Investment Markets » Natural Resources
The Russian Gas Grab
Does Gazprom have any justification for demanding control of Shell's Sakhalin-2 gas field?
Bullies often get what they want and the Russian state is no exception. After months of sustained pressure, Shell is poised to cede majority control of Sakhalin-2 – the world's largest liquefied gas field – to the Russian state-controlled energy giant Gazprom.
The exact terms are unfinalised, but it's clear that neither Shell, nor its Japanese partners Mitsui and Mitsubishi, have much choice in the matter. All three will swap sizeable stake-holdings for a combination of cash and other oil assets, and can probably count themselves lucky that at least Russia has not torn up the agreement, as some feared.
The message from Kremlin Inc is clear: the days of private majority stakes in the so-called "commanding heights" of the Russian economy are over. The Putin government is determined to see control of Russian resources in Russian hands, particularly those picked up by Western companies on extremely favourable terms during the anarchic Nineties.
In some ways you can't blame the Russians: the country derives no benefit from those deals until the foreigners have recovered the cost of their investment. Since costs at Sakhalin-2 have doubled to $20bn, they were in for a long wait.
Besides, the practice of "mugging" oil majors is hardly unique to Russia. Britain has long been guilty of similar economic GBH using the only slightly less brutal weapon of windfall taxes.
Russia is no paragon of democracy, but it is unlikely voters would have opposed any move to extract a higher price out of Shell than it has so far paid for its assets.
But that doesn't excuse this gas grab, which marks a poor day for the rule of law and the sanctity of contract. It bodes ill for other foreign groups, not least the BP-TNK joint venture. Given Europe's growing dependency on Russian gas, the Kremlin's disinclination to play by the rules is disturbing.
Gazprom is now a state within a state: some 40% of Russia's GDP is controlled by the Kremlin's tea-drinkers circle. Putin is operating a capitalist version of Stalin's "Socialism in One Country" policy and it is all the more dangerous because no Russian company has the managerial and technical noose to meet the world's energy needs.
Russia will remain an uncertain arena for investment until 2008 when Putin, if he can resist Tsarist urges, steps down. But the problem won't necessarily go away. One possible berth for an unemployed president is the chairman's office at Gazprom.
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