Sunday, April 22, 2007

Doing Business in Russia and Russians doing Business Abroad

This week's issue of BusinessWeek carries two interesting articles on Russia's internal and external business environment. In "The Kremlin's Big Squeeze" BW talks of BP's struggles and major successes in the Russian market through the TNK-BP joint venture, as well as the looming desire of Gazprom to take a stake (majority or minority) in the $31.3 billion in revenue and $6.7 billion in net income business that provides 25% of BP's commodity output. The question is whether Gazprom will get in at the expense of BP or TNK, or both:

The question is what TNK-BP might be able to get for its stake. Speculation in the market ranges from cash to asset swaps to partnerships in other energy projects with Gazprom. If the terms are acceptable to BP and its Russian partners, development at Kovykta might pick up speed. Company officials say it would cost $20 billion to develop the field and build pipelines. But that wouldn't be profitable without exports—most likely to China and South Korea—which could be permitted if Gazprom were on board.

A deal with Gazprom on Kovykta may not solve all of TNK-BP's problems. Some figure that pressure on the company will continue until Gazprom gets a big stake in the entire venture, not just the Kovykta field. Gazprom last year declared its interest in buying out BP's Russian partners, which could happen after the end of 2007, when the joint venture agreement allows for changes in the company's share structure.

Would BP want to work that closely with Gazprom? It might mean ceding some strategic decisions to Gazprom's management, which has close ties to the Kremlin. Still, BP shows no signs of losing interest in Russia. The company has a minority stake in a venture with state oil giant Rosneft to drill for crude on Sakhalin Island. And last year BP acquired 35 new operating licenses in the country and plowed $1.25 billion into TNK-BP. This year it's likely to invest about that much again.

Despite the tension over Kovykta, BP has tried hard to maintain good relations with Moscow. It snapped up $1 billion in Rosneft shares last year when the Kremlin canvassed support for the company's initial public offering in London. And by bidding in a controversial March auction of assets of bankrupt oil company Yukos, it helped legitimize their sale to Rosneft. That may be the price for global oil companies that want to do business in Putin's Russia.

Note: the Kovytka field is a recent addition to Russia's oil/gas reserves boasting 1.9 trillion cubic meters in reserves.

In another article, titled "Rubles Across Russia", BW talks about the very hungry Russian companies that have signed up for $13 billion dollars of M&A deals in 2006 out-of-Russia, and originally attempted to participate in over $70 billion of such deals. The key highlights are Vneshtorgbank's acquisition of a 5% in European Airbus owner EADS, the $2.3 billion acquisition of Oregon Steel Mills by Evraz Inc, and the recently announced collaboration between Unicredit and Aeroflot to bid for Italian flagship air-carrier Alitalia:

Russian money, though, doesn't always get a warm welcome. Gas giant Gazprom (OGZPY) sparked a media furor in Britain last year when it said it might bid for Centrica PLC, Britain's No. 1 gas supplier. Russian companies lost international deals worth $50 billion in 2006, in part because of political attitudes, Foreign Minister Sergei Lavrov told a meeting of business leaders in Moscow in February. As a result, Gazprom and others have hired Western public-relations consultants to polish their image.

Despite such obstacles, there's little doubt the Russian acquisition trend will intensify. Many big Russian companies see expansion into international markets as a necessary step in their development. Energy and metals groups want to move beyond raw materials into higher-profit areas such as refining and manufacturing. Steelmaker Evraz, controlled by tycoons Roman Abramovich and Alexander Abramov, is rumored to be considering a bid for Ipsco Inc. (IPS), a pipemaker in Illinois. (Evraz had no comment.) Russia's telecommunications companies are on the prowl, too. Altimo, a holding company that owns mobile-phone operator VimpelCom, has taken out a $1.5 billion loan to fund acquisitions in India, Indonesia, and Vietnam. "The saturation of the market means we are looking beyond Russia's borders," says Altimo Vice-President Kirill Babaev. These days, any such deal should come as no surprise.

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