National Agenda : Russia’s Real ‘Underground Economy’ : The huge nation is the world’s best overall repository of oil, gas, coal, gold, timber, diamonds. So why isn’t it rich?

The great Siberian swamp stretches as far as the eye can see. Countless blue cutouts of rivers and streams mix with the chartreuse grass of the frantic northern summer. Here and there, the silhouette of an oil pump, looking like a giant, black pecking bird, breaks the landscape. A massive torch rises where gas is being burnt off an oil well, flaring in the ever-light sky.

Translated onto the map on Nikolai Medvedev’s office at the Surgut Oil and Gas Co.’s headquarters, western Siberia is a marsh four times the size of France, scattered with incursions by man but still holding fabulous untapped riches in its depths.

“This is a unique place,” said Medvedev, geology chief at the giant state oil company. “It can be compared only to Saudi Arabia or the Middle East. In time, there will be no white spots on the map. It will all be covered in well sites.”

And western Siberia, already well-pumped and explored, is only the beginning of Russia’s immense natural wealth. With about one-eighth of the world’s land surface, including the endless expanse of Siberia and the uncharted territories of the north, Russia remains the globe’s richest overall repository of oil, gas, coal, gold, timber and diamonds.

It is the world’s top exporter of natural gas and has nearly 40% of the world’s reserves. Its oil output, even now, in the midst of a production slump, surpasses all producers except Saudi Arabia. It is a major producer of diamonds, and because its mines turn out such a large portion of gem-quality stones, it ranked first last year in the value of its diamond output--ahead of Botswana and South Africa.

In coal, Soviet reserves--lying mainly in Russia--were estimated to be enough to last 350 years. The Russian State Forest Fund controls a “green sea” of 2.87 billion acres, and Russia produces more timber than any other country in the world.

“Russia is based on the riches of Siberia,” the 18th-Century Russian scientist and philosopher Mikhail Lomonosov wrote.

But in the midst of all this wealth, Russia also feels like one of the poorest countries in the world, swimming in debt and dooming nearly half its population to life below the poverty line on typical salaries equivalent to only $50 a month. If only--it would seem--it could learn to use its resources right, to turn its riches into production and income, it would prosper and no longer need to appeal for Western aid and credits.

With that aim--and the far more modest goal of just keeping the economy running--Russia’s government is attempting painful, fundamental changes in how it extracts, processes and sells raw materials.

* It is turning old state monsters of oil and gas companies into something approaching corporations and struggling to introduce a real element of competition into prospecting and mining.

* To make the most of the fuel it does extract, it is also pushing for tough new curbs on consumption that would force greater efficiency on factories that use twice as much fuel as their U.S. counterparts to make the same product.

* It is also allowing foreign companies into sacred Mother Russia to a degree greater than ever before, courting desperately needed investment in failing oil wells. And the companies are coming--slowly, cautiously, but coming.

“You will need a number of things to settle a little more, but we’re not far from the point when the trickle turns into a stream,” said Anders Morland, Amoco’s man in Moscow and a chairman of the Petroleum Advisory Forum, a council of foreign oil companies in Russia.

Western aid is coming as well, with President Clinton showing special enthusiasm for investing in Russian oil and gas and the Export-Import Bank recently approving a $2-billion loan for the Russian fuel industry. Last month, the World Bank approved its largest loan ever--$610 million--to help three Russian oil companies improve their output.

As Russia develops new approaches to exploiting its resources, however, it must still deal with the devastating legacy of 70 years of Soviet development-at-any-cost--oil fields ruined by careless work, giant torches flaring off millions of dollars in natural gas, over-cut forests, the dangerous coal mines.

And a more recent legacy compounds the problem: a drop-off in investment that, in the oil industry, has resulted in Russian production plummeting from 570 million tons in 1987 to 396 million tons in 1992. Coal production has dropped recently from 416 million to 328 million tons a year, officials say.

Much of the lumbering Soviet-era industry is so inefficient that economists have calculated that given current exchange rates, Russia’s gross national product would actually rise if it simply sold all its raw materials abroad at world prices rather than producing anything from them itself--industry, in other words, is producing goods worth less than the sum of their parts.

Along with the burden of the old is the dislocation of the new.

“We’ve turned everything upside down, all our concepts,” Medvedev said. “They taught us one thing from when we were in our diapers, and now it’s all different.”

New laws aim at creating competition where once there was monopoly and impose local government control where once all permits depended on a ministry and the Communist Party.

The “oil generals”--directors of oil companies who control entire Siberian fiefdoms--”used to be more like kings than now,” said Vladimir Ulyanov, the chairman of the Parliament in the oil-rich Tyumen region. “Before, local power couldn’t influence them; now, they depend on us for licensing, so the generals are more dependent.”

The new competition means that the old days when Surgut Oil and Gas, for example, could be sure of getting the rights to any new field in its territory are over.

In the neighboring town of Khanty-Mansiysk--neighboring only by Siberian standards, which means it is nearly 200 miles away--regional Gov. Alexander Philippenko beamed as he talked about Siberia’s first effort to gather bids for several major oil sites along the Ob River.

“It makes us very happy, because now the task of Mobil and Exxon is to fight with Conoco and Shell and not with us,” he said. The competition is meant to choose a partner for a joint venture based on Western financing, with the Western partner then getting up to 50% of the income.

Under Russia’s new law, all mining companies must apply for government licenses to begin new projects. Even in the once top-secret field of diamond mining, the state companies’ monopoly can now conceivably be broken.

Change is also mounting within Russia’s resource industries themselves: Most of them are being transformed from the state-owned monoliths of the Communist era into joint-stock societies meant to motivate workers by giving each one a small piece of the pie.

Fuel and Energy Minister Yuri Shafranik has said that 75% of the gigantic fuel industry will be made private or into joint-stock companies. He is also letting Russian oil companies integrate vertically, creating entities that, like their Western counterparts, include everything from exploration to retail gasoline stations.

The process is only beginning, but it has already spawned nasty struggles for chunks of stock. And workers seem unimpressed at this point. They want money, not stock.

“The only thing we don’t have enough of is salary,” said Valery Paleyanov, drill master at a new site at the once-booming Fyodorovskoye oil-field complex near Surgut. “We earn 260,000 rubles,”--about $260 a month--”but we need 500,000 to live normally.”

“A few shares won’t make a difference,” he said, shouting over the deafening din of the drill’s pump.

The fight over stock, which is just getting under way, still pales next to the central battle over Russian natural resources: what belongs to whom.

The diamond-rich republic of Yakut-Sakha has battled for years now for greater control over its gems and gold and the income they bring, squeezing a few more percent out of Moscow with each crisis. The Russian republic of Tatarstan appeared driven mainly by the desire to control its own oil when it came close to seceding in 1991.

Western oilmen describe with great grimaces the arduous process of trying to track down exactly who has authority over what area and the resources that interest them. Every official along the way claims control, they say.

“No one ever says, ‘This isn’t my table,’ ” Morland said.

In the midst of this confusion over ownership, abetted by general confusion over the laws and rules that apply to the export of resources, what is known as a “secret river” of oil and precious metals is flowing westward illegally, depriving Russia of income just as it needs it most.

According to some officials, Russia is losing $10 billion a year this way.

Nearly 400,000 metric tons of strategic raw materials are smuggled out of Russia every year, according to Vadim Pavlukhin of the Economic Crime Department of the St. Petersburg police. He said police manage to block only about 10% of smuggled raw materials and that most appear to end up at the London Metal Exchange’s branch in Rotterdam, the Netherlands.

Arguably, if Russia could only stem this outflow it would have much of the money it needs for investments and increased production.

Fuel and Energy Ministry estimates hold that for each ton of oil and coal Russia extracts, not more than one-third is turned into useful energy for the Russian economy. The rest is either exported, or lost, or wasted.

Much of the waste comes in getting the resources to where they are needed--just as one-third of Russian food is believed to rot in storage and transport. Shafranik said 25% of gas is lost being propelled through long-distance pipelines, in part because Russia built too many big central plants instead of small local ones that supply consumers more efficiently across shorter distances.

In the forests of Siberia, trees rot where they are cut before they can be gathered.

Now, the Russian oil industry appears to be seeking a new cure-all--Western capital. The government says it needs $30 billion in investments just to get the oil and gas industry back on track and reopen about 30,000 idle Siberian oil wells--about one-quarter of the total sites. And its new plan to cut consumption will take even more outlays.

Western technology can double some wells’ yield and extract oil with less damage to the environment. It can replace the pipelines that belch leaks into the virgin taiga, Siberia’s wilderness, and turn the wasteful flaring gas torches into sources of additional energy. It could improve oil-processing techniques that would vastly increase the worth of Russia’s oil products and cut the estimated 35% of oil value that it now loses in processing.

Russia is openly seeking Western help in developing gas and gold deposits as well. It courted Western bids for developing multibillion-dollar oil and gas fields in the Barents Sea and is also buying some Western equipment for gold mining.

But for all the noise about Western investment and Western aid, the real foreign portion of Russian resource extraction remains minuscule--less than 1% in the oil industry--and is not expected to rise above 10%.

Western companies complain that Russia lacks the stable legal structure and reasonable tax rates they need to justify the massive investments they must make. And Moscow, long known for its xenophobia and aversion to anything that smacks of selling off the Motherland, complains that foreigners just want to grab easy resources and run.

“Foreigners go to where you can get the cream right away--and we can do that ourselves,” Medvedev said.

In June, oil joint ventures suddenly found themselves banned from exporting oil for the month and possibly longer when Shafranik said many had been exceeding their export quotas. He also complains that they have made profits of $600 million on a total investment of only $150 million.

“We’re apparently morally not ready for foreigners, either because of taxes or because of the sense of selling Russia,” said Ulyanov of the Tyumen Parliament. “We have to get over this psychological barrier, to understand that investment means work and salary.”

Ironically, it appears in part to be Russians’ own sense of their tremendous riches that keeps them from becoming as rich as they might be. Waste seems no tragedy when there is so much lying around, and help from outside seems far from urgent.

Pavel Kovch, a wizened driller at Paleyanov’s oil well near Surgut, shrugged at the idea of bringing in foreign investment to increase production.

“We probably don’t need them. We work OK,” he said. “There’s plenty for me to make it to my pension.”

RUSSIA’S SHARE OF THE WORLD’S RESOURCES

GAS: 35.8%

TIMBER: 18.6 %

COAL: 5.9%

GOLD*: 15.3%

DIAMONDS: 3.4% Sources: Penwell Publishing Company, U.S. Department of Agriculture, U.S. Department of the Interior.

Compiled by Moscow Bureau Researcher Beth Knobel

* Percentage for U.S.S.R. as constituted before December 1991. The gold reserves exclude China and some other countries for which data is not avalilable.