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The Daily Yomiuri (Japan): ANALYSIS / Putin wields power to scrap oil link

Toru Kaneko Yomiuri Shimbun Correspondent
(Sep. 21, 2006)

The Russian Natural Resources Ministry’s cancellation of a permit for the Sakhalin-2 oil and gas development project reflects President Vladimir Putin’s steadfast determination to keep the domestic energy industry under the thumb of his administration.

The series of actions taken by the Russian government toward energy-related businesses in recent months, including the ministry’s latest decision, has illustrated risks involved in massive foreign investment in Russia, a nation blessed with vast amounts of natural resources.

Sakhalin-2 is a 20 billion dollars joint project conceived by Royal Dutch Shell PLC, Mitsui & Co. and Mitsubishi Corp.

Monday’s annulment of the permit can be regarded as a coordinated attempt by the Russian government and the country’s energy industry to enable domestic companies to join the Sakhalin-2 project, according to Russian industrial sources.

“The Japanese government and corporations [affected by the ministry’s decision] should demand Russia provides a convincing explanation about this decision and its repercussions, and urge it to maintain relations of mutual trust,” Kensuke Kanekiyo, managing director of the Institute of Energy Economics, Japan, said.

Russia is rich in natural resources, including natural gas and crude oil. It is also one of the world’s largest producers of such precious metals as gold, platinum and vanadium. During the 1990s, then President Boris Yeltsin sought to attract foreign investment in a number of fields, including the development of energy resources.

However, the Putin administration has taken a critical opinion of Yeltsin’s approach to foreign investment, dismissing it as an attempt to “sell out Russian assets to other countries.” The Russian president also criticized his predecessor’s attitude as “weak-kneed diplomacy that allowed Japan, European countries and the United States to intervene in [Russia’s] state economy.”

The Sakhalin-2 project got off the ground while Putin’s predecessor was in office. But the fully foreign-funded venture has been attacked by the Putin administration.

In fact, OAO Gazprom, the world’s largest natural gas producer affiliated with the Russian government, is seeking to join the project, determined to acquire a 25 percent or more stake in it.

Putin has strived to ensure some close aides take up executive positions at domestic energy companies. For instance, Igor Sechin, a senior official of the presidential office, has been named chairman of OAO Rosneft, a state-run petroleum company. Dmitri Medvedev, first deputy prime minister, is serving as Gazprom chairman.

All these appointments reflect Putin’s desire to place the domestic energy industry under his administration’s control.

Putin had also launched an apparently politically motivated campaign against OAO Yukos, which had opposed his government, by using tax and investigative authorities to charge Russia’s one-time largest oil company with tax evasion.

The three-year campaign against Yukos left not only domestic corporations but foreign companies operating in Russia with the impression that if they incur displeasure from the Russian government, it will deal a fatal blow to them.

Meanwhile, the Sakhalin-1 project–a joint venture promoted by Exxon Mobil Corp., Itochu Corp. and Russian corporations–will likely become subject to greater pressure from the Russian government, according to observers.

In October, these participants in the project are set to start shipping crude oil. The Putin administration may seek greater rights and interests for the Russian side under the project, observers said.

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