New Zealand Herald: Extortion is price of doing business in Putin’s Russia

By Matthew Lynn
Thursday December 21, 2006
By Guest Columnists 

How much provocation does big business need before it has doubts about Russia?

Anglo-Dutch oil company Royal Dutch Shell has been threatened with lawsuits from the Russian Government, which is tightening its grip on the energy industry.

Companies as diverse as Swedish furniture chain IKEA and German retailer Metro are also finding that Russia can be a tough place to do business.

Yet Western companies are still pouring money, energy and expertise into Russia. They are attracted by a high-growth, low-tax economy offering the chance to make a lot of money quickly.

It is time they wised up. Sure, you can make a quick buck in Russia. The trouble is that you can lose it just as fast if the Government bullies you out of what you have created.

Until Russia starts playing by the rules as part of the global economy, foreign investment should be shifted elsewhere.

“Investors need to start holding executives to account for giving in to this kind of extortion,” Robert Amsterdam, a lawyer for Russian oil tycoon Mikhail Khodorkovsky, said.

Khodorkovsky, who says he was targeted for supporting opponents of the Russian Government, is serving an eight-year prison term for fraud and tax evasion.

The treatment of Shell is the most shameful episode so far.

Shell’s development of the US$22 billion ($31.5 billion) Sakhalin-2 oil and gas field off Russia’s Pacific coast is one of the biggest foreign investments in the country since the collapse of the communist regime 15 years ago.

Sakhalin-2 is the only major oil and gas field in Russia that is wholly foreign-owned, so it was only a matter of time before President Vladimir Putin decided to bring it under state control.

His Government plans to lodge a claim of at least US$10 billion in environmental damages against Shell. State-owned energy company OAO Gazprom is now positioning itself to buy half the project.

Shell has brought its offshore-drilling techniques to the Sakhalin-2 field. It has invested a huge amount of capital. Now, it looks as if it will be harassed until it sells a big chunk of its assets to Gazprom, no doubt at a knock-down price.

This way of doing business might be normal in some countries. Yet it has no place among major companies from developed nations.

It is an outrageous manoeuvre by Putin and the Russian Government. One wonders why British Prime Minister Tony Blair has flown off to make another doomed attempt at bringing peace to the Middle East instead of deploying his diplomatic genius to help one of his country’s companies.

Although the saga has some way to run, there is little doubt how it will end. Shell will have to surrender. What else can it do? You can’t operate in a nation whose Government is set against you.

Russia’s treatment of Shell should serve as a warning. The country may soon become a no-go area for global companies. It is developing a narrow-minded economic chauvinism that even the French would find embarrassing. The best response from big business would be to stay away.

The oil and gas industry isn’t the only target. IKEA has been embroiled in numerous disputes with Russian authorities since it started opening its blue and yellow sheds there in March 2000.

It was once stopped from building a footbridge across a busy highway to its store because the walkway was too close to a war monument. Founder Ingvar Kamprad unsuccessfully sought a meeting with Putin last year to complain about how IKEA was being treated.

Likewise, Metro, Germany’s largest retailer, is facing criticism from Russian electronics chains for undercutting the prices of local retailers at the Media Markt outlets it has opened in Moscow.

Maybe you can argue that Russia needs control of its oil and gas reserves. But IKEA? What possible harm could cheap, self-assembly bookshelves be doing to Russian pride?

The mystery is that foreign companies are still lining up to get their faces punched. Italian fashion company Stefanel SpA said last month it plans to open about 30 stores in Russia in the next three or four years.

Pernod Ricard SA, the world’s second-largest liquor producer, said this month it may buy Russia’s Stolichnaya vodka brand. How is that possible? If Shell isn’t allowed to own Russia’s second-most-important form of liquid energy, Putin’s Government surely won’t be happy with the French grabbing the most important one.

Rapid growth may have convinced many big companies that they need to be in the Russian market. Yet if you aren’t allowed to keep control of your assets, there is no point in being there.

Put your money to work in eastern Europe, India or China instead.

If Western capital and know-how were withdrawn, Putin and his cronies might even understand that they must start playing by the rules.

– BLOOMBERG

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