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MarketWatch: Threats to Russia worthless when resource riches await

Commentary: Putin playing fast and furious on the corporate scene
By Sieve Goldstein. MarketWatch Last Update: 8:39 AM ET Sep 20, 2006

LONDON (MarketWatch) – If is no surprise by now that the Russian government is playing hardball to achieve its economic aims, though the speed at which Vladimir Putin will shift alliances is truly dizzying.

It was only a few months ago when Putin, peeved he wasn’t able to win U.S. backing for World Trade Organization membership, hinted that international partners for the key Shtokman liquefied-natural-gas project would be Norway’s Statoil and Norsk Hydro, rather than Chevron and ConocoPhillips. (A decision on that project hasn’t been made.)

Fast forward a few months, and it is the Europeans and the Japanese who are on the back foot.

The Russian government is using substandard environmental procedures as an excuse to punish Royal Dutch Shell and its Japanese partners on the $20 billion Sakhalin-2 oil and gas project. The project is located on Sakhalin Island in the Russian far east, immediately north of Japan.

By withdrawing an environmental permit, the Russian government sets the stage to either worm Gazprom into the deal or, at the very least, negotiate a better cut from whatever is unearthed in Siberia. Indeed, no less an authority than the Russian minister in charge of natural resources has said the ruling was taken, at least partly, on economic rather than environmental grounds.

It’s also playing hardball with France’s Total about revoking a license to another oil field, though the field in question represents only a tiny proportion of Total’s production.

Exxon Mobil, meanwhile, is having difficulty expanding the boundaries on the Sakhalin-1 project.

In aerospace, too, Russia is playing the field. First it had a state-controlled bank go out and buy a 5% stake in EADS, a shareholding that inevitably will give the country a say in the defense and aviation conglomerate that heretofore has been mainly run as a Franco-German partnership. An adviser to Putin added that Russia may want to buy up to a quarter of the company.

Though beaten-up, EADS on the surface could use investors as it struggles to get its A380 superjumbo into the production line, such short-term support is a double-edged sword – Russia’s presence will make it more difficult to win defense contracts from the world’s top military spender, the United States.

Then, when Europeans weren’t willing to commit to help Russia’s nascent aerospace industry along, flagship carrier Aeroflot opted to split an order between EADS’ Airbus and Boeing Co.

American industry will benefit, with Boeing obviously winning an important 22-plane order. U.S. defense contractors will be the likely winner if EADS is unable to secure key deals such as the $20 billion U.S. air tanker contract up for grabs.

Threats carry little weight with the Kremlin, whether they come from key leaders like Shinzo Abe of Japan, or unknown bureaucrats from Brussels.

For all the warnings about investment being in danger, companies are desperate to tap into Russia’s vast natural-resource wealth, and the accompanying spending power those resources bring in.

For multinational companies, the risk of being burned by the ex-KGB man simply isn’t enough when the riches of Russia await.

Steve Goldstein is MarketWatch’s London bureau chief.

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