Energy Business Review: Russia: foreign power investors on slightly firmer footing

18th June 2007
By Paul Stewart

Russia’s blatant drive to re-acquire control of strategic energy assets is a growing source of concern to western investors. Why, then, in an increasingly hostile political climate, would any private utility consider a foray into the Russian electricity sector? Key to this, it would appear, is that, for a while at least, the Kremlin will view power and hydrocarbons very differently.

BP is under increasing pressure from Moscow to relinquish control of prized upstream gas assets. Having publicly cannibalized Yukos and, more subtly, edged Sakhalin-2 out of Shell and into Gazprom hands, BP’s Kovykta field is next on the Kremlin’s list.

The Russian drive to seize key upstream assets is understandable, given high commodity prices, and should not be confused with the wave of compulsory re-nationalizations witnessed in the 1970s in many producer countries. It is, however, a genuine concern to current and potential foreign investors looking at Russia. BP’s $6.75 billion joint venture with TNK, signed in 2003, is, after all, still the largest single foreign investment to date in Russia. The loss of Kovykta would, essentially, see BP sidelined in Russia.

Against this highly politicized backdrop, Europe’s leading utilities are investing in Russian power stations and networks. Italy’s Enel, for example, is to spend $1.5 billion on a 25% stake in OAO OGK-5, one of the six large wholesale generators spun out of the ongoing break-up of former monopoly RAO UES. The move will complement a joint Enel-Eni venture, which controversially took control of disputed former Yukos assets in early 2007.

Any potential investor in Russia’s power sector must inevitably be wary of Gazprom. The world’s largest gas company continues to exert a strong influence across the Russian energy supply landscape. Controlling a 43% stake in Mosenergo, which generates around 7% of Russian electricity, while eying other large generators, Gazprom is astutely seeking to sway Russia’s future generation mix firmly towards natural gas.

In the longer-term, this threatens the desired break-up of UES (if Gazprom re-acquires it all) and will serve to further politicize power market liberalization. In the medium-term, however, western investors can take confidence from the reality that Russia needs to attract investment into the world’s fourth largest electricity market, which is currently growing at nearly 5% per annum.

Most importantly, Russian power assets, unlike Russian hydrocarbons, are not a key source of national wealth and economic growth, and this, ultimately, should keep them off the Kremlin’s radar for several years yet.   

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