Moscow In The Money

He needs no further introduction in Moscow, but Europe's richest man under 40 still likes to advertise. Green-hued billboards marking the 10-year anniversary of Mikhail Khodorkovsky's oil giant, Yukos, crop up every few hundred meters on Moscow's busiest roads. The latest shows a sparkling gas pump pouring fuel into a symbol of Russian national pride: a space rocket in midlaunch, spitting fire. The message: riding an oil boom, Russia is regaining its lost status as a world player.

Moscow has been abuzz since last week, when Khodorkovsky, a 39-year-old billionaire, announced plans to acquire a smaller rival, Sibneft. The $15 billion union creates a new Russian icon, a home-grown megacompany that will own the second largest oil reserves in the world after ExxonMobil and pump more oil than ChevronTexaco. It also thwarts the ambitions of the world majors trying to break into Russia's market. Both Royal Dutch Shell and France's TotalFinaElf were rumored to be angling for a deal with Sibneft, too. The new company, YukosSibneft Oil, will be the world's sixth largest producer, pumping 2.3 million barrels of oil a day, about the same as Kuwait or pre-war Iraq. Russian Prime Minister Mikhail Kasyanov excitedly called YukosSibneft a "flagship" of the Russian economy, even though it doesn't formally exist yet.

Russia's oil industry has been basking in the global limelight ever since 9-11, which redoubled concerns over dependency on the Middle East. In the age of terrorism, Siberia doesn't look like the wild, wild East anymore. Oil production is rising again after a long slump, fueling a boomtown optimism throughout Russia. Petro dollars have erased fear of another embarrassing international default, like the one Moscow forced on the world in 1998; the Central Bank now sits on foreign currency reserves of $55 billion. According to Hermitage Capital Management, a Moscow investment bank, Russia has become one of the most sound emerging-market economies, with healthy trade and budget surpluses and GNP growth of 6.5 percent.

The danger is that Russia could become a petrol economy stumbling from crisis to crisis with an entrenched oil elite. The Yukos-Sibneft deal puts $3 billion, a sum equal to 1 percent of Russian GDP, into the pockets of a small group of tycoons led by Sibneft's major shareholder, Roman Abramovich. And it comes only two months after BP paid $6.75 billion for a joint venture with Russia's third largest oil producer, Tyumen Oil, which is also dominated by a few magnates. "Oil mergers in the last three months have put $6 billion into the bank accounts of less than a dozen Russian citizens," says James Fenkner, head of research for Troika Dialogue, a private investment company.

The fact that the boom is increasingly an all-Russian affair is a switch. In the 1990s, foreigners lost millions in Russian markets, while Russian tycoons sent their money offshore. "Nowadays the largest foreign direct investment in Russia comes from Cyprus and the Netherlands, which is essentially Russian money being recycled back into Russia," says Hermitage CEO William Browder. A case in point is Mikhail Fridman, the chairman of Alfa Bank and one of the oligarchs who amassed fortunes after the Soviet collapse. "If I can invest here and my money will make an annual, say, 10 percent profit, why keep it in a Swiss bank account for 1 percent interest? It's not a question of emotions, it's simple math," says Fridman, who is unsentimental about selling Russian assets. He was one of the big players behind the sale of Tyumen Oil to BP.

Many Russians are more emotional about their oil wealth. The BP deal was a global stamp of approval for doing business in Russia, but political considerations are making homegrown sales much more attractive. "Yukos and Sibneft elbowed out all the foreigners," says Fenkner. It's not clear how deeply the Kremlin was involved, but the result helps protect President Vladimir Putin from charges that Russia is selling off its natural wealth as he prepares for elections later this year. After Tyumen Oil, there may be political room for one more big foreign sale, says Browder. Any more "would be like selling Rockefeller Plaza to the Japanese."

Fortunately, analysts say Russia's fundamentals are improving along with its mood. The YukosSibneft deal sent shares in Russian oil soaring last week; the Russian market has risen 500 percent in dollar terms since 1999. But what strikes Fridman are the signs of stability, like healthy cash reserves. "I don't believe in boom-time anything," because of the crashes that follow, he says. "What is much more exciting is steady, stable growth. From that point of view, I think we're finally getting started." There is a huge to do list, from reforming market dysfunctions left over from the Soviet era to finding new sources of wealth beyond oil. But it is nonetheless conceivable that after the boom will come normal times, which would be a real novelty after all the turbulence in Russia.