The West, and Japan, are up in arms. “Vlad is impaling us,” goes the cry, as Russia’s government waves the spectre of criminal charges against Shell in the latest saga to rock Western confidence in Russia.
Russia wants Western money. And, it isn’t shy about buying Western assets either. The success of this is linked to a key question. Is Vladimir Putin likely to use legislation to get what he wants, to circumvent unfortunate legal contracts he wished had never been signed?
Or should we consider the alternative perspective? In business it’s often said you have to leave money for the next guy. But, when dealing with countries suffering from a shaky economy, but which are rich in natural resources, businesses often forget this maxim, and will enter into agreements that leave little profit for the country they are dealing with. Later, this leads to accusations of exploitation. But so often these deals ultimately become untenable. History is littered with examples of countries that were ripped off in the past, but ultimately rebelled, leaving the foreign beneficiaries worse off.
Under Boris Yeltsin, the Russian economy was close to collapse. State assets were sold for next to nothing, and the oligarchs were created. But, when Mikhail Khodorkovsky appeared to involve himself in politics, prison beckoned.
The giant companies of the Western world agreed revenue share deals with the Russian state, deals which only entail a revenue stream to Russia once the project is profitable, but the terms agreed are often remarkably favourable for the big capitalist companies.
Royal Dutch Shell and two Japanse companies Mitsui Co. and Mitsubishi Corp entered into such an agreement for the massive Sakhalin-2 field, with the oil company owning 55 percent and the two Japanese companies owning the rest.
But the bill escalated, as it often does, and recently it emerged that there will be no profit forthcoming until revenue has passed the £20 billion mark - double the level previously announced.
The Sakhalin-2 field is a massive project - it promises to be the world’s largest liquefied natural gas site. Even so, to Russia it must have felt like its share of the revenue was disappearing into some point in the distant future.
Then, Vlad waved the ‘environment’ flag. Russia might not be known for its good record on the environment, but apparently it feels strongly about foreign companies coming in and leaving a nasty mess. And for Shell and its Japanese partners, the deal is on hold.
A pipeline stretching across Sakhalin Island, where Sakhalin-2 is based, has been destroying trees. “Shell received permission to extract oil and gas, not to kill the environment”, said Oleg Mitvol, the deputy head of the Natural Resources Ministry’s environmental inspectorate. He added: “First, I think there will be criminal cases opened for destruction of the forest, then we’ll look at all other issues.”
It’s strange, because other reports said the problem related the Grey Whale, whose habitat has reportedly been damaged by the venture.
This may be the case, but which one is it? Damage to forests, or damage to whales? The fact there is this apparently contradiction in press reports on the subject, is perhaps a little suspicious.
The Japanese government is furious. “A significant hold-up in this project, which is a symbol of Japanese-Russian cooperation, will have avoidable negative repercussions on the whole of our relations with Russia,” said Shinzo Abe, the future Japanese Prime Minister yesterday.
The response from the EU was a little more circumspect at this stage. They want more detail.
Ominously, Gazprom has called off talks with Shell for an asset swap. Shell was planning to give up 25 percent of its stake in Sakhalin-2 for a share in a Gazprom asset.
So, is this about the environment, or is it a smokescreen? Martin Shakkum, chairman of the State Duma committee for industry construction and energy intensive technologies, made some telling comments yesterday. He said action against Shell was justified, saying: “As of today, the companies that participate in the production sharing agreement have gained more than what the increase in crude prices amounted to.”
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