Still a Mystery

Upstream Online runs an opinion piece discussing the effect Russia’s political wranglings are having on outside investment.

[I]n a country run quite autocratically by a character such as Putin there will always be a suspicion that both minor and major political events might be influenced by one man’s mood.

Another feeling commonly expressed is that nothing is quite what it seems in this former superpower. That plays in the minds of foreign investors.

Khodorkovsky is seen by the Kremlin as an annoying local difficulty that should be disregarded by the world at large or at least just seen as the fraudster and tax evader that the Russian justice system has judged him.

But two years after he was arrested at gunpoint seen by many as transgressing Putin rules by using his enormous wealth to dabble in oppositionist politics he remains to many a symbol of Kremlin interference.

Although Putin has urged Western investors to disregard the affair as a one-off domestic issue, he has quietly watched the effective renationalisation of Yukos and the serving on the country’ biggest foreign investor TNK-BP of a $1 billion back tax claim as well as encouraging state-owned Gazprom to spend $13 billion taking over Sibneft.

A draft law has already been prepared that would restrict new oil and gas licensing deals to ventures 51%-owned by Russian companies, while wider reforms of the financial and economic sectors have been put on the back burner. Corruption and bureaucracy by local government officials continue to bedevil the operations of many companies. Yet despite all these caveats, Russia is booming.

The main stock market index, the RTS, celebrated its 10th birthday last month by hitting record levels, while foreign direct investment in Russia reached another record $9.3 billion in the first half of the year not far short of the figure for the whole of 2004. The Financial Times also reported that, seven years after the 1998 financial crisis, Russia has amassed $150 billion in gold and currency reserves.

More than $4 billion has been raised in the last year with the latest initial public offering by gas producer Novatek 12 times oversubscribed. BP has had its tax burden cut by 70% and Prime Minister Mikhail Fradkov this week ordered a 5% cut in value added tax from 2007 plus a decoupling of the mineral extraction tax from world oil prices.

With oil at around $60 per barrel and the country holding reserves of at least 72 billion barrels of oil and 1700 trillion cubic feet of gas, it is perhaps not so surprising that there is so much interest in this country.

But political risk will remain an underlying factor as Putin continues to tighten his grip on the energy sector.

The headline of the piece: Russia remains a land of mystery. Indeed.