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Irish Times: Investors brave Russia’s cold climate

EXTRACT: This week, Putin described another new energy contract, which gave Shell control of the massive Sakhalin energy project, as a “colonial treaty” and said the Russian officials who agreed to it should be “have been put in prison”.

Published: Jun 08, 2007

Investors aren’t feeling the chill of a new cold war, at least for the moment, despite threats of an arms race and a growing political rift between Russia and the West, writes Conor Sweeney in Moscow

There are few signs the business climate has started to follow the downward spiral in diplomatic relations between the Kremlin and both the EU and the US, although there are fears it may be close behind.

The protests and economics will come close together this weekend, when the St Petersburg Economic Forum overlaps with a march against the Kremlin organised by chess grandmaster Garry Kasparov.

While western political leaders may be talking about missiles threats or human rights concerns, it seems that the juicy profit margins to be squeezed from Russia’s ongoing consumer boom remain the focus for investors.

Equally, Russian oligarchs continue to eye Europe, whether it is buying into the Austrian construction giant Strabag last month, or an autumn IPO in London from UC Rusal, now the owner of the Aughinish Alumina plant on the Shannon.

The future of foreign investment was raised again yesterday at the G8 Summit in Heiligendamm in northern Germany, when the outgoing British prime minister, Tony Blair, suggested that British business might like to think again about investing in Russia – a curious intervention by Blair who has always claimed to hold little influence over his country’s business leaders.

The Russian finance minister met the remarks with scorn, though it hit a nerve nonetheless, especially since the ongoing tension between Moscow and the former Soviet republic of Georgia may yet block Russia’s accession to the World Trade Organisation.

Georgia now remains the only country with significant unresolved problems over Russia’s membership – linked to the frozen conflict in the border region between the two countries.

Of course, some EU countries might also reverse the bloc’s present positive position, with numerous rows of a political hue, such as the Polish meat ban, threatening to create yet another forum for conflict.

The rift between the political rhetoric and the business reality was most visible at a recent EU-Russia summit.

Statistics proclaiming the booming trade relations, growing at around 30 per cent per year, or Russia’s 52 per cent of dependance on exports to the EU, were declared as evidence of the close links, just before a slanging match over human rights broke out between Putin and Germany’s chancellor, Angela Merkel.

The relationship remains symbiotic most clearly in the energy sector, with Russia supplying more than one-third of Europe’s gas and oil.

Sometimes forgotten is the reciprocal Russian dependence on these cash inflows to fund the industry’s expansion.

Inside Russia, a small minority of vocal protesters are complaining about democratic standards and human rights, although it’s only fair to say that most of the newly affluent middle classes in cities like Moscow and St Petersburg, from young students upwards, are more concerned with new clothes and cars than revolution.

Even vehement Kremlin critics like Kasparov are not calling for trade sanctions against the Kremlin, but argue that while the West should “do business” with Russia, it should do so without any illusions about the country’s democratic credentials.

The most overt example of political meddling to many investors has been the Kremlin’s backing for the renegotiation of energy contracts agreed during the 1990s, when the country was still going through its chaotic post-communist phase. Some US politicians have described former Yukos chief Mikhail Khordokovsky as a political prisoner after his energy giant was bankrupted and broken up.

This week, Putin described another new energy contract, which gave Shell control of the massive Sakhalin energy project, as a “colonial treaty” and said the Russian officials who agreed to it should be “have been put in prison”.

At the time, many Russians were living on as little as $50 a month. Nowadays, the middle classes in the big cities have a disposable income that is arguably even higher than in western Europe – they may earn less, but have fewer fixed monthly outgoings.

The proportion in poverty has also shrunk, but still stands at about 15 per cent of the 142 million population.

Putin insists his government is not planning to turn the country into a closed economy and argued that even in the sensitive energy sector, it is more open than most energy exporters.

“Unlike the Opec countries, we have completely privatised our oil sector and we now have only two companies with state participation. Gazprom has 49 per cent of its shares on the market,” he said, referring to the huge gas giant.

“Russia has long since become part of the world economy. It makes no sense at all for one part of the global economy to discriminate against another and be afraid of opening up to it,” he said, just before the G8 summit, in an interview with foreign media, where his comments about targeting Europe with nuclear missiles caught the headlines instead.

Trying to read beyond Putin’s comments has sharply divided economic commentators. One of his sharpest critics, Andrei Illarionov, was once a leading Kremlin economic adviser and its “sherpa” at the G8.

Now he complains Russia is deliberately straining relations with the other G8 countries for electoral reasons.

Illarionov, who now heads the Institute for Economic Analysis in Moscow, argues that Russia is provoking foreign leaders into criticism of the country so it can in turn declare the West an enemy and mobilise the electorate to back its own candidate to succeed Putin.

Others have strained to find a middle ground, such as the Irish-born head of research with AlfaBank in Moscow, Chris Weafer. He argues that the outside world must accept that Russia sees itself as stronger and more willing to assert its agenda.

“Investors largely discount the sort of rhetoric heard from all parties over the past six months as ‘politicking’. But, at the same time, they will be looking for evidence of the better, more pragmatic, relationship required to help sustain economic progress in Russia in 2008 and beyond.

“The EU is frustrated because of Russia’s continued preoccupation with asset recovery in the energy sector and the lack of progress in actually developing those assets. It is also frustrated by the lack of clarity in the investment rules caused by such issues as Kovykta,” said Weafer, referring to the looming decision which could cost the BP-controlled consortium its licence to develop a massive gas field.

As the G8 ended and Putin offered a compromise on the site for the new US missile shield, suggesting it should be placed in Azerbaijan, not Poland, it seemed that talks of a new cold war may be just a little premature, after all.

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