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Financial Times: Corruption casts a shadow on resourceful Russia

By Rebecca Bream and Neil Buckley: Published: December 1 2006 02:00 | Last updated: December 1 2006 02:00

Peter Hambro Mining is one of the London market’s success stories and one of the few Aim-listed mining companies to have succeeded in Russia.

However, on Wednesday more than £100m was wiped from its market value after a Russian government official said he wanted to revoke five of its mining licences and accused it of breaching environmental regulations.

Following a 14 per cent fall in PHM’s stock price on Wednesday, the shares slid a further 10 per cent yesterday to 925p. The company says it has not yet been contacted by any Russian government body and is adamant it has not broken any rules.

Yet, with the case coming on the heels of Shell’s problems over its $20bn (£10.2bn) Sakhalin-2 project, investors took the news as further proof of the risks of business in Russia.

Foreign companies face a difficult calculus. On one hand, there is a perception that the risks in Russia are getting worse, not better. On the other, with eight years of strong economic growth, a consumer boom and rising middle class – not to mention its vast natural resource reserves – Russia is in many areas becoming as attractive a growth market as China or India.

A recent survey by the Foreign Investment Advisory Council, a Moscow forum that fosters dialogue between government and business, found 40 per cent of foreign investors reported sales in Russia rose more than 30 per cent in 2005 and nearly a third said profits rose more than 30 percent.

Mars, the confectionery and petfood group, is not untypical in saying the former Soviet Union – predominantly Russia – has contributed about a third of its global organic growth in recent years.

In spite of the high-profile problem cases, government figures show foreign investment in Russia jumped by almost a third, year-on-year, to $35.3bn in the first nine months of this year.

The biggest political risks are in natural resources as Russia pushes to retake state control over strategic assets. That drive seems to be spreading from oil and gas into areas such as metals and mining.

At the same time, Russian authorities are systematically reviewing licences to exploit natural resource assets and penalising those not sticking to the agreed development timetables.

However, even in natural resources, companies say it is possible to do business.

“The risks have risen but that doesn’t mean to say you cannot operate successfully in Russia if you go about it the right way,” says Jocelyn Waller, former chief executive of Trans-Siberian Gold, another Aim-listed, Russia-based mining group.

Since leaving TSG last November, Mr Waller has been pursuing mining projects in the Chita region of Siberia along with some other private UK investors. He suggests developing smaller projects is a sensible strategy for foreignbusinesses, as this does not step on the toes ofthe big Russian groups.

“Peter Hambro Mining is rather high profile, which has served them well but this has also made them a target,” he says.

PHM may have become a victim of its visibility and the crackdown on companies the government feels are not developing fields quickly enough.

If foreign companies are seen to be sitting on projects, the government prefers to have someone else – preferably Russian – take over, speeding up job creation and tax generation. Even Russian companies, such as Lukoil, have suffered similar threats to withdraw licences.

Hans-Jörg Rudloff, chairman of Barclays Capital and an old Russia hand, says the government has every right to keep companies in check. “In the past, people acquired assets and didn’t fulfil the commitments they signed up to.”

Outside natural resources, the biggest difficulties businesses face are red tape and corruption. Labyrinthine requirements for permits and licences create plenty of opportunities for officials to demand bribes.

“Corruption is probably the most immediate threat and difficulty that any business faces in Russia – and the trend is increasing,” says Carlo Gallo, Russia analyst at Control Risks, the business risks consultancy.

This can create particular problems for businesses that need a lot of land or property, such as retailers.

However, some foreign companies say provided a company is firm in refusing to pay bribes from the outset, demands for payments often dry up.

Businesses can also shield themselves by securing high-level official support for their investment projects.

Problems with tax authorities have also receivedpublicity but lawyers say provided companies follow the rules to the letter, the courts system often functions effectively in settling disputes.

Mr Gallo says the media attention inevitably focuses on problem cases can create an exaggerated perception of the risks.

“We often find our clients have more concerns than are really warranted,” he says.

Copyright The Financial Times Limited 2006

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