President Vladimir Putin believes that a powerful, state-controlled energy sector is the key to Russia’s economic future, even if he has to strong-arm foreign investors to get it. But trampling property rights is risky. It is as likely to leave Russia an economic pariah as an energy superpower.
Read more in today's New York Times editorial...
US energy giant ConoccoPhillips said it plans to raise its stake in Russian peer LukOil to 20 percent by the end of this year. In a joint statement, the companies said the move is part of a strategic alliance that was announced in 2004. The companies said in the same statement that LukOil has acquired 376 Jet brand fuelling stations in Europe from ConocoPhillips.
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Russia has emerged as an unrivaled energy superpower in a world thirsty for oil and gas, but the country's recent moves to seize control of strategic parts of the energy industry have slowed growth in production and raised questions about the legal rights of investors and speed of future development, writes Patrice Hill for The Washington Times.
As the world looks increasingly to Russia to satisfy its energy needs, the International Energy Agency is raising questions about whether growth in Russian oil and gas exports will be fast enough to keep up with rising demand in Europe and commitments Russia has made to deliver oil and gas to both Europe and Asia. "Will the investments take place? Will they come on time?" asked William C. Ramsey, deputy executive director of the international agency. "These are costly projects. ... We're concerned that the investment climate now is not conducive to bringing those resources online."
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Top Russian gold miner Polyus Gold (PLZL.RTS: Quote, Profile , Research), which is due to list on the London Stock Exchange on Monday, will consider a foreign merger. Polyus, which produces 18 percent of Russia's gold, has said it plans to create by 2015 a company with market capitalisation of $14 billion to $16.5 billion (7 billion to 8.4 billion pounds) and net annual cash flow of $600 million to $710 million. The firm was spun off this year from Russian mining giant Norilsk Nickel.
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Rapid growth may have convinced many big companies that they need to be in the Russian market. Yet if you aren't allowed to keep control of your assets, there is no point in being there. Put your money to work in eastern Europe, India or China instead, writes Matthew Lynn for Bloomberg.
Lisa Buckingham, the Financial Mail editor writes that the challenges that Shell is facing in the Sakhalin-2 project are great, but nothing new. Muddling through with hostile political regimes is day-to-day stuff for oil giants. The expropriation of assets is, historically, par for the course. Remember, for example, that BP had a goodly part of its business swiped by Iran.
As BP's chief executive, Lord Browne, remarked when discussing the difficulties of doing business in Russia, if not there then the alternative was violent, war-ravaged Africa. Looked at from this perspective, Russia appears eminently hospitable.
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The Russian authorities have changed their mind on the possibility of foreign companies participating in the world’s largest gas field, Shtokman. EU Commissioner for Energy Andris Piebalgs told RBC Daily that Norway’s Hydro and Statoil may accept the Kremlin’s offer, as well as France’s Total.
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Russian daily Kommersant reported on Monday, Dec. 11, that the meeting of the Russian Security Council chaired by President Putin on Saturday developed a new strategy to give the government control of oil and gas extraction on the Russian sea shelf. The paper reported that the Russian authorities may combine state-controlled giants Gazprom, Rosneft and Zarubezhneft into a single government monopoly that would take over the shelf production.
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Gazprom said Royal Dutch Shell Plc made new proposals for the Russian company to join its $22 billion Sakhalin-2 oil and gas venture, as President Vladimir Putin expands his control of the world's biggest energy industry.
Reuters earlier reported that Shell agreed to cede state-run Gazprom a majority stake in Sakhalin-2. Moscow-based Gazprom spokesman Sergei Kupriyanov and Shell Russia Vice President Maxim Shoob declined to confirm or deny the Reuters report, which cited unidentified industry people.
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Royal Dutch Shell’s decision to hand over control of the $22 billion energy project in Sakhalin to Russia’s state monopoly Gazprom is a victory for Russia’s new hardline policy on energy. It is also a warning to Western business that investment in Putin’s Russia still carries real risks, writes Michael Binyon of The Times.
Business Week published an analysis of Russia's economy asking the million dollar question. Is the recent boom that has made Russia the fastest growing emerging market the last two years for real?
There's little doubt that a major driver of the newfound bounty is oil and other natural resources. Without the runup in commodity prices, economic growth would have been two to three percentage points lower during the last three years, estimates the Organization for Economic Cooperation & Development. Developing countries, meanwhile, don't have a very good track record of using windfall profits from commodity booms to lay the foundations for sustainable growth.
To his credit, Putin has used much of the cash to build up financial reserves. Russia has created a $90 billion fund—equivalent to 9% of gdp—to protect against a drop in oil prices. Fiscal policy remains tight, with the Kremlin expecting a budget surplus equal to 7% of GDP this year. And Russia is well ahead of most other resource-rich countries in its economic development, with a long tradition of education, science, and industry.
Economists warn that high oil prices have bred complacency. The OECD cautions that economic reforms have largely stagnated. Worse, corruption and bureaucratic interference continue to impede business: Russia ranks alongside Gambia and the Philippines near the bottom of think tank Transparency International's annual list of corrupt countries.
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Robert Amsterdam: 2006 Marked by the Rise of the Corporate State
"As Andrei Illarionov pointed out during a speech at the Cato Institute last month, in the case of Yukos, these energy assets were transferred by illegal means not from one private owner to the people, but rather from one group of individuals to another group of individuals. It is absurd to pretend that this is a real nationalization when it is only a small group of private individuals within the government lining their pockets with the rents from these businesses."
President Vladimir Putin and two senior state officials reopened the possibility of foreign energy majors taking part in the Shtokman gas project, signaling that Gazprom might soon reverse its decision to bar them from developing the giant Arctic field, reports The Moscow Times.
Gazprom's announcement in early October that it had rejected all five foreign bidders for Shtokman prompted widespread shock and skepticism in the global oil and gas industry. Many doubted Gazprom was capable of developing the huge gas field, its first offshore, on its own.
In separate statements, Putin and Industry and Energy Minister Viktor Khristenko reiterated Gazprom's argument that the equity swaps offered by the five short-listed companies -- U.S. oil majors ConocoPhillips and Chevron, France's Total, and Norway's Statoil and Norsk Hydro -- were inadequate.
Putin's recent comments prompted speculation that the selection of foreign partners for Shtokman could, after all, have been linked to negotiations with the United States on Russia's entry to the World Trade Organization. Spokespeople for the Kremlin have previously denied the existence of a direct link between the two issues.
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Shell’s weblog reprinted a commentary by Ben Aris, the editor of Business New Europe in which he discusses the recent wave of spats between Rosprirodnadzor, the Russian environmental watchdog, and some high-profile industrial groups. The most illustrious example is the recent finding of environmental negligence in the Sakhalin II project. Russian companies are targeted as well as shows the case of Lukoil whose environmental licenses Rosprirodnadzor questioned in October. As we discussed in an earlier post, “the Sakhalin case has done more than anything to popularize the idea that assaults on companies using environmental laws as a weapon represent a new phenomenon in Russia, but the threat has been present since the Kremlin began its more aggressive industrial policy in 2004.” However, despite the rhetoric, Rosprirodnadzor has not yet followed through on any of its threats. But the memory of Yukos (which did not collapse on environmental grounds but because of Kremlin’s crusade against the socalled tax-optimization schemes) is sure to keep the investors on their toes.
A day after announcing the finding of more than 100 violations, Russia has suspended vital permits for Royal Dutch Shell's Sakhalin-2 oil and gas venture, in a move that may further delay the $22bn (£11bn) project, BBC reports.
Russian property developer RGI International Ltd. joined the trend and announced late on Wednesday it planned to raise about $175 million (89 million pounds) after listing on London's Alternative Investment Market (part of the London Stock Exchange), according to Reuters. The company, which specialises in high-end office, retail and residential property in central Moscow, said the offer price had been set at $6 per share. As a result, the market capitalisation of RGI after the listing would be about $593 million.
This is just the last from a series of Russian IPO's in the last few years that culminated with the initial public offering of the shares of the Russian energy giant Rosneft that raised $10.4 billion making it the fifth largest IPO in the world. According to RIA Novosti economic commentator Nina Kulikova, Russian IPO's abroad (mostly in London) raised $5 billion in 2005 and are expected to raise $20 billion in 2006. While the interest is the highest in the commodities sector, other firms like RGI International Ltd. are starting to float their shares as well.
Azerbaijani Prime Minister Artur Rasulzade has announced that his country will be able to cover its energy needs starting Jan. 1, 2007 and will stop the transfer of Azeri oil through the Baku-Novorossisk pipeline. This is seen as a retaliatory measure following Gazprom's proposed increase of the price of Russian natural gas exported to Azerbaijan from $110 to $230 per 1,000 cubic meters.
On November 22, Gazprom announced new price levels for natural gas in an attempt to bring the prices it charges its ex-Soviet neighbors to European levels. These countries have previoulsy enjoyed preferential rates. This move was also seen by some as policial motivated and meant to punish its unruly neighbors, notably Georgia and Ukraine. In the case of Azerbaijan, its president Ilham Aliyev said on December 4: “It is clear that the price of $230 per 1,000 cubic meters suggested by Russia is very high for us. Therefore we have to consider different options. If need be, we should consider reducing the volume of oil being exported to Russia via the Baku-Novorossiysk pipeline in order to provide ourselves with electricity. We have no other choice because we use gas imported from Russia to produce electricity at our power plants.” Today Prime Minister Rasulzade announced Azerbaijan's intention to forgo Gazprom's deliveries and rely on its own reserves instead.
Azerbaijan's decision to not export oil through Russia via the Baku-Novorossiysk pipline is also an economic one. The transit tariff of $2.05 is exactly five times higher than on the shorter alternative route to the Black Sea, the Baku-Supsa pipeline that through Georgia.
This event marks the emergence of the first ex-Soviet country that is independent on Russian energy, notes Stratfor. Russian reaction remains to be seen, but it is unlikely that many others will follow in the near future.
