or the United States. 35 They argued that a country as geographically large
and ethnically diverse as Russia could neither remain united nor sustain democracy as long as
administrative divisions reinforced ethnic ones.

It has become clear, however, that political

realities make it virtually impossible to carry out a redistricting aimed at abolishing existing
administrative units. 36
Since the collapse of the Soviet Union, the working relationship between Moscow and the
regions has been both unclear and unstable. John Young identifies two main sources of confusion
in early Russian federalism. 37 First is the asymmetry of the Russian Federation that allow different
regions various degrees of power and authority.

Autonomous republics possess rights and

powers not afforded to other regions, such as the right to elect their own heads of

34

Note that the term "region" refers herein to each of the eighty-nine subjects of the Federation, including
republics.
35
Sharlet, "The Prospects for Federalism."
36
Gail W. Lapidus, and Edward W. Walker, "Nationalism, Regionalism and Federalism: Center-Periphery
Relations in Post-Communist Russia," in Lapidus, ed., The New Russia: Troubled Transformation (Boulder:
Westview Press, 1995), 79-114.
37
John Young, "At the Bottom of the Heap: Local Self-Government and Regional Politics in the Russian
Federation," in Larry Black, et. al., eds., Beyond the Monolith: The Emergence of Regionalism in Post Soviet
Russia (Baltimore: Woodrow Wilson Center Press and John Hopkins University Press, forthcoming).
16

FIGURE 1-1
Map of Russia's Territorial-Administrative Structure and Natural Resource Endowments
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outonomout oktug
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autonomous okrug
76. e....nkiis!Ui ovtonomOOt oktvg
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78 . Amunkoio oblott
79. Komchottkoio oblott
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82 . Jewish outonomovt oblotl
83. Magodonskoio ~
84. Chukots!Ui autonomous okrug
85. PrimOfskii kroi
86. Sokholinakoio oblott
87. Republic ol Sakho (Yokuno)
88. Koliningrodskoio oblott
89. lngush Republic

Source: Richard M. Bird, et al. , eds., Decentralization of the Socialist State: Intergovernmental Finance in Transitional Economies (Washington, D.C.: The World
Bank, 1995).

executives, the right to a constitution rather than a simple charter (ustav), and preferential control
over natural resources and budget revenues.

This has inspired many oblasts and krais to

campaign for the same rights as republics, or to be upgraded to the status of republic.

An

excellent example of this comes from President Yeltsin's native oblast, Sverdlovsk. In October
1994 regional leaders openly declared Sverdlovsk Oblast a sovereign republic. 38

The new

republic was to be renamed the Urals Republic, and some neighboring regions, including parts of
Tyumen' Oblast, were invited to join. Yeltsin' s response was swift and harsh. Y eltsin issued
presidential decrees that nullified Sverdlovsk' s action and dismissed the regional chief executive.
This demonstration of Moscow's authority served as a warning to other regional leaders with
similar ambitions. 39
During the first few years after the collapse of the Soviet Union, the issue of asymmetry in
the Russian Federation generated fierce and passionate debate. On the one hand, oblast elites
argued, and it was the "national elite's consensus," that asymmetry should be eliminated in favour
of the political and economic equality of the regions. 40 On the other hand, many republic leaders
insisted that the republics retain special status in a new constitution. Although no serious changes
were made, "a positive outcome of the debate was that both groups of federation subjects agreed
on the need for federalizing the Russian state. The central authorities, for lack of viable options,
supported de jure devolution of authority, which was already being decentralized de facto." 41
The second source of confusion in Russian federalism stems from the legal and
constitutional status of the federal division of powers. Two main documents serve to define the
existing arrangement of power between the centre and the regions. Although the republics of
Tatarstan and Chechnya refused to sign it, the Federal Treaty, formally signed into law on 31
38

Sharlet, "The Prospects for Federalism," 122.
Ibid.
40
Ibid. , 115-127.
41
Ibid., 120.
39

18

March 1992, ameliorated some of the centre-regional tensions of the previous year.

But the

Federal Treaty was not an attempt to define and divide power between the centre and the regions
and thus left many important issues unresolved. What was meant by the republics' ownership of
land and natural resources was left unclear. The distribution of profits from exports between the
centre and the regions, relative tax burdens, and the extent and distribution of subsidization of
local budgets from the federal treasury were left to future negotiation or enacting legislation. 42
Consequently, studies such as this one is necessary to clarify how regions' ownership of land and
natural resources is being defined and interpreted.
The Constitution of the Russian Federation did little more to clarify the federal division of
powers. Belya.kov and Raymond argue that unlike the Constitution of the United States, which
"is vague and ambiguous and therefore broad enough to be interpreted in many different ways as
expediency demands, the Constitution of the Russian Federation is specific down to the most
minute detail ... " 43 However, in the Russian constitution the issue of the federal division of
powers is certainly not "specific down to the most minute detail." In fact, Article 72 outlines
fourteen areas that fall under the joint authority of the federal and regional governments. Section
1:j alone places under "joint authority" the authority to legislate on labour, family, housing, land,
water, forests, environmental protection and, notably, mineral resources, so the number of "areas"
is really much larger. 44 The lack of clarity regarding the intergovernmental division of powers has
forced the central government to negotiate dozens of bilateral agreements with regional
governments on these issues of joint authority.
This all suggests that Russian federalism is truly confusing. But if we bear in mind that
Russia is in the early stages of the process of negotiating a federal division of powers, then this
42

Walker, "Federalism --Russian Style."
Vladimir V. Belyakov and Walter J Raymond, eds., Constitution of the Russian Federation (Lawrenceville, VA:
Brunswick, 1994), 9.
44
Ibid., 41-43 .

43

19

confusion is less surprising. The federal division of powers is not a static phenomenon in any
federally organized country, much less one trying to rebuild from rubble. 45 At the present time
Russia probably satisfies some of the aforementioned conditions for federalism but not others.
But rather than trying to conclude whether or not the Russian Federation is in fact federal, this
thesis investigates two more specific aspects of Russian federalism: it seeks to determine whether
the intergovernmental division of powers and the distribution of control in the Russian oil and gas
sector reflects what would be expected in a federally organized country and how the redistribution
of control over oil and gas is affecting Russian "federalization".

Research Design/Methodology

The process of federalization in Russia has clearly begun, but it remains debatable whether
or not Russia is now a federation.
federalization?

How may we determine the nature and extent of Russian

At this early stage of Russian federalization, "indirect approaches like fiscal

federalism or comparative constitutional analysis may offer insights into distributional questions
but reveal little about issues of jurisdiction."46 By analyzing distinct issues of policy, the working
division of powers can be more accurately assessed than with a purely constitutional analysis.
This is especially true in the case of Russia because the Russian constitution is merely three years
old and assigns many issues to the "joint authority" of the Russian Federation and the subjects of
the Russian Federation. Thus, the manner in which joint authority is being interpreted in different
policy arenas and the variation of interpretations between regions will be key indicators of the
nature and extent of Russian federalization.

45

Martin Malia, "From Under the Rubble, What?," Problems of Post-Communism, 8: 3, 1992, 197-238. Malia
uses the "rubble" metaphor aptly in reference to the what was left behind after the collapse of the USSR.
46
Solnick, "The Political Economy of Russian Federalism."

20

A study of Russia's oil and gas sector serves to illuminate the nature and extent of Russian
federalization. For several years now, Russia's federal centre has been involved in negotiations
with oil and gas producing regions, as both sides are seeking to control the development of, and
revenue from these extremely valuable commodities.

And woven into these negotiations, of

course, are the oil and gas industries. A study of the Russian oil and gas sector will also help
generate some conclusions about the future of Russian federalism.
By analyzing the newly emerging distribution of control over Russia's oil and gas, we may
better understand the processes of decentralization and federalization, particularly as they relate to
the Russian Federation. The analysis has two main components. The first is an examination of
the levers of control in the Russian oil and gas industries -- legislation and licensing, privatization
and industrial organization, export quotas and pipeline access, prices, and taxation and rent -- to
determine the extent of decentralization. As the oil and natural gas industries are of strategic
importance and integral parts of Russia's future economic plans, they are key to federal statebuilding in the Russian Federation.
The second component is an analysis of decentralization in the Sakha Republic (Y akutia)
and Tyumen' Oblast. From this analysis, it is argued that resource wealth is a considerable source
of political power and may lead directly to greater regional autonomy. 47 Tyumen' Oblast and the
Sakha Republic are good examples in the study of Russian federalism for several reasons. First, in
terms of natural resources, Tyumen' and Sakha are two of Russia's wealthiest regions, yet they
have some of the lowest standards of living in all of Russia. Second, they are, geographically, two
of Russia's largest regions. Third, each is a northern region with a number of indigenous peoples.

Prima facie, this is a common sense argument that regions with natural resources should be able to acquire
greater political autonomy than regions without many resources. While it is beyond the limitations of this thesis to
do extensive case studies of other regions, the case of the Tuva Republic is a good example of a negative case
scenario to add validity to this central thesis. Tuva has republic status but few economic or natural resources, thus,
the political autonomy derived from its status as a republic is severely diminished by its financial dependence on
the Russian government in the form of federal subsidies.

47

21

Fourth, the Sakha Republic has been one of the most aggressive of the autonomous republics in
challenging the authority of Moscow, while Tyumen' has been one of the most aggressive oblasts.
Fifth, the presence of two autonomous okrugs within Tyumen' Oblast allows for an examination
of another key aspect of Russian federalism, that is, the web of relations between the centre, a
region, and "autonomous" regions within a larger region.

Finally, in terms of autonomy

(assuming of course that autonomy is a relative and not absolute term), Sakha is now one of
Russia's most autonomous republics, while Tyumen' is one of the most autonomous oblasts. The
thesis addresses how and why these two regions have secured more autonomy than others.
Although a trip to Tyumen' was not possible, a three month visit by the author to Sakha yielded
useful information about the region.

Ideally, more regions would be included, but the

aforementioned factors serve to make these two regions highly interesting and informative, if not
optimal, examples in the study of Russian federalism.

22

Chapter 2

THE RUSSIAN OIL AND GAS SECTOR

Introduction

Oil and gas revenues are enormous in many of Russia's regions and a vital source of
revenue for the central government. In 1993, approximately 20 percent of central government
revenue came from special taxes on oil and gas and if all taxes had actually been paid, it is
estimated that more than 30 percent would have come from the oil and gas industry. 48 Also, oil
and gas exports consistently account for around 50 percent of Russia's foreign currency earnings.
Oil and gas are unquestionably Russia's most valuable revenue sources.

AB Yuri Shafranik,

Russia's Minister of Fuel and Energy, espouses, "oil and gas are the best wealth of Russia's
today." 49
The authority of the Soviet institutions that formerly managed the oil and gas industries
was immediately challenged by the regions, and by others such as the mafia and the industry elite.
AB regional governments strive for more political power and authority, they must seek out new
and greater sources of revenue to support new responsibilities.

Decentralization of political

power and authority is not particularly useful unless it is accompanied by sufficient
decentralization of revenues and economic resources.
This chapter analyzes recent developments in the Russian oil and natural gas industries
focusing on the economic and political decentralization of control, or rather the lack thereof.
Since the collapse of the highly centralized Soviet system, some control over oil and gas resources

48

Matthew Sagers, et al., "Resource Rent From the Oil and Gas Sector of the Russian Economy," Post-Soviet

Geography, Vol. 36, No.7, 389-425, 390.

49

Sbafranik is quoted in Victor Kuznetsov, "Is the Gift of Nature Profitable?," New Times, July 1995, 1-3.
23

has shifted away from Moscow. But to what extent has the industry decentralized? How has it
occurred? Who now controls Russia' s oil and gas resources? And what are the consequences for
Russian federalism?
The structure of ownership and control in Russia's oil and gas sector affords Russia's
natural gas monopoly, Gazprom, and the major oil companies tremendous power and influence.
These are some of the richest companies in all of Russia and they are beginning to diversify their
portfolios, particularly with acquisitions in the Russian media. For example, the oil major, Lukoil,
now owns 10 percent of the television channel "TV6" and 19 percent of Izvestia, arguably
Russia's best all-round daily newspaper; Gazprom owns outright the television channel "ORT",
and has recently bought 30 percent of the television channel "NTV" and 20 percent of
Komsomolskaya Pravda, a top-selling middlebrow newspaper.50 These purchases are testimony

to the wealth and power generated from Russian oil and gas, and the strong presence of these
companies in the Russian media makes them integral players in Russian politics and society.
Several key "levers" (rychagi) are used to control Russian oil and gas-- (1) legislation and
licensing, (2) privatization and industrial organization, (3) export quotas and access to pipelines,
(4) prices, and (5) taxation. Power in the Russian oil and gas industries rests with those people
and institutions in control of these levers.

An analysis of these levers will result in a better

understanding of how control over Russian oil and gas resources, and revenues from them, are
distributed.

This chapter begins with an examination of the Russian oil industry, followed by a

similar analysis of the Russian natural gas industry. The struggle for control over oil and gas
resources remains a source of conflict in Russian politics, and this control (or lack of it) may
determine whether the central, regional and local governments possess the funds necessary to
operate effectively.

50

"Russia's media: All the news that fits ," The Economist, 15 February 1997, 50-51.
24

The Oil Industry

After years of astounding increases in production levels during the 1970s and 1980s,
mostly as a result of rapid development in western Siberia (see Table 2-1), the Russian oil industry
is in decline, though it remains one of the largest sectors of the Russian economy. Figure 2-1
shows Russia's main oil regions. During the fmal few years of the Soviet Union, the oil industry
was pushed to the brink as oil export revenues were used in a desperate attempt by the Soviet
elite to preserve the communist system. The Russian oil industry is still reeling, mostly due to the
lack of key pieces of legislation, industrial reorganization, a lack of clarity concerning exports and
pipeline access, pricing problems, and the confusing tax regime for the oil industry.

TABLE 2-1
Oil Production for Russia and West Siberia,
Selected Years, 1980-1993 (in million b/d)

Total for Russia

West Siberia 's Share

1980

10.94

6.44

1985

10.84

7.32

1988

11.36

8.28

1993

7.08

4.40

Source: Robert Ebel, Energy Choices in Russia (Washington, D.C.: The Center for Strategic & International
Studies, 1994), 9.

25

FIGURE 2-1

Map of Russia's Major Oil Regions

•

Producing Region

•

Prospective Region

.,._,
'

~

1011,..."

~

R' Wakhalin

----------------Source: Ebel, Energy Choices in Russia, 27.

- --- - - - - - - ' - '

Legislation and Licensing
Federal oil legislation has developed significantly over the past six years, as the central
government has attempted to assert control over this critical sector of the economy, but some key
pieces of legislation are still lacking. During this period of legislative development, many players - notably the mafia, the oil industry elite and regional governments -- have been vying to usurp
some of the centre's control over the oil industry. Oil producing regions are competing directly
with the Russian government for the power to enact oil and gas legislation, and there are a
number of issues which yet require much attention.
The legislation that has guided the entire natural resource sector since the collapse of the
USSR is the Subsoil Act, adopted by the RSFSR in February 1991. The main feature of the Act
is that it preserves central government ownership of all subsoil resources. The Act was intended
to serve as an "umbrella" mineral resources law and was perceived as a general framework within
which more detailed amendments could be made. 51 The oil and gas industry has thus far been
forced to comply with the Act, but it is widely understood that a distinct Russian oil and gas law
is essential, as this is the case for every oil and gas producing country in the world. 52
On 10 September 1992, a draft energy plan entitled "The Conception of the Energy
Program for the Russian Federation" was approved by the Russian government. 53 The plan's
main proposal was to revive the fuel energy complex "by forming a regulated energy market, in
which trade is based on world prices and the internal convertibility of the ruble, with indirect price
controls exercised by the state through taxation and other means." 54 The scientists and engineers
involved in the formulation of the plan agreed that state control over domestic energy prices was

51

P. Cameron, "Investing in Russian Oil and Gas: The Legal Factor," Petroleum Review, March 1993, 120-121.
Ibid.; see also, Alan Jones, "Energy and Developing Law in the Russian Federation," Petroleum Economist, July
1992, 9-15.
53
A. A. Makarov et. al., "The Conception of the Energy Policy for Russia in the New Economic Situation,"
Thermal Engineering, Vol. 40, No. 1, 1993, 1-6.
54
Ibid., 3.
52

27

the chief problem for the energy sector, but prices continue to be held at artificially low levels by
the state (see below). Although the plan was a step forward, the need for a distinct Russian oil
and gas law remained.
In 1994 Russia finally had a draft Law on Oil and Gas put before the State Duma (i.e.
Russian parliament). There were six main provisions in the draft Law. 55 First, ownership rights
for oil and gas were to be certified by licenses issued by the State Committee for Geology and the
Use of Subsoil Resources, Roskomnedra. Second, "duly authorized government agencies" were
to have the power to compile a list of projects that would be subject to licensing through closed
tenders to which only Russian enterprises would be admitted. Third, in "exceptional cases," and
by decision of the government of the Russian Federation, a development license could have been
issued without holding a tender or auction. Fourth, licenses could have been assigned from one
company to another with all the rights and obligations of the license, but only with the approval of
Roskomnedra. Fifth, a "grandfather clause" existed which would have protected license holders
from legislative or regulatory enactments adopted after the purchase of the license, save for
changes relating to the protection of the environment and to labor safety.
Lastly, and most important to this thesis, the Law provided for the creation of a "federal
fund" consisting of oil- and gas-fields that are considered to fall under the jurisdiction of the
Russian government. These included fields for which no prospecting or development licenses
have yet to be issued. According to Gennady Shalmanov, the chairman of the main joint board of
legal and normative-legal support of the Ministry of Fuel and Energy, "the process of developing
the list of fields to be included in the Federal Fund is very likely to create tension between
Moscow and regional governments, which eventually may turn into major conflicts over some of

55

"Nothing is Easy," Russian Petroleum Investor, June 1994, 26-27 .
28

the more attractive deposits."56 With the power to issue development licenses, Moscow would
retain one of the most important levers of control over the oil industry. Regional governments,
however, continue to fight for this power.
Given the importance of oil and gas in Russia's economy, it might be expected that
passing an oil and gas law would be a serious challenge. Indeed, this has been the case. On 27
May 1994, the draft Law on Oil and Gas failed to pass the Duma. 57 Several parties boycotted the
vote, thus, a mere 251 of the parliament's 450 deputies were present and, due to the low turnout,
the measure received only 211 of the 226 votes needed for passage. Unfortunately, the latest
draft of the Law on Oil and Gas also did not resolve the issue of joint ownership and jurisdiction
over resources between Moscow and the republics. 58 It is certainly possible that very powerful
interests are benefiting from legal uncertainty, and are working to ensure that it persists. But,
after some amendments to the draft Law, Russia should have a Law on Oil and Gas in place in the
not too distant future.
One piece of legislation which has passed is a production-sharing-agreement law (PSA)
which became operative on 30 December 1995. The law is a "blueprint" for contracts between
Russian and foreign oil companies, but it must be emphasized that the law applies to both foreign
and domestic investors. The "primary purpose of any production sharing arrangement is to offer
a stable, attractive tax regime fixed for the full term of the Agreement and operating outside the
normal legislative framework in return for a share of production." 59 Investment in Russia's oil
industry is still hampered by an unfavorable and unstable tax regime where taxes "change every
day and are imposed retroactively." It was hoped that a production sharing law would provide a

56

Ibid.
Ibid.
58
Leslie Dienes, Corporate Russia: Privatization and Prospects in the Oil and Gas Sector (University of
Washington: Jackson School of International Studies, 1996), 34.
59
Chris Ferguson, "Russian Law- production sharing agreements," Petroleum Review, February 1996, 60-62.
57

29

mechanism to make taxes stable throughout the term of an investor's involvement. As one analyst
suggests, the PSA "does not steal from the state - it bars the state from stealing." 60 Production
sharing agreements are common in countries with unstable tax systems such as Russia.
The PSA also met several challenges before being enacted.

The chairman of the

Federation Council, Vladimir Shumeiko, personally led a campaign for the defeat of the PSA
while conceding that the law is "very necessary for the country'' and that with new amendments,
the law would be passed by parliament. Shumeiko's spokesman, Yuri Algunov, suggested that
this contradiction stemmed from the fact that the bill offered "no guarantee that the share in
decision-making and the share of income for local [i.e. regional] governments was properly
secured." 61 The bill failed in the Federation Council by a large margin on 3 October 1995, and on
27 October the Duma fell 12 votes short of the 300 necessary to override the veto.

It was

another three months before the PSA was passed by both houses of parliament and became
operative. However, a reconciliation commission introduced highly restrictive amendments to the
original version that will make the law completely unworkable -- disputes arising from the PSA
must be resolved in Russian court, and the final version gives the state the right to unilaterally
amend the terms of any agreement in the case of "drastic changes in market conditions." 62
Thus, acting collectively via the Federation Council, Russia's regions were able to force
amendments to guarantee a share of control at the regional level. However, this may not have
been the only motive behind the amendments.

Mikhail Subbotin, one of the bill's authors,

maintained that Shumeiko was simply flexing "his political muscle." Shumeiko was implicated in

Yulia Latynina, "Absurdity: Adventures of the Law on Production Sharing, or a Dog in the Well," Sevodnya, 2
November, 1995, 3, translated in Current Digest oft he Post-Soviet Press, Vol. XLVII, No. 44, 1995, 8-9.
61
Steve Liesman, "Russian Oil Bill Still Alive," Globe & Mail, Friday, 6 October, 1995, B7.
62
Dienes, Corporate Russia, 34.
60

30

several financial scandals and may have been trying to secure his position as chairman of the
Federation Council, then an appointed body. 63 Furthermore,
[w]hile it was publicly claimed that the late amendments were added to
placate conservative elements opposed to Russia's strategic resources
falling into the hands of rapacious foreigners, it is likely the real reason
behind the amendments was to enable the legislature to wrest control of the
process from unaccountable civil servants. In a country known for its
corruption, where none of the normal constitutional checks and balances
are in place, the legislature felt the need to oversee the agencies negotiating
the Agreements. 64
It is likely that taking power out of the hands of "unaccountable civil servants" was indeed an
intended consequence, but the power of Russia's "conservative elements" should not be so easily
dismissed or underestimated. Many communists and nationalists still favour full state control over
oil, at both the national and regional levels.
Environmental legislation has a profound impact on the Russian oil industry, but it is still
evolving and remains vague. There is little doubt that this is an area where stable, consistently
enforced legislation is critical. Soviet oil production left a legacy of environmental abuse and
post-Soviet Russia's lingering instability has done little to ameliorate the situation. Since 1991,
accident rates at well sites and along pipelines have been increasing as a result of the overall aging
of the capital infrastructure and a decrease in maintenance and safety practices. 65 That the power
to protect the environment has yet to be vested at a single level of government has led to
confusion and corruption, with oil producers often receiving conflicting information from federal,
regional and local authorities.
Environmental protection is an area where regional control may be appropriate, as there
are likely variations between regions as to what are acceptable environmental costs reflecting the

63

Liesman, "Russian Oil Bill Still Alive."
Ferguson, "Russian Law," 60.
65
James Peterson, "Russia's Environment and Natural Resources in Light of Economic Regionalization," PostSoviet Geography, Vol. 36, No.5, 1995,291-309.
64

31

diversity of regional economies.

Indeed, in a recent treaty on the demarcation of powers,

Moscow for the first time went so far as to delegate to the Republic of Udmurtia "sole authority"
over the environment, and similar treaties are on the table for Krasnodarskii Krai,
Kaliningradskaya Oblast and Komi Republic. 66 Other powers demarcated under the Udmurtia
treaty included the demarcation of state property ownership, the organization and management of
customs affairs, and the possession, utilization and disposition of forest and petroleum resources,
all of which affect the oil industry.

Moscow may have simply downloaded some of these

responsibilities, but the agreement does give Udmurtia considerable power and authority. As with
other centre-regional agreements, the Udmurtia agreement should set a precedent for the other
autonomous republics of the Federation and perhaps other regions as well. Whether delegating to
regional governments the power to protect their environments will make enforcement more
predictable for the oil industry remains to be seen; what is important is that that this power is
beginning to be consolidated at the regional level.
As with many aspects of Russia's transition period, Russian oil legislation is characterized
by instability. Enacted laws are still immature and some critical legislation is lacking (most
notably the Law on Oil and Gas), which leaves the industry with some unresolved issues. Stability
will be difficult to achieve without a comprehensive oil and gas law to serve as a "constitution"
for the industry. And with the federal division of powers far from complete, the situation remains
very fluid. Thus, although the Russian government is still the legal owner of all subsoil resources,
regional governments have earned a measure of control and collectively Russia's regions have
exercised power through the Federation Council, using the upper chamber of parliament to force
amendments to critical pieces of oil legislation.

66

Nadezhda Bannikova and Dmitry Kamyshev, "Relations Between the Capital and the Regions: Special
Relations Will Help the Capital Deal With Udmurtia," Kommersant-Daily, 18 October 1995, p. 3, translated in
Current Digest ofthe Post-Soviet Press, Vol. XLVII, No. 42, 1995, 16-17.
32

Privatization and Industrial Reorganization
An intense struggle over the future direction of the Russian oil and gas industry began in
early 1992. Victor Chernomyrdin, then Deputy Chairman of the Council of Ministers in charge of
energy, was largely responsible for overseeing the reorganization of the industry. Positions on
this issue ranged from complete nationalization of the oil industry to all out privatization. Months
of discussion culminated with Presidential Decree No. 1403, 67 signed on 17 November 1992. The
decree regulated the procedure for privatization and stock issuance of enterprises in the oil
industry and it envisaged the creation of four large oil companies in which the federal government
would hold a controlling stake. 68 Lukoil, Surgutneftegaz and Yukos were established as vertically
integrated joint-stock companies (JSCs) while the fourth, Rosneft' , acts as a holding company for
the state throughout the industry. In 1993 these four organizations controlled over ninety percent
of Russian oil output. 69 Since 1993, other vertically integrated companies have been established,
including the Orenburg Oil Company (ONACO), Slavneft', the Eastern Siberian Oil Company
(Vostok), and the Siberia Far Eastern Oil Company (Sidanco).

Given the absence of a

comprehensive state policy in the oil and gas sector, decree No . 1403 noted only general
"outlines" of the process of privatization and left resolution of many issues "for the future." 70
As the names of these "oil majors" suggest, each has carved out a geographic sphere for

itself which has led not to increased competition but rather the creation of geographical oil
monopolies controlled by oil "generals." 71 The lack of competition in bidding for development

67

The decree is titled, "On Special Features of the Privatization and Transformation into Joint-Stock Companies
of the State Enterprises, Production, and Scientific-Production Associations of the Oil and Oil Refining Industry
and Petroleum Product Supply".
68
Arild Moe and Valeriy Kryukov, "Observations on the Reorganization of the Russian Oil Industry," Post-Soviet
Geography, Vol. 35, No. 2, 1994, 89-101,90.
69
Ibid.
70
Ibid., 90-91.
71
Robert Ebel, Energy Choices in Russia (Washington, D. C. : The Center for Strategic & International Studies,
1994), 25-26.
33

licenses makes it extremely difficult to make an accurate valuation of individual deposits or fields.
From the outset, the oil majors were made responsible by the Russian state for supplying oil
products to specific regions (although a few regions were not assigned a supplier). For example,
Sidanco supplies oil products to the regions from Baikal to the Far East. V. V. Razuvaev argues
that, by and large, "this circumstance has led specifically to the practice of combining the overt
monopolism prescribed from above with the more covert competition between companies in the
"non-assigned" regions." 72
With the reorganization of the industry, the oil majors have usurped a great deal of power
and influence and are in the middle of some of Russia's biggest political struggles. As an article in
The Moscow Times reported,

the major oil companies are already at the hub of all the country's basic
domestic conflicts: those between the military-industrial complex, the
agricultural sector, and the energy sector; between the center and the
regions; and between political forces which favor protectionism and those
which support an open economy ... [R]elations between the oil companies
and the [central] government will remain tangled for the foreseeable
future.73
The approach to privatization, or rather destatization, of the Russian oil industry had four
basic features. 74 First, privatization of oil industry was unified in character, that is, differences in
approach were determined not by the specifics of the entities, but by their degree of "readiness"
for transformation -- companies were forced to demonstrate that they were prepared to privatize
before they were permitted to do so. Second, the federal level played an active decision making
role regarding the creation of independent companies and the dismantling of existing production
associations. Third, Rosneft' was given a significant portion of shares in reorganized enterprises

V . V . Razuvzev, "The Oil Companies in Russian Politics," Russian Politics and Lilw, March-April 1996, 71-81 ,
75 .
73
Vladimir Razuvayev, "Managing Russia's Oil," in The Moscow Times, 12 March 1995, 25 .
74
Moe and Kryukov, "Observations," 90-91.

72

34

in the oil industry. Fourth, dividends from state shares and revenues from privatization were to be
allocated to finance technical re-equipment, reconstruction, and expansion of the production
capacities of oil-sector enterprises.
In appearance, privatization has decentralized the oil industry, but in practice power
remains highly concentrated in the hands of the oil majors and in the federal Ministry of Fuel and
Energy via Rosneft' and Roskomnedra. 75

There is no question that the central government

supports the continued growth of the vertically integrated oil majors.

A good example is the

manner in which central authorities quashed the bid for regional independence by the production

. .
p ermneft' .76
associatiOn,

In mid-1995, Lukoil acquired Permneft's refinery assets and

subsequently the whole company. Lukoil acquired Permneft, and later eight more regional oil
firms, through direct transfer from the Chernomyrdin government. The direct transfers increased
Lukoil's reserves by one-third and its production by 29 percent. The move also gave Lukoil a
virtual monopoly on exploration, development, processing, and transit routes from the upper
Kama River to the Caspian Sea, except in the republics of Tatarstan and Bashkortostan. The
political implications of the transfers, just as election campaigning was approaching, were only too
obvious;77 as the head of Lukoil, Vagit Alekperov, publicly supported President Yeltsin's reelection. 78
The oil sector continues to be based upon the Soviet principle of a "single production and
technological complex", within which production associations (PAs) are the core units. Many
production associations hold regional monopolies, a situation which affords the presidents of PAs
a great deal of power. In turn, within production associations, actual production is carried out by

75

Ibid., 94-97; see also Valeriy Kryukov, "Industry Profile. Siberian-based Oil Companies,"
http://solar.rtd. utk.edu/friends/siberialeco_bus/f2_6.html, 1-2.
76
The Permneft example is from Dienes, Corporate Russia, 32.
77
Ibid.
78
Robert Orttung, "Lukoil Head Backs Yeltsin," OMRI Daily Digest, 17 April1996.
35

production organizations (POs), sometimes referred to as field directorates. While P AB manage

abnost all ancillary services -- supporting transport services, rig assembly and well maintenance,
as well as preparation of tracts for drilling, management of drilling operations, exploration, etc. -POs are normally engaged in only one or a few of these tasks. 79 AB was the case in the Soviet oil
industry, POs are highly subordinate to their respective production associations, particularly
financially.
Production organizations are in a position similar to local governments; that is, most
desire greater autonomy but lack the fmancial stability and independence to realize this goal.
Superordinates (in this case PAs and holding companies) are reluctant to delegate power and
continue to control the finances of POs. But there have been some tendencies towards economic
pluralism. In 1987-88, under the Soviet "Law on State Enterprises", some POs were given a
more independent status as state enterprises which enabled them to establish their own bank
accounts and gave them more control over operational decisions, such as negotiating and paying
service organizations; but by 1991, only 15 of 140 POs had received this status, most notably the
POs of the largest production association at the time, Nizhnevartovskneftegaz. 80
One PO from Nizhnevartovskneftegaz PA, however, successfully gained full autonomy,
the only instance of such to date.

In 1990 Chernogorneft' successfully "seceded" from

Nizhnevartovskneftegaz, employing cleverly the Law on State Enterprises. The general director
of Chernogorneft', S. Volkov, managed to take the PO completely private by transforming it into
a "leased company" (arendnoye predpriyatiye). Such a risky entrepreneurial act could not have
succeeded without the acquiescence of highly placed people in Moscow and it "was perceived by
other POs that it would have been impossible to duplicate at the time;" Volkov, a former

79

80

Moe and Kryukov, "Observations," 92.
Ibid.
36

Communist Party official, had connections in Moscow that "were simply too good." 81 Other POs
aspiring for independence have not had similar success and remain under the "tutelage" of their
respective P AB.

Similarly, P AB remain subordinate to their respective holding companies,

although there have been some exceptions in the autonomous republics.
It is largely the structure of ownership that has perpetuated centralization in the Russian
oil industry (see Fig. 2-2). The major Russian oil companies have been established as holding
companies, amalgamating existing P AB and having a 38 percent stake in each. It is important to
note that a 38-percent share is a controlling share, since 25 percent of all shares are non-voting
shares distributed to employees. 82

While in decree No. 1403 of 17 November 1992, the

relationship between holding company and subsidiary is represented as primarily financial, and on
paper the arrangement appears to support the independence of subsidiaries, as long as the
vertically integrated companies hold controlling shares they will retain tight control over their
subsidiaries, regardless of their status as joint-stock companies or state enterprises.
AB most production associations operate in a given region, they tend to have close ties

with regional governments. Just as autonomous republics have secured a relatively high degree of
autonomy from the federal government in the political arena, republican governments have also
earned a significant degree of control over their oil and gas resources by establishing republicowned oil and gas companies.

For example, the autonomous republics of Komi, Tatarstan,

Bashkortostan and Sakha (Yakutia) have all formed their own oil and gas companies, Komineft' ,
Tatneft', Bashneft' and Sakhaneftegaz, respectively.

81

These are all former PAs that

Bruce Kellison, "Siberian Crude: Moscow, Tiumen, and Political Decentralization," in Stephen Kotkin and
David Wolff (eds.) Rediscovering Russia in Asia: Siberia and the Russian Far East (Armonk, N. Y.: M. E.
Sharpe, 1995), 193-206, see 200-203.
82
Moe and Kryukov, "Observations," 94.
37

FIGURE 2-2
Organizational Structure of the Russian Oil Industry

51%

PA

PA

A

PA

PA

PO PO

PO

PO

PA

/

PA

PA

PA

PA PA

PA

PO

PO

PO

PO

PA

~

PO PO PO

PO

PO

PA=Production Association
PO=Production Organization
ROGCs= (Autonomous) Republic Oil and Gas Companies

38

PO

PO

PO

PO

PO

have been appropriated by regional governments since 1991. While most PAs tend to hold
regional monopolies in their geographic domain, none have earned outright independence from
their holding companies as is the case with these republic-owned companies.
The Russian Federation maintains a 45 percent stake in new vertically integrated holding
companies.

Of the remaining 55 percent, 40 percent was sold at investment auctions and 15

percent to employees and residents of the producing area. But again, 25 percent of the nongovernment shares are non-voting shares, leaving the Federation with a controlling share.
This allocation of shares in the new oil companies would appear to give
federal authorities decisive influence in their operations. This impression is
strengthened by a provision that grants the federal government the
authority to appoint directors in these companies, and that stipulates that
members of the companies' management board have to be approved by the
government.... Government-appointed members of the respective boards
of directors shall vote as a bloc according to government instructions. This
set-up resembles companies in other countries where the state holds a
majority of the shares. In these countries, the government does not
interfere in daily operations of the companies, but can influence major
strategic decisions that are brought before the board of directors or the
general assembly. 83
Thus, the oil majors are afforded a degree of independence, but the Russian government is not
prepared to lose control over an "industry that poses an implicit threat to the government, since
oil supplies are so vital to the stability of the economy and thus the society. " 84
Lukoil has been the most liberal of the Russian oil majors in terms of privatization,
restructuring and foreign investment. When Lukoil was established in April 1993, the joint-stock
company (JSC) had a book value of $29 million US. By mid-1994 its market value had reached
$850 million US. 85

In a second phase of privatization, shares totaling 20.4 percent of the

company's registered capital were offered to Russian investors and another 15 percent were

83

Ibid., 94.
Ibid., 97.
85
Oil & Gas Journal, 25 July 1994, 38.
84

39

offered to foreign investors. A further 10 percent of Lukoil shares, then owned by the state, were
earmarked for sale through a voucher auction. 86 Lukoil' s short term strategy involves stabilizing
oil production, increasing refining capacity, doubling the number of retail outlets in Russia from
the current 1,300, and expanding activities abroad. Lukoil has already exhibited a degree of
independence from the federal government, but it remains to be seen whether the state will
relinquish its controlling shares.
Rosneft' has also made shares available on the Russian market.

A 1995 Presidential

decree enabled the changing of Rosneft' into a JSC. As with the other oil majors, the state retains
a 51 percent interest with remaining shares sold on the stock market. 87 While it is unlikely that
the state will relinquish control of Rosneft' any time soon, shareholders may be able to exert
pressure, and they may be able to influence the state on important strategic decisions.
The oil majors and some PAs have earned a degree of independence, but Moscow still
controls key elements of the industry and retains ultimate decision making power with its
controlling share in the major holding companies. It seems evident that from the beginning, the
central government "intended to exert a large measure of influence over [production associations]
through substantial ownership of stocks in the newly created holding companies. This influence,
in fact, borders on control." 88

Production associations have significant control over daily

operations and, due to their size, many continue to operate as geographical monopolies; but most
remain subject to the strategic decisions of the holding companies.

Finally, as with local

governments, 89 many POs are being given more responsibilities without the requisite fmancial
resources.

86

Ibid.
Oil & Gas Journal, 17 April 1995, 28 .
88
Dienes, Corporate Russia, 10.
89
See, for example, John Young, "At the Bottom of the Heap: Local Self-Government and Regional Politics in
the Russian Federation," in Larry Black, et al., Beyond the Monolith: The Emergence of Regionalism in Post
Soviet Russia (Woodrow Wilson Center Press and John Hopkins University Press, forthcoming) .
87

40

Given the volatility of oil markets, the capital intensity of the industry and the high degree
of risk involved, vertical integration of the Russian oil industry should not come as a surprise as it
has proven to be a time-honored strategy worldwide. Russia's Fuel and Energy Minister, Yuri
Shafranik, is confident that large, vertically integrated oil companies, as the basis for the
organization of the Russian Federation's fuel-and-power complex, will guarantee the security of
the domestic market and participate in the division of spheres of influence in the world market. 90
Vertical integration in oil industries is generally deemed necessary for efficiency, security and
stability -- three things that are certainly in short supply not only in the Russian oil and gas
industry, but in Russia's economy, politics, and society as a whole.

Export Quotas and Access to Pipelines

Given the instability of the Russian transition, the central government has taken measures
aimed at protecting domestic oil producers and consumers. The wide differential between world
prices and Russian domestic prices forced the central government to use a quota system in order
to restrict the amount of oil being exported. Acting as agents for producers, "special exporters"
(normally producers or trading companies) were the only legal entities legally authorized to
export. The quota system was "a major policy instrument in regulating the oil industry, especially
in maintaining the low internal price level," however, under intense pressure from the IMF and
World Bank, the quota system was abolished. 91
Initially, the Ministry of Economics set an aggregate quota based on expected production
volumes and consumption requirements.

The export quotas were then desegregated into

assignments for producers by the Ministry of Fuel and Energy, but with assistance from the
90

Pyotr Zhuravlyov, "Government Decides to Manage Oil Complex," Sevodnya, 21 September 1994, translated in
Current Digest ofthe Post-Soviet Press, Vol. XLVI, No. 38, 1994,21.
91
Energy Policies ofthe Russian Federation: 1995 Survey (Washington, D. C.: International Energy Agency,
1995), 131.
41

Ministry of Economics, the Ministry for Cooperation with CIS Nations and the Ministry for
Foreign Economic Relations. The export quota system, however, was plagued by a problem
typical of Soviet economic planning - that is, "problems in developing realistic forecasts for
energy consumption resulted in a bottling up of too much oil on the domestic market." 92 This
forced quotas to be repeatedly adjusted. While export quotas were designed to ensure domestic
supply would be sufficient to meet consumers' (mostly refineries') needs, the actual result was a
situation where refineries often had oil in excess of their capacity. In December 1994, a system of
domestic quotas was proposed, but, since this would have jeopardized future IMF and World
Bank loans, the plan was scrapped.
The oil export quota system was finally dismantled with a 31 December 1994, resolution,
issued by Prime Minister Victor Chernomyrdin, which called for the liberalization of oil exports
and "stipulated that the volumes of exportable oil envisaged for each producer should vary with
the amount of oil produced." 93 The resolution was followed by a 6 March decree from President
Yeltsin "that fully relaxed foreign trade and disbanded the institution of special exporters. It also
revoked the many tariff concessions enjoyed by selected enterprises and regions, and explicitly
prohibited the restriction of exports through a mandatory domestic sales target." 94

In lifting

export quotas, the federal government has released its grip on one of the important levers of
control over the oil industry.
As most oil pipelines are operating at or near capacity, a key issue has been pipeline

regulation and access. This will be an even greater issue now that export quotas have been lifted
because there will be increased attempts to export crude oil and petroleum products. The agency
responsible for the overall pipeline system' s operation is Transneft' , which includes twelve

92

Ibid.
Ibid., 132.
94
Ibid.
93

42

regional pipeline associations organized as "daughter" JSCs. 95 As a natural monopoly wholly
owned by the Russian government, Transneft' is "nominally a regulated common carrier operating
under several existing laws (notably the Law on Natural Monopolies)" and is required "to offer
nondiscriminatory pipeline services to all customers, including equal access to the network by all
accredited shippers and nondiscriminatory tariffs." 96 When pipelines are operating at capacity,
rules call for prorationing, but they do not specify precisely how this is to be done. Of course,
this makes it difficult to be "nondiscriminatory." An independent regulating agency, known as the
Federal Service, was established in March 1995, but its position remains weak.
Transneft' is a significant vehicle for the central government in maintaining central control
over the oil industry:
The pipeline monopoly has long ranked among the most immovable and
impenetrable of Russian enterprises. It earned about $450 million US in
profit for the government [in 1996]. But, to the frustration of its
customers, little was re-invested in the pipeline system, which Transneft
operates but does not own.... Exporters have to wheedle quotas for
pipeline use out of an opaque bureaucracy operated jointly by Transneft
and the federal energy ministry. Pipeline charges are high, yet users are
denied the stability of long-term contracts. 97
Pipeline access and regulation are issues that will remain omnipresent in the oil industry as the
desire to export increases and, at the same time, pipeline infrastructure continues to age and
deteriorate.
Pipeline access is an issue which has a direct effect on Russian federalism because it
transcends regional borders.

With pipelines being centrally controlled by the Transneft'

monopoly, disparities may result, even when the system is run honestly. Producers that are denied
sufficient access to the pipeline network may be discriminated against. Nevertheless, if regions

95

Ibid., 125 .
Ibid., 128.
97
"Russia's energy monopolies: Giving an inch," The Economist, 1 February 1997, 66.
96

43

controlled pipelines they could demand exorbitant prices, thereby denying producing reg1ons
precious revenues, leaving consumers helpless, and disrupting federal interests. Also, the Russian
government must play a leading role because a lack of interregional regulation will undercut
attempts at intraregional regulation. With Transneft', central control over oil transport remains
secure.

Prices

The dilemma of oil prices is that while it is necessary, economically, for Russia to have a
domestic oil price that is at or near world market value, it is currently almost impossible socially,
and thus politically, to raise the price to such levels. Oil consumers are already having a difficult
time paying their bills and rapid price hikes would bankrupt many Russian enterprises and leave
millions of residential consumers without heat and power. Such a situation would leave Russia
with a cold, unemployed, and thus angry electorate, and support for nationalist and communist
parties would probably increase.
Prices tend to be the most difficult problem for the Russian oil industry. At the time of the
collapse of the USSR, while the world price fluctuated around $20 US per barrel, the Russian
internal price could be calculated in cents per barrel. 98 This was one of the principle causes of
waste and inefficiency in the Soviet oil industry. Although the domestic price for Russian oil has
now risen substantially, it remains state-controlled below the world market price. Presidential
decree No . 23 of 17 February 1992 allowed enterprises to dispose up to 40 percent of their
produced oil and gas at free prices (i.e. negotiated between buyer and seller), but these "free"
prices are still well below world market prices .

98

Cameron, "Investing in Russian Oil and Gas."
44

There are three serious problems that have arisen from artificially low prices. First, oil is
often exported illegally by producers trying to get a better price for their product.

These

clandestine exports generally avoid taxation which allows the illegal exporter to capture virtually
all of the resource rent (see below). In September 1992, the Department for Economic Crimes in
the Russian Internal Affairs Ministry reported that the illegal export of unlicensed oil to Europe,
most of which flows through the Baltics, cost the federal government 190 billion rubles (about
US$950 million).99 The so-called "oil mafia" has capitalized on new laws designed to encourage
joint ventures in the once-restricted energy sector. In one case, a new joint venture, "approved by
the government after presenting a detailed drilling schedule, never drilled a single well, even
though it managed to conclude contracts for the sale of seven hundred thousand tons of oil. Its
crude actually came from supplies already produced by government wells, and siphoned off with
the collusion of officials." 100

Also of consequence, the murder of two western Siberian oil

company presidents "has been widely interpreted as a manifestation of the effort of organized
crime to take over parts of the oil industry." 101
Regional authorities appear to be involved m clandestine oil sales as well, taking
advantage of "market" prices. By decree No. 151 of the President of the Russian Federation,
regional authorities were given the right "to establish regional trade and raw material "funds"
through the purchase (at government-regulated prices) of up to 10 percent of the oil produced
within their territory, and to sell part of this volume (up to 40 percent) at "free" prices."

102

Revenue from these sales were to be transferred directly to regional budgets. For 1992, however,
it is estimated less than 2 percent of production (6.7 million tons) was sold on the commodity

99

Stephen Handelman, Comrade Criminal: The Theft of the Second Russian Revolution (London: Michael
Joseph, 1994), 226.
100
Ibid., 114.
10 1
Dienes, Corporate Russia, 35 .
102
Sagers et. al., "Resource Rent," 401-402.
45

exchanges, and overall, 20-30 percent of oil production was believed to have been disposed of
outside state channels, so most of the increase in "free" oil sales occurred outside the
exchanges. 103 Therefore, a good portion of oil was still being sold at government-regulated prices
or through informal channels and much of the revenues never found their way into regional
budgets.
A second major problem resulting from artificially low oil prices is that the price of almost
every other domestically produced product is being distorted.

The Russian oil price must

eventually rise to world levels even though this will lead directly to further inflation.

Full

economic recovery and stabilization will be extremely difficult without raising domestic oil prices.
And third, even with controlled prices, oil consumers owe the oil industry staggering amounts of
money. Inter-enterprise debt is a huge problem for the Russian economy, but particularly for the
energy industry, to which the bulk of these arrears are owed. Hence the economic necessity, but
political difficulty, of allowing oil prices to rise to world market levels.
Inter-enterprise debt in the energy industry has been exacerbated by the aforementioned
regional dimension of industrial organization, with selected companies supplying specific regions.
Higher energy prices have led to acute energy crises in some regions. Some oil and gas suppliers
have reduced or cut supplies to regions that have accumulated large debts . Without a choice
among oil and gas suppliers, regions may be held hostage by their oil and/or gas supplier. In the
city of Tver, for example, despite freezing temperatures in October 1996, heating stations were
not being turned on because of the city's 210 billion ruble ($40 million US) debt to Gazprom. 104
Although mayor Aleksandr Belousov complained that two thirds of the debt was owed by federal
institutions within the city, Gazprom still cut supplies to the city by 45 percent. A similar crisis

Ya. Ruderman, "Oil in Russia has still not become a stock market commodity," Biznes-MN, 4, 1993 ; cited in
Ibid.
104
Peter Rutland , "Cold War in Tver," OMRI Russian Regional Report Part II, Vol. 1, No.6, 2 October 1996.
103

46

arose in Samara Oblast when the local power company, Samaraenergo, could not afford to pay its
1.5 trillion ruble (US$283 million) debt to its gas supply company, Samaratransgaz. 105

The

problem stems the inability of residents and enterprises to pay their electricity and heating bills,
which in turn makes power companies unable to pay the oil and gas companies.

However,

artificially low prices will simply allow this problem to fester into the foreseeable future.
With the authority to set prices, the central government holds one of the critical levers of
power in the oil industry. Some regions, however, are being delegated more authority in setting
oil prices. For instance, the legislature of Tyurnen' Oblast, Russia's most important oil and gas
producing region, has reserved for itself the right to set oil prices in the oblast. 106 But this does
not include the vast majority of Tyumen' oil, which is sold to other parts of Russia or exported
abroad.

Taxation and Resource Rent
Resource rent represents income generated in excess of what a producer would normally
receive in terms of returns on investment (i.e. capital and labor). This type of income is possible
because of low costs of production and/or transportation which, in turn, reflects favorable
geological conditions and/or geographic location. Resource rent may accrue to producers as
residual profit or surplus, to employees of producing firms in the form of higher wages, or to
consumers as a result of lower prices. In most countries, however, "governments, as owners of
the land or mineral resources in their states, attempt to capture most, if not all, of this resource
rent through various means, usually through special taxes."

105

107

Penny Morvant, "Energy Crisis Threatens Samara Oblast," OMRI Russian Regional Report Part II, Vol. 1, No.
3, 11 September 1996.
106
Bruce Kellison, "Siberian Crude: Moscow, Tiumen, and Political Decentralization," in Kotkin and Wolff, eds.,
Rediscovering Russia in Asia: Siberia and the Russian Far East (Armonk, N.Y.: M.E. Sharpe, 1995), 193-206,
199.
107
Sagers et al. , "Resource Rent," 390.

47

Although Soviet enterprises were not subject to market relations, some still generated a
type of rent because of favorable operating conditions leading to lower costs. In the Soviet oil
and gas sector, low domestic prices led to a rent type income for some producers, regardless of
whether they were exported or not, and "it appears that oil and gas rent alone were equal to about
40 percent of total budget revenues." 108 Of course, in the centrally-planned economy, virtually all
resource rent was captured by the central government.
Thus, the "rent" generated from the exploitation of the country's natural
resources was largely directed toward the maintenance of the state-political
system and the international expansion of the former USSR, and use was
made of the levers of a planned centralized economy for its accumulation.
The centralized state structure made it possible to subordinate the
exploitation of resources in the territory of any geographic unit (including
union republics and autonomous republics) to the common goals and
interests of the dominant political system. 109
Since the breakdown of the Soviet Union's "centralized state structure", lower levels of
government have been scrambling to capture greater shares of resource rent. The oil industry is a
prime target for many regional and local governments, particularly those with exporting producers
within their territory.
The implementation of market relations in Russia has necessitated significant tax reforms.
Much of the tax reform effort has been ad hoc, driven by the need to minimize budget deficits.
For the oil industry, taxation has been unstable and oppressive, as the number of taxes and
payments collected from oil enterprises for the federal, regional and local budgets is around 30, or
even greater in some regions due to the relative power of regional and local governments to
assess and collect taxes .11 0

108

Ibid., 395.
Ibid., 393.
11 0
Ibid., 414.

109

48

In the oil industry, four main taxes apply. First, the export tax, introduced in January
1992, was devised as a wedge between foreign and relatively lower domestic prices. Such a tax
was necessary for the security of the domestic oil market. As world prices remained substantially
higher than domestic prices, without the export tax the incentive to export would have been too
intense, leaving domestic consumers with unaffordable oil, or no oil at all. This tax, in accordance
with the Law "On Export Tariffs", is levied in rubles and paid directly into the federal budget. 111
Second, the excise tax, introduced in August 1992, is levied as a percentage of sold
product for all enterprises and varies according to individual enterprises' production costs. The
excise tax is "the pre-eminent mechanism of collecting resource rent because of its variable,
profit-sensitive character." 112 Proceeds from this tax normally go to the central government,
however, their assignment to regional and local budgets is possible under certain arrangements
between the federal government and its regional counterparts. For example, such an arrangement
was concluded between the Russian government and Samara Oblast, where 50 percent of the
excise taxes on oil produced in the oblast is transferred to the oblast budget for developing fuel
sources. 11 3 However, the central government has been less accommodating with other regions.
Dienes' account of a situation in Bashkortostan is a good illustration of this point. On 3 August
1994,
Bashkortostan' s government set a new excise tax on oil that is to be remitted to
Moscow. The Bashkir action flatly contradicts the resolution of the federal
government on a new excise tax. The federal government quadrupled the per ton
tax payment and would have bankrupted Bashneft' in short order. (Maintaining a
slim 3 percent profit rate would have required a selling price of 110,000 rubles per
ton, impossible for refmeries to pay). Bashkortostan' s new excise tax amounts to
only 39 percent of that previously paid and a mere tenth now demanded by
Moscow. 114

111

Ibid., 416.
Ibid.
11 3
Ibid., 41 7.
114
Ibid., 34.

11 2

49

Thus, some regional governments have been successful in capturing all or a portion of this
important source of revenue, but only through special deals with the Russian government.
Third, royalties and bonuses, introduced in mid-1992, are two other examples of rentcapturing mechanisms. Royalty (i.e. payment for use of the subsoil) rates have varied between 6
percent and 16 percent of the value of product sold (low-cost fields being subject to higher rates).
A bonus, also payment for the use of the subsoil, is a one-time payment negotiated as part of the
license bid and subject to minimums set by law. Revenues from royalties and bonuses go to all
three levels of government -- 40 percent federal, 30 percent regional and 30 percent local -although for "regions occupied by minority peoples and ethnic groups, some of the payments
entering the federal budget are to be used for the socioeconomic development of these peoples
and groups." 11 5
Fourth, a geology fee is applied to all oil fields that have been explored by the Geology
Committee or its Soviet predecessor. The geology fee is assessed as an ad valorem rate that has
typically been 10 percent of the domestic sales price, with proceeds going to a special
extrabudgetary fund used to pay for the geological exploration activities of the Geology
Committee. 11 6 However, on 30 December 1993, the geology fee was changed under Government
Resolution No. 1359.

With the change, varying "rates by region and by enterprise were

introduced to reflect the fact that enterprises are increasingly fmancing geological exploration
themselves." 11 7 Thus, the geology fee is not a direct contribution to government budgets at any
level, though the Geology Committee is a federal agency.
Not surprisingly, the system of taxation in the oil industry appears to favour the federal
government.

11 5
11 6
11 7

However, as this tax system evolves, some regional and local governments are

Ibid., 418 .
Ibid .
Ibid.

50

challenging Moscow's position. On the one hand, the export tax continues to be paid entirely into
the federal budget and the geology fee supports state-funded geological exploration. On the other
hand, the regions are gradually achieving some control over revenues derived from royalties,
bonuses and, most importantly, the excise tax.

This is particularly the case for autonomous

republics that have established republic-based oil and gas companies (see Chapter three) . More
time is needed before a clear and stable tax regime is established for the Russian oil industry.

Analysis of the Russian oil industry shows that the central government holds many of the
important levers of control. The Subsoil Act states that the Russian Federation is the owner of all
Russia's natural resources, although this conflicts with the Federal Treaty which granted natural
resource ownership to the autonomous republics.

Unless bilateral agreements have been

concluded that allow for a region to be the legal owner of its oil, the Russian Federation remains
one hundred percent owner. Also, the manner in which the oil industry was reorganized leaves
the Russian Federation with decisive influence. The oil majors have close ties with the Russian
government and have really only been quasi-privatized. The regions have some authority with
respect to taxes, and to a lesser extent pricing, but the Russian government is still the dominant
player in the oil industry.

The Natural Gas Industry

Natural gas is quickly becoming Russia's most important fuel. Beginning in the late 1970s
the Soviet Union initiated a massive "gas campaign" that substantially increased natural gas
production.

Figure 2-3 shows Russia's gas producing regions.

As with oil, the bulk of the

increase was derived from development in western Siberia. In 1970 Soviet gas output was 197.9
billion cubic metres (bern), but in 1988 output had reached 770.0 bern; and from 1970 to 1988,
51

FIGURE 2-3

Map of Russia's Major Natural Gas Regions

•

Producing Region

•

Prospective Region

0'

'

........___.__
-~·

~

--

VI

N

Russia

'
~

~

._ . - .

/' <.1

. ..,.
-.. . // ··; :::. ~
·

· C. . r

'

•

~

.- .

-~ ... ~

Source: Ebel, Energy Choices in Russia, SO.

.. ,

Soviet gas output as a percentage of Soviet primary fuel output increased from 19.1 percent to
37.7 percent. 118 Due to declining oil and coal production, natural gas now accounts for about 54
percent of Russia's energy balance, an all time high not only for Russia but for anywhere in the
world. 119 Moscow's leading energy specialists have predicted that natural gas, not oil or coal, will
pull Russia out of its fuel production slump by the end of the century. 120
As natural gas output has increased rapidly, so has the power of the gas industry. The
former head of the Soviet gas industry, Victor Chemomyrdin, has since become the first gas
company chairman ever to be appointed Prime Minister of a country. 121

Chemomyrdin' s

promotion was largely a reward for running the only significant Russian enterprise that continued
to operate more or less according to plan -- natural gas is the only primary Russian fuel that has
not suffered a large decline in production over the past ten years. But Chemomyrdin is perhaps
the only person with the ability to successfully coordinate the affairs of the energy sector with
those of the rest of the economy, for his experience and contacts in the oil and gas industries are
unparalleled in Russia. As Prime Minister, he is also very much responsible for many of the
special deals that the gas industry has concluded over the past few years.

Chemomyrdin' s

elevation is evidence of both the importance of the gas industry in Russia, and his tremendous
personal power and influence.
In the Soviet Union, natural gas production was entrusted to the monopoly producer,
Gazprom. Gazprom has survived the collapse of the Soviet Union and continues to hold a virtual
monopoly over natural gas production, transmission and sales. In 1993, Gazprom produced 95
percent of Russia's natural gas.122 The value, or more importantly, the potential value of Russian

118

Thane Gustafson, Crisis Amid Plenty: The Politics of Energy Under Brezhnev and Gorbachev (Princeton,
N.J.: Princeton University Press, 1989), Table 5.1, 138.
119
Oil & Gas Journal , 7 September, 1992, 18.
120
Ibid., 17-20.
121
Patrick Heren, "Prices Become the Paramount Factor," Petroleum Economist, August 1993, 7-11.
122
"Gazprom Pressured to Sell Shares Freely," Moscow News, No. 47,25 November-1 December 1994, 8.
53

natural gas is enormous and through Gazprom the central government maintains almost complete
control over the industry. With sales of 123 trillion rubles ($30 billion US) in 1995, Gazprom
ranks among the world's fifty largest companies, it is the world's largest monopoly, its output is
equal to eight percent of the entire Russian GDP, and some suggest that Gazprom has displaced
the central bank as the most important source of credits in the Russian economy. 123 Furthermore,
Gazprom controls two-thirds of the world's confirmed gas reserves and, in 1993 Russia
accounted for 27 percent of world natural gas extraction. 124
As for the reorganization of the Russian gas industry, the situation is much different than

m the oil industry.

In 1993, Gazprom was reorganized as a joint stock company, but the

privatization of Gazprom has been far from simple.

Shares of the corporation were made

available in a privatization process that began in the sprmg of 1993, with residents of gasproducing regions having preferential access to the auctions. The regionally based privatization
scheme of closed auctions, however, lead to "tremendous distortions in access to the shares. It
also provides the cover of legitimacy to misappropriation and fraud on a colossal scale." 125 The
3,156,000 inhabitants of sparsely populated Tyumen' oblast were offered 25 percent of the 68
million Gazprom shares, or 10 times more than those living in Russia's densely populated Central
Black Earth Region which is well served by pipelines and therefore has a good portion of
Gazprom' s assets. An resident of Tyumen' was given access to 73-83 times more shares than a
resident of Moscow Oblast; the territory east of the Kuzbas, which accounts for 12 percent of
Russia' s population, was excluded from the auctions entirely.126
There are indications of high-level intervention in the privatization of Gazprom.

By

restricting participation rn voucher auctions to individual investors, and by excluding both
123

Peter Rutland, "Gazprom Issues Annual Report," OMRI Daily Digest, 5 June 1996.
"World Natural Gas Market for 1993," Moscow News, 9-15 September 1994, 8.
125
Dienes, Corporate Russia, 18.
126
Ibid.
124

54

professional and foreign buyers, Gazprom "came out of the auction with a valuation of under
$228 million[US], which is roughly one thousandth of the value put on it by foreign investment
banks." 127 Furthermore, Gazprom, with the support of the Russian government, placed "every
possible kind" of limitations on the movement of shares on the stock market, and as early as 1994,
it was "practically impossible" to buy Gazprom shares on the stock market. 128 At any rate, as
with the oil industry, the Russian government retains forty percent of Gazprom shares which
amounts to a controlling interest in the Russian gas industry.

Gazprom chairman, Rem

Vyakhirev, insists that centralized control over gas production and distribution is essential to
Gazprom's efficient operation in Russia, 129 but this is debatable.
Gazprom has concluded special deals with respect to the excise tax and export duties, and
was allowed to form a tax-exempt investment or "stabilization" fund. Previously, Gazprom had
been exempt from virtually all taxes and customs duties, but the gas sector is now subject to an
excise tax, royalties and the geology fee. The excise tax, extended to the gas sector in mid-1993,
was initially set at 15 percent and has subsequently been increased to 25 percent. 130 A 6-16
percent royalty (the same as for oil) now applies to gas production (it was previously set at 2.8
percent). As of August 1993, the 10 percent geology fee was applied to gas production, up from
2 percent.

The gas sector has been largely exempt from the export tax.

Not surprisingly,

Gazprom' s favorable tax status has continued to come under fierce attack by the Ministry of
Economics as the Russian government is looking for additional revenues to close the budget
deficit. Yevgeny Yasin, Minister of Economics, considers it possible to increase Gazprom' s taxes
and to rescind its tax-free investment fund. 131 Indeed, in March 1996, as one of the conditions for

Maxim Boyco, et. al., Privatizing Russia (Cambridge, MA.: MIT Press, 1995), 109.
"Gazprom Pressured to Sell Shares Freely," Moscow News, 25 November-1 December 1994, 8.
129
Oil & Gas Journal, 7 September 1992, 18.
130
Sagers, et al., "Resource Rent," 419.
131
Aleksandr Bekker, "Gazprom Could Become a Source of Revenue," Sevodnya, 1 August 1995, 2, translated in
Current Digest ofthe Post-Soviet Press, Vol. XLVII, No. 31 , 1995, 8-9.
127

128

55

a US $10.1 billion IMF loan, Gazprom's tax-exempt "stabilization fund" was merged with the
federal budget; however, President Yeltsin compensated Gazprom by cutting the duty on pipe
imports and lowering the excise duty. 132
The Russian natural gas industry remains highly centralized under the Gazprom monopoly.
Privatization thus far has been limited and mostly cosmetic, as Gazprom tries to quiet critics like
the IMF and Russian Ministry of Economics, and the privatization that has taken place was
heavily skewed in favour of producing regions. With Gazprom, it appears as though the future of
the potentially lucrative Russian gas industry is entirely in the hands of the Russian government,
much more so than in the oil industry.

Conclusion

Analysis of the Russian oil and gas industry has revealed a visible attempt to maintain
central control, but also a less visible trend of decentralization.

The creation of joint stock

companies has diversified ownership and has allowed managers more freedom in enterprise
operations. Nevertheless, ultimate decision making power tends to remain in the hands of the
central government, and preserved by the structure of ownership in the industry. That the central
government retains the power to issue development licenses via Roskomnedra should prove to be
a significant vehicle for maintaining central control over the oil industry. The current tax regime
also allows the central government to capture a considerable portion of the economic rent derived
from the oil industry -- assuming, of course, that these revenues are successfully collected. The
export tax should prove to be a substantial source of central government revenue, and is an issue
which will inevitably cause friction between the central and regional governments, as regional
initiatives clash with central government attempts to retain control.

132

Peter Rutland, "Gazprom Loses Tax Privilege," OMRI Daily Digest, 9 April 1996.
56

In the natural gas industry, although Gazprom shares have been made available and the
company is technically a joint-stock company, its monopoly position does not appear to be
threatened on any front for the time being. AB for the oil industry, it is possible that the major oil
companies will push for greater independence, but their close relationship with the central
government is serving their interests for the time being. While the Russian state may not be
willing to part with its controlling shares, but rather keep them in defense of the "national
interest" or protection of the domestic market, it is possible that once a Law on Oil and Gas is in
place the oil majors will be "set free." But this may simply set the stage for more pointed battles
between the oil majors, the Russian government, and regional governments, as the federal division
of powers remains ill-defined.
The distribution of control over Russia's oil and gas is being shaped largely by
negotiations between the central government, relevant regional governments, and the oil and gas
companies. The system of joint authority, entrenched in Article 72 of the constitution, has led to
numerous bilateral agreements between the central and regional governments in an effort to set
the parameters for joint authority over oil and gas. This is not an ideal way to establish a federal
division of powers in this policy arena, but it is perhaps the only realistic way that this could be
accomplished in Russia -- a country that is geographically large, ethnically diverse, and where
endowments of oil and gas vary considerably from region to region.

57

Chapter 3
RUSSIAN FEDERALISM AND OIL AND GAS: EXAMPLES OF
THE SAKHA REPUBLIC AND TYUMEN' OBLAST

Introduction

This chapter investigates decentralization and the rise of regional power in Russia,
focusing on the centre-regional distribution of control over natural resources (but particularly oil
and natural gas). The Salcha Republic (Yakutia) and Tyumen' Oblast are used as examples. Such
an investigation serves a dual purpose. First, it demonstrates that natural resources are substantial
sources of political power and outlines the relationship between natural resource control and
federalism.

By controlling natural resources and their revenues, regions may become less

dependent on the central government. Natural resource revenues add to a region's autonomous
revenue pool and may allow regional governments more freedom in budget formation. Second,
such an investigation illustrates the importance of a region's status in the Russian Federation.
Republics appear to be in privileged positions vis a vis other regions in the Russian Federation and
some have taken advantage of the situation by seizing significant control over their natural
resources, including oil and gas, while most oblasts and krais seem to be having less success.
The chapter begins with an analysis of decentralization of power and authority from
Moscow to the Sakha republic since 1990. Included is a discussion of the success Sakha has had
in gaining control over its oil and gas resources and the actions Salcha has taken since gaining this
control.

This is followed by a similar analysis of decentralization from Moscow to Tyumen'

Oblast. Again, emphasis is on the Tyumen' oil and gas sector, but also of importance is the

58

FIGURE 3-1
Map of the Sakha Republic

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c

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8 HJWII Cl,.IL

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011

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Na t ural qJ s

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PRECIOUS STONES

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0

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Source: Republic of Sakha: Yakutian Business Guide, 31.

60

~

~

~•

relationship between Tyumen' and the two autonomous okrugs within Tyumen' -- KhantyMansiisk and Yamal-Nenets.
There are several similarities and differences between Sakha and Tyumen'. In terms of
similarities, they are both large, sparsely populated regions with significant indigenous population
and substantial amounts of natural resources. With Sakha's diamonds and Tyumen's oil and gas,
these two regions account for about half of Russia's foreign currency earnings, yet they have
some of the poorest standards of living in Russia. Both are northern regions, and as Greg Poelzer
argues, no part of Russia "has experienced the consequences of the collapse of the former Soviet
Union more than the Russian North," because federalization raises some unique issues in the
Russian North. 133 In particular, the differences in the ownership of natural resources may lead to
enormous variations in regional wealth. The most glaring difference between the two regions is
that Sakha is an autonomous republic, while Tyumen' is an oblast. Another major difference is
the presence of two autonomous okrugs within Tyumen'. Given the many similarities, however,
we may isolate somewhat the variable of status to determine its importance in building regional
autonomy.

The Sakha Republic

Background
The Sakha Republic in the Russian Far East (RFE) covers more than 3.1 million square
kilometres, or about one-fifth of all Russian territory (see Fig. 3-1).

134

This makes Sakha 5.5

times the size of France, 10 times larger than Italy, or 13 times as large as Great Britain. At a

Greg Poelzer, "Devolution, Constitutional Development, and the Russian North," Post-Soviet Geography, 36,
No.4, April1995, 204-214, 204.
134
Respublika Sakha (Yakutia): Special Issue of Deloviye Lyudi, November 1994, 5.
133

59

distance of 2,500 kilometres from its westernmost to easternmost points, the republic spans three
time zones, 6, 7 and 8 hours ahead of Moscow. Salcha is one of Russia's northernmost regions
and much of it lies within the Arctic Circle.
With just over one million residents, 18 percent (or 200,000) of which live in the capital
city of Yakutsk, it is a very sparsely populated region. The average age in 1989 was 27.6 years,
which makes Salcha a relatively young region in Russia. 135 The past thirty years or so has been a
period of intensive natural resource development which drew a large influx of people to Salcha
from across the former Soviet Union. But after several decades of immigration, Salcha is now
experiencing some emigration from the republic, mostly because some Russians, Ukrainians,
Belorussians and other immigrants to the region are returning to their places of origin.
Half of Salcha's population is Russian, one-third is Salcha (or Yakut), and the remaining
nationalities of numerical significance include Ukrainians, Tatars, Belorussians, and the indigenous
Evenks, Evens and Yukagirs. 136 Russian colonization and migration over the past few centuries
has left the Salcha people a minority in their own land. 137 Cultural freedom has increased in Russia
since the mid-1980s, allowing Salcha nationalism to grow somewhat, but it is not as yet radical.
There have been instances of conflict between Russians and Salcha, 138 but the situation is certainly
not critical. Diplomatic avenues have been used effectively to handle Russo-Sak:ha disagreements,
thanks in part to president Mikhail Nikolaev' s ability to tactfully arbitrate serious disputes. Salcha
boasts an abundance and wide variety of valuable natural resources, in particular, gold and
diamonds, but also oil, gas and coal. Gold mining began in the region in the 1920s, and mining of

135

Ibid.
Republic of Sakha: Yakutian Business Guide (Y akutsk: The Ministry of Foreign Relations of the Republic of
Sakha, 1995).
137
For an excellent account of Russian colonization of Sakha and Siberia see James Forsyth, A History of the
Peoples of Siberia: Russia's North Asian Colony 1581-1990 (Cambridge, U. K.: Cambridge University Press,
1992).
138
Marjorie Mandelstam Balzer and Uliana Alekseevna Vinokurova, "Nationalism, Interethnic Relations and
Federalism: The Case of the Sakha Republic (Yakutia)," Europe-Asia Studies, Vol. 48, No. 1, 1996, 101-120.
136

61

both alluvial and ore deposits continue to this day. Sakha's diamond industry is forty years old
and so far almost one thousand diamond-bearing kimberlite pipes have been discovered, 15 of
which are suitable for commercial development. Sakha produces about 99 percent of Russia's
diamonds and 25 percent of the world supply. Sakha produces 60 percent of Russia's tin and all
Russian antimony. Over one-third of Sakha territory is believed to contain oil and gas. Sakha
also possesses coal reserves in excess of ten trillion tons, most of which is located in the world's
largest coalfied, the Lena basin. 139

Decentralization
On 27 September 1990 Yakutia declared its "sovereignty within the Russian Federation,"
the declaration coming on the heels of similar declarations by the Republics of Tatarstan, Komi
and Udmurtia.

140

In 1992 Sakha exercised its right as an autonomous republic to enact a

constitution, one of the first republics to do so. 141 The Constitution of the Republic of Sakha
(Y akutia) expanded republic authority in some key areas. For example, Article 9 of Section 1
states that Sakha is an "independent participant" in international relations and has the authority to
conclude international treaties; while Article 6 states that the "land, resources and its wealth,
waters, forests, vegetable and animal kingdoms, other natural resources, air space, continental
shelf in the Republic of Sakha (Y akutia) are the property of the people of the Republic of Sakha
(Yakutia)." 142 Article 6 in particular, though consistent with the Federal Treaty, is in direct
conflict with Article 72 of the Constitution of the Russian Federation.
There are two main goals which motivate Sakha' s regional authorities to push for more
regional autonomy. First, some are motivated by Sakha nationalism. Balzer and Vinokurova
139

These numbers are from Respublika Sakha: Special Issue, 7.
In Russian parlance, "sovereignty" is generally a relative rather than absolute term.
141
The Sakha constitution was revised in 1994.
142
Constitution ofthe Republic ofSakha (Yakutia), 1994.
140

62

take this social anthropological approach in explaining Sakha' s bid for sovereignty. 143 Cultural
revival is an important goal of many Sakha and with the end of Soviet ideology, it has become a
realizable one. Second, regional authorities are motivated by the desire to control Sakha' s wealth
of natural resources. Cultural freedom and the authority to implement and administer such things
as social programs would be small consolation if they were not accompanied by more authority in
the regional economy. If Moscow controls the finances of the region, then very little tangible
power has decentralized.

Control over Sakha' s natural resources is also directly related to

regional authorities' cravings for personal power and influence.
With these motivations in mind, we may begin to look at the means by which Sakha has
increased its autonomy. Three of these means are studied here: (1) the expanded authority of
Sakha' s regional government institutions; (2) bilateral agreements concluded with Moscow; and
(3) Sakha' s ability to control the Russian voucher privatization process in the republic.
First, as with most of Russia's regional government institutions, Sakha' s government
institutions have been reformed and their authority has increased since 1991. On the legislative
side, members of Sakha' s parliament (known as the "Il Tumen") are democratically elected. On
the executive side, Sakha has a democratically elected president, Mikhail Nikolaev.

It is

Nikolaev' s executive branch which appears to possess the bulk of power and authority in the
republic.
Nikolaev was formerly the chairman of the Y akutian Supreme Soviet before being elected
president of Sakha on 20 December 1991, and re-elected to a second term of office in 1996. He
has strong ties with Boris Yeltsin dating back to their years together in the Soviet bureaucracy.
Nikolaev supported Yeltsin in his campaign against former Soviet president Mikhail Gorbachev,
and channeled the republic's diamond revenue to the Russian Federation rather than the Soviet

143

Balzer and Vinokurova, "Nationalism, Interethnic Relations and Federalism ."
63

government during the months leading up to the collapse of the Soviet Union.

Nikolaev's

popularity is based largely on his strong connections in Moscow, but he is also seen as a
guarantor of political stability, the person most capable of solving the republic's socio-economic
problems, and a buffer against inter-ethnic conflict in the republic.

144

Riding this wave of

popularity, Nikolaev successfully amassed considerable power and authority in the executive
branch of the Sakha government. From 1991 to 1994 he essentially ruled the republic by decrees
in much the same way as Yeltsin's executive branch governed Russia.
President Nikolaev' s strong base of power in Sakha has allowed him to challenge
Moscow's power and authority on several fronts. In 1992, he advocated Sakha's secession from
Russia, arguing that Sakha ought to conduct relations with Moscow on the basis of international
treaties. However, he relented only after an agreement was reached which allowed Sakha to keep
20 percent of the profits from the republic's mined gem diamonds and all of its industrial
diamonds. Upon achieving this concession from the central government, Nikolaev subsequently
became a "firm advocate" of allowing Sakha to develop as a part of the Russian Federation. 145
Under Nikolaev, "Sakha leads virtually all the other Russian republics in the pursuit of
sovereignty, and even has the right to its own military." 146
A second example of Sakha's increased autonomy is the success Sakha has had rn
negotiating bilateral agreements with Moscow.

On 29 June 1995, Sakha signed a series of

bilateral agreements with Moscow, 147 which in terms of political and especially economic
freedoms even surpassed other similar agreements with the republics of Tatarstan and

144

Robert Orttung, "Sakha President Relies on Moscow Ties and Diamond Revenues to Secure Re-election,"
OMRI Russian Regional Report Part II, 17 January 1997.
145 Ibid.
146
Ibid.
147
All of the 29 June 1995, Russian Federation-Sakha Republic agreements are found in Respublika Sakha, 5 July
1995.

64

Bashkortostan. 148 The agreements consolidated Sakha' s control over its natural resources in
three key ways. First, Sakha became the legal owner of 30 percent of its gold resources and
slightly less of oil and gas (see below).

Second, Sakha was made 30 percent owner of

Y akutugol', the republic's coal company (30 percent is owned by the Russian Federation and 40
percent by Y akutugol employees). 149

Third, and perhaps the most important part of the

agreement, Sakha became a full fledged owner of 32 percent of its mined diamonds under the
closed joint-stock company, Almazy Rossii-Sakha (Diamonds of Russia-Sakha, hereafter ARS).
Fourth, Sakha was given the right to sell cut stones in addition to rough diamonds, which satisfied
Sakha' s need and desire to diversify economically by developing a lapidary industry. All of this
came at a time when world diamond mining had dropped by 6 percent from the previous year,
whlie Sakha mining had grew by 9.2 percent. 150

Previously, in March 1991, the Sakha

government launched Tyumaada Diamond to spawn Sakha's diamond cutting industry. By 1994,
Tyumaada had opened six cutting plants and employed 900 people; and with future plants in the
works, it is expected that Tyumaada will employ about 2000 cutters, many of whom are taking a
required, year-long training course. 151 The agreements simply provided legal recognition of, and
official support for a Sakha diamond cutting industry.
Natural resources in general, but specifically diamonds, are Sakha' s marn econonuc
resources.

In 1995, ARS generated gross returns of US$721 million and profits of US$250

million. Seeing as taxes on the diamond industry make up 80 percent of the republic's budget, 152

Vladimir Yemelyanenko, ''Yakutia Wins Rights to its Own Diamonds," Moscow News, 30 June-6 July 1995, 1.
For more on bilateral agreements between Moscow and Tatarstan see, for example, Peter Rutland, "Tatarstan: A
Sovereign Republic Within the Russian Federation," OMRI Russian Regional Report Part II, Vol. 1, No.5, 25
September 1996.
149
The ownership structure of Yakutugol was outlined in the 29 June 1995, bilateral agreement "On Cooperation
in the Fuel-Energy Complex," Respublika Sakha, 5 July 1995.
150
Yemelyanenko, "Yakutia Wins Rights to its Own Diamonds."
151
Daniel R. Kempton, "The Republic of Sakba (Yakutia): The Evolution of Centre-Periphery Relations in the
Russian Federation," Europe-Asia Studies, Vol. 48, No.4, 1996, 587-613, 593-594.
152
Orttung, "Sakba President Relies on Moscow Ties."
148

65

this is an area where regional authorities are no doubt seeking as much regional control as
possible. Kempton suggests that there were three keys to Sakha increasing its control of the
diamond industry and a greater share of diamond profits. 153 First is Nikolaev' s strong relationship
with Yeltsin.

Second, during Yeltsin's struggles with Soviet president Gorbachev, Nikolaev

withheld diamond shipments to the Soviet government after Yeltsin promised Sakha greater
control over its resources. Then, when it appeared as though Yeltsin was not going to keep his
promise, rumours of a diamond boycott resurfaced. Third, Nikolaev cleverly played Yeltsin off
against the Russian parliament to get a better deal for Sakha. In the end, "this three-part strategy
proved useful not only in the diamond war but also in Nikolaev' s more general efforts to
maximize Sakha's political and economic autonomy." 154
Bilateral agreements have also allowed Sakha to gam more control over its regional
budget and matters of taxation. In 1993 the Russian government faced a serious budget crisis.
The central government was having a difficult time collecting taxes, and the value of what was
collected was rapidly eroded by inflation. Russia and Sakha had come to agreements in 1992 on
dividing federal property and tax receipts, but Sakha did not receive its agreed upon subsidies
from the central government. Faced with a severe cash shortage, in 1993 Sakha threatened "to
introduce its own gold-backed currency if disputes over federal budget subsidies were not
resolved." 155 Lacking cash needed to pay wages, Sakha issued its own temporary legal tender
worth millions of rubles. 156 This type of action occurred in numerous other regions throughout
Russia, but considering Sakha's wealth of gold and diamonds, the action may have been a more

153

Kempton, "The Republic of Sakha (Yakutia)," 594.
Ibid.
155
Darrell Slider, "Federalism, Discord, and Accommodation: Intergovernmental Relations in Post-Soviet
Russia," in Theodore H. Friedgut and Jeffrey W. Hahn, eds., Local Power and Post-Soviet Politics (Armonk, N.
Y.: M. E. Sharpe, 1994), 239-269, 247.
156
Ibid., 251.
154

66

realistic threat to Moscow than in most other regions. While prompted by the severe fiscal crisis
of the central government, it still represents an attempt to increase regional power.
Sakha ultimately found an answer to the subsidy disputes with Moscow. Many regions
advocated a "one channel system" of taxation whereby federal taxes would be eliminated in
favour of voluntary sharing of locally raised taxes. Such a system was unacceptable in the eyes of
the Russian government, but the centre failed to prevent its implementation as Sakha (along with
the republics of Tatarstan, Bashkortostan, Chechnia and Ingushetia) virtually stopped paying
taxes to federal authorities. The Russian government eventually conceded, allowing Sakha to
retain all its tax revenue, but on the condition that Sakha fund all federal programs directly from
the republic's budget. 157
Sakha now has more freedom in the realm of international relations thanks in large part to
bilateral agreements. The 29 June 1995, bilateral agreements consolidated and expanded Sakha's
areas of sovereign power by giving the republic the right of diplomatic representation in the
world, 158 a power which Sakha had already been exercising to a certain extent. For instance, in
February 1994, Nilcolaev headed a Russian delegation that traveled to Japan and South Korea for
meetings with authorities from the two Asian nations.

The meetings produced several key

agreements on political and economic cooperation between Sakha and South Korea; and, as
Nilcolaev was in fact representing not only Sakha but all of Russia, several documents were signed
paving the way for further cooperation between Russia and South Korea in industry, energy and
natural resources. 159 The legal right of diplomatic representation will allow Sakha to explore

157

This compromise was part of the 29 June 1995, agreements; the relevant agreements are "On Budget
Relations" and "On the Realization of Federal Programs on the Territory of the Salcha Republic (Yakutia),"
Respublika Sakha , 5 July 1995.
158
"On the Division of Powers in International and Foreign Economic Relations," Respublika Sakha, 5 July 1995.
159
"Podpisano Soglasheniye," Re.spublika Sakha, 1 March 1994, 1; "Koreskoye Chudo," Respublika Sakha, 8
March 1994, 1-2.
67

more international trade opportunities, particularly in the growing markets of the Pacific Rim
nations.
Sakha is now able to attract foreign investment with less interference from central
authorities and has used this opportunity to develop its social infrastructure.

Projects in the

republic financed with foreign investment include an addition to the university, an airport terminal,
a surgical hospital and a "model village" for musically gifted children.

160

Sakha also has the

power to draw foreign loans, using as collateral security its gold and diamonds.
Sakha' s ability to persuade the Russian government that it might be able to survive on its
own, combined with real or perceived threats of secession from Sakha and other republics,
compelled the Russian government to give up a good deal of control over Sakha' s natural
resources in the agreements.

Nikolaev' s friendship with Y eltsin was also a definite asset for

Sakha in concluding the bilateral agreements.
A third example of Sakha's increased power vis a vis Moscow is the manner in which the
massive Russian voucher privatization process was manipulated by regional authorities. In 1992
Russia initiated the largest, most comprehensive privatization program in history.

161

The aim was

to dismantle the former Soviet centrally-controlled economy and move towards a market or mixed
economy. This required building and legitimizing a private sector, basically from scratch. As the
privatization program was conceived, the process was to follow guidelines imposed by the
Russian government on all of Russia's regions and municipalities.

But, as Darrell Slider has

shown, this clearly did not happen as many regional governments, particularly the republics, took
control of the privatization process on their territories. 162 By the official end date of the voucher
privatization program, on 1 July 1994, the extent of privatization varied greatly from region to
160

Respublika Sakha (Yakutia): Special Issue, November 1994.
For a comprehensive look at the Russian privatization program see Maxim Boyco et al., Privatizing Russia
(Cambridge, Massachusetts: The MIT Press, 1995).
162
Darrell Slider, "Privatization in Russia's Regions ," Post-Soviet Affairs, Vol. 10, No.4, 1994, 367-396.
16 1

68

region, with the republics generally having created much smaller private sectors than the rest of
the regions. In Sakha for instance, by May 1994 the ratio of privatized enterprises to prior total
of state enterprises was a mere .1 0, one of the lowest in all of Russia. 163 This has much to do with
the immense power and authority of Sakha president, Mikhail Nikolaev, whose economic views
"tend toward the authoritarian -- he backs state regulation of the economy, arguing [curiously]
that it creates conditions that stimulate business and entrepreneurial activity." 164 Thus, it was the
Sakha executive branch that was able to defy federal legislation and prevent a good deal of
privatization in the republic.
Sakha found a unique method of using the voucher privatization process to gain control
over its substantial economic resources. On 28 September 1992, with decree No. 243 of the
President of the Sakha Republic, a state-owned investment fund, Sakhainvest, was created. 165
According to the decree, Sakhalnvest was created "for the purpose of accelerating the
privatization process, ... " and to "guarantee the security of Sakha citizens." 166 The fund bought
privatization vouchers from Sakha citizens and used them to buy stocks in enterprises not only
within the republic, but throughout Russia. Table 3-1 shows Sakhalnvest' s holdings by industry.
In a bold maneuver, President Nikolaev also ordered all enterprises in the republic, including
federally owned ones, to contribute 10 percent of their shares to Sakhainvest without
compensation. 167

With Sakhalnvest, "republic authorities attempted to coopt the process of

voucher privatization to retain some degree of control over the republic's larger enterprises." 168

163

Ibid., Table 3, 388-389.
Robert Orttung, "Salcha President Relies on Moscow Ties ."
165
The decree, "On the Creation of the Republican Investment Fund Sakhalnvest," is published in Sbornik:
Ukazov I Razporyazheniy Prezidenta Respubliki Sakha (Yakutia) , July- September 1992, 27.
166 Ibid.
167
Ibid.
168
Slider, "Privatization in Russia's Regions," 390.
164

69

TABLE3-1

Sakbalnvest's Holdings By Industry
Metallurgy
Gold and Diamonds
Machine Building
Chemicals
Construction
Oil and Gas
Others

30%
17%
15%
13%
7%
5%
13%
100%

Source: Sakhalnvest-Servis, July 1995

Sakha had one other organization which impeded privatization m the republic.

The

privatization of most small enterprises was not possible because virtually all of them were owned
by a cooperative society called Kholbos. 169 As Kholbos was not state-owned, there was very little
that federal authorities could do, despite the fact that the situation conflicted with the directives of
the Russian State Committee for the Administration of State Property (Goskomimushchestvo, or
GKI). 170 But holding companies such as Kholbos enjoyed the support of GKI' s main opposition,
the Russian Federal Property Fund, which saw holding companies "as a transitional stage between
state ownership and full privatization." 171

By October 1993 a mere four percent of Sakha's

"small" enterprises were privatized, the third lowest percentage of all Russian regions. 172 Thus,
Kholbos obstructed the privatization of small enterprises while Sakhalnvest enabled the state to
retain control over most of the republic's largest enterprises and industries.
The Sakha Republic has become more independent than it was at any time during the
latter half of the Soviet period. The power of president Nikolaev' s executive branch and his close

169

Author's interview with Semyon Lamber, Vice-President of the Salcha Committee on State Property, 14 August
1995.
170 Ibid.
171
Slider, "Privatization in Russia's Regions," 371.
172
Ibid., Table 2, 384-385; only theY amal-Nenets and Taymyr Autonomous Okrugs had lower percentages of
privatized enterprises than Salcha, and seven of the nine regions with the lowest percentages were republics.

70

relationship with Boris Yeltsin have helped Salcha's pursuit of autonomy. Sakha' s response to the
cash shortage and unpaid subsidies, and the decision to quit paying federal taxes demonstrated
that considerable political power lay in the hands of the Sakha government. Salcha's ability to
control the privatization process in the region, despite the central government's objections, is yet
another example of increased regional power. Natural resources, however, are the backbone of
the Sakha economy, and Sakha' s independence from Moscow may be measured largely by its
degree of control over natural resource industries in the republic.

The Sakha Oil and Gas Sector
This section outlines the way in which the Sakha Republic took control of the levers of
power in the Sakha oil and gas sector, and goes on to discuss some of the steps Sakha has taken
since it assumed control of its oil and gas industries. While the oil and gas sector in Sakha is not
as large as in some of Russia's other regions, oil and gas are valuable resources and Salcha has
tremendous potential for development.
Hydrocarbon exploration in Salcha began in 1935. Since that time, over 1000 wells have
been drilled, about 500 of which are located in thirty discovered natural gas fields. Of these thirty
fields, four are under production, six are prepared for commercial development, fifteen are under
exploration/appraisal, and five are under conservation. 173 Sakha has yet to develop any of its
eleven discovered oil fields, but more than half of Sakha' s 3 million square kilometres are
considered to be prospective for oil and gas.

174

At present, Salcha is not even energy self-sufficient and is forced to import about 15
million barrels (bbl) of oil each year. But this is not to say that Sakha lacks energy resources. In
173

Keun Wook Paik, Gas and oil in Northeast Asia: Policies, Projects and Prospects (London: The Royal
Institute of International Affairs, 1995), Table 3.9.
174
Steve Thompson and Vladimir Matveev, "Exploration opportunities, 30 fields dot eastern Russia's Sakha
Republic," Oil & Gas Journal, IS August 1994, 98-102.
71

1994 gas production was 53 billion cubic feet (bet), all for local consumption.

Recoverable

reserves from discovered fields are estimated to be 35 trillion cubic feet (tcf) for gas and 15 billion
bbl for oil, making Sakha an exploration frontier with great potential for development and
growth.

175

With its relatively low carbon dioxide emissions, natural gas is quickly becoming the

fuel of choice in much of the developed world, and Sakha gas may be marketable in the energy
deficient countries of the Pacific Rim if the difficult job of erecting the necessary infrastructure is
accomplished.
During the Soviet period, Sakha' s natural resources were owned and administered by
Moscow. As owner of all Soviet natural resources, the Soviet government captured virtually all
natural resource rents. Sakha used to put one hundred percent of its profits from precious metals
mining at the disposal of the Soviet government. The Russian government still holds a stake in
most of Sakha' s natural resource industries, but many key decisions regarding Sakha natural
resource development are now made by republic, rather than federal, authorities.
The Sakha government has successfully taken considerable control over the management
of the republic's oil and gas industries. On 17 January 1992, decree No . 19 of the President of
the Sakha Republic, M. Nikolaev, spawned the creation of a Sakha national oil and gas company,
Sakhaneftegaz. 176 Sakhaneftegaz brought all of Sakha's geophysical, geological, production and
trade organizations in the oil and gas sector under the control of a single organization (see Fig. 32).

The

Sakha

Republic

owns

51

175

percent

of

Sakhaneftegaz,

which

m

Steve Thompson and Vladimir Matveev, "Salcha Republic of Russian Far East looks like new exploration
frontier," Oil & Gas Journal, 8 August 1994, 70-72.
176
The formative decree is "On the Creation of the National Company of the Republic Salcha (Y akutia)
Sakhaneftegaz," Sbornik, January- March 1992, 30; it was amended slightly with the 4 September 1992, decree
"On Changes and Supplements to the Decree "On the Creation of the National Company of the Republic of Salcha
(Yakutia) Sakhaneftegaz from 17 January 1992, No. 19," Sbornik, July- September 1992, 39.
72

FIGURE 3-2

Organizational Structure of Sakhaneftegaz

51%

51%
JV "Takt"

JSC "Yakutgazprom"

"Taas-Yuriakhneft"
JSC "Lenaneftegaz"

"VGP KSGM"*

JSC "Lenagaz"

JSC "Yakutskgeofizika"
JV "Safarg"

Centre"

JSC "lreliakhneft"

* Viluiskoye Enterprise on Control of Gas-Field Preservation
JSC=Joint-Stock Company
N=Joint Venture
Source: Sakhaneftegaz National Oil and Gas Company

73

turn holds 51 percent of shares in each of its main subsidiary organizations. The largest of these,
Yakutgazprom, had already severed its ties with Gazprom of Russia a year earlier, making the
creation of Sakhaneftegaz somewhat easier. 177 This break was unusual, as Gazprom has a virtual
monopoly on Russian gas production, transport and sales. Sakha' s remoteness and the small size
of its oil and gas sector relative to regions such as Tyumen' and Tatarstan facilitated
Sakhaneftegaz' s consolidation process.
Sakhaneftegaz is formally an open joint-stock company (JSC) with shares in the company
available to Russian investors on stock markets in Yakutsk and Moscow.

In 1994, 8,730

investors bought 855,000 shares in Sakhaneftegaz at a price of 17,000 rubles per share. Shortly
thereafter, by decree of President Nikolaev, the share price was reduced to 3,000 rubles for
"social defense purposes," though the meaning of "social defense" was never made clear. In
Moscow, shares continued to sell for 14,000 rubles. By 1995, ten percent of Sakhaneftegaz had
been sold to private investors. This represents only a small fraction of the shares that were to be
made available to private investors, and it was expected that Sakhaneftegaz will also accept
. mvestment
.
. th e f uture. 178
f ore1gn
m

Although Sakha has successfully secured the right to manage its oil and gas industries, the
Subsoil Act still protects the Russian government's legal ownership of Russia's natural resources.
With the Russia-Sakha treaty of June 1995, Sakha became the legal owner of 20 percent of its oil
and gas. So long as Sakha did not export any oil or gas, this was not particularly contentious.
However, this will likely change within a decade or two as Japan and South Korea are keenly
interested in the possibility of developing Sakha gas for export. For this reason, Sakha may seek

177
178

Author' s interview with Konstantin Fyodorov, General Director ofYakutgazprom, 25 July 1995.
Author' s interview with Mikhail Tsikel', Vice-President of Sakhaneftegaz, 18 July 1995.

74

more legal ownership, but Moscow may be reluctant to cede it as future revenues may be
enormous.
Several proposals to develop Sakha gas have been prepared over the past few decades,
but none have come to fruition. During the late 1960s and early 1970s, various proposals were
tabled that purposed to have Sakha gas exported to Japan (see Fig. 3-3). 179 The projects all
failed, however, partly due to a lack of capital but also because the parties involved could not
agree on a pipeline route that would have ultimately transported the gas to market.
In early 1991, a very ambitious plan for accelerating Russian Far East (RFE) gas
development was devised. 180 This was a report entitled the "Concept of Developing Y akutian and
Sakhalin Gas and Mineral Resources of Eastern Siberia and the USSR Far East," commonly
known as the "Vostok (East) plan." Figure 3-4 shows the planned pipeline routes for the Vostok
Plan.

The plan was prepared by the USSR Ministry of Geology, the Russian Republic's

Committee on Geology and Utilization of Energy and Mineral Resources, the USSR Ministry of
Oil and Gas Industry, the State Gazprom Concern, the USSR Academy of Sciences and the
Russian Technological Academy.181 According to the Vostok Plan, by 2005 the Sakha Republic
and Sakhalin oblast together would produce about 15.7 million tons per year (mt/y) (54 percent)
for RFE consumption and 13.3 mt/y (46 percent) for export-- 6.0 mt/y to South Korea, 6.0 mt/y
to Japan, and 1.3 mt/y to North Korea. The key elements of the plan were the construction of a
3,230-km gas pipeline from Sakhalin Island across Russian territory and North Korea to South
Korea, and a 3,050-km line from Yakutsk to Khabarovsk. But the projected cost of the project
was colossal. Based on the official exchange rate of the time (1.8 rubles to one US dollar) the
total cost was estimated to be US$20.7 billion, and on the commercial rate (30 rubles to one US

179

Wook Paik, Gas and oil in Northeast Asia, 227-235.
Ibid. , 231-233.
18 1
Ibid. , 231; see also, Oil & Gas Journal, 23 March 1992, 121.
180

75

FIGURE 3-3
Y akutian Gas Pipeline Proposals, 1968-197 4

- ·-

- -

~

propoeal (1970)

Soriet ~

(19'70)

. . . . . . US-J•pu- propoul (lf71)

- - - Sovitt propoul (lf74)

Source: Wook Paik, Gas and oil in Northeast Asia, 228.
76

dollar), US$7.4 billion.182 Another estimate, from Allen S. Whiting, sets the total at US$15 billion
with delivery beginning ten years after the start of feasibility studies. 183
The Vostok plan was essentially dead until November 1992. At that time, an agreement
was reached to undertake a preliminary feasibility study for the development of Sakha gas, and
construction of a gas pipeline connecting the Sakha Republic with South Korea. Fig. 3-4 shows
the planned pipeline route for the Vostok project. But disputes over financing meant that nothing
was accomplished on the preliminary feasibility study until June 1994 when Russia and South
Korea agreed to invest $20 million in the study, with a twelve month working period. 184 The
study has thus far involved three consortiums to assess the economic and geological feasibility of
the project. 185 South Korea is providing capital for feasibility studies and to assess its potential
domestic demand. The Sakha Republic is conducting a resource evaluation to prove that enough
gas exists to make the project worthwhile; this is being carried out by Lenaneftegaz, a subsidiary
of Sakhaneftegaz. 186 Gazprom, representing the Russian consortium, is responsible for geological
and engineering studies to determine the obstacles that exist for the extraction and transportation
of Sakha gas to market. No construction will begin until these studies demonstrate the feasibility
of the project.
Another party that is indirectly involved in the Vostok plan is the joint venture (JV),
Safarg, one of the only geophysical JVs in all of Russia. Safarg was established in 1991 as a five
year corporate agreement between Yakutskgeofizika and Fairfield Industries of Houston,
Texas. 187 With computer equipment provided by Fairfield, Safarg's computer department went

182

Wook Paik, Gas and oil in Northeast Asia, 232.
Allen S. Whiting, "Yakutiya Gas," in Mark J. Valencia, ed., The Russian Far East in Transition:
Opportunities for Regional Economic Cooperation (Boulder, CO: Westview Press, 1995), 111-124.
184
Respublika Sakha, 8 June 1994; the June agreement also dealt with future Sakba coal exports to South Korea.
185
Author's interview with Mikhail Tsikel', Vice-President of Sakbaneftegaz, 18 July 1995.
186
Interview with Konstantin Fyodorov.
187
Author's interview with L. L. Popova. General Director of Safarg, 4 August 1995.

183

77

FIGURE 3-4

Planned Pipeline Routes for the " Vostok" Plan

Unior:
OJ SoYiel
(Russia)

.

~

6

CD China

m
CD
m

[Q

Japan
North Koret

• 7

South Korea

..

6 Yakutsk
7 Polo-ovsk

8 Neryungri

9

·.
;a

10
II

u

lJ

14

15

16

17

18
19

zo
21

• 16

CD

0

Gu pipeliae
Gurtdds

Svohodnyy
Khaharo vsk
Komsomol' sk
Okha
Aniva
N .. khodka
Vladh·ostok
Harbin
Change hun
ShenyRng
Beijing
P'yonyang
~

u

Seoul
Pusan

25

Osalul

23
24 Fukvok.a

•17

26 Tokyo

Crvde oil pipeliae
Oil r.elds

- ·-

Planaed crude pipeline

• • • Planned cu pipeline

Source: Wook Paik, Gas and oil in Northeast Asia, 230.
78

from 300 down to 4 employees and still accomplishes more.

The N' s mam work involves

processing seismic data, and it has been entrusted with that task in the feasibility study for the
Vostok plan. Safarg is 45 percent Sakha, 45 percent American and 10 percent Japanese and is
another example of Sakha' s increased power in foreign economic relations. 188
During President Nikolaev's February 1994 visit to Japan, he hosted a briefmg in hopes of
generating more interest in the Sakha gas project.

Representatives from over 70 Japanese

companies attended, but despite the high turnout, the Japanese remained lukewarm on the idea
and South Korea continued to be the active foreign partner. Nevertheless,
South Korea's initiative on Sakha gas development embarrassed Japan,
which knew only too well the importance of its commitment to the
development. Four Japanese organizations -- the Ministry of Foreign
Affairs, JNOC [Japan National Oil Company], Institute of Energy
Economics of Japan and Keidanren -- have undertaken studies on the
Sakha Republic's gas project, and Japan will not become an idle onlooker.
It continues to be interested in Sakha gas development and is only waiting
for the best moment to become actively involved. 189
With or without Japan's involvement, the next steps in the Sakha gas project would be to amass
the enormous sums of money required to fmance the project and to tackle the formidable
engineering obstacles associated with the daunting climatic and physical conditions.
These geographical and fmancial obstacles are now being addressed and the important
point regarding any plans to develop and export Sakha natural gas is that the republic appears to
be in control of the process. South Korea and Japan are interested as potential consumers and as
sources of necessary capital, and Gazprom of Russia is conducting feasibility studies that Sakha is
probably incapable of undertaking due to a lack of experience and inadequate technology. But
Sakha has the power to control the process -- the decision to develop is entirely in the hands of
the republic. Although it is too early to tell how future revenues from Sakha gas exports might be

188
189

Ibid.; see also "<<Safarg>> ishchyot i nakhodit", Respublika Sakha, 6 May 1995, 1-2.
Wook Paik, Gas and oil in Northeast Asia, 233 .

79

divided between Sakha and Moscow, with Sakhaneftegaz, the Sakha republic has an established
institution with which to control the current and future development of its oil and gas resources.

Tyumen' Oblast

Background
Tyumen' Oblast is situated just east of the Ural mountains in western Siberia. The oblast
covers 2,296 square miles, which makes it twice the size of Texas, and Russia's largest oblast.
Tyumen' has a population of about 3 million residents, 600,000 of which live in the oblast capital,
Tyumen' City. The majority of residents are Russian, but indigenous inhabitants include Khantys,
Mansis and Nenets. Tyumen' City is reputed to be the first Russian city in Siberia.190 The
Tyumen' region is best known for its abundance of oil and gas resources -- it is the source of
about two-thirds of Russia's oil and natural gas.

Decentralization
Much has changed in Tyumen' Oblast since the collapse of the Soviet Union. As with all
of Russia's region's, Tyumen' has become more independent, both politically and economically.
Tyumen' is regarded as a pro-reform region, 191 which has kept it in favour with the Yeltsin
administration. For instance, the process of appointing an oblast governor -- a good indicator of
the extent of conflict or cooperation between the centre and a region -- was a Herculean task in
some regions, but was accomplished with relative ease in Tyumen'. In 1991 the oblast soviet and
President Yeltsin promptly agreed upon Yuri Shafranik as governor and Shafranik later became

° Forsyth, A History of the Peoples of Siberia.

19

19 1

Tyumen's pro-reform stance is well documented in Josephine Andrews and Kathryn Stoner-Weiss,
"Regionalism and Reform in Provincial Russia," Post-Soviet Affairs, Vol. 11, No.4, 1995, 384-406.
80

Russia's Minister of Fuel and Energy when Victor Chernomyrdin left the post to become Prime
Minister. Shafranik' s replacement was Leonid Roketski whose relationship with Chernomyrdin is
quite strong. That there exists a degree of trust and agreement between Tyumen' and Moscow
likely facilitates decentralization. However, the office of governor in an oblast is not nearly as
powerful as that of president in a republic. Oblast governors remain largely subordinate to the
executive branch of the Russian Federation, and in several cases Yeltsin has appointed regional
governors regardless of regional sentiments, or removed existing governors not loyal to him.
As a resource-rich region, Tyumen' has actively sought to achieve greater control over its

oil and gas industries and this control is now more decentralized than at any time during the
Soviet period. As early as 1991, the Tyumen' oblast soviet (i.e. legislature) reserved for itself the
right to enact laws that could not be rescinded by Moscow, including the right to set prices on oil,
gas and wood products. 192 Much of this is a result of, and justified by, "marketization" and the
breakup of the centrally-controlled Soviet economy, a professed goal of President Yeltsin.
Challenges to the power and authority of the Tyumen' government come not only from
Moscow, but also from the Yamal-Nenets and Khanty-Mansiisk autonomous okrugs, which are
themselves subjects of the Federation, but lie fully within Tyumen'.

The okrugs' pursuit of

autonomy has a direct impact on Tyumen's own pursuit. The challenge from within may prove to
be a more serious one for the Tyumen' administration than the one from above. In particular,
members of both the legislative and executive branches in Tyumen' have argued that "the threat to
local oblast-level control over resources and authority to tax lay not with Moscow but with the
autonomous okrugs." 193

192

Bruce Kellison, "Siberian Crude: Moscow, Tiumen, and Political Decentralization," in Stephen Kotkin and
David Wolff, eds., Rediscovering Russia in Asia: Siberia and the Russian Far East (Armonk, N.Y.: M.E. Sharpe,
1995), 193-206, 199.
193
Ibid.
81

The process of decentralization in Tyumen' is made eminently more complex by the
presence of the two autonomous okrugs within its territory. There exists an interesting web of
relations between the central government and each of these three regional governments, but also
between Tyumen' and the two okrugs.

Khanty-Mansiisk and Yamal-Nenets were largely

subordinate to Moscow and Tyumen' under the Soviet system, but they have recently secured
considerable independence from both the central government and from Tyumen'. For instance,
Presidential decrees giving the okrugs "fair compensation for the extraction of natural resources
and the adverse consequences of the extraction, ... put the Tyumen region into a "one against all"
situation." 194
The situation of the Khanty-Mansiisk and Yamal-Nenets autonomous okrugs in the
Russian Federation is a peculiar one. Under Russia's federal structure, they are subordinate to the
Tyumen' administration, but are also themselves subjects of the Federation.

Of course, this

creates much jurisdictional confusion. Going back to 1992, there was great hope that the okrugs
could continue their previous relationship with Tyumen', but the parties are now realizing the
problems of dealing with each other in governing such a large territory. 195
Yamal-Nenets is far and away Russia's most important natural gas-producing region, for
the present and the future, while Khanty-Mansiisk is Russia's main oil-producing region.
Together they account for almost all of Tyumen's wealth and a good portion of Russia's wealth.
This wealth affords them considerable economic and political resources that put them in positions
of strength in federal negotiations. On some issues, the okrugs have been dealing directly with
Moscow, much to Tyumen's dismay. For the Tyumen' government, a loss of control in the

194

Alexei I. Ivandaev, "The Struggle for Power Allocation Between the Central Government in Moscow and the
Administration of the Tyumen Region," in James E. Hickey Jr. and Alexej Ugrinsky, eds., Government Structures
in the U.S.A. and the Sovereign States of the Former U.S.S.R.: Power Allocation Among Central, Regional, and
Local Governments (Westport, CT: Greenwood Press, 1996), 222-229.
195
Rossiskaya Gazetta, 11 July 1992.

82

okrugs represents a serious threat to its power. In particular, lost revenues would be enormous if
the okrugs were to become independent of Tyumen'.
A recent example of increased independence in Yamal-Nenets and Khanty-Mansiisk, and
their threat to Tyumen' s power, comes from the Tyumen' gubernatorial election of 22 December
1996. Khanty-Mansiisk and Yamal-Nenets elected their own governors in October 1996 and both
okrugs threatened to boycott the Tyumen' election. 196

Khanty-Mansiisk relented but only

managed about 15 percent turnout (which basically amounts to a boycott), well below the 25
percent required by okrug law for a valid election. Yamal-Nenets, however, flatly refused to
participate in the Tyumen' election. Despite presidential decrees, visits from Kremlin emissaries,
and warnings from First Deputy Presidential Chief of Staff Aleksandr Kazakov and Gazprom
chairman Rem Vyakhirev to the Yamal-Nenets legislature, the okrug was not deterred. Kazakov
suggested that the Yamal-Nenets boycott represents a "serious challenge" to Russia's political
structure. 197 Indeed, although the Yamal-Nenets boycott does not threaten Russia's territorial
integrity in the same way as the actions of the independence-minded Chechen Republic, it does
have potentially serious implications for Russia's federal structure as it currently exists.
Yamal-Nenets was able to successfully boycott the Tyumen' election partly because its
abundance of natural gas is a valuable political resource.

Yamal gas is one of the vital

components of Russia's future economic plans, thus Yamal may use this as leverage in
negotiations with the centre and with Tyumen'. Russia is anticipating massive revenues from gas
exports to western Europe. The Russian government, wary of jeopardizing both present and
future gas development in the okrug, must proceed cautiously in its relations with Yamal-Nenets.
Although it has not been stated publicly, it is quite possible that the Russian government would

196

"Tyumen Election Held, but Okrug Follows Through on Boycott Threat," OMRI Russian Regional Report, 17
January 1997.
197
Ibid.
83

like to leave Tyumen' out of the loop and share gas revenues directly with Yamal-Nenets. This
might leave a larger portion of gas revenues in the hands of the Russian Federation at the expense
ofTyumen'.
Plans to further develop Yamal-Nenets gas for delivery to Russian and European markets
involve some of the most ambitious natural resource development projects in the world. Russia
has already signed some export deals, in particular with Germany, in anticipation of further gas
development in the okrug. 198 Potential revenues from Yamal-Nenets gas exports are enormous
and would give the struggling Russian economy a tremendous boost. With its small population,
Y amal-Nenets could conceivably become a "Kuwait" in the Russian north if it were to gain more
control over revenues from gas produced in the okrug.
To briefly summarize, as an oblast, Tyumen's regional autonomy does not yet match that
of the Sakha Republic. But, with its pro-reform stance and tremendous oil and gas resources,
Tyumen' has become one of the more autonomous oblasts.

Political decentralization from

Moscow to Tyumen' has been facilitated by the close relationship between central and regional
authorities.

However, decentralization is complicated by the craving for increased power and

authority in Yamal-Nenets and Khanty-Mansiisk. At the heart of all of these struggles for power
and authority is the desire for greater control over West Siberia's oil and gas resources.

The Tyumen' Oil and Gas Sector
During the Soviet period, Tyumen' City was home to most of the Soviet economic
planning institutions that directed investment in the region's oil and gas sector. As many as nine

198

See, for example, Gennadiy Y astrebtsov, "Rurgaz -- Gazprom: Konkurentam tesno, partnerram -- prostomo,"
Trud, 21 June 1995, 2.
84

Soviet ministries, overseeing everything from exploration and production to refining and
distribution, had offices in Tyumen' .199 Moscow's control over a large part of the Soviet oil and
gas industries was directed through Tyumen' city and extended throughout the oblast.
As noted in the previous chapter, privatization in the Russian oil industry has resulted

predominantly in regionally-based joint-stock companies (JSCs) which now wield enormous
power in their respective areas of operation.

The power that is being secured by the "oil

generals" that manage these companies is an example of economic decentralization and an
important part of Russia's federalization process. Although some of these JSCs may be regional
monopolies or even managed by regional governments themselves, their mere existence indicates
that a degree of power has passed from Moscow and that the old Soviet centrally-controlled
economy has been further eroded. As Russia's main source of oil and gas, much of this process
has occurred in Tyumen' oblast.
Tyumen' appears to have some legitimate reasons for wanting more control over oil and
gas. For a region so rich with oil and gas, living standards are dismal.
Tens of thousands of Tyumen oil workers still live in temporary houses that
are not equipped with any utilities. No more than 69% of the oil workers
in the region have proper housing, which is 12.4% less than the number for
oil workers in other areas of the country.... Tyumen' s crude oil did not
make the people in the region rich. The standard of living in this oil capital
is lower than in the capital of any other region in the country. Tyumen is
62nd in housing development, 67th in development of schools and
hospitals, 74th in telephones. Crude oil from the Tyumen did not enrich
either the country or its oil and gas industry. 200
Much of the blame for this situation must be placed on the Soviet government. For two decades,
the Soviet economy rode on the shoulders of Tyumen' oil and gas, yet the residents of the region

199
200

Kellison, "Siberian Crude."
Ivandaev, "The Struggle for Power Allocation."
85

were not rewarded with even average living standards. A dramatic decline in oil production since
1989 has made socio-economic development still more difficult.
In the foreseeable future, Tyumen' can entertain little hope of gaining legal ownership of
its oil and gas. The Subsoil Act made the central government the owner of all subsoil resources,
most of the hundreds of oil and gas companies in Tyumen' are controlled by one of the major
holding companies, and Tyumen' s oil and gas resources are of such enormous value to the
Russian state so as to make regional ownership highly implausible.

Furthermore, most of

Tyumen' s oil and gas resources are situated in the autonomous okrugs which have similar visions
of legal ownership.
Under these circumstances, Tyumen' has opted to strive for greater control over the
management of and revenues from its oil and gas. In this endeavour Tyumen' has had some
success.

For instance, Presidential decree No. 93 of 17 February 1992 gave the Tyumen'

executive the power to buy up to ten percent of the total volume of the extracted crude oil and
sell up to forty percent of it to domestic buyers at free market prices. 201 However, the main
powers of management which Moscow and Tyumen' are struggling to control are the authority to
set quotas, to issue drilling and export licenses, and to draw foreign investment into the oil and
gas industries; and in these areas Tyumen' has had less success. 202

Conclusion

The analyses of the Sakha Republic and Tyumen' Oblast offer two main conclusions.
First, the status of autonomous republic gives Sakha an advantage over Tyumen' in relations with

20 1
202

Ibid.
Kellison, "Siberian Crude."

86

the centre. More power and authority have been delegated to the Sakha government, largely
because Sakha is an autonomous republic. Sakha' s executive branch possesses more power and
authority than those of oblasts and krais, and has used this asset to aggressively challenge the
Russian government on many issues of jurisdiction.

Second, natural resource wealth is a

considerable source of political power in centre-regional negotiations. The regions of Sakha and
Tyumen' derive substantial power from their right to independently market fixed shares of their
natural resources -- a right granted by Presidential decree, not by constitutional principle. 203 The
political power derived from natural resources is also evident in the gas-rich Yamal-Nenets and
oil-rich Khanty-Mansiisk autonomous okrugs.

The okrugs have successfully challenged the

power and authority of both the Russian and Tyumen' governments. In boycotting the Tyumen'
gubernatorial elections, the okrugs have made it clear that they are not satisfied with the current
arrangement of power and are striving to usurp power and authority from the Tyumen' oblast
administration.
The increased power of resource-rich regions, however, creates some problems for
Russian federalism, particularly fiscal federalism. By gaining the right to retain all republic-raised
taxes and fund federal programs in the republic, a right delegated to very few regions, Sakha
earned a good deal of autonomy. The share of taxes being collected by oblasts and krais that
went to the federal budget ranged from 29 percent to 72 percent. 204

Thus, there are wide

discrepancies from region to region, and the procedures for sharing central government tax
revenues with the regions are changing frequently and unpredictably. 205

Naturally, these

circumstances seriously limit the Russian government's ability to reduce economic inequalities
among the regions and demonstrate Moscow' s lack of control over federal taxation and fmances .
203

Solnick, "The Political Economy of Russian Federalism," 17.
Slider, "Federalism, Discord, and Accommodation," 246-251.
205
Christine I. Wallich, "Intergovernmental Fiscal Relations: Setting the Stage," in Christine I. Wallich, ed.,
Russia and the Challenge of Fiscal Federalism (Washington, D. C.: The World Bank, 1994), 64-95 .
204

87

The executive branch in Moscow has proven to be weak when confronted by the regions, most
notably by the republics. The centre "has no political recourse when subnational governments
refuse to allow tax revenues to be remitted to the federal government." 206 A reasonably equitable
distribution of resource rents among regions is something that may be expected from a federal
state, but a sound system of revenue redistribution does not currently exist in the Russian
Federation.
The main observation to be gleaned from examinations of the oil and gas industries of the
Sakha Republic and Tyumen' Oblast is that negotiations with the centre over joint authority, as
specified in Article 72 of the Russian constitution, have produced different outcomes.
Specifically, the ownership structures that have emerged in the oil and gas sectors of these two
regions are markedly different. Sakha has consolidated republic control over its oil and gas in one
organization -- Sakhaneftegaz; while the bulk of Tyumen' s oil and gas sector is controlled largely
by the Russian government via the vertically-integrated oil majors.
There are several explanations for the different ownership structures that have emerged in
the Sakha and Tyumen' oil and gas sectors. First, Sakha' s oil and gas sector is very small in
relation to Tyumen' s. As of yet, Sakha does not export any oil or gas, while revenues from
Tyumen' oil and gas exports are a critical to the strength and stability of the Russian economy.
Second, as an autonomous republic, Sakha has more legal power and authority with which to
control its natural resource industries. The Federal Treaty paved the way for aggressive republics
such as Sakha to gain greater control over their natural resources.
similar rights and powers under the Treaty.

Oblasts were not granted

And third, Tyumen' is forced to deal with two

independence-minded okrugs, thus further complicating any oblast efforts to increase control over

206

Ibid.

88

oil and gas resources. These two okrugs appear to be assuming, or at least attempting to assume,
a status akin to that of republics.
It is also important to reiterate the value of natural resources in the Russian economy in
general, but especially in Sakha and Tyumen'.

In 1992, Sakha, Yamal-Nenets, and Khanty-

Mansiisk had the three highest per capita revenues of all Russian regions ; and in terms of per
capita expenditures, Sakha ranked first, Yamal-Nenets fourth, and Khanty-Mansiisk fifth. 207 That
resource wealth may be readily converted into a considerable political resource is evinced by the
success these three regions have had in negotiations with the Russian government, and by the
success of the two okrugs in their struggles with Tyumen'.

207

Wallich, Russia and the Challenge of Fiscal Federalism , Appendix E.

89

Chapter 4
CONCLUSION

This thesis examined the changing distribution of control over Russia's oil and natural gas
resources, and how this is affecting the nature of post-Russian federalism. The evidence suggests
that Russian "federalism" is still very much in flux, as the instability resulting from the collapse of
the Soviet Union has yet to subside. Although many new institutions have emerged to guide a
fledgling market economy and a young democracy, many more are needed. In particular, a
concrete system of federal revenue redistribution is lacking. In the meantime, the nature of
Russian federalism is being determined as intergovernmental relations are being resolved, and they
are being resolved, for the most part, with bilateral agreements between the centre and the
regions. One of the principle powers that is being addressed by bilateral treaties is the power to
control natural resources, particularly Russia's lucrative oil and gas resources.
Thus, in assessing the nature of Russian federalism, Friedrich's concept of federalism as a
"process" and Riker's theory of federalism as a "bargain" seem very appropriate. Constitutional
analysis sets the framework of the bargainillg process, but does not reveal the complexity of the
situation. A sociological approach helps in understanding the dynamics involved when building
federalism in a multi-ethnic environment, but does not address all dimensions when dealing with
natural resources. Conceptualizing Russian federalism as a "bargainillg process" is useful at this
time because, on the one hand, Russia is engaged in processes of differentiation, from highly
centralized to more decentralized economic and political systems; and, on the other hand, since
the Russian constitution is still young and obviously conflicts with many republic constitutions and
the Federal Treaty, the federalization process is best characterized by persistent centre-regional
90

bargaining. Russian federalism may be defined, then, as an ongoing process of political bargaining
between the central government and each of the regional governments, as is the case in any
federation.
What Russia clearly lacks, however, are effective, stable institutions through which to
conduct the bargaining process. In terms of control over oil and gas resources, the most pressing
need is a federal system of revenue redistribution. At present, if regions were to gain full control
of their oil and gas, Yamal-Nenets, Khanty-Mansiisk and other oil- and gas-rich regions could
conceivably become "Kuwaits." This type of situation would not encourage Russia's continued
federalization. However, this by no means implies that oil and gas regions do not deserve to reap
the benefits of their resource wealth. For its last ten to twenty years, the Soviet system was
sustained largely by oil and gas export revenues, while oil and gas producing regions were
rewarded with dismal, below-average living standards and serious environmental degradation. In
a true federation, these regions that drive the Russian economy ought to be compensated with, at
the very least, living standards equal to the Russian average.
At any rate, the Russian government has retained decisive influence in Russia' s oil and gas
industries. In the oil industry, the Russian Federation continues to hold a controlling bloc of
shares in the vertically-integrated joint-stock companies, or oil majors, which dominate the
industry. The Russian government has the authority to appoint directors in these companies and
members of the companies' management boards must be approved by the central government.
Although central authorities do not interfere in day-to-day operations, they have the power to
influence major strategic decisions in the oil industry. As for natural gas, the industry is still
owned and managed by the Gazprom monopoly which has strong ties with the Russian
government, in particular with the company's former general director, now Prime Minister, Victor
Chernomyrdin. Under pressure to increase competition in the gas industry, especially from the
91

Minister of Economics, Yevgeny Yasin, Gazprom recently insisted that it is planning to regroup
its operations into separate divisions for production, transport and sales, though it remains unclear
whether such a move will increase competition or simply create a clearer corporate structure for
the continuation of the monopoly. 208
The preeminent form of control over oil and gas, and the one which creates the most
tension between the federal and regional governments, is ownership.

While the Subsoil Act

established the federal government as the legal owner of all subsoil resources, this situation has
been successfully challenged by some regions.

Several intergovernmental agreements have

awarded regions substantial de jure ownership rights, which in many cases were already being
assumed de facto. For example, the republic of Tatarstan, which now draws up its own budget
independently, has also won the right of ownership of its land and subsoil resources and the right
to do as it wishes with a third of the oil it produces. 209 But the constitution of the republic of
Tatarstan, in direct violation of the Russian constitution, had already made the republic legal
owner of its land and subsoil resources, so the federal-regional agreement was simply an official
concession of these rights. 210
In some cases, however, ownership may not be enough, for Moscow possesses various
means by which to trespass on the domain of its sub" ekty. For example, through its pipeline
company, Transneft', the central government can seriously limit or completely undermine the flow
of oil into or out of a region. Moscow has also prevailed in some centre-regional disputes over
oil and gas taxation. The conflict between the Republic of Bashkortostan and Moscow over
excise taxes is evidence of the central government's authority over taxation in the oil industry.

208

"Russia's Energy Monopolies: Giving an Inch," The Economist, 1 February, 1997.
Sanobar Shermatova, "Mintimer Shaimiyev's Big Game," Moskovskiye Novosti, 24-31 March 1996, 8,
translated in Current Digest of the Post-Soviet Press , Vol. XLVIII, No. 12, 1996, 15-16.
210
Leslie Dienes, Corporate Russia: Privatization and Prospects in the Russian Oil and Gas Sector, Paper No. 5
(University of Washington: Jackson School of International Studies, 1996), 11.
209

92

It is obvious that the struggle to control oil and gas is at the heart of many centre-regional
negotiations, and, in some instances, it appears as though the intergovernmental struggle to
control oil and gas is shaping Russian federalism. Natural resources in general, but specifically oil
and gas, translate into valuable political assets. Accordingly, regions such as Sakha, Y amalNenets and Khanty-Mansiisk that are rich in natural resources are among the leaders in the pursuit
of regional autonomy.
The other principal asset available to some regional governments is the administrative
status of autonomous republic within the Russian Federation.
administrative structure of the Russian Federation gives

The "layered" territorialrepublics

an advantage in

intergovernmental negotiations, although it is not clear whether it is a decided advantage -oblasts such a Tyumen' have had greater success challenging the central government than some
republics. 211 Still, oblasts and republics do not begin the bargaining process with the centre on
equal footing -- the Federal Treaty granted autonomous republics rights and powers that the rest
of Russia's regions simply do not possess.
Asymmetry is one of the more conspicuous aspects of Russian federalism.

Most of

Russia's autonomous republics enjoy relations with the federal centre that resemble federalism,
while most oblasts, krais and okrugs remain largely under the tutelage of the centre, embedded in
a unitary system of intergovernmental relations. Continued challenges to central authority by the
republics should push Russia closer to federalism, but unless oblasts and krais begin to win rights
and powers comparable to the republics, Russia will continue to operate under a system of
"marble cake" or "matrioshka" federalism, with varying degrees of power and authority in each of
the eighty-nine regions; this will be exceedingly difficult to sustain over the long-term.

2 11

Steven Solnick, "The Political Economy of Russian Federalism: Problems of Measurement and Analysis,"
prepared for the 1995 Annual Meeting of the American Political Science Association, Chicago, Ill., 31 August- 3
September, 1995, 31-32.
93

The hypothesis that republics have more control over their natural resources is supported
by the evidence from Tyumen' Oblast and the Sakha Republic. According to the Federal Treaty,
mineral resources are the possessions of the republics, and Sakha used this right to secure control
over its oil and gas industries, and its lucrative diamond mining industry. Although it has some
authority in terms of oil and gas pricing and taxation, Tyumen' does not control the levers of
power in its oil and gas sector to the extent that Sakha does. But the hypothesis that resourcerich regions have earned a relatively high degree of autonomy also appears legitimate, although
research on more regions is necessary to validate it with more conviction.
An important factor which prevents Tyumen' from gaining more control over oil and gas

is that Tyumen's oil and gas resources are not really in Tyumen', but rather in the Yamal-Nenets
and Khanty-Mansiisk autonomous okrugs which are fully within Tyumen', but are themselves
subjects of the Russian Federation. The okrugs have similar visions of controlling their natural
resources and their outright secession from Tyumen' Oblast now appears to be a real possibility.
Should the okrugs be successful in their bids for independence, it would be testimony to the
political power generated by their natural resource wealth.
Russian federalization will continue to be an arduous, complex process, but the wheels are
certainly in motion. Federalism is beginning to take shape in Russia, and that shape is peculiarly
Russian, as it well should be. Decentralization of economic and political power has already been
extensive enough so as to make a recentralization of Soviet proportions extremely difficult, as
both domestic and international resistance would be stanch. As with any federal state, Russian
federal state-building will depend on the continued cooperation between centre and regions.
The challenge for future research in this field of study seems quite obvious: at this stage,
assessing the nature of Russian federalism requires direct examinations of jurisdictional divisions.
It is insufficient to simply suggest that republics are in privileged positions vis a vis other regions
94

without investigating and analyzing the true division of powers in specific regions. This thesis
shows that natural resource wealth also puts regions in privileged positions in intergovernmental
relations and that, in some cases, natural resource wealth may indeed be of more consequence
than administrative status. Again though, for this to become a firm conclusion more regions
would have to be studied. Direct examination of jurisdictional divisions in a greater number of
regions would also enable us to address deeper questions, such as: Is the Russian Federation
really a federal state? Is the Russian Federation sustainable, or is it destined for disintegration or
re-centralization?
This thesis is a contribution to this endeavour. With direct examinations of the Russian oil
and gas industries, the Sakha Republic, and Tyumen' Oblast, it further clarifies the nature of
Russian federalism by highlighting the manner in which the intergovernmental struggle to control
oil and gas is shaping Russian federalism. In doing so, it also promotes a greater understanding of
the forces which give rise to and sustain federal states.

95

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