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By Vladimir Milov
Mr. Milov, a former Russian deputy energy minister, is the president of the Moscow-based Institute of Energy Policy.
Summary prepared by Hayk Sargsyan of CDI

Russia's oil industry is in trouble. Average daily crude production hasn't grown over the past nine months, after notching record-breaking increases from 7.7 million barrels per day in December 2002 to 9.4 million barrels in September 2004. Signs of trouble out on the Russian fields mean more bad news for oil markets. Over the last three years, the upsurge in Russian production helped meet dramatic global oil-demand growth in the Asia-Pacific region and elsewhere. Russia was able to fill the gap thanks to the major restructuring and privatization of its industry that was carried out in the 1990s. Mikhail Khodorkovsky's Yukos, then the country's largest oil producer, led the industry to new heights in growth and efficiency by promoting Western-style transparency, production technologies and management.

The destruction of Yukos and Mr. Khodorkovsky, who was sentenced to nine years in prison on fraud charges last month, is partly - but not wholly - to blame for this worrying turn of events. At major Yukos oil production subsidiaries, including Yuganskneftegaz, which was auctioned off by the state to meet back-tax claims, daily production has fallen 7% to 18% off 2004 peaks.

Rising political risk is making investors think twice. The Yukos case showed that the Kremlin won't shy from redistributing assets. State-dominated companies like Gazprom have their eyes on companies controlled by Russian oligarchs, such as Sibneft and TNK-BP, which have both seen production fall. The Russian government's plans to stop new foreign investment in upstream oil and gas ventures also worries TNK-BP, which is half-owned by British Petroleum and therefore could be shut out of these lucrative projects in the future.

Considering all this political pressure, it's hardly surprising that companies were cautious with new investment decisions in 2004 and the first half of this year. Yukos and its former subsidiaries are pumping less crude while depleted oil fields at other companies aren't being regenerated with fresh investment.

Neither situation looks likely to change. So don't look to Russia for relief in bringing $60-plus oil prices down anytime soon.