Why Russia is Fleeing from the Energy Charter Treaty

The following is an exclusive translation from Novye Izvestiya.  Aren’t you a lucky reader…

The tail wags the dog

Judging by everything, Russia has refused to sign the Energy Charter because of the «YUKOS case»

IVAN MARKOV, «Novye Izvestiya»

Two weeks ago at a session of the government a decision undeservedly passed over by the attention of the mass information media was adopted about how Russia refuses to ratify the Energy Charter. This is one of the long-suffering international documents in the most recent Russian history. Our country first put its signature under this document our country in the long-ago year of 1994. So what happened, if after 15 years Russia has so harshly abandoned this document?

The Energy Charter regulates mutual relations between the countriesthat have signed it in the sphere of energy. One of the most importantquestions touched upon by this treaty is the protection of foreigninvestors. Moreover, unlike many such documents, the Energy Charterdoes not limit itself to mere general declarations on the necessity ofa reverential attitude towards foreign investments. In the Charter arespelled out in sufficient detail the mechanisms for the protection ofinvestments, including the possibility for investors to assert theirrights in international courts.

It would seem there is nothing bad in this. Both the first personsof the state and specialists in energy have declared on many occasionsabout the necessity of attracting foreign investments in thedevelopment of large-scale capital-intensive projects for theproduction of oil and gas in Eastern Siberia and offshore. It isobvious that without the participation of large transnationalcompanies, to realize the energy strategy of the country is simplyimpossible. And ratification of the Energy Charter would serve as animportant positive signal for western investors. A high degree ofprotection of capital from risks outside economic ones would increaseby several orders of magnitude the likelihood of the coming of largeforeign investments in energy as a whole and into the production of oiland gas in particular. And the additional protection would also come inhandy for domestic companies realizing a strategy of internationalexpansion.

But everything was outweighed, judging by everything, by just onesole argument. The Energy Charter is the legal foundation for a claimby former shareholders of the YUKOS company against the Russian state.Investors who have suffered from the artificial bankruptcy of theformer company of Khodorkovsky are demanding of the government ofRussia to pay them back for their losses. In its time, the market hadappraised the YUKOS company in the tens of billions of dollars.Correspondingly, the sum of the shareholders’ claims is comparable issize as well.

The budget of our country too could not withstand payouts of tens ofbillions of dollars on a claim in a period of high oil prices, not tomention the current – crisis and deficit budget. Litigation withrespect to the «YUKOS case» in an international court not under thecontrol of our powers likewise would be fraught with image losses forthe country. Therefore the majority of analysts and politicalscientists converge in the opinion that the refusal to ratify theCharter – this is an attempt to avoid litigation with YUKOSshareholders. It is possible that the attempt is unsuccessful, because,as certain jurists consider, what has significance is only that factthat the Charter had been signed by Russia at the moment of thebankruptcy of YUKOS.

But even if we succeed in avoiding the claims, then nevertheless itturns out that by this decision we are depriving the country of westerninvestments so needed now, which could well have become the locomotiveof the economy in conditions of crisis and deficit of financialresources. It turns out to be a paradoxical situation. At the beginningof the so-called «YUKOS affair» it was said that the interests of thecountry demand this. But now the consequences of the struggle with theoil company and its owners demand giving up on these interests?

It is possible that the powers would do well to be more consistent.It looks somewhat strange that the development of internationalrelations and questions of economic strategy are subordinate to thelogic not of benefit for the country or of society, but lie in thestream of resolution of superannuated conflicts. But, probably, it isnot at all the «YUKOS affair» that should be determining the policy ofthe country, or else it turns out that the tail is wagging the dog,although it should be the other way around.

© 2009, «ZAO «Gazeta Novye Izvestiya»

Illustration from Economist.