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The Times: A lesson learnt in Siberia, or a diplomatic red flag?

June 21, 2007
Patrick Hosking: Business Commentary

Congratulations to Sir John Collins and John Clare for pulling off a diplomatic coup worthy of a Talleyrand or Metternich. The chairman and chief executive of DSG International, formerly Dixons, probably didn’t have British foreign policy uppermost in mind when they scrapped plans to buy Russia’s biggest electrical goods store Eldorado. But there can hardly have been a more emphatic way of underscoring Tony Blair’s recent message to President Putin that British companies would shun Russia if it did not change its interventionist spots.

DSG has terminated the option agreement that gave it the right to buy Eldorado for $1.9 billion (£959 million) any time up to the end of this year. It would have been one of the biggest British direct investments in Russia outside the resources sector.

Despite well-documented political interference encountered in Russia by the likes of Shell and BP, there has been no let-up in the flood of British business people and bankers hopping on the flight to Moscow. Nor does the spat over the attempt to extradite a former Russian agent over the murder of Alexander Litvinenko in London seem to have cooled the ardour of the UK business community for things Russian. Only last week, the doorstep loans group Provident Financial revealed it was close to buying a Russian bank.

DSG is coy about its move, beyond talking vaguely about a range of corporate, economic and social risks. It may just be that due diligence uncovered something unpalatable about Eldorado, which is privately owned. The fact that the option was abandoned six months early suggests that alarm bells rang.

It may be that Russia was regarded as just too difficult. DSG has stubbed its toes in relatively familiar and straightforward territories, such as Italy and France. A major foray into one of the most corrupt nations on earth, one straddling eight time zones, would have been much more challenging.

Mr Clare will remember Silo – an expensively botched attempt to enter the American market in 1987. Dixons got out six years later, £200 million poorer.

Perhaps the role of Sir John was pivotal. He spent 30 years at Shell, which has been badly mauled in Siberia by Russian government interference. Doubtless his old colleagues were more than happy to update him on the perils of Putin-influenced capitalism.

DSG’s decision won’t have been an easy one. DSG has invested much time and money in the relationship with Eldorado, helping it with logistics and cooperating on joint buying projects. Some analysts had started to pencil in profits from the prospective deal.

Yet all the signs are that DSG is more than fully stretched by the 27 countries in which it it already operates. Back home, customers of its online operations report serious service shortcomings.

With a new chief executive due to take over in September, Russia would have been a territory too far.

http://business.timesonline.co.uk/tol/business/columnists/article1964023.ece

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