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article imageOp-Ed: Sanctions in Russia create problems for global multinationals

By Ken Hanly     May 1, 2014 in Politics
Washington - Every year CEO's of the globe's largest oil companies meet in Moscow for an economic forum and to meet with Vladimir Putin and his chief lieutenant in the energy realm Igor Sechin.
At a panel discussion last year, Sechin spoke to leaders of major companies such as BP, Chevron, ConocoPhillips, ENI, Royal Dutch Shell, and Statoil. He claimed that there was a bright future for the energy industry in Russia citing offshore drilling in the Arctic and shale oil development in Siberia. At the time, Sechin said:“The participants of this meeting are a big and powerful group which controls capital of two and a half trillion dollars. It is of course an honor for me to speak to such a high-level group.”
Recent sanctions by the US target Sechin, who is also president and chair of the management board of Rosneft the huge state-owned Russian energy giant. The latest American sanctions cover 17 companies mostly in oil and gas and finance as well as Sechin and six other individuals closely connected to Putin.
While so far there have not been large financial implications for global capital, the moves will hardly improve the situation as far as investment by Big Oil in Russian energy development is concerned. Opportunities for profit will be lost to the advantage of countries such as China, India, and others not signing on to sanctions.
You can be sure that where there are sanctions, some companies and countries will take advantage of the situation to swing deals that will benefit them by purchases at reduced prices. Last year China and India both ignored sanctions against Iran.
The sanctions will create a headache for some US investors. While US investors will no doubt still be able to invest in Rosneft, since it is Sechin the individual not the company that is sanctioned, problems come up about whether a US portfolio manager could take part in a quarterly conference call with Sechin. Would this be commercial interaction? A Treasury Department Official claimed that individuals in the US are not prohibited from dealing with Rosneft and that would include participating in meetings of the company board of which Sechin is a member.
In some cases the sanctions do extend to companies such as SMPP Bank, Bank Rossiya, InvestCapitalBank, and Sobinbank. Both Visa and Mastercard have said they will not service cards issued by those banks. While this is a small part of the business of the two companies in Russia, it has resulted in a move by Russia to develop its own credit card system. In time this will no doubt result in the loss of a great deal of Russian business to the two companies as they control a large percentage of transactions at present. There is even the possibility of Russia imposing restrictions on US companies.
Another person targeted by sanctions is Sergei Chemezov, the director general of Rostec, an organization that oversees high-technology industries. Chemezov has had extensive dealings with US-based Boeing. In fact a joint venture that is partly-owned by Rostec manufactures about half of the titanium parts used in Boeing aircraft. A Russian regional airline that is a Rostec affiliate had contracts to buy Boeing jets. A Boeing spokesperson said: “We are aware of the new sanctions announced on Monday and are reviewing the matter to understand what impact, if any, there may be to our ongoing business and partnerships in the region.”
BP, Exxon Mobil and Shell have for years been building relationships in Russia. They have been eager to invest in projects that will give them access to oil deposits in return for investment capital and technology transfer. All that is now being placed in jeopardy.
BP already owns a large stake in Rosneft — twenty per cent. Shell has partnered in developing a large liquefied natural gas facility on Sakhalin Island in the far east of Russia. Exxon Mobil is in an Arctic exploration joint venture with Rosneft.
Sechin is one of the Putin loyalists known as"siloviki" or men of power. Western executives work through him to arrange deals. Bob Dudley of BP said of Sechin in January: “I have got a lot of respect for him.”
Dudley is on the Rosneft board along with Sechin. BP spokesperson Toby Odone said that BP was committed to its investment in Rosneft and that the company would remain a long-term successful investor in Russia.
However, the sanctions will no doubt dampen enthusiasm for investment in Russia. It will also harm US oil equipment supply companies who stood to profit from increased joint ventures.
Russia is the world's largest energy-exporting country. If the west buys less from Russia one could expect energy prices to increase and the flow of exports to increase from Russia to China and other countries. Sanctions not only may deprive western-based Big Oil companies and western financial companies of profits they may not work.
While the Russian economy may slow down or even decrease, Russia has about half a trillion in foreign exchange and exports — enough oil to bring in about $330 billion a year and that does not even include sales of natural gas. Putin seems willing to suffer some economic loss in order to press for political gains in the annexation of Crimea and perhaps ultimately at the very least establishing closer relations with parts of the eastern Ukraine.
Clifford Gaddy, a Russia expert at the Brookings Institution, after noting that folowing the fall of the USSR, Russian GDP contracted by 40 per cent said: “The whole idea that we are going to defeat Russians by imposing hardship on them boggles my mind, It’s not a matter of how much pain you can impose, but how much they can tolerate. And how much they can tolerate depends on the motivation for behavior.”
Not just energy giants and financial companies could suffer from sanctions. Ford and General Motors both have plants in Russia. Of course the US and EU have been careful in exactly who and what is targeted but surely Russia will seek foreign investment from elsewhere. Gaddy claims that the idea of targeting companies associated with Putin's close allies is misguided: "We are targeting the very best of Russia, the part that’s most modern, most eager to integrate into the global economy, most progressive, Sanctions will tend to hurt them.”
The Castros still rule in Cuba after an embargo lasting more than half a century. The Kim family also still holds sway in North Korea in spite of sanctions. Arguably sanctions helped end apartheid and also brought Iran to the bargaining table but Mark Medish who was a National Security adviser on Russia and the Ukraine in the Clinton administration points out: “Sanctions may cause economic inconvenience and reputational pain for the targets, and imposing sanctions may also make us feel correct, that we have done the right thing.” However rather than getting Russia to change its behavior, they are more likely to "galvanize the will of the other side". Great powers, especially nuclear powers, do not allow themselves to be extorted he said.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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