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International Financial Law Review: Russia – ‘a riddle, wrapped in a mystery inside an enigma’ (Winston Churchill)

Risk in Russia: The price of stability

August 2007
Sam Jones, Staff writer

Yukos, back in 2004, did not put pay to the government’s aggressive relationship with energy investors in Russia. Until June this year, TNK-BP (a joint venture owned by British fields, the huge Kovykta reserves. The company, however, failed to deliver on its production targets mandated in its licence.Petroleum and Russia’s Alfa Group) held the licence to develop one of Russia’s largest gas

“How much longer do we have to tolerate this?” asked Putin at a press conference. It was, perhaps unwittingly, a rhetorical question. Despite the fact that TNK-BP could not meet its licence targets because Gazprom had refused to build the required pipeline to China, Russian officials refused to back down on TNK-BP’s licence infraction.

As with Shell’s Sakhalin-2 project, Russia’s Ministry of Natural Resources was relentless in it’s prosecution of the case. Then TNK-BP was hit with a crippling $1.4 billion demand for allegedly unpaid taxes in November.

The Ministry’s environmental regulator, Oleg Mitvol, chose a different tack here. Whereas Shell had its licence revoked for environmental damage, TNK-BP was attacked for not producing enough gas, as was required by its licence – a prescription other oil companies remedy by pumping enough and then burning it.

Mitvol’s case against TNK-BP culminated in May, in the Russian city of Irkutsk. Unsurprisingly, the court found against the oil company, and its licence was duly revoked. “They can file court cases, but what’s the point?” said Mitvol, belying a truth when it comes to corporations taking on the state.

Gazprom moved in and took over the hapless company’s assets – buying TNK-BP’s stake in the Kovykta field for $800 million in July.

Lawyers tell of clients often willing to pay bribes to do business in Russia. Not every law firm advises against it. “The international firms here are aware of bribes as much as some of the local firms,” says one Moscow partner in a major US firm.

More than attacks from the centre, the political risks companies face in Russia are increasingly coming from zealous officials, such as those in the Ministry of Natural Resources, whose agenda is increasingly shaped by a sense of national importance and protectionism. Rather than a new cold war, companies are more likely to find themselves caught in the crossfire of smaller rows over competition and the Russian national interest – a concept that is increasingly taking on the character of vested interests of local officials, local people and local businesses. What’s going on in Russia may not be all that different to old-fashioned European protectionism – just with an unnerving dose of opacity.

Perhaps the price of stability in Russia was always thus. “I cannot forecast to you the action of Russia,” said Churchill. “It is a riddle, wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest.”

The above are extracts. The complete article can be found via this link:

http://www.iflr.com/includes/magazine/PRINT.asp?SID=690720&ISS=24031&PUBID=33

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