LONDON () -- A major consideration in the international oil & gas markets for some time has been Russia and its associated oil & gas companies; which in general are now heavily and crucially backed by Western finance. However, Russia still often manages to confound the rest of the world as to its corresponding investment climate. What are the omens now?
Some insight may be gained from the recent majority purchase of the privately held Russian oil company Sibneft by Gazprom, Russia's state controlled natural gas monopoly. This came as a stark contrast to the earlier purchase of privately held Yuganskneftegas, formerly of the dismembered Yukos, by Rosneft, also state controlled. The former transaction has been carried out on the basis of what many are calling a reasonably fair market value, while the latter can be seen as the climax of a sustained, quasi legal assault on Yukos by the Russian government.
The Sibneft and Yuganskneftegas deals are analogous because they each ultimately represent the reestablishment of strategic control by the Russian government over oil & gas assets it had obviously controlled in Soviet times, but had sold off following the collapse of the Soviet system. Indeed, it is likely that part of what irks today's Russian government about the issue is that these sell offs arguably look to have been carried out at rock bottom prices as part of various murky, Faustian bargains struck by the then government with numerous extra-governmental power brokers in order to retain control of the country.
Part of the likely explanation for the divergent natures of the recoveries by the Russian government of Sibneft and Yuganskneftegas concerns the two companies' respective former figureheads and de facto controllers; the so called Russian oligarchs Roman Abramovich and Mikhail Khodorkovsky. Whilst the British tabloid press took the opportunity of the Sibneft deal to titillate their lumpen readership with tales of U.K. resident Abramovich's enormous wealth, more pertinent is the issue of why Abramovich and Sibneft escaped the ignominious evisceration visited on Khodorkovsky and Yukos.
The answer to this question seems to lie in the fact that whilst following the passing of Sibneft and Yukos from state to private hands, Abramovich took up residence in Britain and distanced himself somewhat from Russian politicking, Khodorkovsky remained in Russia and harboured serious political ambitions; thereby prompting the indignant wrath of the government.
Ergo, the recent deal could be interpreted to mean that the Russian government is prepared to do business with the so called oligarchs and with Western business interests, perhaps in tandem, so long as they do not attempt to become overly political actors. A second, related inference might be that the Russian government regrets somewhat its previous treatment of Yukos for the scaring effect that it had on emplaced and potential foreign investors, whether directly or through joint ventures, in Russia's oil & gas firms; investors which the government realises are necessary if Russia is to benefit fully from its natural oil & gas endowments.
Political ructions with the West, particularly the E.U., could though cause some upset to this putative new interaction, albeit probably in a relatively temporary way as strategic links remain strong; the E.U. is needed by Russia as its largest export market, and Russia is valued by the E.U. as a prime source of natural gas as North Sea supplies begin to diminish more noticeably. Recent diplomatic cosiness between Russia's president Vladimir Putin, and E.U. and U.S. leaders might attest somewhat to a growing acceptance of this relationship.
However, as an indication that Russia's investment climate still leaves much to be desired, demand for London stock listings from large Russian firms looks to be remaining strong, with steel groups EvrazHolding and Novolipetsk being the latest to announce sizable London equity transactions.
Overall though, as the world prices of oil & gas remain buoyant, investment in the sourcing of these commodities from Russia, often through investment in joint ventures with or directly in the large Russian firms, will continue to look attractive from the points of view of Europe, North America and East Asia.
Whilst it is possible that a new direction regarding the exploitation in this manner of Russia's oil & gas resources may have been decided upon by the Kremlin, it is probably still advisable for foreign investors to remember the country's historically oblique and changeable nature, and to stay cautious.
