International Herald Tribune: Russia strong-arms West

By Steven Lee Myers
Tuesday, December 26, 2006

MOSCOW can afford to ignore its critics

Inside the Kremlin last week, the executives of three major international companies — Royal Dutch Shell, Mitsubishi and Mitsui — heaped praise on the man whose government had effectively forced them to cede control of the world’s largest combined oil and natural gas development.

“Thank you very much for your support,” Shell’s chief executive, Jeroen van der Veer, told President Vladimir Putin during a meeting that ended a six- month regulatory assault on the project, Sakhalin II, at the cost of ceding control to the state energy giant, Gazprom. “This was a historic occasion.”

It was also a telling one, with lessons that extend beyond energy policy to include such disparate matters as the murders of Alexander Litvinenko, a former KGB agent in London, and Anna Politkovskaya, a prominent journalist.

Putin’s Russia, buoyed by its oil and gas riches, has become so confident — so arrogant, its critics say — that it has become impervious to the criticism that once might have modified its behavior. And those who might have once criticized, from investors to foreign governments, have largely acquiesced to the new reality confronting them.

The Kremlin is now dictating its terms with greater assertiveness than it has at any time since the collapse of the Soviet Union (15 years ago this coming Monday, to be precise). Many had hoped that Russia’s presidency of the Group of 8 industrial nations this year would temper Putin’s diplomacy, but it has not.

Russia began 2006 by making good on a threat to cut off natural gas supplies to Ukraine to get a higher price for Gazprom. The shut-off, though brief, provoked a storm of concern and fear in Europe about dependency on Russian energy, but Russia is ending 2006 by warning Belarus of the same fate.

What criticism that has been leveled against the Kremlin has had little effect. Vice President Dick Cheney of the United States leveled the harshest criticism to date when he accused the Kremlin of using oil and gas as “tools of intimidation or blackmail.”

That was in May, and U.S. policy towards Russia has changed imperceptibly, with one significant exception: The Bush administration struck a deal to allow Russia’s long-coveted membership in the World Trade Organization.

“Russia since last year has been enjoying some feeling of euphoria, that feeling that we have so much money, so many resources that we can do what we want,” said Fyodor Lukyanov, editor of the journal Russia in Global Affairs.

The reality is that the United States or Europe has little leverage beyond persuasion. And persuasion no longer works, as the Kremlin’s campaign against Sakhalin II, the largest foreign investment project in Russia, showed.

The campaign was so transparent that it seemed comical, beginning with the surprise inspections of a colorful and hitherto little-known environmental inspector, Oleg Mitvol, who threatened to fine Sakhalin II’s developers for every tree they cut down.

As the campaign unfolded, analysts issued warnings. Diplomats and their governments protested. But in the end the Kremlin got what was clearly the goal from the start: state control of a lucrative project that opens the gas market to Asia.

And the three companies with the most to lose said nothing critical as they sold 50 percent plus one share of Sakhalin II for what some analysts called a discounted price, $7.45 billion. Putin declared instantaneously that its environmental problems could “be considered resolved.”

“Experience has disappointed many foreign investors in Russia,” said Valery Nesterov, an energy analyst at Troika Dialog, an investment firm in Moscow.

And yet, when it comes to energy or other investments, it does little to deter them. “The attraction is so large,” Nesterov said, adding that companies like Shell still held out hope of winning access to Russia’s other fields.

The Sakhalin affair has revived memories of the government’s assault on Yukos Oil and its founder, Mikhail Khodorkovsky, in 2003 and 2004. When that started, even Russia’s supporters worried of the damage the Yukos case would cause to the country’s reputation, especially among investors. If the damage was done, however, it is hard to quantify it now.

The company is a rump of its former self, under bankruptcy receivership with its major assets now belonging to the state oil company, Rosneft. Khodorkovsky, once the richest man in Russia, remains in a Siberian prison, reportedly facing a new round of criminal charges that could keep him there.

The effect on investors, however, was most revealing. Russia’s stock market plunged 21 percent in the month following Khodorkovsky’s arrest, with the Russian Trading System Index dipping below 500. It is now above 1,800; Yukos is a painful memory only for those who paid dearest.

The connection to the murders of two prominent Kremlin critics — Litvinenko in self-exile in London and Politkovskaya here in Moscow — might seem tangential, but the response to them also underscores the new reality of a newly confident Russia.

There is as yet no evidence directly linking anyone in Russia to the killings, even if critics have been quick to say so, reviving some of the worst fears about the country Russia has become.

After Litvinenko’s murder, The Daily Telegraph in Britain declared flatly, “Russia is rotten to its heart.” A recent cover of The Economist showed Putin dressed like a gangster, holding a gasoline nozzle as a machine gun.

The British government, by contrast, has said nothing even remotely so critical, even after British detectives who came to Moscow were confronted with strict limits on their ability to question three Russians who met Litvinenko in London on the November day he became ill.

Wealth has clearly emboldened Putin and those around him to ride out any criticism directed toward them.

Critics warn that Russia is ignoring the consequences of its behavior, that the monopolistic policies of Gazprom, the erosion of political competition and the easy dismissal of critics as Russia- haters blinds the Kremlin to the dangers of the overly centralized system Putin has created.

Mikhail Kasyanov, Putin’s prime minister from 2000 until 2004 and now one of his biggest critics, said that the foreigners who rush to join Russia’s boon were equally complicit.

“Investors are very shortsighted,” he said in an interview.

Even in the long term, though, history may be on Russia’s side.

“It pains a lot of people here to admit that Russia is not ‘like us,'” Katinka Barysch, chief economist of the Center for European Reform, a research group in London, wrote in an electronic message, saying that Europe’s energy interests would trump other concerns about Russia. “But unless the country slides into full-scale dictatorship or chaos, we will put our interests first.”

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