Sep 21st 2006
From The Economist print edition
Russia must stop strong-arming foreign investors
IT IS natural to be miffed when a deal that seemed shrewd turns out worse than you thought. It is especially galling if it involves a prized asset. The civilised response—if the other party is disinclined to renegotiate—is to shrug and move on. But with the gigantic energy developments on Sakhalin Island, the Kremlin prefers to bully its partners into surrender.
Sakhalin and the seas around it host the two biggest foreign investments in Russia, which are also two of the world’s biggest energy projects. Led by Exxon Mobil and Royal Dutch Shell, the consortia signed “production-sharing agreements” (PSAs) with the Russian government in the 1990s to insure against unpredictable legal changes; another PSA applies to an Arctic development led by Total, of France. Sakhalin has other ominous peculiarities. The Shell consortium is building Russia’s first liquefied natural gas (LNG) plant, to serve markets in North America, South Korea and Japan. It is the only big energy scheme without a Russian partner. The projects are also the only exceptions to Gazprom’s gas-export monopoly—staunchly defended by both the state-controlled gas giant and the Kremlin against European efforts to break it up.
In other words, Sakhalin is potentially crucial in the Kremlin’s drive to recapture its geopolitical clout using energy wealth. Hardly surprising, then, that its state-controlled energy firms want pieces of the island action. Opportunities for foreign firms in energy—the “holy of holies” of the economy, as Vladimir Putin puts it—are now tightly circumscribed. Using Gazprom and Rosneft, a state-controlled oil firm, the Kremlin has recaptured its stewardship of the industry. PSAs were controversial even when they were signed, amid low oil prices and a scarcity of foreign capital and expertise; now that Russia is flush, to some officials they look downright humiliating. (An enormous cost overrun at Shell’s Sakhalin project, which will massively reduce the state’s share of the profits, has bolstered this conviction.) Other countries, Kremlin apologists point out, have redrafted energy deals as the oil price has risen.