Daily Mail: Sakhalin shatters last illusions about Russia’s reliability

Monday View: 16 October 2006
By Robert R Amsterdam

OVER the last few weeks the largest foreign investments in the Russian energy industry have come under attack as part of an ongoing Kremlin campaign to consolidate state ownership in the sector.

Despite having pumped billions of dollars into the Sakhalin oil and gas project, and despite full compliance with its legal obligations, Royal Dutch Shell has been threatened with revocation of its development licence.

The ‘siloviki’ – former intelligence and military strongmen who have muscled their way into President Putin’s Kremlin and state-owned energy companies – are laughing their way to the bank.

They enjoy the silent complicity of many Western political leaders, the London Stock Exchange and its investors.

The LSE’s flotation of the state-owned Rosneft oil company this summer was tantamount to syndication of the gulag. Most of Rosneft’s value consists of assets that previously belonged to Yukos, which had been built into one of the world’s largest private oil companies by Mikhail Khodorkovsky.

With Khodorkovsky jailed in Siberia after an illegitimate show trial, and Yukos crumbling under exaggerated tax claims, Rosneft grabbed its main assets through a fraudulent auction orchestrated by the Russian authorities. Yet the LSE chose to look the other way.

In the meantime, a leading British solicitor, Tim Osborne, is being pursued abroad by the Russian state over fictitious criminal allegations, essentially for having had the temerity not to cave in to the Kremlin in a high-profile dispute.

BP has been forced to buy $lbn of Rosneft shares, in a transaction that is much less an investment than the payment of protection money to the neighbourhood bullies.

Influential fund manager William Browder has been barred from Russia, having apparently been too vocal in his campaign to improve corporate governance in Russia.

The presumption of legitimacy lent by institutions such as the LSE, and Rosneft’s bookrunners ABN AMRO, Dresdner Kleinwort, JP Morgan and Morgan Stanley, has emboldened the siloyiki with a sense of impunity.

Enter Sakhalin. The power games now being played over the development shatter any remaining illusions about the Russian state’s reliability as a business partner. Yukos was the first big test of what the siloviki could get away with – Sakhalin is Yukos in another form.

AS THE drama unfolded last month, the World Bank ranked Russia 151st of 208 countries in terms of political stability, democratic voice and accountability, effectiveness of government, quality of regulatory bodies, rule of law and control over corruption.

Russia is clearly on a dangerous trajectory. Though change must come from within if it is to succeed, Western political and business leaders should not shirk from their duty to to be a positive influence.

■ Robert R Amsterdam is based in London as partner in Canadian law firm Amsterdam & Peroff. He is international defence counsel for Mikhail Khodorkovsky. This article expresses the author’s personal views.

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