Russian Oil Towns

That’s black gold to these folks

Financial Times 4 November 1998

SIBERIA: Economy shows its two faces

Arkady Ostrovsky visits the Siberian oil towns of Surgut and Nefteyugansk
and finds radically different moods

Two oil towns face each other across the river Ob, which divides east from
west Siberia. They look similar – grey and depressing monuments to Soviet
industry built on the swamps of Taiga forests – but as harsh winter and harsher
economic times tighten their grips, the mood in each is radically different.

In Surgut, on the east bank, a Siberian oilman dressed in Soviet-style grey
suit and tinted glasses, dubbed the “general” by his employees, has built
up the oil company that takes its name from the town and is considered the
best managed in Russia. Surgutneftegas, is debt-free and analysts believe
it should be proof against the storm of economic uncertainty that broke across
Russia this summer.

Across the river in Nefteyugansk, people rail against a slick Muscovite banking
tycoon dressed in a Marlboro Classics shirt who bought their company,
Yuganskneftegas, and milked it for profit, impoverishing the town in the
process. Queuing recently outside a bank for their wages, which they
had not received in full for three months, Nefteyugansk workers complained
bitterly about Mikhail Khodorkovsky, one of the new class of bankers, the
so-called “oligarchs”. Some counted themselves lucky to receive Rbs200 ($12.50)
– or 10 per cent of the wages due three months earlier.

Alevtina Kosareva, 43, says she has been forced to exchange her sewing machine
for vegetables. “He [Khodorkovsky] keeps us on a drip-feed so we do not starve
and continue to work for him. Khodorkovsky simply laughs at us. He does not
even think we are people . . . In the past, masters fed their slaves, but
the new masters do not bother.” In the past two years Yukos – the loss-making
oil company that owns 51 per cent of voting shares in Yuganskneftegas – has
reduced wages by 30 per cent, cut its drilling programme, and laid off about
15,000 people, reducing the workforce to 39,000. It has transferred the old
Soviet social responsibilities to the municipal budget, in line with advice
from western consultants.

But industry analysts fear Yukos’s short-term approach is jeopardising the
long-term interests of the oil giant. “Khodorkovsky has killed the
goose which was laying golden eggs,” says Ivan Mazalov, a senior analyst
at the broker CentreInvest. Disgruntled investors claim Yukos milked
money from Yuganskneftegas by using a mechanism known as transfer-pricing.
Yuganskneftegas was obliged to sell all its oil at a fixed rouble rate to
Yukos, which would then re-sell it at market prices and use the revenues
as it saw fit.

The growing economic crisis has seen the pressure on Yuganskneftegas increase.
Recently the company – the second largest in Russia in terms of oil production
– had its telephones cut off because it had failed to pay its bills. With
oil prices falling, and Yukos reluctant to pay taxes to the Nefteyugansk
authorities, tension in the town has escalated. Roads have been neglected,
nursery schools have closed and hospitals handle only emergencies. Four months
ago, Vladimir Petukhov, the mayor and a vocal critic of the oil company,
was shot dead. His funeral turned into a protest demonstration against Yukos,
one witness said.

Residents of Nefteyugansk long to cross the river. According to Vladimir
Nozhin, chief engineer of Yuganskneftegas, the company has lost 700 top
specialists to Surgutneftegas following the recent wage cut, but now Surgut
needs no more workers. Whereas it is hard to sell a one-bedroom flat in
Nefteyugansk for Rbs60,000, the same flat in Surgut would cost Rbs 200,000.

Surgut may not be prosperous by western standards, but its oil company is
one of the few in Russia where workers have benefited from market reforms
and display no signs of nostalgia for the Communist era. “Nobody here wants
to go back to the Soviet days, to deficits and empty shelves,” says Oleg
Plaksin, a drilling master at Surgutneftegas.

In Nefteyugansk, that seems to be exactly what is happening.

Imported products which once filled the shops have been replaced by old-
fashioned glass jars filled with potato soup and preserved vegetables. “We
took them off the shelves four years ago, but now we have nothing else to
sell, so we put them back,” said Olga, saleswoman at the proudly named Europa
Tsentr (Europe Centre). Apart from its name, however, the shop is a spitting
image of any Soviet supermarket.

“We have no sugar, no rice. God knows what we are going to eat in winter.
There is no master in this town. We have the same resources as Surgut and
look how we live,” says Olga. Zoya Nikolaevna, a pensioner in Nefteyugansk,
often goes to Surgut to buy food. “I was in Surgut last week, they have 30
kinds of sausage there. But here the shops are empty – just like in the Soviet
days.”

Surgut’s comparative prosperity is partly due to the president of Surgutneftegas,
Vladimir Bogdanov, who until recently was criticised as an old-style Soviet-era
manager with xenophobic views. But his hands-on style management has paid
off. Contrary to the advice of some western consultants, Mr Bogdanov
continues to pay for schools and accommodation for his staff. In return he
gets the loyalty of his workers, who have more faith in their management
than in the central government.

“When you pay your workers and give them something to do they simply do not
have time to talk about politics,” says Andrei Atepayev, an energetic 38-year-
old manager. “People start waving flags and slogans when they have nothing
to do at work.” Not only are workers at Surgutneftegas happier, the
company is investing up to $1bn a year in production and exploration and
has among the lowest counts of idle oil wells of any Russian company in the
sector.

“We always counted money here and never splashed out on fast cars and lavish
offices. We did only what was economically prudent and as a result we are
still drilling new wells, while most of our competitors have almost stopped,”
says Mr Atepayev.

Surgutneftegas is not an island, however. The company’s investment programme
could be jeopardised by the collapse of the banking system – it has $1.5bn
locked in various Russian banks crippled by the government’s default on its
debt. It has also had to cut 1,000 jobs from its total staff of 68,600.
But such is the paradox of recent Russian history that it is Mr Bogdanov,
a local “red” director, who has used his Russian know-how to build a profitable
enterprise in which the workers are the most effective advocates of capitalist
economy.

“Of course we can curse the government and complain about the crisis,” says
Tatyana Nikolaeva, who works at Surgutneftegas’s nursery school, but “I always
say to my staff – do not whine that it is dark in the room – turn on the
light.”