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Daily Telegraph: Bearing the brunt of Russia’s anger

Gazprom Moscow HQ: Daily Telegraph Photo

(Having lost the arms race, the Kremlin sees an opportunity to reassert dominance through its vast oil and gas reserves)

Last Updated: 1:55am BST 19/07/2007

The row over the murder of Alexander Litvinenko may see commerce suffer as Cold War battles return, writes Industry Editor Russell Hotten

I don’t understand the position of the British Government,” said Russia’s foreign ministry spokesman Mikhail Kamynin. “It is prepared to sacrifice our relations in trade and education for the sake of one man.”
That use of the word “trade” will send shivers through companies with Anglo-Russian interests.

The row over who murdered Alexander Litvinenko is currently being fought out at the political level. But once the tit-for-tat expulsion of diplomats is exhausted, how do the countries ratchet up the pressure? By attacking each other’s economic links, perhaps.

No one is expecting anything so brutal as the closure of companies or expulsion of executives. But in this feverish climate there are plenty of more subtle – or not so subtle – ways to hinder the conduct of business.

Stephen Pope, chief strategist at Cantor Fitzgerald, says: “The last time this erupted, BP had trouble with plans for a gas pipeline to China. The risk is that President Putin is going to make [British companies] dance for a bit.”

UK companies could, for example, find themselves barred from major new energy projects. Last week state-run energy company Gazprom picked French oil firm Total as a partner in the Shtokman gas field, with US rivals Chevron and ConocoPhillips losing out because of poor Russian-American ties.

“We should be expecting a less favourable attitude for British business,” said Masha Lipman, an analyst with the Moscow Carnegie Centre.

About 400 UK companies operate in Russia, including household names such as Marks & Spencer and Mothercare. Food and drinks company Cadbury Schweppes’s factory in Russia is its largest outside the UK. And Scottish & Newcastle has a stake in Baltika, Russia’s largest brewer. There are also many companies exploiting Russia’s wealth of natural resources, from BP and Royal Dutch Shell to smaller firms such as gold miner Peter Hambro.

In the first quarter of this year Britain invested about $3.1bn (£1.5bn) in Russia, 10 times the amount coming from the US. It made the UK the third largest investor in the country. Last year, UK exports to Russia were worth £2.05bn.

Russia has already unnerved Western companies and investors. The treatment of BP over the Kovykta gas field and of Shell over Sakhalin-2 – where both companies were forced to relinquish control of these projects to state-run energy company Gazprom – demonstrated a political will to interfere in the running of business.

Yesterday Russia’s natural resources minister Yuri Trutnev again attacked the UK’s Imperial Energy for allegedly falsifying oil reserves figures at a field in Eastern Siberia, something the company denies.

And last week, traders and analysts at the Moscow office of Hermitage Capital Management, a leading activist investment fund in Russia, were relocated to London amid claims from Russian authorities of tax evasion.

However, some people think the tax inquiries have more to do with Hermitage’s use of litigation to expose practices at some of the companies in its investment portfolio.

Russia’s ability to flex its economic muscles is due to its emergence as an energy superpower. Having lost the arms race, the Kremlin sees an opportunity to reassert dominance through its vast oil and gas reserves, and the revenues generated from them.

The decision to cut off gas supplies to Ukraine, which contributed to a surge in UK domestic energy prices a couple of years ago, shows how Moscow is prepared to use its power.

This is, in particular, causing alarm in London. In the next decade Britain will become more dependent on gas from Russia. Energy imports from Russia, 3pc now, are forecast to grow to up to 15pc by 2012. Britain would like to open up new supplies from places such as Qatar, and is promoting more investment in renewables.

But the plain fact remains: if the UK is to meet the energy shortage created by declining North Sea oil and gas, it will have to turn to Russia.

“That puts Russia in a very strong position,” said an analyst yesterday. “Britain needs security of supply. It’s important to remember that Russia also needs markets like the UK to sell its gas – so Moscow must tread carefully. But, on balance, Britain needs them more than they need us.” Russian companies, too, may suffer if the diplomatic row spills over into a commercial dispute. The British Government has none of the political levers that Moscow has to influence business. But that’s not to say that London could not find the means to derail a long-rumoured Gazprom bid for UK energy firm Centrica, something that now looks even more remote.

Where Russian companies would suffer most is if the UK takes fright and withholds investment. The London Stock Exchange is the primary destination for Russian firms seeking to raise capital. There are 42 Russian companies listed on the LSE and the Alternative Investment Market. In the second quarter of 2007, three Russian IPOs worth more than $10bn accounted for half of all money raised in London.

“In the current environment, what pension fund manager wouldn’t think twice about whether there was going to be some big trade dispute, even if that prospect looks slim at the moment?” said one fund manager.

The banks being lined up by mining giant Rusal to handle its likely flotation later this year may find themselves having to work a little harder to convince investors.

James Nixey, a Russia specialist at the Royal Institute of International Affairs, believes these financial links between London and Moscow are a good reason why commercial links between the two countries may survive intact.

“The trade aspect of the relationship between the UK and Russia is the only healthy part of it,” he said. “Both countries would be shooting themselves in the foot to do away with billions-worth of trade.”

Even so, some analysts fear that Moscow’s political and business elite is minded to give UK companies a bloody nose. There is a strong sense in Moscow of Russophobia in the West.

This view surfaced strongly last year when Russia’s Severstal lost out to Mittal Steel in the battle to take over Arcelor. Russian politicians and media said the West promoted “the ‘Russian threat’ myth”. Boris Gryzlog, chairman of the Russian Parliament, spoke of Western “propaganda”, while the minister for energy and industry, Viktor Khristenko, said Mittal’s victory was a “bad sign”.

Now Gazprom feels it is also a victim of anti-Russian sentiment.

Should a trade dispute develop, UK companies have more to lose than Russian ones, however.

Peter Hambro, chairman of Peter Hambro Mining, said: “At an operating level there’s no effect, but it makes the business environment harder. There’s no doubt that the perception of foreigners, and in particular of Britons, has changed.”

He added: “With all our assets in Russia, it makes life difficult.”

See more on the crisis in today’s edition of ‘The Business Show’

Have your say    

Should we not return to old Saxon law and tradition, and insist that murder requires a blood price? We are perfectly prepared to settle the matter on amiable terms provided, for example, that the British government is offered the remaining 24% of the Shtokman project!
Or perhaps we should think ahead and sell Centrica and a few huge companies to the Russians, and then follow their horrible habits and simply seize them back on some absurd excuse – as these heirs of Ivan the Terrible did with Shell and BP? We could even sell Shell and BP to Gazprom and then grab them back and keep the money- a big whack of it as compensation for Litvinenko’s murder!
Posted by Robert Sebag-Montefiore on July 18, 2007 12:50 PM

To read all the comments go to… and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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