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Financial Times: Russia and asset seizures

Published: June 1 2007 14:32 | Last updated: June 1 2007 14:32

When it comes to energy in Russia, timing is everything. In 1911, the Rothschilds swapped their Russian oil assets for big shareholdings in Royal Dutch and Shell. Six years later, during the revolution, the less prescient Nobel family had to flee disguised as peasants, and eventually sold their one-third share of the country’s oil output for a derisory sum.

On Friday the Russian authorities again signalled that BP’s joint venture TNK-BP may lose its permit to develop the Kovykta gas field. Last year Royal Dutch Shell ceded a controlling stake in its Sakhalin project to Gazprom. Some investors nevertheless remain sanguine. Shell got a roughly 25 per cent premium to its capital invested, and TNK-BP might recover the $500m it has invested in Kovyta. Foreigners, it is argued, remain welcome as minority partners.

Given that both companies still have Russian investments worth over $20bn, this may end up looking incredibly complacent. As historian Daniel Yergin has noted, oil nationalisations, from Mexico in the 1930s and Iran in the 1950s, to the Gulf in the mid 1970s tend to take the form of creeping seizure. In 1974 Saudi Arabia agreed to take 60 per cent of Aramco – by 1976 it insisted on 100 per cent. In 1971 Venezuela committed to maintain foreign concessions until 1983. A year later it had moved to take full control.

Nor is it self-evident why the Kremlin will necessarily limit its interventions to the energy sector. Telephony, where European companies have some $15bn of exposure, could be vulnerable – Venezuela has just renationalised its main operator. And while bond spreads and equity valuations suggest political risk is manageable, the state already owns a significant proportion of these markets.

Forecasting Russia’s future is tricky – in 1920 the chairman of Royal Dutch predicted the “Bolsheviks will be cleared…out of the whole of Russia within six months”. But with the state and its proxy companies flush with cash, foreigners with illiquid strategic investments should consider whether selling out beats clinging on.

Copyright The Financial Times Limited 2007

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