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Financial Times: Lex Column: Seizure later

Published: June 2 2007 03:00 | Last updated: June 2 2007 03:00

When it comes to energy in Russia, timing is everything. In 1912, the Rothschilds swapped their Russian oil assets for big shareholdings in Royal Dutch and Shell. Five years later, during the revolution, the Nobel family fled and sold their one-third share of the country’s oil output for a derisory sum.

Moscow yesterday deferred its decision on the Kovykta gas field but BP’s joint venture, TNK-BP, is still widely expected to lose its permit within weeks. Last December, Royal Dutch Shell lost control of its Sakhalin project to Gazprom. Yet some investors remain sanguine. Shell received a 25 per cent premium to its capital invested, and TNK-BP might recover the $500m it sank in Kovykta. Foreigners, it is argued, are still welcome as minority partners.

Given that BP and Shell have investments in Russia worth more than $20bn, this view may end up looking incredibly complacent. As the historian Daniel Yergin has noted, oil nationalisations are usually creeping seizures. In 1974, Saudi Arabia took 60 per cent of Aramco – by 1976 it insisted on 100 per cent. In 1971, Venezuela committed to maintain foreign concessions until 1983. A year later it moved towards full control.

Nor is it self-evident that the Kremlin will only manipulate the energy sector. Telephony, where European companies have up to $15bn of exposure, could be viewed as “strategic” too – Venezuela has just renationalised its main operator. Russian bond and equity valuations suggest political risk is moderate, but such measures may be unreliable given that the state owns or controls a big chunk of both asset classes.

Forecasting in Russia is tricky – in 1920 the chairman of Royal Dutch predicted the “Bolsheviks will be cleared . . out of the whole of Russia in about six months”. But with an election of sorts imminent and the state and its proxies flush with cash, foreigners with illiquid investments should at least be debating whether selling out beats clinging on.

Copyright The Financial Times Limited 2007

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