Published: June 2008
Send Me to Siberia
Oil transforms a Russian outpost.
By Paul Starobin

It's around midnight, and the couples on the dance floor at the Palace Restaurant are gently swaying to a slow one. "Za nas, za neft—To us, to oil," the singer croons,

Wherever life sends us,
To us, to oil …
We fill our glasses to the brim.

It is Oilers' Day in the western Siberian province of Khanty-Mansi. This annual holiday, honoring the hard labor of the oil workers, the neftyaniki, falls early in September, after the worst of the summer mosquito season and before the first snowfall, in October. Hours earlier, as daylight faded, thousands crowded into a huge outdoor sports complex. A stage was framed by a deep-green backdrop of unbroken forest. Balloons were released, torches were lit, and a troupe belted out a song:

There is only one joy for us,
And this is all we need,
To wash our faces in the new oil,
Of the drilling rig.

Little wonder Russians are toasting oil: These are boom times. Global oil prices have increased tenfold since 1998, and Russia has pulled ahead of Saudi Arabia as the world's top crude oil producer. The Kremlin's budget now overflows with funds for new schools, roads, and national defense projects, and Moscow's nouveau riche are plunking down millions of dollars for mansion-scale "dachas."

The pumping heart of the boom is western Siberia's boggy oil fields, which produce around 70 percent of Russia's oil—some seven million barrels a day. For Khanty-Mansi, a territory nearly the size of France, the bonanza provides an unparalleled opportunity to create modern, even desirable living conditions in a region whose very name evokes a harsh, desolate place. Khanty-Mansi's regional capital, scene of the holiday revelries, is being rebuilt with oil-tax proceeds. The new structures include an airport terminal (once a wooden shack with an outhouse), an art museum featuring paintings by 19th-century Russian masters, and a pair of lavishly equipped boarding schools for children gifted in mathematics and the arts. Even the provincial town of Surgut, a backwater only a few decades ago, is laying out new suburbs and is plagued by traffic jams.

But the opportunity presented by oil could slip through the region's fingers. Despite the remarkable surge in oil prices, oil production in western Siberia has leveled off in recent years. Output barely rose from 2004 to 2007—a period when the rulers of the Kremlin, a cold-eyed and control-oriented crew, seized choice fields once held by private oil barons. The oligarchs, as they were known, were rapacious sorts who jousted among themselves for spoils. But they also heavily invested in the fields in order to maximize production and profits. The Kremlin, by contrast, aims to exploit oil not only as a source of national wealth, but also as a political tool for making Russia a great world power once again. Its heavy-handed tactics have made foreign investors wary and could undermine the boom—and with it Khanty-Mansi's chances for a brighter future.

WESTERN SIBERIA'S great oil deposits lie under lands that an exiled Marxist revolutionary, suffering in the gulag, once called the "waste places of the Earth." But to someone visiting by choice, oil country looks fetchingly wild and pristine. The terrain is dominated by taiga—dense forest of spindly birch, cedar, and pine—and boloto, peaty marsh that is frozen for most of the year and in spots bubbles with methane. There are no mountains and few hills, but there are numerous lakes, rivers, and streams.

Oil exploration began in earnest here in the mid-1960s. When geologists reported that large reserves of oil were waiting to be tapped, the Kremlin organized a frenzied military-style invasion of "pioneers" and bulldozers to ramp up production. Western Siberia, it turned out, had even more black gold than anyone had dreamed: More than 70 billion barrels have been pumped over the past 40 years.

In the early days "Siberia was all frontier," says Khanty-Mansi's governor, Alexander Filipenko. The governor appears older than his 58 years, with a shock of gray hair, watery eyes, and a mottled nose that has weathered its share of frost. Filipenko arrived in Khanty-Mansi in the early 1970s with orders to lay a bridge over the Ob River, which in the late 19th century was a route for squalid barges transporting prisoners to their final places of banishment. The bridge project took four years of toil under brutal conditions. Yet despite the hardships, the governor looks back at that time the way an old man might recall his first love for a beautiful young woman.

Filipenko is equally passionate about his latest project—the redevelopment of the provincial capital, Khanty-Mansiysk, a town of 60,000. He attends to every detail, and he has the funds to remake the capital to his liking. The province's oil industry generates 40 billion dollars in annual tax revenues, 4.5 billion dollars of which Khanty-Mansi gets to keep for its own use. The rest goes to Moscow.

His party background notwithstanding, Filipenko's vision is a distinctly non-Soviet one. The capital's leading architectural symbols include a shopping emporium topped by an enormous green dome in the shape of a chum, the traditional tent used by the region's indigenous people—the Khanty, Mansi, and others who herd reindeer, hunt, and fish. That symbolism would have been unthinkable in Soviet times, when the state, with its ideological cult of "the worker," denied the very idea of culturally derived identity.

When Siberia's oil lands came under development, native people were forcibly herded into villages and cut off from their hunting and fishing grounds. Following the breakup of the Soviet Union, the nomads won legal status as "aboriginal people," with the right to roam the oil fields. In spite of their new status and the architectural homage in the capital, their lot has hardly improved. Their numbers are small, about 30,000 in all; their languages are nearly extinct; and they are heavily afflicted by the scourges of contemporary Russia—AIDS, alcoholism, and tuberculosis. Some oil-tax money is being invested in medical ships that stop along the rivers to care for patients. But critics say these floating clinics diagnose disease, then leave patients with no means to get treatment.

Rural Russia is also being depopulated by the flight of young people to Moscow and other cities. To counter these trends, Filipenko has implemented ambitious plans to turn Khanty-Mansi into a place young people will choose to live in rather than leave. And this effort, he boasts, is working. He notes that Khanty-Mansi has the third highest birthrate among provinces in Russia, and unlike the country as a whole, whose population is in decline, Khanty-Mansi's has increased 18 percent since 1989, from a combination of births and immigration.

Oil composes 90 percent of the capital's economy, which is not surprising given the surge in oil prices. But it points to a problem shared by all resource-dependent economies: At some point the resource will be exhausted, and new sources of prosperity will have to be found. Recognizing the need to develop economic prospects beyond oil, Filipenko persuaded some 80 top researchers from Akademgorodok—a famed science and research town in southern Siberia created in Soviet times—to move to his regional capital to staff a new institute specializing in information technologies. The institute provides consulting services to oil companies, but it also takes on projects in unrelated fields such as nanotechnology.

It's the start of a "Silicon Taiga," says Alexander Sherbakov, a 60-year-old mathematician with a gray walrus mustache. As the era of easy oil comes to an end, he says, "we're going to grow our own scholars" by creating information-age jobs for the younger generation. Unlike investment in oil, investment in science, he says, can guarantee an everlasting bright future for the region's economy and its people.

That's undoubtedly an optimistic assessment. For one thing, the touted model, Silicon Valley, is located in temperate California. In Soviet times the Kremlin could simply order top scientists to move to remote research centers. In post-Soviet times Russia's top researchers can live and work wherever they choose, and most are choosing to live in prosperous cities such as Moscow and St. Petersburg.

WHILE THE OIL BOOM has yet to make Siberia a magnet for Russia's knowledge class, it is attracting many other newcomers: impoverished immigrants from beyond Russia's borders. Early one morning, in a vacant lot just off the highway to Filipenko's showcase capital, a group of about 15 shabbily dressed men ranging in age from their 20s to their 40s are waiting for offers of work, however menial. A white Nissan pulls up, and several of the men walk over to talk to the driver, who is looking for a few hands to dig potatoes. But his offering price, just under ten dollars a day, isn't enough, and he drives away without any takers.

These men are what Russians, borrowing a German word, call gastarbeiters—guest workers. They are nearly everywhere in Khanty-Mansi. Most are Muslims from Tajikistan, the former Soviet republic in Central Asia whose economy was shattered by civil war in the mid-1990s. They come here in spring and return home before winter arrives. It's not every day they find a job, but when they do they can earn about $20 lugging bags of cement for a construction crew or doing household cleaning. They wire funds back to their families, and their employers avoid paying taxes on the wages.

The men balk at my request to see their living quarters. One says he is ashamed to show me how he lives. "I don't want you to get the wrong idea," he says. "We are not bandits; we are civilized people. We just need work."

The men are supposed to obtain registration papers certifying their place of residence, but, as they tell me, they have no authorized place to live, bunking instead in unheated garages illegally rented to them. A work boss—a kind of Mafia figure—obtains papers for them by bribing the registration office, but those documents, listing a false address, leave the gastarbeiters at the mercy of the police. When they are found out, they're sometimes forced to pay a spot "fine" (read "bribe"), and repeat offenders may face deportation. Russia's federal government recently put the burden on employers to register the workers and check their identifications, but such measures are unlikely to stem the tide so long as the oil boom continues.

A FLOOD OF RUSSIANS from economically depressed cities west of the Urals is also swelling the oil towns of western Siberia. Forty years ago Surgut was a collection of wooden hovels, in a place where temperatures can plunge to minus 60 degrees Fahrenheit and midwinter darkness lasts for all but a few hours a day. Today Surgut is one of western Siberia's largest cities, with 300,000 people. The new arrivals are voting with their feet, a sign that Russia's new market economy is actually working.

The polish and prosperity on view in Surgut were once unthinkable in Russia's hinterlands. A combined day care and preschool the city recently remodeled with 5.2 million dollars largely from oil revenue now has a heated indoor swimming pool and hydromassage whirlpool; an animal collection with rabbits, turtles, and parrots; and a room with a small wooden stage on which colorfully costumed children diligently perform fairy tales. When weather doesn't permit outdoor exercise, the children can ride around in toy cars in a large, glass-enclosed playroom kept at a moderately chilled temperature. And then the toddlers can be soothed by a hot drink from the herbal tea bar.

I understand that the "foreigner" is being shown the finest kindergarten in town, but only so much can be faked. Stuck in Surgut's traffic jams are as many Hondas, Toyotas, and Nissans as inexpensive Russian-made Ladas. Two-car families are becoming more common with the rise in living standard.

The housing stock of a typical Russian city consists of large (and ugly) multistoried concrete apartment blocks. Surgut boasts a suburban development of single-family town houses, aimed at a new upper middle class of oil company managers, bankers, and entrepreneurs. The redbrick houses, each with its own small plot of land, are being built along a tree-lined stretch of riverfront at an average cost of $400,000. Envious townspeople coined an ironic sobriquet for the elite community: Dolina Nischikh, Valley of the Beggars.

Surgut might have fallen apart, as did some other Russian cities, in the chaos following the collapse of the Soviet Union. That it didn't is a testament to the rootedness and stability of its political and business leadership.

"I was born in Surgut, my children were born here, and my grandchildren were born here," Alexander Sidorov, the city's longtime mayor, proudly declares. Surgut's economic anchor, the oil company Surgutneftegas, Russia's fourth largest producer, is majority owned by local managers. And unlike most Russian oil barons, who rule their western Siberian empires from Moscow, Surgutneftegas's general director, billionaire Vladimir Bogdanov, makes his home in town. Though now a towering figure in Surgut, Bogdanov started out as a common neftyanik.

Surgutneftegas is using the oil boom to finance an ambitious modernization program. At the oil field management center, computer engineers have custom designed an enormous digital map to monitor and adjust the field's performance. The map displays real-time information sent by coded radio signal from pump stations, active wells, and pipelines. From this display, managers can tell how much electric power is being consumed, whether a well needs repairs, and whether a pipeline is leaking.

Protection of the environment, barely a concern in Soviet times, is becoming part of the new ethos. It's not that the oil industry has suddenly become softhearted toward flora and fauna. Rather, high oil prices provide an incentive to minimize waste, as do license agreements that include big fines for spills. Moreover, as Russian oil firms have become global players, they've also become more sensitive to international concerns about the environment. "Maintaining a good reputation is very important," says Alexey Knizhnikov of the World Wildlife Fund in Moscow. "Otherwise, doing business becomes difficult."

Lubov Malyshkina, director of the environmental department at Surgutneftegas, is a chemical engineer with an advanced degree in the science of corrosion protection and geoecology. She also serves as an elected official in the regional parliament. In Soviet times, she says, the oil ministry in Moscow, oblivious to local conditions, would send chemicals that proved useless to treat oil spills and other hazards. Now Malyshkina's department, drawing on a nearly 500-million-dollar budget, makes its own purchases. She shows me one: a Swedish-made Truxor vehicle with tanklike treads that break up oil-saturated peat so that spills can be cleaned up. The company is also investing five million dollars in a new plant for recycling old tires into fibers that can be mixed into the asphalt used to pave company roads.

One aspect of the oil industry here hasn't changed: The neftyanik's job is still hazardous and grueling. At a rig about an hour's drive from Surgut, villagers gathering mushrooms are dwarfed by massive pumps, whose rhythmic motion suggests a giant bird dipping its beak to the soil. Metal stairs slick with oil lead to a platform where a drill is boring through rock with a diamond-coated bit nearly a foot in diameter. It's noisy and the air is foul, but this is a good spot to be in winter, I'm told, because the platform is bathed in steam. The men work eight-hour shifts for up to 30 straight days, sleeping on-site in trailer wagons, then rest off-site for up to 30 days. Alcohol is strictly forbidden. Drink all you want during your rest, the men are told, but return sober.

Yet the jobs are a route to a prosperity unimaginable a few years ago. The least experienced workers get a monthly salary of $1,000, the most senior hands as much as $4,000. And there are bonuses for exceeding daily quotas. A thrifty neftyanik can save enough to purchase a flat in Surgut's apartment complexes—if not a town house in the Valley of the Beggars.

All of this is impressive, of course. But the larger question for Surgutneftegas, and every oil firm in Khanty-Mansi, is whether they can rise to the myriad political, economic, and technical challenges on the horizon. While most analysts expect western Siberia to remain the dominant source of Russia's oil for at least the next 20 years, the region's oil fields are aging. Coaxing additional barrels of oil from the ground is becoming more difficult and expensive, and maintaining production will require infusions of capital and expertise from sources outside Russia. But burdensome taxes—all gross revenues above $25 a barrel go to the federal government—and Kremlin-backed power plays have chilled the investment climate like a Siberian blizzard. One need only visit Nefteyugansk, a city of 114,000 on the Ob River about an hour's drive from Surgut, to see why.

A BLACK GUSHER of trouble is what the oil boom has been for Nefteyugansk, which has the look and feel of an unkempt industrial park. The central plaza is strewn with iron pipes, and down by the river a crumpled barrel of Shell oil floats next to a dilapidated dock. A few paces inside the gate of the town's cemetery lies the grave of Vladimir Petukhov, the burial ground's most famous resident. In 1996 the townspeople elected Petukhov as their mayor. Two years later, as he walked to work on a June morning, he was shot to death by a pair of gunmen. An etching on his black marble gravestone depicts him in a crewneck sweater and leather jacket.

For more than ten years oil has been at the center of a violent and chaotic power struggle in Nefteyugansk. The difficulties began in the mid-1990s, when a nouveau riche Moscow banker snagged one of Russia's prime oil producers—and the town's sole large employer—in a privatization auction. The banker, Mikhail Khodorkovsky, made the Nefteyugansk unit the core subsidiary in his new oil company, known as Yukos. But he antagonized the city by delaying tax payments, causing city workers to go unpaid for months. Mayor Petukhov, a former neftyanik, led public protests against the new Moscow owners, who, he said, "spit into our faces, the faces of oilers." The mayor's murder, at the age of 48, outraged the townspeople, many of whom connected the deed to his stand against Yukos. "This blood is on your hands," read anti-Yukos banners put up at city hall by Petukhov's mourners.

For five years no one was brought to justice. During this time the city was governed by a corrupt official who eventually was sent to jail for swindling oil workers out of their promised retirement homes in Russia's balmy Black Sea region. Oil prices, meanwhile, went ever higher, inflating the value of Khodorkovsky's holdings. And then the hammer came down.

In June 2003, Moscow prosecutors arrested Yukos's security chief on charges of organizing the execution of Petukhov. Four months later they arrested Khodorkovsky on charges of fraud and tax evasion. Tax authorities seized the Nefteyugansk subsidiary and handed it over to a Kremlin-controlled company called Rosneft. Khodorkovsky was convicted and carted off to jail in southeastern Siberia, where his face was slashed by an inmate. Meanwhile, the security chief was convicted in a trial heavily publicized on state television. In the latest development, prosecutors announced last February that Yukos co-owner Leonid Nevzlin also would be charged in Petukhov's murder.

Perhaps it did happen the way the government claimed, but ask folks in Nefteyugansk about the murder, and they tend to shrug and say they don't know what to believe. The coordinated elements of the Yukos affair have the whiff of a Moscow plot hatched by the KGB types in control of the Kremlin. The result, in any case, is that a cash cow—and still the town's livelihood—has passed from the hands of a Moscow oligarch into the hands of the Kremlin.

When I show up in town, Sergey Burov has been mayor for four months. He was once a deputy director for Rosneft and before that a senior manager for Yukos. He, too, is no stranger to violence: In 2005, while walking to his car in the morning, he took a bullet to the stomach. It looked like another contract job, but prosecutors closed the case without finding a culprit.

Burov is a burly man whose wide shoulders stretch his suit. He is interested in talking about the town's future, not its bloody past. In partnership with Rosneft, he tells me, the city administration has ambitious plans to redevelop Nefteyugansk. Come back in two years, he says, and I will see an entirely different town, maybe even a yacht club. After the interview his press secretary shows off an indoor sports facility with an Olympic-size swimming pool. In the central plaza, the one littered with pipe just a few days earlier, workers are starting to install brick walkways and flower beds.

Are things finally looking up for Nefteyugansk? Residents seem skeptical. "Maybe Rosneft feels better being here," Vasily Voroshilov, a 52-year-old oil well repairman, says. "But we don't feel it."

That skepticism is shared by many observers outside Russia, who say it's one thing to seize control of an oil company and quite another to run it. Says one analyst of the Kremlin's takeover of Russian oil, "You can steal a Chevy, but that doesn't mean you know how to drive it."

FOR ALL THE WEALTH that oil can produce, it is often as much a curse as a blessing for countries such as Russia. Early in the 1990s, before the oil boom, Boris Yeltsin encouraged local provinces to grab what autonomy they could. This was when Russia's potential for political pluralism and Western-style grassroots democracy looked greatest. When oil prices rose toward the end of the decade, the Kremlin realized that this source of wealth could be used to bring about a humiliated Russia's global resurgence. Salvation by oil has since become an article of national faith.

"Oil," said a 16-year-old student at Khanty-Mansiysk's school for math whizzes, "is the only way for our country to stand up, to survive." Actually, there are many ways that the Russians, a creative and educated people, can revive their country. But oil suggests national potency, and Russia's petroleum patrimony lends itself to patriotic incantations of an almost mystical kind. At the festivities on Oilers' Day one of the songs, a salute to the collective might of the neftyaniki, proclaimed, "We are the fingers pressed tightly into a fist."

"Russia's superpower status today comes from energy, not its military," says Julia Nanay, a senior director at PFC Energy, a global consultancy based in Washington, D.C. "The Kremlin determines what happens with oil in western Siberia. They want to control production and exports in order to maximize Russia's geopolitical relevance."

Just as the tsars of old exercised monopolies on valuable commodities such as fur and salt, the Kremlin wants direct control over oil—and over the oligarchs who produce it. Those who come to heel survive; those who don't risk suffering Khodorkovsky's fate, or worse.

One of the survivors is Vagit Alekperov, president of Russia's biggest private oil company, Lukoil. Starting out working on the rigs near his native Baku, Alekperov was sent to Siberia in the late 1970s to manage an oil-production team. A notoriously strict paternalist, he angered his men by banning the sale of alcohol in the village. Several of them grabbed hunting rifles and fired shots at his cabin, but Alekperov, ever the survivor, wasn't there at the time.

During the final days of the Soviet Union, Alekperov forged Lukoil from prime oil assets in western Siberia. Today the company is a global multinational with hydrocarbon reserves second only to ExxonMobil—and some 2,000 gas stations in the U.S. Though most of Lukoil's reserves are in western Siberia, Alekperov keeps his headquarters just two miles from the Kremlin. Like other survivors, he knows that he must be attentive to any change in political mood that could affect Lukoil's fortunes, for better or worse.

A distinguished-looking man with bronze skin and a crop of steel gray hair, Alekperov dresses in impeccably tailored suits. A tough guy, he can also charm. When pressed on whether oil consumers around the world should feel comfortable now that Russia has a large finger on the globe's petroleum tap, he leaned back in his chair, smiled expansively, and asked, "Do I look like a bear?" I couldn't help laughing. "We just want to make money."

Having gobbled up Yukos, might the Kremlin want to swallow Lukoil next? "I don't think either the government or the president of Russia will target such a company," Alekperov remonstrates. I decide not to mention that Khodorkovsky had told me the same thing not long before his arrest.

Lukoil's base of operations in Khanty-Mansi is the town of Kogalym. A roadside floral arrangement spells out the company's name not far from the golden domes of a Russian Orthodox cathedral and the green minaret of a mosque. At a refurbished maternity house—what Russians call a roddom—Dr. Galina Pustovit, director of the gynecology department, shows off new Western-standard medical equipment. In a country where many women deliver their babies in Soviet-era buildings reeking of sour cabbage and damp concrete, this gleaming facility rates four stars.

When I mention to Pustovit that Russia's oil industry is known for being corrupt, the doctor gives me a sharp look. "This is oil," she says, sweeping a hand around the gynecology ward. "Oilers built this hospital. All of the objects in this city have been built with oil money, including our beautiful boulevard." Don't judge us too harshly, her look says: Life in these parts has never been better.