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August 03, 2007

Polonium, Politics and $100 Oil
by Adrian Ash

"...If you fear that we're only a couple of headlines away from $100 oil, be careful how you buy into Russia's huge energy reserves..."

A RISK CONSULTANCY firm based in Canary Wharf's gleaming financial district emails us here at BullionVault to ask:

"We are keen if possible to get a view from you on the recent heat between the UK and Russian governments.

"Is this likely to make London a less attractive place for Russian companies to list their equity? Is the City suddenly going to go up in arms and demand further regulation? Or will it just be business as usual?"

Regular readers of the View from the Vault might guess we have no answers. They might also wonder why-in-the-hell anyone would ask us! But they'll also know we shall attempt a reply regardless. Yes, it's eight months since we last studied the hazards of Russian equities listing on the London market, right around the time that Polonium 210 poisoned a dissident Russian spy in a West End sushi bar.

Nor can we begin to guess how the LSE or City watchdog, the Financial Services Authority, might feel about becoming bit-players in Whitehall's latest comedy of errors. Chasing down the Russian spy accused of poisoning Alexander Litvinenko in Central London would surely require an extradition treaty, not a tightening of stock-market rules.

And besides, as John Kampfner notes in The Guardian, "If the UK and Russia did have an extradition treaty, what would happen to Boris Berezovsky, a one-time top Kremlin figure-turned-dissident whom Putin regards as his public enemy No.1? Berezovsky and other oligarchs now live here [in London] in opulence, thanks to our absurdly generous tax laws."

But still, we can't help wondering: Do Russian companies - most especially the gas, oil and mining companies who make up 80% of the Russian stock market - actually need to raise cash by listing on Western exchanges?

If you haven't bought into Gazprom yet, you might not get chance to buy Russia in London for much longer, perhaps. As Marc Faber has observed, what finally destroyed the Soviet Union at the end of the '80s wasn't so much the victory of Western capitalism but the collapse of global oil prices to $10 per barrel. Now oil looks firm above $60 if not $70, and "we're only a headline of significance away from $100 oil," reckons John Kilduff, an analyst in New York for Man Financial.

Little wonder then that President Putin's belligerence looks like the swagger of a man who just can't lose...so long as energy stays expensive. As it is, Russia's forex reserves now stand at No.3 behind China and Japan, and Europe needs Russian energy flows far more than Russia needs European cash in return. Or so it would seem for the foreseeable future. And as for Western companies investing in Russian resources directly, Shell's loss of its Sakhalin project...foreign gold miners' ongoing problems with Moscow's Environmental Agency licenses...and now the expulsion of Britain's trade ambassador...would suggest that capex from overseas simply isn't wanted or needed.

Foreign investment dollars are being actively scorned. Yet British companies still want in! Will they never learn? "Last month, following months of pressure from the Russian authorities, BP's 50%-owned joint venture TNK-BP was forced to sell its stake in the vast Kovykta gas field to Gazprom, the [Russian] state-controlled gas company, at a bargain price," reports Ed Crooks in the Financial Times. "But BP still sees great potential in investing in Russia, and hopes for further development of joint ventures with Gazprom and other Russian companies."

BP on Tuesday reported a 16% drop in earnings between April and June. Its No.1 competitor for British stock market cash, Shell Plc, said today it grew its earnings by 18% during the same period. No wonder then that BP needs to deal with whomever it can - and at what looks like any price in terms of risk - to catch up.

"As part of the Kovykta deal," Crooks goes on in his FT report, "BP, TNK-BP and Gazprom agreed to set up a global joint venture worth at least $3bn that could develop projects inside and outside Russia. Tony Hayward, BP's new chief executive, talked about what he described as the growth of 'reciprocity', which he said meant 'the development of not just foreign investment into Russia, but investment by Russian companies overseas'."

In other words, Russian companies are not only willing to grab control Western-owned assets in the Motherland at bargain prices, forced through by the Russian courts. They're also willing to put up their own money for joint-venture development of oil and gas projects outside Russia, too. Buying BP Plc, in other words, might just give you exposure to Russian business practices across the world.

"Deals with Russia could involve Gazprom taking stakes in BP assets worldwide, including projects in liquefied natural gas," says Crooks, "which is one of the Russian company's ambitions for expansion."

If more Russian firms did choose to follow Gazprom's example and list here in London, then at least UK investors might hope to enjoy some domestic legal protections. But why would a nationalist and recidivist Kremlin want to encourage that? Letting the wealth produced by Russia's natural resources slip overseas could easily be presented by the pro-Putin Nashi youth movement as Robber Baron Capitalism Mark II. The more profitable action - and the more politically useful - would be to seize new energy reserves. Such as, say, in the Arctic Circle...?

"Moscow has dispatched a submarine under the North Pole that is expected to arrive on Sunday to plant a titanium flag on the seabed," reports Australia's Herald Sun. "The mission is part of a race to assert rights over the area, which is rich in energy reserves."

Now throw in the two Tu95 "Bear" bomber planes that dared to near British airspace last Tuesday...the suspension of Russian visas to British citizens...the Kremlin's permission for Gazprom to build a private army of security and defense staff...and the comments in The People's Daily, China's leading newspaper, that "Britain and China are in a 'controlled' crisis."

Crude oil is trading back at a new 11-month high. Above $70 throughout July, it's starting to look awful expensive for British diplomacy...let alone investors and consumers.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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