Analysis: The Kremlin’s majority share

By Peter Lavelle –
MOSCOW — Russia’s Natural Resources Ministry announced on Thursday that foreign companies would be banned from bidding for large strategic oil and metal deposits in 2005.
The ministry’s decision mandates that bidders for deposits will have to be at least 51 percent Russian owned. This Kremlin-sanctioned move is another example of Russia asserting greater control over its natural resources, while defending the interests of domestic companies.

The decision to limit foreign investment in Russia’s oil and metal sectors will most likely affect a number of large existing joint ventures and very lucrative planned tenders. The Anglo-Russian oil company TNK-BP, a 50-50 joint venture in which British Petroleum paid $7.5 billion of its stake, may face impediments to future expansion. ChevronTexaco’s hookup with Russian petroleum giant Lukoil may also face barriers to future cooperation.
In the metals sector, the ministry’s decision is set to make Fleming Family and Partners of London reconsider its interest to developing Russia vast gold deposits. The same will probably apply to Chinese companies interested in investing in Russia’s copper mines. Instead of looking for raw materials to be imported to domestic markets for later production, these companies may now look for ways to invest in Russian production.
Limiting foreign investment in strategic sectors is expected to determine the outcome of this year’s mega-tender for Sakhalin 3 – a vast offshore oil field in Russia’s far east with reserves of 250 million tons of oil. It has long been expected that ExxonMobil has been eyeing this tender, with TNK-BP, ChevronTexaco, and France’s Total showing interest, as well. All of these companies may now have to reassess their investment plans in Russia.
With many foreign companies expressing various shades of regret and disappointment with the ministry’s decision, they cannot miss the fact that Russia is showing a renewed interest in protecting the country’s natural resources and promoting domestic companies. Far from what some have called Vladimir Putin’s “nationalistic state policy,” the Kremlin’s decision to limit foreign investment in strategic sectors is in fact the international trend of countries exporting energy supplies and other strategic commodities.
Petroleum rich Venezuela, Kuwait, Saudi Arabia, and Mexico do not allow foreign oil concerns to develop their reserves. Russia is set to follow this trend.
The Kremlin also appears to be responding to how international petroleum markets are evolving. After two decades of international oil surpluses and a “buyers” market, the balance is starting to swing in the opposite direction – to a “sellers” market. Those countries with large reserves will determine price and production outputs – both of which will be political decisions made by governments and not oil companies.
Additionally, there is a Russia-specific issue in play. Limiting foreign investment in Russia’s oil patch and other sectors not only promotes the development of domestic companies, but it also gives the Kremlin leverage over oligarchic structures in sectors the state has defined as strategic interests.
This interest in leverage over the oligarchs has already been demonstrated with what is called the “Yukos affair.” As disappointing or even outrageous the forced breakup and de facto re-nationalization of Yukos’ primary production has been for foreign investors and foreign governments, the Kremlin has signaled that the state will make strategic decisions concerning the country’s national resources and not companies own by oligarchs and/or their foreign partners.
The slightest possibility that Yukos could have been sold or partially sold to a foreign oil company without Kremlin consent was deemed a national security threat. The Natural Resources Ministry’s announcement to limit foreign investment in Russia’s strategic sectors merely codifies this Kremlin demand.
Will foreign companies, particularly international petroleum concerns, lose interest in Russia? This possibility is hardly in the cards. With international petroleum markets again swinging to a “sellers” mode, all large oil major will continue to be keenly interested in accumulating reserves to increase their market capitalization. Toward this end, Russia is an oil market that cannot be ignored.
There is, of course, some downside for the Kremlin with this latest move. Big-ticket tenders may not be meaningfully competitive or even optimally lucrative for the state budget. Large tenders, without significant foreign interest, almost automatically mean valuable state-owned assets would again fall into the hands of oligarchs.
On the whole, the Kremlin appears to have assessed the costs and benefits of limiting some forms of foreign investment: the oligarchs will remain mindful of Kremlin’s self-declared strategic interests, and foreign investors will do the same. Using this calculus, all parties concerned make money and foreclose the possibility of another “Yukos affair.”

Peter Lavelle is an independent Moscow-based analyst and the author of the electronic newsletter on Russia “Untimely Thoughts”
Source: World Peace Herald

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