Lukoil’s Trust Deficit in Spain

repsol113008.jpgThe rumored deal of Lukoil taking over an $8.3 billion stake in the Spanish energy giant Repsol is causing quite a feverish political debate in the country, underscored by deep suspicion and paranoia that the private Russian company could be a Trojan horse for the pernicious influence of a foreign authoritarian power, seeking to seize control of the Spanish energy sector (or so goes the narrative).

But wait a minute – this isn’t Gazprom we are talking about – whose on-againoff-again interest in owning part of Repsol was what originally had raised all the furor.  If anything, it could have just been the sheer coincidental timing that has everyone on edge, as the Lukoil rumors came directly after Gazprom was thoroughly and aggressively rebuffed by negative statements across Spain’s political spectrum (Leader of the opposition centre-right party, Mariano Rajoy, declared that he was “radically against” any entrance of the Russians into Repsol).

My questions:  To what extent are the Spanish fears of Lukoil reasonable, and to what extent can we consider Lukoil a truly private company, independent of the Kremlin’s implicit or explicit interests in foreign policy?

On the one hand, some of the complaints from Spain’s politicians over Lukoil seem petty, and more directed at attacking political opponents than actually presenting the concerns at stake.  Socialist Prime Minister José Luís Rodríguez Zapatero appears to have found himself under siege, as he had initially been among the majority opposing Gazprom, warning that his government would work to block the Repsol acquisition.  However, when it came to Lukoil, just a week later, he changed his tune, which has opened up a line of attacks from his political opponents in the Partido Popular.

Rajoy, naturally, once again leads the charge against Zapatero and Lukoil, remarking during a rather heated parliamentary debate over the issue that the Repsol deal is bringing to the surface “the lack of transparency, and even governmental favortism, and that the Prime Minister’s refusal to use legal means to prevent the deal could result in a “enormous scandal.”  Other Spanish officials from various parties have concurred.

Some see the accusations being launched against Lukoil as a Kremlin weapon as thinly veiled protectionism, which would likely emerge against any foreign takeover, no matter the country.  The Financial Times points out the irony:  “Repsol is today vulnerable to foreign takeover precisely because of anoperation designed to fortify it against invaders from abroad.”  Economic nationalism, you could say, is just as strong in Spain as it is in Russia.

To many outside observers, it may seem strange that it is Spain, the country which has made nary a peep about Russia’s human rights or foreign policy issues, which has come out so aggressively against not only Gazprom, but also the private company Lukoil.  Likewise, Spanish politicians certainly had no complaints when Gas Natural signed on with Gazprom for the Shtokman Field, nor did they voice any concern about Russia’s takeover of North African case which has been going on for about five years (though Repsol chief Antonio Brufau has intelligently spoken about it).

Furthermore, it should be carefully considered how much independence Lukoil has from the Kremlin.  Like any successful corporation in Russia, good relations and close ties with the executive are by definition a method of survival, but there are some signs that the oil company has a little leeway.  It should also be noted that one major shareholder of Lukoil is of course the U.S. corporation ConocoPhillips – controlling 20% – the same size stake that Lukoil is looking to obtain in Repsol.  Some point out that the fact that Lukoil has publicly complained about the state’s burdensome oil tax shows independence, and there are of course hundreds of Lukoil petrol stations across the United States and Europe (including a prominent station right in front of Washington DC’s Four Seasons Hotel – a clear sign to visiting global executives), yet nobody is complaining about any “Russian invasion.”

But for as many encouraging signs as there may be, there are also reasons motivating the Spanish and other observers to worry.  Lukoil has consistently received some of the lowest transparency grades among oil and gas majors (surprisingly, both Rosneft and Gazprom rank higher in that TI report).  In the past, we have seen Lukoil participate in suspicious supply cutoffs that seemed to coincide with Kremlin interests, while CEO Vagit Alekperov, the world’s 48th most wealthy man ($12.4 billion in 2007), first got into the energy sector as a Soviet deputy oil minister.  Given his close political relationships, we’ve seen Alekperov carry out the explicit instructions of Vladimir Putin in the past.  As I’ve written in the past, Spain makes a lot of sense in geopolitical and economic terms for Russia.

But at the end of the day, Lukoil is not Gazprom, and doesn’t deserve to be treated as such.  Even if it were a trojan horse for the Kremlin, it seems thinly protectionist and politically convenient to raise such a fuss about a 20% stake in Repsol (there are clear corporate governance rules within the company, and the Russians would not win themselves a dominant voting block on the board).  It also seems problematic that the Spanish have no problem throwingmoney into Gas Natural going into Shtokman, but purport to bescandalized over the Russian interest in Spain without engaging in a discussion of the substantive issues. 

It now appears that the deal is likely to collapse anyways, but my sense is that in the halls of power in Moncloa, this was never about Russian energy imperialism, but rather about the primacy of domestic corporate politics.  The Repsol-Lukoil affair has however illustrated the tremendous trust deficit that has been inflicted upon Russia’s private sector, undeserved as it may be, because of the heavy handed, political, and monopolistic state interventions by this administration in the business sector.   The Kremlin’s foreign policy mercantilism and  omnipresence of corporate bureaucrats has always had a negative cost on the country’s interests, but now that reputational damage is even spreading to private business groups which have had nothing to do with it.  That is indeed a pity.

Photo:  Drivers fill up their tanks at a Repsol gas station in Madrid November26, 2008. Spain will fight to keep oil major Repsol YPF Spanish andindependent in the face of possible stakebuilding from Russia’s LUKOIL,Prime Minister Jose Luis Rodriguez Zapatero said on Wednesday. (Reuters Pictures)