Polonium, Politics and $100 Oil
By Adrian Ash
August 3, 2007
If you fear we're only a
headline away from $100 oil, beware of Russia's huge energy
reserves...
A RISK CONSULTANCY firm based in Canary Wharf's
gleaming financial district emails us here at BullionVault
to ask:
"We are keen if possible to get a view from you on the
recent heat between the UK and Russian governments.
"Is this likely to make London a less attractive place for
Russian companies to list their equity? Is the City suddenly
going to go up in arms and demand further regulation? Or will it
just be business as usual?"
Regular readers of the View
from the Vault might guess we have no answers. They might
also wonder why-in-the-hell anyone would ask us! But they'll
also know we shall attempt a reply regardless. Yes, it's eight
months since we last studied the hazards of Russian equities
listing on the London market, right around the time that Polonium
210 poisoned a dissident Russian spy in a West End sushi
bar.
Nor can we begin to guess how the LSE or City watchdog, the
Financial Services Authority, might feel about becoming
bit-players in Whitehall's latest comedy of errors. Chasing down
the Russian spy accused of poisoning Alexander Litvinenko in
Central London would surely require an extradition treaty, not a
tightening of stock-market rules. And besides, as John Kampfner
notes in The Guardian:
"If the UK and Russia did have an extradition treaty, what
would happen to Boris Berezovsky, a one-time top Kremlin
figure-turned-dissident whom Putin regards as his public enemy
No.1? Berezovsky and other oligarchs now live here [in London]
in opulence, thanks to our absurdly generous tax laws."
But still, we can't help wondering: Do Russian companies –
most especially the gas, oil and mining companies who make up
80% of the Russian stock market – actually need to raise cash
by listing on Western exchanges?
If you haven't bought into Gazprom yet, you might not get chance
to buy Russia in London for much longer, perhaps. As Marc Faber
has observed, what finally destroyed the Soviet Union at the end
of the '80s wasn't so much the victory of Western capitalism but
the collapse of global oil prices to $10 per barrel. Now oil
looks firm above $60 if not $70, and "we're only a headline
of significance away from $100 oil," reckons John Kilduff,
an analyst in New York for Man Financial.
Little wonder then that President Putin's belligerence looks
like the swagger of a man who just can't lose...so long as
energy stays expensive. As it is, Russia's forex reserves now
stand at No.3 behind China and Japan, and Europe needs Russian
energy flows far more than Russia needs European cash in return.
Or so it would seem for the foreseeable future. And as for
Western companies investing in Russian resources directly,
Shell's loss of its Sakhalin project...foreign gold miners'
ongoing problems with Moscow's Environmental Agency
licenses...and now the expulsion of Britain's trade
ambassador...would suggest that capex from overseas simply isn't
wanted or needed.
Foreign investment dollars are being actively scorned. Yet
British companies still want in! Will they never learn?
"Last month, following months of pressure from the Russian
authorities, BP’s 50%-owned joint venture TNK-BP was forced to
sell its stake in the vast Kovykta gas field to Gazprom, the
[Russian] state-controlled gas company, at a bargain
price," reports Ed Crooks in the Financial Times.
"But BP still sees great potential in investing in Russia,
and hopes for further development of joint ventures with Gazprom
and other Russian companies."
BP on Tuesday reported a 16% drop in earnings between April and
June. Its No.1 competitor for British stock market cash, Shell
Plc, said today it grew its earnings by 18% during the same
period. No wonder then that BP needs to deal with whomever it
can – and at what looks like any price in terms of risk – to
catch up.
"As part of the Kovykta deal," Crooks goes on in his FT
report, "BP, TNK-BP and Gazprom agreed to set up a
global joint venture worth at least $3bn that could develop
projects inside and outside Russia. Tony Hayward, BP’s new
chief executive, talked about what he described as the growth of
'reciprocity', which he said meant 'the development of not just
foreign investment into Russia, but investment by Russian
companies overseas'."
In other words, Russian companies are not only willing to grab
control Western-owned assets in the Motherland at bargain
prices, forced through by the Russian courts. They're also
willing to put up their own money for joint-venture development
of oil and gas projects outside Russia, too. Buying BP Plc, in
other words, might just give you exposure to Russian business
practices across the world.
"Deals with Russia could involve Gazprom taking stakes in
BP assets worldwide, including projects in liquefied natural
gas," says Crooks, "which is one of the Russian
company’s ambitions for expansion."
If more Russian firms did choose to follow Gazprom's example and
list here in London, then at least UK investors might hope to
enjoy some domestic legal protections. But why would a
nationalist and recidivist Kremlin want to encourage that?
Letting the wealth produced by Russia's natural resources slip
overseas could easily be presented by the pro-Putin Nashi youth
movement as Robber Baron Capitalism Mark II. The more profitable
action – and the more politically useful – would be to seize
new energy reserves. Such as, say, in the Arctic Circle...?
"Moscow has dispatched a submarine under the North Pole
that is expected to arrive on Sunday to plant a titanium flag on
the seabed," reports Australia's Herald Sun.
"The mission is part of a race to assert rights over the
area, which is rich in energy reserves."
Now throw in the two Tu95 "Bear" bomber planes that
dared to near British airspace last Tuesday...the suspension of
Russian visas to British citizens...the Kremlin's permission for
Gazprom to build a private army of security and defense
staff...and the comments in The People's Daily, China's
leading newspaper, that "Britain and China are in a
'controlled' crisis."
Crude oil is trading back at a new 11-month high. Above $70
throughout July, it's starting to look awful expensive for
British diplomacy...let alone investors and consumers.