Streetwise Professor

November 20, 2008


Filed under: Economics,Energy,Russia — The Professor @ 10:01 pm

An interesting article in the Moscow Times states that ConocoPhillips and ExxonMobil are negotiating with Gazprom to help the latter in the Yamal LNG project.   I know what you are thinking–Time to short CP and Exxon!   Are they out of their minds?   Investing in Russia with Gazprom?   Don’t they remember Sakhalin II?   BP-TNK?   Yukos?

But read a little bit deeper, and take a look at an accompanying article,   and it makes a little more sense.   Gazprom chairman Alexander Medvedev said: “Recently, we had a meeting with top managers of Conoco and outlined potential areas of cooperation. One of these areas [involves] the Arctic, both in the United States and Russia. … They are very similar.”   The accompanying article states:

Gazprom said it might explore offshore Alaska with ConocoPhillips as the gas exporter seeks to expand its global reach.

CEO Alexei Miller and his counterpart from ConocoPhillips, Jim Mulva, held talks Monday in Moscow, Gazprom said in a statement.

Gazprom, which supplies one-quarter of Europe’s gas, is seeking access to new markets in North America, and a delegation visited Alaska last month. Miller and Mulva on Monday discussed joint projects on international markets, focusing on liquefied natural gas supplies, the statement said.

“The experience of Gazprom could be beneficial in developing gas projects in the U.S.,” Miller said in the statement.

Miller said in June that Gazprom had approached ConocoPhillips and BP on joining their Denali pipeline project, aimed at delivering Alaskan gas to the continental United States. Gazprom sent eight executives, including Miller, to Anchorage in October, where they met with ConocoPhillips representatives.

My interpretation of all this is that it involves a Williamsonian exchange of hostages.   Yes, maybe US majors will invest in Russia, but at the same time Gazprom will invest in the US.   If Russia expropriates the western firms, they will have a hostage that they can seize in return.

The critical thing will be to craft the agreement and contracts so that Gazprom’s investment can truly be seized if Russia/Gazprom attempts to steal the western firms’ investment in Russia.   Russia has already shown great creativity in finding ways to expropriate assets–even from its own.   Yukos–taxes.   Uralkali (perhaps)–safety investigation.   Mechel (perhaps)–antitrust.   Sakhalin II–environmental violations.   BP-TNK–immigration issues, license revocations.   It will be a challenge to write an agreement that defines expropriation sufficiently broadly so as to encompass all the various schemes that the Russian government–and the country’s pliant courts–could use   to effectively expropriate western investments in Yamal, or make the transaction so unpalatable that the western majors are forced into selling their stake at a distressed price.   (Perhaps one clever thing to do would be to preclude any Russian firm from buying the stake in the future.)   Even then, there is the challenge of dealing with the asymmetry between Russian and western courts.   Gazprom would almost certainly get a fairer hearing in any western jurisdiction than any western firm would get in Russia.

Perhaps no deal will get done.   But the I’ll-invest-in-yours-if-you-invest-in-mine approach is quite revealing.   It indicates that Putin’s and Gazprom’s past actions have affected the thinking of western firms.     They understand the nature of the expropriation risk, and are dealing with it by going medeival: that is, by exchanging hostages the way knights and dukes and kings did in the days of yore.

The discussions are revealing in another way.   They represent a dramatic turn away from Gazprom’s go it alone bravado of 2007 and earlier in 2008.   Their tune then: Western investors?   We don’t need no stinkin’ western investors.     Their tune now: come on over!   We could use the help.   This is indicative of (a) the effects of the financial crisis on Gazprom’s ability to finance these huge projects, and likely (b) Gazprom’s recognition of its technical capability to complete these challenging projects and its desperate need for new gas supplies to offset its declining production and large delivery commitments.

It’s amazing how rapidly things can change.   But CP and XOM and BP should recognize that things can change right backagain.   Therefore, I suggest that they craft their hostage agreements very, very, carefully.

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  1. The reference to medieval ways of doing things reminded me of the following famous dialogue from Pulp Fiction:

    [after Butch saves Marsellus from rapists]
    Butch: You okay?
    Marsellus: Naw man. I’m pretty fuckin’ far from okay.
    Butch: What now?
    Marsellus: What now? Let me tell you what now. I’ma call a coupla hard, pipe-hittin’ *******, who’ll go to work on the homes here with a pair of pliers and a blow torch. You hear me talkin’, hillbilly boy? I ain’t through with you by a damn sight. I’ma get medieval on your ass.
    Butch: I meant what now between me and you?
    Marsellus: Oh, that what now. I tell you what now between me and you. There is no me and you. Not no more.

    Personally, I’d like to see world business take to the pliers and blow torch when it comes to Russia’s ass.

    Comment by Dave Essel — November 21, 2008 @ 2:56 am

  2. Dave–I’d just like to see Russia stop re-enacting its medieval ways (which are in many ways distinct from their Western counterparts) in business, economics, politics, foreign policy, etc., etc., etc. They tend to enrich a very (an undeserving) few, and ensure continuing misery for pretty much everybody else.

    The ProfessorComment by The Professor — November 21, 2008 @ 4:11 pm

  3. Prof – I couldn’t agree more. The world I hoped for after the collapse of communism was one in which Russia rejoined(?joined) the world community, in they way that the countries of Eastern Europe and the Baltics rejoined it.

    Russia, however, chose to remain exceptionalist. One can’t counter a semi-psychopathic, thick-as-a-plank schoolyard bully by calling on the conscience and better nature that he hasn’t got.
    Sociopaths get to enjoy short-term gains because those who voluntarily bind themselves to mutually beneficial norms are unable (because they have forgotten this state of mind) to act on this other level. So the sociopath wins in the short term (as we have seen with Russia’s contractual beh post ’98 oil-fed surge and subsequent collapse).

    Two recent upsurges and collapses have still not led this particular sociopathic entity to understand the benefits of cooperation.

    On the other hand, only a fool continues to behave towards such an entity as if he is dealing within normal frames of reference.

    Hence my applauding of your post and of any ways to force or bind the sociopath to an acceptable course by means of another game plan. Torch and pliers are, I hope, just a metaphor (but I’m not too sure).

    I think big business should hire ex-Cold War game theorists, who devised the steps the keep the USSR within bounds and at bay, to consult on their drafting of any contracts with the new Russia.

    Comment by Dave Essel — November 21, 2008 @ 8:48 pm

  4. Talking of medieval…

    На солиста латвийской группы завели дело за шутку об экономике

    Полиция безопасности Латвии завела уголовное дело на солиста группы Putnu balle Валтера Фриденберга, сообщает со ссылкой на портал Diena. Молодого человека подозревают в попытке дестабилизировать финансовую систему страны…

    I can’t be bothered translating so I’ll let Google do it for me…

    “At soloist Latvian group brought the case to joke about economy

    Latvia’s security police brought criminal charges for the soloist group Putnu balle Valtera Fridenberga, said with reference to the portal Diena. A young man suspected of trying to destabilize the financial system.

    The frustration of Latvia’s secret service, according to the, causing Fridenberga speech at a concert on November 9. Speaking in Jelgava house culture, it before one of the songs joked, saying that “if someone wants to run and collect money from the banks, then at least wait for the end of the concert.”

    “Everyone knows what the situation in the country – tells the singer. – I just beat this our next song called” I’m going next. “According to him, sitting in the hall, people understand very well that this is a joke.

    In connection with the expression Valtera Fridenberga it has been summoned for questioning. Commenting on what is happening, he said that “in the country, it seems, introduced censorship.”

    The sources did not cause direct quote soloist Putnu balle (with a concert on November 9). Security Police earlier said that before the concert in Jelgava house culture someone called the crowd to take money out of banks and called with a specific company: Parex banka and Latvijas Krajbanka. Parex banka, the second-largest banks, recall was nationalized in early November.

    A few days ago, Latvian Finance Minister Atis Slakteris said that the detained distributors rumors about the devaluation of Latvia’s currency. Later in an informal media information that the Security Police detained economist Ventspils University College for an article about the prospects of the Latvian economy and banking system.

    Latvia, along with other countries affected by the economic crisis. In early November, international agencies, as reported, reduced the rating of the financial system which has become a lack of liquidity. November 20, Prime Minister Ivars Godmanis stated that Latvia will ask the IMF for the stabilization loan.”

    I certainly don’t want Russia to be in such a community, Messrs SWP and Essel.

    Comment by Da Russophile — November 25, 2008 @ 2:27 am

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