It’s Time To Leave Russia

Relations between the West and Russia are plummeting to lows not seen since the Cold War. Foreign investors should now be very weary of committing to new investments in the country.

President Dmitry Medvedev over the weekend upped the ante by declaring Russia’s intention to preserve spheres of privileged interest, most notably in the ex-Soviet states situated along its borders.

This declaration, coming right on the back of military aggression against Georgia and the backing of two breakaway states from that country, sent pulses in the West’s capitals racing.

Western capitalists should also be worried. For a long time they have seemingly overlooked politically motivated actions against various businesses and individuals.

The most notorious of which, involved the wilful destruction of the Yukos Oil Co. and the imprisonment of its boss, Mikhail Khordorkovsky. The then President and now Prime Minister, Vladimir Putin, deemed him a political adversary.

For Western investors, the reasoning went along the lines of: “as long as we stay out of politics everything will be fine.” Then when Moscow started targeting foreign investors in energy assets, the reasoning morphed to: “as long as we stay away from strategic assets like energy everything will be fine.” Such lines of reasoning now need to be questioned.

With the political climate between Russia and the West being so much colder could Western capitalists be on the receiving end of similar treatment? Could they eventually see their assets confiscated on spurious grounds such as that they originate from enemy countries or are industrial spies, economic saboteurs, criminals, parasites etc…? Indeed, their assets could eventually end up going in a fire sale to local politically connected oligarchs.

The possibility of such actions can no longer be ruled out. Especially, given the Putin administration’s record of dealing with individuals and companies that it classifies as opponents.

For the sake of its shareholders, BP should look sell-out of the BP-TNK consortium for the best possible price before the going gets too tough. BP will lose control of the company in the end anyway and its so called Russian partners will exploit this new cold front to the best of their ability.

Peter Levine of Imperial Energy seems to have timed his exit perfectly by selling the company, with oil assets in Russia, to ONGC of India for US$2.6bn giving original shareholders a fifty-fold return on their investment. Other western investors, where possible, should seriously consider leaving Russia to.

Fortunately, Indian and Chinese investors seem less phased by Moscow’s belligerence – after all it isn’t aimed at them, at least not for now. For Westerns they could make ideal acquirers, especially if a competitive bidding situation can be developed as happened with Imperial Energy.

Western investors can’t expect too much in the way of protection by their own governments against potential Russian injustices if their response to Georgia is anything to go by. Basically, Russia has Europe over a barrel of oil and has skilfully played various EU-member countries against each other so no strong common front can be mustered against Moscow.

Basically, encouraged by soaring revenues from the commodities boom, Russia feels confident about throwing its weight around and worries little about the consequences. And in the short- to medium-term they will probably get away with it.

Russia now more than ever seems prepared to sacrifice economic development for the sake of geopolitical goals, namely by bringing its neighbours back into the Russian fold. If it vigorously pursues such aims, as seems to be the case, then relations with the West will deteriorate further.

It’s time to leave Russia.

This post first appeared at Thomson Merger News