Streetwise Professor

October 19, 2010

Follow the Money: Draw Your Conclusions

Filed under: Economics,Energy,Politics,Russia — The Professor @ 4:02 pm

This FT Beyond Brics post raises an interesting issue:

BP is having to eat humble pie. Two years ago, it fought a bitter battle with Fridman and his partners in AAR, the holding company that holds their TNK stake, over influence at TNK-BP, which ended with a truce after Bob Dudley, the joint venture’s chief executive fled Russia. Among the points of dispute was whether TNK-BP should be a Russia-focused company, as BP wished, or go international, as the Russian partners demanded.

Even before Macondo, it was clear that Fridman and friends had come out on top, with BP’s Dudley being replaced by a Russian chief executive. The latest deal sees the Russian shareholders gaining further ground – putting the joint venture’s hard cash into international expansion. [Emphasis added.]

Interesting, isn’t it, that it’s the Russian owners of BP-TNK who are so anxious to invest outside of Russia?  (Ditto Rosneft’s recent splurge for PDVSA refining assets in Germany.)

That desire by Russian firms to invest cash flows generated inside Russia outside the country even in the energy business (where Russia presumably has its greatest attraction because of the often-touted untapped oil and gas reserves there), says a lot about the investment climate there.  And it doesn’t say anything good.  We’re constantly lectured that Russian assets are undervalued; the investment prospects there are amazing; there’s a lot of money just lying around to be picked up.

If all that’s true, why don’t Fridman et al pick up the money and buy all those undervalued assets in Russia?

If Russian oligarchs aren’t too wild about investing their capital in Russia, Putin’s new initiatives to attract foreign investment are facing a serious uphill climb.  That’s especially true in light of stories like this one:

After an arduous 17 years in Russia, Motorola is finally throwing in the towel – and for good reason. Once the country’s leading mobile phone producer, Motorola saw its market share drop from 20 per cent to 1 per cent in a few years, while it became embroiled in a local scandal.

Motorola’s exit is another reminder of why multinationals get so nervous investing in Russia – and it comes in the very week when the government launched a new drive for foreign investors.

Motorola’s troubles date back to 2006 when a $20m-shipment of its phones to local retailer Yevroset was seized by the interior ministry’s economic crimes department. The phones were first declared contraband, then counterfeit, and finally, when the other two claims were disproved, a health hazard.

Putin’s plan to address these kinds of horror stories?  Appoint an ombudsman.  In my experience, “ombudsman” means “reputational window dressing: somebody appointed to make it look like an authority with a reputation problem is doing something, but really isn’t.”  Ombudsman also means no real authority, no resources, and no power.

So yeah, that’ll work.

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  1. BP probably did not want to take TNK-BP outside of Russia because they understood that a couple of dodgy Russian oligarchs are of no use whatsoever outside of Russia. I think a similar problem will hit Gazprom as soon as they do any kind of work abroad (instead of merely announcing one plan after another that they are going to). Gazprom (and most Russian companies) only are successful only because they enjoy preferential treatment in Russia which is afforded to nobody else (witness the difference in environmental compliance expected from Shell and Gazprom respectively, for example). Companies like Gazprom would have no hope of competing against intrnational or local companies outside of Russia. Even if they received enormous subsidies from the Russian govt., they would not be able to cope with the quality standards prevalent in the international business. How can they be, when their sole experience in implementing quality controls is to largely ignore them in favour of handing supply contracts to mates?

    Comment by Tim Newman — October 20, 2010 @ 2:00 am

  2. “desire by Russian firms to invest cash flows generated inside Russia outside the country even in the energy business”
    IMHO it’s wise to use the good relations between two freaks (Putin and Chavez in this case) to be able to do business in Venezuela.

    Comment by a.russian — October 20, 2010 @ 7:16 am

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