Russian Riddles
In a 1939 radio broadcast Winston Churchill said, "I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma." Those words seem just as apt today. The mega-merger of the Russian state oil company, Rosneft, and the world's largest natural gas enterprise, Gazprom, now appears to be off. Instead, as the Financial Times notes, they will remain separate entities, but after a series of market transactions, each will have a majority stake held by the government and minority stakes held by investors, including foreigners. While it's interesting to speculate what signals this may send about factional politics within the Kremlin, there are larger issues at stake.

Gazprom controls the largest natural gas reserves on earth, exceeding those contained in North, Central and South America, combined. It also supplies most of Europe's natural gas imports. Rosneft, after a less-than-transparent purchase of Yukos's largest producing subsidiary, is now the preeminent oil producer in Russia. The key question for these two companies, and for the energy consumers of the world, is whether the arrangements following the failed merger will provide these companies with sufficient access to capital and technical services--both Russian and international--to tap their reserves efficiently and continue to grow production. This is particularly critical for Rosneft, since it is stepping into the shoes of the Yukos, which had been most successful at rejuvenating Russia's fading oil production and contributing to the growth of non-OPEC oil production.

As a consequence, the outcome of President Putin's forced restructuring of the Russian energy industry will play a major role in determining the balance of market power between OPEC and non-OPEC in the years immediately ahead, and thus have an inordinate influence on the global price of oil.