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WorldEnergySource.com: From Russia with Oil

By Robert A. Mosbacher Sr., Chairman
Mosbacher Energy Company
and Kiril Stefan Alexandrov, Executive Director
U.S.-Russian Investment Symposium

This Symposium is helping American leaders in government, business and education learn more about the Russian business environment and encouraging partnerships between American and Russian businesses. Your efforts not only are strengthening our countries’ relationship but also are injecting new vitality into the global economy.

(President George W. Bush in his letter to the seventh U.S.-Russian Investment Symposium, November 10, 2003)

Texas’ black gold abundantly overflowing in Russia is on everyone’s mind now that oil prices are hitting stratospheric levels with nary a soft landing in sight. The world’s second-largest oil reserves reside in the vast domains of an entity that was our last major foe and now has the potential to be our new best friend. Russia has gone through an accelerated rollercoaster of capitalist development over the past 15 years since Glasnost made a beeline to democracy. Former Soviet President Mikhail Gorbachev opened the floodgates, and those who were strong and brave enough to take the plunge found themselves immersed in oily prosperity. Already Moscow has more billionaires (33) than New York (31), and it has become the third most expensive city in the world. Oil money abounds, and the lucky few who fished in the early, sometimes murky waters of Russia’s business climate have caught the biggest fish. What do most of them have in common? They have been regular attendees of the premier event dedicated to educating investors about Russia: the annual U.S.-Russian Investment Symposium (www.usris.org) that was founded at Harvard University in 1997 and hosted there ever since. This election year’s eighth annual Symposium will be held October 6-8 in Washington, D.C., at the Omni Shoreham Hotel.

Harvard: Birth of Investor Education about Today’s Russia

In 1997, at the height of economic and social turbulence during the reign of Gorbachev’s successor, Boris Yeltsin, the U.S. and Russian governments went to one of Harvard’s expert bright lights, Professor Graham Allison, and asked him to start a symposium dedicated to expanding awareness about Russia’s economic and investment potential. Professor Allison opened his Rolodex and, with a few quick calls, had the first investment symposium running in high gear. With a direct blessing and support of both governments that continues to this day, the U.S.-Russian Investment Symposium quickly attracted the real movers and shakers of a Russian economy that is deeply tilted toward vast amounts of natural resources, with oil as the belle of the ball.

And what a ball this Symposium has been. As the history books on this era of Russian economic development will show, most of the players have been steady Symposium stars and attendees. Starting with the powerful prime minister of the 1990s and now alleged billionaire Victor Chernomyrdin, the roll call of “who’s who in Russia” that has either spoken at the Symposium, attended regularly or sponsored continues to the currently jailed Mikhail Khodorkovsky of YUKOS fame.

Mr. Khodorkovsky was a perennial Symposium sponsor, speaker and attendee. In the concentrated two-day annual Symposium, the heady debates between Khodorkovsky and other titans of industry and government are fondly remembered by attending journalists and investors alike. That’s how seeking the Veritas about the Russian investment climate takes place. The ever-changing relationship between Russian government and industry requires a dynamic scorecard, and the Symposium provides that while serving as a two-day playing field.

For the past four years, the Symposium has worked closely with the U.S. Department of Commerce, spearheaded by Secretary Donald Evans and Russian Trade Minister German Gref, to create an event that serves the interests of both countries. This year Secretary of Energy Spencer Abraham will keynote and highlight energy. Throughout the years, other top ministers and officials have been major participants, such as Leonid Reiman, Russian minister for information technology and communication. In one of the most newsworthy episodes two years ago, Andrei Illarionov, special adviser to President Vladimir Putin, exchanged many interesting words with the top executives of RAO UES, one of Russia’s largest companies, in the course of representing the Russian government’s shareholding status. This kind of forthright behavior and brave exchange of ideas is a trademark.

Oil in Russia: Much Ado about YUKOS

Naturally, one current question in top oil circles is, “What will happen to YUKOS, and what does it mean for the international players of the energy industry in Russia?” The framing of that question belies the single clichéd answer often bandied about today that the Russian government is not interested in YUKOS’ back taxes but is merely retrieving what was privatized at bargain-basement prices. That’s an easily digestible bromide for the masses. Of course, the opposite case might be made since the Russian government is currently auctioning a good part of its ownership (7.59 percent) in the giant Lukoil. As most already know, recent New York Times and Financial Times articles cite ConocoPhillips as having the pole position as the most favored buyer. With Lukoil already having finalized the purchase of 779 ConocoPhillips filling stations on the East Coast that currently operate under the Mobil brand, a nascent international partnership may be forming.

With the single biggest privatization in Russian history at close to $2 billion for the sale of the Lukoil shares, and ConocoPhillips, a Houston based oil-company, as the favored potential primary buyer of Russian oil largesse, a major signal is being loudly broadcast to international oil investors who listen beyond the YUKOS din. Far from stifling the energy industry in Russia with the YUKOS situation, this Lukoil auction shows the enormous potential for those who can make the right deals with the right people. Among others, U.S. companies that are active in Russia include ExxonMobil, ChevronTexaco and Marathon.

Pipelines to Mutual Prosperity

Yet with a mixed interpretation of these YUKOS and Lukoil scenarios, how does one predict what the twin pillars of government and industry in Russia will do in the near and far future? As in many Balkan peace treaties, only players in the know are aware of the cards being held. There is now too much at stake as world energy has become the “new great game” of geopolitics. In this game, as we’ve uncovered during prior Symposia, the importance of transportation cannot be underestimated. With the delivery of oil to the West a priority, Transneft currently holds the Russian high card; CEO Dr. Simon Vainshtock is a major player and one slated to attend this year’s Symposium.

Yet with the shortfall in pipeline capacity and the proposed expansion of other private pipelines, isn’t Western capital still needed to finance and help build the infrastructure to international specifications and world energy needs? Now that oil prices are high enough again, the economics of an alternative pipeline scenario may trump the politics that once held it back. This type of economic-over-political triumph is exactly one of the major drivers underscoring the idea that globalization is here to stay and that the relationship between our two countries must be further developed toward a mutually beneficial partnership. Secretary Abraham made a major move with his visit to Vainshtock’s Transneft in 2003.

Good trusting contacts on the level of leadership of both countries foster close cooperation.… But for a stable and strategic partnership … business must be interested in constructive, good relations with Russia.

(President Putin’s July 2004 address to Russian diplomats)

This Year’s Symposium:

Taking a “New Step in the Energy Dialogue”

This year’s Symposium has worked closely with the Department of Energy and Secretary Abraham to continue his fine work by providing the appropriate venue, optimal conditions and the right people through which the relationships between both countries’ oil players can shift into higher gear as world oil demand grows. Trade Minister Gref, in his 2004 support letter, states his hope that “a new step in the energy dialogue” will be taken at this year’s Symposium. Perhaps this is the signal that the U.S. needs. That President Putin has performed a volte-face and is now ready to become friendlier to U.S. oil concerns should be explored immediately. Perhaps the world’s second-largest producer and the world’s largest consumer can finally come to closer terms on this vital resource before China’s growing thirst complicates the picture. Thus, the world’s major oil players will be at this year’s Symposium once again to discuss this and other major issues of today and tomorrow, and turn ideas and plans into bona fide ventures.

Aside from the longstanding support of YUKOS and others from the Russian side, who are the international players that frequent the Symposium arena? No less than ExxonMobil has thrown its weight behind the Symposium as a loyal supporter and partner. This year, TNK-BP has been added. Last year’s special executive interview with TNK-BP CEO Bob Dudley centered on beneficial partnerships with Russian oil companies that can bear rich oily fruit. This year, Mr. Dudley’s Russian partner Victor Vekselberg from TNK (according to Forbes magazine the second-richest man in Russia and also the recent buyer of the Faberge Egg collection) will be joining the dialogue. JP Morgan’s popular energy roundtables are often the talk of the day and a place where deals begin. Many independent energy companies have also earned a seat at the table in recent years: Teton Petroleum, Access Industries and Parker Drilling have made strong impressions as sponsors and attendees. This year, Harvard Professor Rawi Abdelal will feature a case study on Shell and Russia. Daniel Yergins of Cambridge Energy Research Associates (CERA) will be a moderator once again. The importance of energy will be emphasized formally and informally through private, invitation-only meetings.

Two Texans at Harvard: The Birth of the IEA

After seven successful Symposium years at Harvard, and during the last two, I was honored to stand at the helm with a fellow Texan: Van McCormick. Both Mr. McCormick, lecturer and director of investment symposia at Harvard, and esteemed Professor Allison realized that the scope and promise of the U.S.-Russian Investment Symposium must continue to include Harvard but grow beyond the ivy-adorned walls of academia. The international exposure of the event and the growth in size brought challenges that were better met outside Harvard’s hallowed halls.

The success of the Symposium had prompted representatives of several corporations and foreign governments to ask for the creation of new symposia dedicated to promoting economic relations between the U.S. and other key geographic areas. Having carefully studied this possibility, they concluded that this could prove an exciting opportunity.

A new and separate nonprofit organization was created within Harvard to convene the U.S.-Russian Investment Symposium and any future symposia. This new entity, the International Economic Alliance (IEA), was incubated for a full year inside Harvard before spinning out to a spirited Texas-style independence. This will be the first year that the IEA will be hosting the Symposium, and this election year, to capture the attention of top policy makers and business leaders, the eighth annual Symposium will be held in Washington, D.C.

As happens with most Harvard spinouts, the major players remain the same. Mr. McCormick is the director, and founder Graham Allison of Harvard continues his legacy as the chairman of the Academic Advisory Board. Numerous Harvard alumni also carry the Harvard legacy for the Symposium. This year, no fewer than five top Harvard professors are directly involved in speaking, creating and moderating the content of the Symposium. Besides Professor Allison, other Harvard professors involved include Rawi Abdelal, Marshall Carter, Marvin Kalb, Robert Kaplan, Walter Kuemmerle, Malcolm Salter and Richard Vietor. This group is dedicated to creating an event that serves the needs of investors, our government and the energy industry and contributes to strengthening existing economic ties while forming new ones.

Aiding in that effort is a board of advisers that counts both current and former U.S. and Russian governmental officials such as Paul Volcker, former chair of the Federal Reserve; William Perry, former secretary of defense; Russian Trade Minister German Gref and Andrei Illarionov, special adviser to President Putin. Every year, certain attendees and sponsors travel multiple time zones just to have a chance moment to meet Mr. Illarionov at the Symposium.

Industry leaders who are also active board members include such luminaries as Donald Kendall, longtime CEO and chairman of PepsiCo, Stanley Fischer of Citigroup and CEO Robert Wussler of Ted Turner Pictures. The newest addition is Maurice R. Greenberg, who is CEO and chairman of American International Group (AIG), one of the world’s leading companies. Along with three current or former ambassadors on both sides of the equation – James F. Collins, Thomas R. Pickering and Yuri Ushakov – the denominator that links all members of the board is a profound tie to Russia, whether governmental or commercial. These are expert members who have spent their lives promoting U.S.-Russian economic relations.

Building on a Vision of Success: IEA, AIG and Maurice R. Greenberg

Economic relations among nations have taken a place alongside security at the high table of international relations. Free trade has proven a powerful contributor to economic prosperity; it has improved relations among peoples and helped create international stability where there had been chaos and strife. With the advent of today’s globalization, governments and businesses are increasingly cooperating to advance their common interests. As Ambassador Robert Zoellick, the U.S. trade representative, has said: “The new American trade agenda serves our security interests.… So all of us have a stake in development and democracy.” This shift presents great possibilities for new venues to improve mutual understanding and strengthen international business cooperation and investments.

What do these abbreviations of IEA and AIG have in common? It’s really a shared vision of how international economics can move forward. The U.S.-Russian Investment Symposium has proved itself a multi-year success story.

The mission of the IEA will be to convene analogous world-class symposia dedicated to furthering global trade, economic development and business relations between the United States and major regions of the world, including Asia, the Americas, Russia/Eurasia, the Middle East, India, Africa and Europe. These symposia will continue to bring together the world’s key players and decision makers – business and government leaders, international investors and leading intellectuals – for an open, bipartisan, solution-oriented exchange of ideas. The symposia will continue as an important source of knowledge, facilitator of relationships and catalyst for new business opportunities.

AIG’s roots are also multinational, and they also tell a multi-year success story. The person most responsible for their stunning growth and profitability for decades has been Maurice R. Greenberg, known to his friends as Hank. With his own long record of business and political success, Hank Greenberg observed the success of the U.S.-Russian Investment Symposium and was witness to its timely incubation within Harvard as the nascent IEA. At the right time for this early opportunity, Hank Greenberg’s Starr Foundation has agreed to support this vision by committing financial support and becoming a founding member of IEA. With this year’s eighth annual Symposium, this Harvard-incubated venture will continue and expand its global vision of facilitating free markets and democracy.

As we continue to strengthen our relationship with the Russian people and move toward ever stronger partnerships and economic development in the face of the news featuring scandals and political unrest, people continue to ask, “Why do Western oil companies keep going to Russia for oil?” I like to relate this question to the questions asked of the famous bank robber Willie Sutton: “Why do you continue robbing all these banks?” Willie replied simply, “Because that’s where the money is.”

In looking toward Russian investment by Western oil companies, the answer to the question “why?” becomes clear: “Because that is where a lot of the oil is.” And the oil is accessible.

Often politicos reflect on Russia’s faltering steps toward democracy, but Russia had been making great strides toward becoming a stable democracy. Recently they took an unfortunate step backwards. Nevertheless, they provide an improving environment, and many other key oil areas around the globe are far behind Russia in the struggle for government reform.

With Russia swimming unsteadily against the tide, it is only a matter of time for that tide to turn and propel Russia and investors far beyond those who wait on the shore refusing to jump into the water. As a democracy we need to pick our partners for the long haul, and over time Russia will prove to be a very good pick.

We must continue to work with nations committed to freedom, democracy and open economies. By expanding trade throughout the world we can create and maintain better jobs for our citizens, build stronger bonds with our neighbors and contribute to a world that is more peaceful and more prosperous.

(President George W. Bush in his letter to the sixth U.S.-Russian Investment Symposium, November 2002)

Robert A. Mosbacher Sr. is chairman of Mosbacher Energy Company and of Mosbacher Power Group. He was secretary of commerce under President George Bush from 1989 to 1992. He is a past chairman of the National Petroleum Council and Mid-Continent Oil and Gas Association. He was formerly on the executive committee and board of directors of the American Petroleum Association.

Kiril Stefan Alexandrov, executive director of the U.S.-Russian Investment Symposium, is an international entrepreneur who started his career at IBM and Bell Atlantic Mobile Systems. He has founded a magazine and a biotechnology company while serving as consultant to organizations for information technology, Web applications, multimedia, fashion and the arts. A winner of both the Massachusetts Institute of Technology’s $50K Entrepreneurship Competition and Stanford University’s Global Entrepreneurship Challenge, he has been featured in and interviewed by CNN, National Public Radio, Business Week, Business Wire, the Industry Standard, Wired magazine, the Chicago Tribune, the Boston Globe, Boston Business Journal, Mass High Tech, America Online and publications in Japan, France, Korea and Bulgaria. He received his master’s degree at Harvard University. For information about the Symposium, Mr. Alexandrov can be contacted at [email protected].

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