While many have voiced serious concerns about the recent arrest and detention of former OAO Yukos CEO Mikhail Khodorkovsky, several government and energy executives played down the controversial incident reiterating their commitment to energy development in Russia.
A group of Russian and American energy and financial executives met Nov. 12-14 in Boston for the 7th US-Russian Investment Symposium, sponsored by Harvard University and Dow Jones Conferences. The meeting came just weeks after the Khodorkovsky arrest, the topic dominated discussions at the conference.
"We believe it is very important for Russia to administer the rule of law evenhandedly without prejudice, and without political intervention," said US Sec. of Commerce Don Evans at the conference, but was not explicitly critical of the Russian government, or specifically Russian President Vladimir Putin.
Evans met with German Gref, Russia's Minister for Economic Development and Trade at the symposium, and Gref went to great lengths to ease investor concerns about the Yukos controversy. "I can tell you with certainty that liberal reforms will continue," Gref said, adding he believes Putin is an "economically speaking, a liberal person."
Capital flight?
While most western energy executives aimed to lessen the significance of Khodorkovsky's continued detention, billionaire investor George Soros said, the incident gives him a "bad feeling about the direction Russia is going," adding, "This is going to frighten capital away, both domestic and foreign capital."
The Russian Central Bank has said it expects more than $13 billion to leave the country in the second half of the year. Last week, Moody's Investors Service defended its decision recently to upgrade Russia to investment grade, but McGraw-Hill Cos. Inc.'s Standard & Poor's said the Yukos incident could lead to significant capital outflows and a potential downgrade.
Phillip Merrill, president and chairman of the Export-Import Bank of the United States, said the Khodorkovsky affair is a "chilling event," that will "have no effect at all on the Russian energy sector," calling it a "bump in the road."
Energy execs undeterred
Several executives from major energy companies made it patently clear that they see Russia as part of their long-term plans, and they are fully aware of the risks. "Be very careful not to criticize, when we don't have all the facts," said Archie Dunham, chairman of ConocoPhillips, adding, "We're not going to be quickly discouraged. We want political stability, and for Putin to implement the rule of law."
"There's a lot of noise, but this is a long-term business. Let's wait and see how it plays out," said Rex Tillerson, senior vice-president, ExxonMobil Corp.
"We're very positive about Russia. It's a fast-changing ballgame, the management of the Russian oil companies is moving towards exploration and development, rather than just work over of existing properties," said Robert Parker, chairman of Parker Drilling Co., which is conducting the drilling for ExxonMobil's Sakhalin operations and Total SA's fields in Siberia.
Parker said he expects the energy service sector in Russia to "dramatically increase," adding, "I don't think western companies are hedging."
And even the president of one of Europe's leading lending institutions to Eastern Europe and the former Soviet Union is not overly alarmed by the legal wrangling surrounding Khodorkovsky and Yukos. "We don't see it as a concern, we will monitor the situation. The implementation of the rule of law is crucial and we don't see today this affair as impacting our investing in Russia," Jacques Lemierre, president of European Bank for Reconstruction and Development told OGJ.
Russian natural gas growth
Within the energy sector, several bankers and executives said they expect deal flow to increase, especially around natural gas deals.
"In spite of the recent frictions surrounding Yukos, there is interest and continued discussions are going on. We may see transactions in the Russian natural gas sector in the coming months," said Natasha Tsukanova, vice president, Investment Banking, Energy Advisory, JP Morgan Chase & Co.
ExxonMobil's Tillerson said he expects a tripling of the natural gas trade in Russia, and huge potential for development of pipelines and LNG systems.
Room for improvement
Energy executives said the situation is far from perfect, but the legal and taxation situation has improved, and there is immense potential for development in the coming decades.
"The most serious issue facing Russia today is the shortcomings of the infrastructure," said Dunham, adding, "The rule of law has improved in Russia and there are better tax regimes, especially for investment in the upstream."
And a George W. Bush administration official said that Russia has only attracted a fraction of the investment it needs to grow its energy sector. "Russia is underperforming relative to its potential," said Kyle McSlarrow, deputy secretary of the US Department of Energy, adding the Russians "need to eliminate arbitrariness in the implementation of the rule of law."
Several executives conveyed that there have been problems with federal and local legal regulation and taxation policies in Russia, and many believe these issues need to be ironed out before significant investment occurs.
"When we step into new, unknown areas and exploratory activities, stability has got to improve before major foreign investment occurs," said Tillerson, adding there is a need for Russia to take on "underground license reform." Tillerson went onto say, "the government has taken the decision that they are not interested in PSA's going forward."
Troubling signs of renationalization
Whether it is election politics, or not, there are several troubling signs that point to the Russian government plans to take control of certain aspects of the energy sector.
Putin was reported as saying, "The powers of regulating export duties on fuel, primarily oil products, should be returned to the government," according to Interfax News Service.
Then-Russian Defense Minister Sergei Ivanov was quoted in the Russian newspaper, Kommersant, as saying the state should take control of Russia's energy reserves, and that private Russian oil companies are underinvesting in exploration of new oil.
The news from Putin and Ivanov comes as new Yukos CEO Simon Kukes is reported telling the UK's Sunday Telegraph that he didn't think it made any sense for his company to merge with any of the foreign oil giants.
Kukes also distanced himself from his predecessor, Khodorkovsky. Yukos was reported to be in discussions with both ExxonMobil and ChevronTexaco Corp. for a possible stake in the company, prior to Khodorkovsky's arrest.