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The Financial Times: EBRD drops work on loan for Sakhalin-2

By Stefan Wagstyl in London
Published: January 12 2007 02:00 | Last updated: January 12 2007 02:00

The European Bank for Reconstruction and Development has abandoned work on a $300m loan for the controversial $20bn Sakhalin-2 energy project in Russia’s far east following the scheme’s de facto nationalisation by the Kremlin.

The multilateral bank announced yesterday it would no longer pursue the financing package it had been considering for the past five years after Gazprom, the Russian state-controlled gas group, acquired majority ownership from a consortium headed by Royal Dutch Shell.

Shell and its partners agreed to sell the stake last month for $7.45bn (€5.7bn, £3.8bn) in the face of pressure from the Kremlin which has made clear it wants state-controlled companies to dominate control of Russia’s natural resources.

In a carefully worded statement, the bank left open the door for Gazprom to initiate talks about a new financing package saying that if the new shareholders were to make a request “the bank could consider financing in the future”.

But this appeared to be little more than a diplomatic gesture. The bank has never lent to Gazprom despite years of talks. The fact that Sakhalin-2 is close to completion also appears to breach EBRD rules of not financing projects once they are finished.

Jean Lemierre, the EBRD president, said in an FT interview: “The potential borrowers have changed and we don’t know yet how they will view the situation.”

The bank seems to be trying to pull back from the project without embarrassing the Kremlin. The bank’s policy is to finance schemes which contribute to the transition to a market economy. With a state-controlled company now in charge, the Sakhalin-2 project no longer appears to meet this rule.

However, the EBRD, established to support economic modernisation in the former communist bloc, regards Russia as its most important country of activity – and sees continued co-operation with Moscow as essential for its many other investments in the country. Fortunately for the bank’s hopes of a quiet exit, it never sanctioned a Sakhalin-2 loan, so the issue of backing out of an agreed deal does not arise.

Meanwhile, Mr Lemierre underlined Russia’s importance in the bank’s portfolio saying that its share of new investments last year rose to €1.9bn (£1.2bn) out of a total of €4.9bn, compared with €1.1bn out of €4.3bn in 2005.

Mr Lemierre said the bank was achieving its aim of switching its focus from the more developed countries of central Europe to the less advanced economies of south-east Europe and the former Soviet Union.

In the light of this week’s row between Russia and Belarus over oil shipments, Mr Lemierre urged the European Union to continue discussions with Moscow on energy co-operation, saying both sides needed “increasing partnership”.

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