Is Russia Becoming an Investment Gulag?

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With all that's occurring in Russia these days, I'm wondering how long it'll be before Western investment in that nation grinds to a halt.

The Russian military's incursion of the past week into Georgia is part of the picture, but there are a couple of similar -- albeit somewhat less widely reported -- bits of industrial skullduggery that bode almost as ill for Russia's ability to continue to function as a member of the modern world community.

One, the TNK-BP affair that I've told you about in the past, has Russian authorities, along with a trio of the country's billionaires, playing more than hardball in a partnership with oil giant BP (NYSE: BP  ) . Just last week a Russian court banned the partnership's CEO -- who already had been forced from Russia following a government refusal to grant him a new work visa -- from holding executive office there for two years. The executive, Robert Dudley, has been trying since last month to run the partnership's business from an unknown European location. It'll be a neat trick if he can continue to pull it off.

BP fleecing on the horizon
I don't know where this one is going (no one does) but I'd bet a fair number of rubles that, perhaps by year's end, TNK-BP's production and reserves will be on their way via forced sale to Russian state-backed energy heavies Gazprom and Rosneft. Such a forced sale would take a hunk from BP's hide since it would squeeze out about a quarter of the company's total global production and a fifth of its reserves. 

But such a required divestiture at the hands of Russian authorities would hardly be unprecedented. Late in 2006, another of Europe's Big Oil contingent, Royal Dutch Shell (NYSE: RDS-A  ) (NYSE: RDS-B  ) , was pushed into selling its assets on remote Sakhalin Island to Gazprom at a below-market price. Like ExxonMobil (NYSE: XOM  ) , which continues to operate on Sakhalin under considerable duress, Shell had been permitted to develop the oil and gas assets, which then were effectively expropriated from the company.

Which is turning out to be the Russian way as it relates to extractive industries: Let Western expertise get the job done in terms of preparing the assets for production, and then swoop down and reclaim same, perhaps for a minimal cost, for the state. I frankly wouldn't be surprised if Exxon doesn't feel this sort of ominous tap on its shoulder at some point.

The natives get it, too
But please don't assume that the Russians direct their insidious harassment only at foreign companies. You may recall that early in this decade, the assets of Yukos, then a big Russian oil company, were effectively confiscated and handed over to Rosneft. Former Yukos CEO Mikhail Khodorkovsky continues to while away his time in a Siberian cell.

Just last month, Russian coal and steel company Mechel (NYSE: MTL  ) came under fire from former Russian president and now Prime Minister Vladimir Putin for alleged tax evasion and price gouging. That shot across the bow sent the company's shares plummeting by more than 50% in just days.

Cops and robbers
There's a seeming contrast, though, between Putin's rough-em-up actions and the more moderate statements of his successor as president, Dmitry Medvedev. Putin clearly has been the majordomo in the Kremlin's nefarious tactics, while Medvedev has called for a more normal investment climate in the country, and has suggested that Russian authorities should "stop causing nightmares for business."

The Wall Street Journal recently wondered rhetorically whether Medvedev's public approach signals an emerging power struggle between the two Russian leaders or simply represents a "good cop/bad cop routine." The answer to that one is far more than academic, since it will signal whether doing business in Russia will even be possible for Western companies and investors going forward.

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Fool contributor David Lee Smith doesn't have financial positions in any of the companies mentioned above. He does welcome your questions and comments. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 19, 2008, at 12:21 AM, ganzemacher wrote:

    I am not at all surprised by any of the actions taken by Russia recently, or in the past few years. In fact, I was just telling my broker today, before I saw this article, that I wouldn't invest in Russia because of the previous Sakhalin problems, and the tactics that Putin used to get Belarus in line. I also told him that I wouldn't invest in China, either. Basically, the same reason, you could wake up and find you investment given to a government run operation, or just plain nationalized. I think Medvedev should watch his back. I wouldn't trust Putin as far as I can throw the Kremlin. The good cop/bad cop idea is very plausible as Medvedev was Putin's pick. It is also very important to get the Baltic states, Ukraine, Belarus, and Georgia into NATO and/or EU as quickly as possible for their own safety.

  • Report this Comment On August 19, 2008, at 10:19 AM, TheHappyHeretic wrote:

    Well, you reap what you sow. After the fall of the Soviet Union, instead of providing economic assistance and expertise, Western companies bought up huge chunks of Russia's resources at kopecks on the ruble. The U.S.-backed IMF offered loans that required state industries to be privatized "overnight" and allowing the ruble to float, resulting in a economic collapse that wiped out most Russians' savings and lowered their income to 3rd World standards. The Yeltsin government, eager to distance itself from its communist past, rushed headlong into capitalistic anarchy. The result was a Russia plunged into chaos, creating the environment where a shrewd, former-KGB agent named Putin could rise from obscurity to lead a nation. Sound familiar? Remember the Weimar Republic and a young man named Adolf Hitler?

    The current "resource grab" by the Russian government makes complete sense if you look at it in the context of what occurred in the 1990s. Western companies and shrewd Russian oligarchs raided the collapsing Soviet state, seizing control of natural resources and means of production. The result is a nation owned by foreigners and mobsters -- not a good situation. Energy and raw materials are the building blocks for modern industry, and having outsiders control these put Russian prosperity at risk. The resulting backlash was inevitable. Putin is essentially recovering for Russia what he believes belongs to the Russian people -- while he benefits financially, of course. The idea that Russia belongs to the Russians is very popular.

    If the West had been more mindful and less greedy, it would have phased the transition from state-controlled industry to free markets, to ease the pain and create a positive view of the Western investment. Instead, we're viewed as pillaging raiders, like the Mongol hordes that swept over the plains of Russia centuries ago.

  • Report this Comment On March 07, 2009, at 4:50 AM, Ironbob wrote:

    The Russians would do well to treat Putin as the last Czar of Russia was treated before it's too late and all hope is lost.

  • Report this Comment On March 07, 2009, at 4:52 AM, Ironbob wrote:

    P.S Happyheretic, you are a complete and utter moron.

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