Russian Government Muscling In on Anglo-Russian Gas Field Venture

The Russian government's threat to suspend licenses for two giga-billion projects by TNK-BP, in part owned by BP (BP) and Royal Dutch Shell (RDS.A), demonstrates its very short-term thinking. The Russian government argues that it is motivated by environmental concerns. Nothing, I repeat nothing, in Russia gets done based on environmental concerns. The government simply wants to muscle in on the projects for a larger stake.

Russia feels it has an upper hand in any negotiation as commodity prices and demand are on its side. Also, it is becoming less dependent on the rest of the world as it is swimming in cash. This arrogance raises a political risk premium that foreign companies have to factor into their models when deciding to invest or not to invest in Russia. Since commodity prices are very high, rates of returns are high enough to cover the increased cost of capital. But commodity prices will not be scratching the sky forever.

Maybe I am too cynical and TNK-BP really is trying to pollute poor Mother Russia... nah. If Gasprom were doing it, the government would be laying down a red carpet under its pipelines to make sure its executives don't get their feet wet.

Vitaliy N. Katsenelson may have a position in the securities mentioned in this article.

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