New York Times: Editorial: The Kremlin’s Shell Game

Published: December 19, 2006

President Vladimir Putin believes that a powerful, state-controlled energy sector is the key to Russia’s economic future, even if he has to strong-arm foreign investors to get it. But trampling property rights is risky. It is as likely to leave Russia an economic pariah as an energy superpower.

The latest intrigue centers on a huge oil and natural-gas project off of Russia’s eastern coast. The project, Sakhalin 2, includes offshore platforms and the world’s biggest liquefied natural gas plant. It is also the single largest foreign investment in Russia. Royal Dutch Shell owns a 55 percent stake, but won’t for much longer from the looks of things.

It appears that the Kremlin is again trying to muscle an energy company into doing its bidding, this time with environmental regulators. Russian officials have threatened to halt the project by revoking necessary operating permits and warning that they might criminally prosecute Shell employees over supposed ecological violations.

While the project is hardly spick-and-span, industry analysts say the arbitrary enforcement of oft-ignored regulations is a barely disguised power grab for the $20 billion project. Shell refuses to comment publicly, but after months of pressure has offered to sell a sizable, possibly controlling stake in Sakhalin 2 to Gazprom, Russia’s state gas giant. Russian authorities have been pressuring other foreign energy companies, including threatening to revoke BP’s license for a natural-gas field near China.

This has not sparked the outcry you might expect. The European Commission president, José Manuel Barroso, has called the pressure on Shell “a matter of concern.” Maybe the muted tone has something to do with Gazprom’s supplying over a quarter of Europe’s natural gas. It hardly seems like sound energy policy to allow a country with so little respect for contracts to supply a critical share of heating and electric needs. Foreign investors, like Shell, also have to ask whether they are going to keep giving Russia a pass just because of its impressive energy reserves. Business deals should look a lot less attractive if the Kremlin decides it can “renegotiate” contracts on a whim.

Russia’s leverage — even in an era of tight energy supplies — is not as great as it appears. The country is already facing the very real possibility of declining production and will need the expertise and capital of foreign companies to keep exploiting its natural resources. Western governments and companies should remind Moscow of that vulnerability.

Moscow also needs to be reminded that threatening property rights will eventually dissuade all investments. Even Mr. Putin’s allies should remember that without a clear rule of law, their own assets might be threatened if political winds shifted.

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