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Surrendering Sakhalin-2

What do you do when an aggressive goliath-like state company takes a keen interest in one of your largest foreign investments in the world, and uses the thin legality of the environmental agency to put you under the gun? As they muscle you up against the wall to whisper a clear threat: “give up majority control of this project and make it look legal, or lose everything in what would be seen as large scale investment-jacking,” what would be your response?

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For Royal Dutch Shell, the difficult answer was the former, and today they are going about putting on the good face as they pass over the lunch money to the big bully Gazprom – a $7.5 billion majority stake of the Sakhalin-2 oil and gas project. Of course there is an argument that Shell is just looking out for the short term interests of its shareholders, and hoping to put a tourniquet on this financial wound, but in the long term, these gestures of surrender to Russia playing quasi-legal hardball only embolden these hostile tactics against foreign investors. Need proof? Look no further than the environmental watchdog (or attack dog, if you prefer) Oleg Mitvol, who is already busy putting the squeeze on Imperial Energy’s license in Siberia, causing a 17% dip in the share value. If using regulatory authorities to carry out the orders of state energy companies was accepted by Shell, why won’t the international financial community accept it again? You almost can’t blame them for sticking with what works. The Sakhalin fiasco is a prime example of how corporate Kremlin sees its role in global capitalism – it is not the acceptance of markets, but rather the distortion-producing intervention in markets to funnel benefits toward state-owned firms that is the norm (see Yulia Tymoshenko’s recent piece on competition). Any mention of these anti-competitive type moves, and Gazprom and Kremlin officials (unfortunately there is little difference) strike a defensive pose. Presidential favorite Sergei Ivanov told the Financial Times yesterday “There is no energy imperialism. Oil and gas have a price. In the mid-1990s you taught us how to be a . . . market economy. We learnt our lesson. Now we hear criticism that ‘you are acting wrongly – you are using energy prices for political aims’. [But] we’re selling to everyone according to market prices.” And in regards to the Sakhalin heist, Alexander Medvedev of Gazprom echoed the pro-market illusion in a recent interview with Time Magazine:

The state doubted the capital expenses they claimed. Also, the consortium failed to meet its ecological safety commitments. The state couldn’t ignore that. Personally, I didn’t spare time to look into this issue, because I come from Sakhalin. We resumed talks, only once the issues of expenses’ compensation and ecological damage had been settled. The state lifted ecological restrictions on the project, once Gazprom stepped in, because we submitted a plan to clear up the damage and make sure that nothing of the kind happens again.

One would think that Shell would be bitter about this transaction, but actually, quite the opposite is true: the company is one of the key sponsors for the 10th Annual Russian Economic Forum to be held in London 22-24 of April, which will feature the top brass from Gazprom and the Russian government, as well as other companies such as ENI and Enel who have been so helpful in helping launder the titles of stolen Yukos assets. It must be a truly surreal experience for these executives to talk enthusiastically and optimistically about investment in Russian energy.