Recent History Proves Western Investors Should Avoid Putin's Blandishments

Russians have a reputation for being a dour, humorless people. I know this is wrong. There are some great Russian comedians; and no, I’m not talking about Yakov Smirnov. Take Vladimir Putin–please.

Consider this comic classic: “Putin seeks stable and long term partners for Arctic investments“:

Russia wants foreign energy majors for “stable and long-term” partnerships to develop gas deposits on the Arctic peninsula of Yamal, a region with enough gas in the ground to satisfy world demand for five years.

Prime Minister Vladimir Putin, hosting executives from several international energy companies on Thursday, said Russia would consider tax breaks to encourage development of gas fields in the region. State giant Gazprom (OGZPY.PK) backed the move.

“We would like you to consider yourselves participants in our undertaking,” Putin told a meeting in Salekhard, the capital of the Yamalo-Nenets region. “The main condition from our side is that partnerships should be stable and long-term.”

“The main condition from our side is that partnerships should be stable and long-term.” From “our” (i.e, the Russian) side. Stop it! You’re killing me! You’re one of the great dead-pan comics of all time!

Uhm, Vladimir. Any “short-termism,” any “instability” that has plagued past western energy investments (and other investments, cf. Telenor (TELNY.PK)), has one source, and one source only: your side. Russian opportunism and expropriation. And not just directed against foreigners, but against the unfavored in Russia too (most notably Khodorkovsky).

The Telegraph opines that this reflects Putin’s desperation, given Gazprom’s financial difficulties and limited technological expertise:

No doubt his guests salivated at the idea of getting a piece of the action. By 2020, Yamal is estimated to be capable of yielding up to 300bn cubic meters of gas annually. This compares with a total annual Russian production that currently stands at around 550bcm. State-owned Gazprom spends around 25pc of its capex on the Yamal fields.

But Gazprom is running late, and it’s running short – of both technology and money. It needs foreigners. The aim is to use the Yamal resources to become a major player of liquefied natural gas – which can be exported anywhere without the need for pipelines. Hence Putin’s friendly hand.

. . . .

But Western companies should pause and think. They’ve been burnt before – as when Shell was bullied out of the Sakhalin-2 gas project three years ago. Since then, the legal framework under which Western companies operate hasn’t improved a bit.

What has changed is Putin’s need for foreign capital and expertise. This would be a good thing if it were accompanied by more than words to reassure investors that their money is safe and that they can plan on staying in Russia for the long term, without the hassle of corrupt bureaucrats and judges. Westerners must seize the chance to extract serious concessions from Russia before they rush head-first into the great gas hope, in what otherwise risks being a triumph of greed over experience.

In one of my earliest posts, I noted that fools and their money are soon parted, and that companies would be foolish to invest in specific assets in Russia–particularly in the energy sector, or any other sector deemed strategic. With the experiences of Yukos, Telenor, Shell (RDS.B), TNK-BP (BP), and arguably now Exxon (XOM) behind them, western investors have to know that the likelihood that they will be parted from their money is very high if they fall for Putin’s come hither look, and get entangled with Gazprom in Yamal or anywhere else.

Put differently, Putin is the spider, and any investor would be the fly. Putin may be desperate now, but once there is pipe in the ground and the gas is flowing, his (or his successors) desperation will disappear, and the temptation to expropriate will be irresistable. Once caught in the Russian web, any foreign energy investor is likely to be the spider’s meal, sooner or later.

Like the Telegraph says, absent credible, enforceable legal safeguards, western investors should avoid Putin’s blandishments like the plague. The existence of a resource is a necessary, but by no means a sufficient, condition for a profitable investment. To profit, you must be able to protect the asset against the predations of the state. These protections are completely absent in Russia. STAY AWAY.

It is sometimes argued that, echoing Willie Sutton, energy majors have to invest in Russia because that’s where the oil and gas are. But, Russia is the Willie Sutton of nations: it will rob energy investors because, as Willie said, that’s where the money is. But only if they are foolish enough to put it in Putin’s reach. If they do, it will be no laughing matter.

Comments

[Jimbo:]

Add Venezuela and Ecuador to the list of "fly traps".

Sep 27 09:58 AM

[Albert Ling:]

And to a lesser extent Argentina... they are falling apart.

Sep 28 11:55 AM

[Martel:]

In Russian talk, "seeking stable and long-term partners" means they would like to find investors who, for a long time, don't ask where their money disappeared.

Written contracts, even if your counterpart is the 2nd largest city in Russia, don't mean a thing. A case in point: www.hs.fi/english/arti...

In Russia, if somebody powerful thinks you've got money, they'll find a way to take it. Even if you have the law on your side. A case in point: www.hs.fi/english/arti...

One of the worst fleecers is the Russian state. They'll make it convenient for you to get in, but once you're in, they'll change the laws and you're trapped. This might apply to the 'Arctic investments partnership' as well.

I'm not saying there are no opportunities in Russia. It is just that foreign companies might not be able to profit fully from those opportunities, because some other people want that profit. Many of those "other people" are part of the FSB/oligarch-kleptocracy, so they have the officials and police on their side.

Oct 01 03:35 PM