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Royal Dutch Shell Plc .com headline of the year: Energy giants cede Putin control with a thank you

President Putin

(Man of the people … Vladimir Putin greets children in Moscow’s Red Square.
Photo: AP/Yuri Kochetkov)

The New York Times
Steven Lee Myers in Moscow

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

“Thank you very much for your support,” Shell’s chief executive, Jeroen van der Veer, told the President, Vladimir Putin. The meeting ended a six-month regulatory assault on the project, Sakhalin II, but only after the companies surrendered control of it to the state energy giant, Gazprom.

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

Mr Putin’s Russia, buoyed by oil and gas riches, has grown so confident that it has become impervious to criticism that once might have modified its behaviour. And those who might once have criticised, from investors to foreign governments, have largely acquiesced to the new reality.

The Kremlin is now dictating its terms with greater assertiveness than at any time since the collapse of the Soviet Union – 15 years ago on Monday. Many hoped that Russia’s presidency of the Group of Eight industrial nations this year would temper Mr Putin’s diplomacy, but it has not.

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

Gazprom threatened on Tuesday to halt natural gas supplies to Belarus if it did not agree to a large price increase by New Year’s Day. Gazprom, the world’s largest energy company by volume of reserves, is insisting Belarus pay more than double its current price.

“Responsibility for what has taken shape today lies with the Belarusian side,” Gazprom’s chief executive, Aleksei Miller, said to a Belarusian delegation led by the First Deputy Prime Minister, Vladimir Semashko.

The US and Europe have 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 began with surprise inspections by a little-known environmental inspector who threatened to fine developers for every tree they cut down.

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

The three companies with the most to lose said nothing critical as they sold 50 per cent plus one share of Sakhalin II at what some some analysts say is a discounted price, $US7.45 billion ($9.5 billion). Mr Putin then declared that the project’s environmental problems could “be considered resolved”.

The New York Times
December 28, 2006

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