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Sunday, December 24, 2006

First Khodorkovsky, then Shell, now BP (and next Khodorkovsky all over again?)

First the Kremlin stole the assets of Mikhail Khodorkovsky (it is now being reportd that it isn't done persecuting him and will bring new trumped-up charges against him next week), then Royal Dutch Shell, and now it is moving on to British Petroleum. First Politkovskaya, then Litvinenko, then Gaidar. Who's next? The Financial Times reports on the BP assault:

TNK-BP, the Anglo-Russian oil joint venture, is bracing itself for a full investigation within weeks into its licence agreement for a giant Siberian gasfield as the Kremlin tightens its grip on the country's energy resources. Russia has used environmental audits and regulatory threats to restore state dominance over oil and gas supplies. This week saw Gazprom take a controlling stake in Royal Dutch Shell's Sakhalin-2 project after months of pressure. People familiar with the situation said Gazprom's negotiations with TNK-BP were likely to follow a similar pattern to Shell's prolonged battle with state officials and the Russian gas monopoly. TNK-BP has already offered Gazprom majority control over the Kovykta gasfield, but has insisted that Gazprom should pay for its stake with cash or assets. Russian authorities have already stepped up pressure on TNK-BP, accusing it of breaking a licence agreement on production levels. The prospect of losing the licence for Kovykta is likely to soften TNK-BP's negotiating position. Gazprom and TNK-BP have been talking about the joint development of the project for years but have not reached an agreement. Although TNK-BP has a licence to develop the field, expected to supply gas to Asian countries, it cannot do so without Gazprom agreeing to build an export pipeline for the field. Gazprom, which has a mono-poly over the pipeline network and gas exports, has been stalling negotiations for months. It says it has other priorities. The authorities have decided to investigate the Kovykta licence because of TNK-BP's alleged failure to meet its conditions. Under the licensing agreement, TNK-BP was obliged to produce 9bn cubic metres of gas by the end of this year. TNK-BP has said it cannot produce anything near this amount of gas because it has nowhere to sell it. "We could not burn this gas," TNK-BP said. The talks between Gazprom and TNK-BP have intensified in the past few months and it is understood TNK-BP has made Gazprom a more lucrative offer that includes participation in other gas projects. Once Gazprom reaches a deal with TNK-BP, the threat to the licence is likely to disappear. Alexander Medvedev, deputy chief executive of Gazprom, on Friday said Sakhalin-2 would not have encountered problems if Gazprom had been part of the project from the start.

These outrages are already having an effect, as a major shareholder group in Britain has issued a warning to avoid Russian investments. The Telegraph reports:

One of the City's leading shareholder groups has warned about the "inhospitable" and "difficult" climate facing investors and companies wanting to do business in Russia. F&C Asset Management also questioned the wisdom of allowing so many Russian companies to list in London when their standards of corporate governance were below those in the UK.

Peter Hambro
Peter Hambro: Risky market

The comments, by Karina Litvack, F&C's head of governance and sustainable investment, come after Royal Dutch Shell's bruising encounter with the Kremlin over the company's huge Sakhalin-2 oilfield. Ms Litvack said: "We take into account the extent to which a government creates an inhospitable climate for investors and is prepared to enforce the rule of law. What's happened makes it a very dodgy place [for investors]." F&C, which has £100bn under management, is an investor in Russia's Lukoil, but is wary about many other businesses in the country. "We look on Lukoil positively because it is not tight with the government and has no politicians on the board," Ms Litvack said. But doing business with a company such as Gazprom, the energy giant that on Wednesday took control of Shell's Sakhalin project, was a different matter, she said. Gazprom is a "perfect example" of a company in league with the government. "It's OK until the government changes, and then the uncertainty induces people to behave in ways that are not in the interests of shareholders," Ms Litvack said. She continued: "The irony is, some Russian companies are reasonably well run, but they are caught in the cross-fire between the government and a judicial system that is not independent." She was also wary about the future for many smaller western exploration companies operating in Russia. Many of these Aim-listed firms think they are below the Kremlin's radar screen and will continue to do business unfettered. But Ms Litvack was not sure. " Shell has other businesses around the world to cushion itself against something like Sakhalin. Other companies might not be so robust," she said. She also thinks that UK financial regulators should review rules that allow Russian companies "to come to London in their droves". The firms seek access to foreign capital by listing their depository receipts in London. "They come here rather than New York because of the tougher listing rules in America under Sarbanes-Oxley," she said. The eponymous chief executive of Peter Hambro Mining (PHM), Russia's third-largest gold producer, said its own brush with Moscow's authorities had damaged investor confidence. Reports that PHM's licences could be revoked caused the company's shares to plummet. PHM was cleared of breaching licences, but Mr Hambro said it has "raised the risk premium" for investors.

More analysis from the Telegraph can be found here.

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