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The Motley Fool: Petulant President Putin

By Rich Smith (TMFDitty)
September 20, 2006

“All I really need to know, I learned in kindergarten,” goes the saying. Here, at least. Over in Russia, I’m guessing it goes more like: “What I didn’t learn in dyetsky sad, I never learned.”

Case in point: Russian President Vladimir Putin, who’s acting less like a “Vladimir” and more like a tantrum-throwing “Vova” with every passing day.

In the latest fit of presidential petulance, The Moscow Times reports that the Kremlin has apparently tried to pull out of a deal for Russian national carrier Aeroflot to purchase 22 Boeing (NYSE: BA) 787s, to counterbalance a similar deal to purchase 22 Airbus A350s. The original plan was for Aeroflot, which is controlled by the Russian state, to make purchases from both of the world’s dominant large aircraft-builders, playing one against the other in pricing negotiations.

Back in February, the strategy bore initial fruit as Aeroflot extracted a $100 million discount on its $3 billion purchase from Airbus. Subsequently, Aeroflot got an even better deal out of Boeing, which offered its 22 Dreamliners for just $2.5 billion (about a $220 million discount). Then things got ugly.

First, the Bush administration proved reluctant to accede to Russia’s bid for entry into the World Trade Organization. Then, the administration up and levied sanctions against Russian defense contracting powerhouse Rosoboronexport and military jetmaker Sukhoi, over alleged assistance these firms provided to Iran’s nuclear program. Neither move endeared the Americans to President Putin, and in an apparent tit-for-tat move, Aeroflot suddenly decided to postpone its purchase of the Boeing planes indefinitely. This put the sale in jeopardy and, according to Russian oligarch Alexander Lebedev, would force Aeroflot to acquire the needed planes elsewhere, at a cost of as much as $3.3 billion — further illustrating just how important it is for Aeroflot to maintain two price-competitive providers for its planes. Luckily for Aeroflot (and Boeing), Lebedev stepped up yesterday, and had one of his other companies advance $40 million to Boeing to hold Aeroflot’s place in line to buy the 787s until the end of this year.

Meanwhile, in Siberia

The situation in Moscow bears an eerie resemblance to recent developments on the other side of the country. Over on the eastern island of Sakhalin, home to two oil and gas “production-sharing” projects titled Sakhalin-1 and Sakhalin-2, Western oil majors Royal Dutch Shell (NYSE: RDS-A) and ExxonMobil (NYSE: XOM) are butting heads with Russian regulators who allege that the companies are violating environmental regulations, and threaten to revoke their licenses. Analysts are pretty unanimous in their opinion that the regulators are less concerned with the environment, and more concerned with renegotiating the firms’ production-sharing agreements to give the Russian state a larger share of the loot.

The unhappy moral of this story (for investors): Beware of investing in Russia. Certain children over there have difficulty playing nice with others, and sharing their toys.

Fool contributor Rich Smith does not own shares in any company named above.

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