Moscow takes back economic resources
Arkady Ostrovsky in Moscow and Doug Cameron in Houston
The ban on foreign-owned companies taking control of Russia's strategic
natural resources extends the state's policy of re-establishing control over commanding
heights of the economy.
While the government has been prepared to allow foreigners into retailing, consumer goods
and services, the Kremlin has capped overseas investment in Russia's rich natural
resources.
For years, foreign oil and gas companies have grappled with Russia's shifting regulatory
system, and the politically motivated break-up of Yukos, formerly its largest oil
producer, has added to the uncertainty.
While the investment cap applies only to tenders this year for certain
strategic assets, some investors fear it could be extended to other natural resources.
President Vladimir Putin has defended the dismantling of Yukos whose main asset is now
owned by state-controlled Rosneft as a move to defend the national interest. A similar
argument was used to prevent Siemens, the German conglomerate, buying Power Machines.
"If an engineering company is a strategic asset, it makes you wonder what is not
strategic in Russia," says Robert Edward, analyst at Renaissance Capital.
Tax and regulatory changes are already taking their toll on the oil and gas sector, with
production falling and domestic producers cutting back on investment.
For foreign energy groups, which have already committed billions of dollars to Russia in
pursuit of the world's largest gas reserves and fourth-largest oil deposits, the
investment cap will give further pause for thought.
The cost of developing fields continues to rise as companies move into
more difficult regions, while inflation in materials leads companies to reconsider
investment plans. Other countries, notably Venezuela, have seized on high energy prices to
amend tax and licensing regimes to secure a larger share of revenues.
What analysts view as a "reduced opportunity set" for companies to invest in new
fields has added to the pressure on oil and gas prices. The big companies are opting to
return more cash to shareholders rather than developing fresh supplies which do not meet
their investment rules.
ExxonMobil, ConocoPhillips, BP and others which have already invested billions of dollars
in Russia risk being barred from future development if they decide they cannot progress
without investment control.
BP, which has a 50-50 joint venture with Russia's TNK, responded cautiously to the
proposed law. "It is up to the Russian government how they distribute or license
their resources. Until we have seen the law or the legislation, it is difficult to
comment," it said.
Exxon, which once toyed with a bid for Yukos, also declined to
speculate. "ExxonMobil takes a long-term perspective, and we remain interested in
investment opportunities in Russia consistent with our investment criteria," said a
spokesman. However, the requirement for majority Russian ownership in any consortium could
affect Exxon's decision to rebid for a licence for the Sakhalin 3 development in Russia's
far east. Exxon already operates the neighbouring Sakhalin 1 field in partnership with
Japan's Sodeco. Both hold a 30 per cent stake, with Russian partners owning 40 per cent.
The ministry's move would block a similar structure for any Sakhalin 3 bid.
One legal expert viewed the announcement as a political move to test market reaction.
"This is a very limited trial balloon," said Doug Stinemetz at Haynes &
Boone in Houston. "There is a faction [in the ministry] that wants to limit foreign
acquisitions of natural resources. In the end, it will depend on how much negative
reaction they receive inside and out side Russia."
Additional reporting by James Boxell and Kevin Morrison
"Financial Times", February 11, 2005
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