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From Saturday’s Globe and Mail: Russia Inc. Is Canada ready?

BARRIE MCKENNA
May 12, 2007

Washington — After his KGB spy days and before becoming President of Russia, Vladimir Putin busied himself by writing a PhD thesis at the St. Petersburg Mining Institute.

The seminal, 218-page work – “Strategic Planning of Regional Resources Under the Formation of Market Relations” – still guides his economic thinking today. In it, Mr. Putin floated the idea of nurturing “national champion” companies and harnessing Russia’s natural resources to create an economic superpower.

No matter that experts say large tracts of Mr. Putin’s dissertation were blatantly plagiarized from a KGB translation of a 30-year-old textbook by two University of Pittsburgh professors. Or that Russia’s “champions” are really just privatized reincarnations of stodgy Soviet-era state enterprises. Or even that many of the vaunted entrepreneurs now leading those champions got there by cozying up to the Kremlin, pilfering state assets, strong-arming rivals and then idly watching commodities prices fly.

Russia Inc.’s murky lineage hardly matters any more. The Russians aren’t just coming any more. They’re here.

Enter stage left: 39-year-old oligarch Oleg Deripaska, who this week bought a $1.54-billion (U.S.) piece of car parts giant Magna International Inc. and its dream of acquiring DaimlerChrysler’s U.S. operations. Canadians got their first glimpse of Mr. Deripaska when Magna chairman Frank Stronach introduced the nuclear physicist turned automobiles-to-aluminum tycoon to North Americans at the company’s annual meeting in Toronto on Thursday.

The deal makes a lot of sense for both men. Mr. Deripaska, whose empire includes Russia’s No. 2 auto maker and UC Rusal, the world’s leading aluminum producer, needs foreign technology to build his Russian auto-making company and diversify geographically. Mr. Stronach, 74, needs capital and a global strategy if he is to avoid Chrysler becoming a quagmire.

But the deal is equally important to Mr. Putin, who has made no secret of his desire to see his champion companies step confidently out on to the world stage.

The Magna investment is part of a multibillion-dollar buying binge by Russia Inc. in Canada, the United States and Europe. Russian companies have bought steel makers, alumina and platinum mines, construction companies and gas pipelines. OAO Lukoil operates more than 2,000 gas stations, from Maine to Virginia. And OAO Gazprom wants to invest in liquefied natural gas projects in Canada and the U.S. to help create export markets for trapped resources.

To some analysts, the increasing global reach of Russian companies is the next stage of the Cold War, fought with rhetoric and petro-dollars, instead of missiles. “This process has been going on since the mid-nineties,” explained Steven Rosefielde, professor of economics at the University of North Carolina and an expert on the Russian economy. “At that point, it was about capital flight. Now, with Putin pulling all strings behind the scenes, it has become an intriguing dimension of the second phase of the Cold War.”

Not unlike China, the economic objectives of the Russian state are never far from the global aspirations of its companies, and vice versa.

“There are definitely echoes of the Cold War,” agreed Marshall Goldman, professor emeritus of Russian economics at Harvard University’s Wellesley College in Boston. “Do we really trust these guys? Are they playing dirty?”

There is a suspicion Russia’s oligarchs may be trying to buy respectability and shed their robber-baron image by buying into public companies overseas. Sales from Russia’s enormous reserves of oil and gas have pushed its economy to heights unseen since its dramatic post-communist collapse. From the brink of bankruptcy in 1998, Russia’s foreign reserves, estimated at roughly $330-billion (U.S.) are second only to those of China and Japan.

The Russian economy, meanwhile, has been growing at a rate of more than 7 per cent a year for nearly a decade. With economic might has come a much more muscular, even hostile, foreign policy.

Mr. Putin is eager to flex both his political and economic muscles, even if that means ruffling a few feathers in the West. Earlier this year, he accused the United States of imposing its policies on a reluctant world by force, indirectly comparing Washington to the Third Reich.

And to its European neighbours, Mr. Putin has turned rhetoric into action. On New Year’s Day, Russia threatened to shut off gas flows to neighbours Ukraine and Belarus unless they agreed to pay substantially more for their natural gas – a move that briefly disrupted deliveries to Western Europe.

The notion that Russia’s oligarchs might not be the kind of investors North America should welcome with open arms is a fair question.

Back in Mr. Putin’s Russia, foreign investors have been blatantly abused. And recognition of property rights is spotty.

Moscow recently bullied a powerless Royal Dutch Shell PLC into handing over part of its stake in the massive Sakhalin Island oil and natural gas project to state-owned OAO Gazprom. It had been the largest foreign investment in Russia. Exxon Mobil could well see some of its investments expropriated. And BP PLC has been shut out of a Siberian gas field project.

If it’s any consolation, Russian investors are often treated even worse. Mikhail Khodorkovsky, former chief executive officer of oil giant OAO Yukos, lost his company and is now in jail after running afoul of Mr. Putin.

The line between state and private ownership in Russia is often fuzzy. Mr. Deripaska, for example, is very close to Mr. Putin, and he’s politically well-connected through his wife, the granddaughter of former Russian president Boris Yeltsin.

Being independent on paper does not mean Mr. Deripaska and the other oligarchs can operate entirely freely, even abroad.

“The key skill for an oligarch in Putin’s times is the cow’s dilemma: Choose whether to give milk or meat,” remarked Sergei Guriev, associate professor of corporate finance at Moscow’s New Economic School. “The government can either nationalize and imprison them or keep them private, but milk them and ask them to do the government’s bidding.

“Deripaska is second only to [Russian industrialist Roman] Abramovich in this art – staying private and yet keeping government happy and actually have the government lobby on his behalf.”

And yet by all appearances, Mr. Deripaska’s privately held business empire remains quite apart from government, according to Anders Aslund, director of the Russian program at the Washington-based Peterson Institute for International Economics. “He uses the Russian government for his purposes, rather than the other way around,” Mr. Aslund argued. “He makes sure he has good relations with the Kremlin, but he is not a creature of the Kremlin.”

That isn’t the case with all of the Russian oligarchs. The assets of Mr. Abramovich, owner of Britain’s Chelsea FC soccer team, are sometimes indistinguishable from those of the Russian government.

“Mr. Deripaska is not a self-made man. He’s not Bill Gates,” added Wellesley College’s Mr. Goldman. “None of the oligarchs are.”

Russia Inc.’s arrival on North American shores has created a dilemma for Mr. Putin. With their Western investments, Russian companies must now play by market rules. At the same time, Canada and the United States have new leverage to protect their own investors against abuse in Russia. “Suddenly they are subject to being held hostage and threatened with expropriation here, rather than the other way around,” Mr. Goldman said.

In the end, more Russian investment overseas may not be such a bad thing. It’s in the interests of Canada and the other leading industrialized countries that Russia becomes more integrated into the global economy, and that its companies play by Western rules.

The Magna investment is a step in the right direction, argued Andrew Kuchins, senior fellow and director of the Russia program at the Center for Strategic and International Studies in Washington. “We want the Russian economy more integrated in the world economy,” he said. “This is a major way that it’s going to happen.”

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