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Financial Times: Putin’s double vision

Published: May 30 2006 03:00 | Last updated: May 30 2006 03:00

There are many reasons to express doubts about the move by Arcelor, the Luxembourg-based steel group, to buy Severstal of Russia in order to sidestep the hostile bid by Mittal Steel. One is the way the Arcelor board is presenting the takeover as a done deal, which only an absolute majority of all shareholders will be able to reject. A second is the opportunity for yet another oligarch’s fortune to leave Russia, with Alexei Mordashov picking up nearly one-third of Arcelor in return for his90 per cent of Severstal.
But the reason to welcome this deal, which will have been cleared in advance with the Kremlin, is that Vladimir Putin, the president, is evidently showing none of the neurosis about one of his country’s top two steelmakers coming under foreign control that he displays about foreign ownership in Russia’s energy sector. If only his evidently relaxed view on Severstal could become the template for a more general Russian openness to foreign investment. But only last week, at his summit with the European Union, Mr Putin was touchily describing the energy sector as “the holy of holies of our economy” and demanding reciprocity for any EU investment in it.

This touchiness was underlined last week by a report from the Academy of Natural Science that got some support from Moscow’s natural resources ministry. This called for Russia to renegotiate its production-sharing agreements with foreign oil companies to giveRussian companies more of a role in the two offshore projects at Sakhalin and one in northern Russia. In fact, the ministry’s support for renegotiation was then firmly overruled by the senior energy minister, Viktor Khristenko, who said Russia would stick to the PSA terms. Nonetheless, these deals are causing growing Russian frustration. As their name suggests, PSAs allow foreign companies to sidestep the regular tax system and to pay the government out of shared oil or gas production, but only after the companies have recovered all their development costs. Therefore, in the case of Sakhalin 2, where Shell has incurred enormous cost overruns, Moscow is understandably concerned at seeing the prospect of payment receding into the future.

Yet the price of contract sanctity is something the Russian government can pay, because with only three PSAs ever granted the problem is essentially limited. It is also something it must pay in order to avoid further damage to a contractual reputation badly dented by its savage victimisation and break-up of the Yukos oil group of Mikhail Khodorkovsky, now in a Siberian jail.

A big chunk of Yukos was snapped up by state-owned Rosneft. The government intends to sell Rosneft shares on western exchanges this summer, but some western investors have called for a boycott of what is seen as the resale of stolen property. In these circumstances, Moscow cannot afford not to honour the PSAs

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