Russian bear can squeeze the life out of foreign investors

Lord Browne

Dancing with the Russian bear can be dangerous to your wealth. Nobody knows this better than Lord Browne of Madingley, chief executive of BP. He's already lost one fortune through the encounter.

Once bitten, twice shy, you might have thought but, on the basis that Russia was becoming one of the biggest oil and gas producers in the world and BP therefore could not afford not to be there, Lord Browne hopped straight back into bed with the very same oligarchs who had ripped him off first time around.

His second bite at the cherry - TNK BP - has thus far proved an altogether more advantageous one. In just three years, BP has had all its original capital investment of US$8.5 billion ($12.8 billion) back in dividends and asset sales.

Yet BP still owns half the company and, if the Kremlin is indeed hell-bent on expelling the foreigner in its efforts to re-establish control over Russia's energy assets, then this would knock a mighty hole in BP's reserves and profits. The Russian Government has already done it once with Yukos, since renamed Rosneft and floated on the London and Moscow stock markets. Apologists said that was a special case as Yukos founder Mikhail Khodorkovsky had evaded taxes and tried to set up a state within the state by bribing the Russian Duma.

Unfortunately, the evidence of the past month suggests that it perhaps wasn't as much of a one-off as presented. With the chorus of "what about the grey whale" echoing in its ears, the Russian Government's Natural Resources Ministry has now formally withdrawn an environmental permit for the US$11 billion Royal Dutch Shell-led Sakhalin-2 development in north-eastern Russia. That the grey whale would fare better in Russian hands than those of Shell seems rather doubtful but, of course, everyone knows the withheld permit has got nothing to do with the environment.

Instead it's about money, as these things usually are and, in particular, about the terms on which Shell and others originally went into Sakhalin in the late 1990s.

Even then, with the oil price flat on its back and Russia desperate for foreign investment, the deal looked a giveaway.

Today, the terms of Shell's production-sharing agreement seem like outright theft from a Russian point of view, never mind that we in the West tend to regard a contract as a contract. The trouble with Russia is that it has yet to learn these niceties of the capitalist system. The negotiating point is around an asset swap that Shell had been planning with Gazprom, the state-controlled Russian gas company. The idea was that Shell would give up part of its Sakhalin-2 spoils in return for a stake in Gazprom assets elsewhere.

On Tuesday, Gazprom formally withdrew from these negotiations but presumably the door would be open again (with the promise of the environmental permit) if Shell was prepared to give ground on what's swapped for what. What is plain is that in matters commercial, the Russians cannot be trusted. These are the wild eastern frontiers of capitalism where, despite Russia's attempts to join the modern world, the rule of law has yet to be properly recognised. Anyone with any understanding of Russian history, with its tradition of arbitrary, authoritarian government, would know the dangers. The potential rewards are vast but the risks daunting.

Nobody is yet suggesting that Russia would attempt to sequestrate BP's interest in TNK BP. By deliberately not going the production-sharing route, where past agreements may be open to interpretation, but instead investing directly in a Russian oil company, Lord Browne seems to be on somewhat firmer ground. His partners can sell at the end of next year should they wish. The last thing BP would want to do is buy them out even if the Kremlin said it was allowable. Rightly, Lord Browne figures that his best defence is for TNK to be seen as Russian controlled.

- INDEPENDENT