Streetwise Professor

June 30, 2009

Lucy Putin Tees It Up

Filed under: Commodities,Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 8:59 pm

A couple of interesting stories about investment and Russia: one about investment in Russia, the other about Russia as an investor.

The investment in Russia story involves Putin’s invitation to Shell to participate in the Sakhalin III and IV projects.  Shell, if you recall, was browbeaten into giving up a stake in the Sakhalin II project at a bargain basement price to Gazprom.  The new offer (along with deals with German Eon and French Total) is widely considered a symptom of Russian desperation for cash as a result of the financial crisis, and its technological backwardness, combined with the desperation of the supermajors to replenish reserves.  

To me, reserves or no, it is the height of folly for Shell to rush back in.  Russia has proven time and again that it has myriad ways to separate oil majors foreign and domestic from their oil investments.  Environmental regulations, taxes, labor law, you name it.  Although some have suggested that Shell will only invest if it receives “international bank guarantees”  I don’t find this credible.  What bank would take this risk?  How could you write a contract that would specify the relevant contingencies, given the imagination of the Russians in finding ways of exerting pressure to extort wealth?

Russia may be desperate.  Today.  They were desperate in the late-90s when they entered the PSAs with Exxon and Shell and others.  They took the terms offered, then undid some of the deals when prices turned around and they felt that they didn’t need the supermajors’ money.  

Indeed, Russia used the fact that it agreed to the PSAs due to its economic exigencies to justify its subsequent attacks on Shell and others; it had been taken advantage of, Russia whined, and was taking back what had been taken from it due to its weakness.  

It is eminently predictable that it will do the same again when the market turns around at some future date. Indeed, if Shell and others rush back in now, it will reassure Putin and future Russian leaders that they pay no price for expropriation.  Steal from them today, and they’ll be back tomorrow.  

So, it appears that Shell is ready to play Charlie Brown yet again.  Good luck with that.

The other story relates to GM’s second thoughts about selling Opel to Magna, Sberbank, and Russian automaker GAZ.  GM is seeking other potential buyers, and demanding Sberbank pay 14 times more than it originally offered (perhaps reflecting a perception that the economy has firmed and the value of Opel is higher as a result).  

Another sticking point is concern about technology:

However, the Magna talks have run into difficulty over access to the Detroit group’s global technology, which Magna wants to secure on behalf of Russian partners. If the sale proceeds, Magna and Sberbank plan to build Opel-based cars in Russia with Gaz, billionaire Oleg Deripaska’s car company.

This is wise.  Property rights in Russia are weak, and this is especially the case with respect to intellectual property.  It will be very difficult for Opel and GM from keeping GAZ from circumventing any contractual protections on its IP.  

In short, whether you are thinking of investing in Russia, or having Russians invest in you . . . be VERY careful.

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