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Is Russia Becoming an Investment Gulag?

By David Smith - Updated Apr 5, 2017 at 9:05PM

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Events in Georgia are but one example of Russia's current treachery.

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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Royal Dutch Shell plc
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