YukosSibneft to become too big to ignore

The numbers are eye-catching. Created out of the combination of Yukos Oil and Sibneft, YukosSibneft will pump about 2.3 mm bpd of oil, more than Kuwait and as much as Iraq. The new company will have 19 bn barrels of oil and gas in reserves, 150,000 workers and a market value of about $ 35 bn.
Yet the numbers only scratch the surface of the story. YukosSibneft is the first of what is likely to become a handful of Russian companies too big for global equity investors to ignore. It forces consideration of the identity and nature of Russian companies bidding to compete worldwide. It poses three questions.
1. Will YukosSibneft take its place alongside US and European rivals, or will it remain an oversized local company?
2. What does the creation of YukosSibneft say about its Western rivals?
3. Will the new company be a modernizing or reactionary force in Russia?

YukosSibneft has some of the attributes of its US and European rivals. It is either the fourth- or seventh-biggest oil company in the world depending on how you count -- by reserves, output or market value.
Yukos and Sibneft were the two fastest-growing Russian oil companies and the two lowest-cost producers. The combined business is set to become the class act of the Russian petroleum industry.

The company is heading down the trail blazed by its Western rivals. Mikhail Khodorkovsky, the CEO of the merged businesses, has said repeatedly he wants to build a retail business outside Russia. In pursuing this goal he places himself in the line of oil barons originating with John D. Rockefeller who have sought control over distribution as well as production.
Placing himself in the tradition of Rockefeller means that Khodorkovsky almost certainly will sink cash into European and American refineries and gas stations. YukosSibneft will probably also try to become a global brand name in some form. Expect in the next decade to pick up a free Cossack toy for the kids as you fill up your car with tank of Yukos unleaded.

The news makes the established oil majors look different. It makes Lord Browne, CEO of BP, look like the smartest oilman in the world. In February, Browne paid $ 6.75 bn for a joint venture with Russia's Tyumen Oil. That just might turn out to be the last big foreign investment in the Russian oil industry.
Before the merger announcement, the market was awash with rumours that Shell Group would take control of Sibneft. Sibneft executives said they talked to foreign companies before striking their deal with Yukos. Now Yukos has trumped Western oil companies. Other opportunities may arise, though the inaction of oilmen other than Browne may prove to have been a massive misjudgement.

Russian oil companies that could have been turned into thriving subsidiaries a few years ago may instead become ferocious competitors. Historians may interpret this inaction as a failure of nerve. The merger brings Russia a step closer toward defining itself in the aftermath of communism. Russia could go one of two ways. It may become the next Argentina -- a country rich in natural resources stumbling from crisis to crisis.
Or it may become the next Spain -- a country emerging from a long period of dictatorship to create a modern, vibrant economy. Which kind of country Russia becomes depends a lot on its oil industry. Russia is an oil economy. ING Groep estimates oil accounted for 30 % of its gross domestic product in 2002 and half its exports.

History shows that oil has the potential to propel nations into the modern age -- or to entrench corrupt elites standing in the way of modernization. In most of the Middle East and Latin America, oil has been a reactionary force. It has created an interlocking class of businessmen and politicians concerned with splitting up the wealth that gushes from the ground -- not with using petrodollars as the foundation for economic development.
At times, Russia has looked to be going that way. But there is another model. Oil was crucial in helping the US become a superpower. Aside from supplying energy, US oil companies pioneered modern management. They invented techniques allowing big companies to resist bureaucratisation and to stay entrepreneurial.

Aside from creating capital, US oil companies such as ExxonMobil fostered learning in marketing, finance and management. The same could be true of YukosSibneft. The new company may become a seedbed of Russian managerial talent.
That model is not restricted to North America. British oil companies have played a big role in the UK's economic development. Norwegian oil has spurred the Norwegian economy. It could happen in Russia as well. Which way will YukosSibneft go? It's too early to say. Still, we won't have to wait long for indications. One of the first will be the treatment of small shareholders in Russia's first entrant in the big league of global companies.