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Exxon As Russia’s Trojan Horse – OpEd

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They say doing business in Russia is not for the faint of heart. But doing business with Russian state-owned corporations, on the other hand, is not for the sane of mind.

Putting aside horror stories like Yukos and Hermitage, or even ignoring the risks of getting into bed with known criminals, there are still further untold liabilities in partnering with the Russian government given that their companies are active in much more than business.

Such debates are taking place with regard to Exxon’s recent blockbuster deal with Rosneft, which seen as one of the most important energy deals in the past decade. Unlike the last “historic” deal with BP, which was blocked by local partners who demonstrated that the British multinational was in breach of contract commitments, Exxon is feeling visibly more confident about its Russian adventure.

A consensus seems to have emerged among observers that Exxon won big with this deal, and will somehow be able to escape the accompanying political risk. This conclusion is based on the assumptions that 1) Russia is “desperate to prove” it can hold its end of a bargain after the BP debacle, 2) Exxon has corporate reputation of being a “tough guy” when it comes to expropriatory conduct by resource nationalists, and 3) the Americans were smart enough not to take possession of any Rosneft shares (which would imply receiving stolen goods, given Rosneft’s theft of Yukos assets, and open them to litigation). Instead they got their terms to participate in production in Russia by swapping shares in production projects in Texas and the Gulf of Mexico, opening the door for the Kremlin to finally get a piece, albeit small, of the U.S. market.

The key question about the Exxon-Rosneft tie up that will be examined by the Department of Treasury’s Committee on Foreign Investment in the United States (CFIUS) will be to determine whether or not the entrance Russian government participation in the U.S. oil production sector will pose a risk to national security. From what I understand, CFIUS is unlikely to block the deal, as any perception of risk is, at the moment, too indirect to merit intervention.

However, as Ariel Cohen has pointed out, this is about long term strategy to garner influence: “The new deal with Exxon gives Rosneft and Russia the massive lobbying capabilities of a leading U.S. oil company. The deal of the century may seriously alter the geopolitical balance, moving the United States and Russia closer together.”

While there might be nothing wrong with Moscow and Washington improving relations if achieved on proper terms, the idea of the Kremlin having access to Exxon to operate as a lobbyist on their behalf is much more ominous – something along the lines of Virgil Sollozo’s failed appeal to Don Corleone in the Godfather.

There’s no shortage of precedent of Russia using state-owned corporations and their business partners as lobbyists, especially with Gazprom’s push into Europe over the past 10 years. A given company that is invested in Russia, whether they are from Germany, the United Kingdom, or the United States, is likely to find itself eager to help the Foreign Ministry achieve its goals with their own governments – especially if that would lead to the resolution of a political risk problem on the ground in Russia.

In her book Lonely Power, Lilia Shevtsova writes “Far from holding their noses while conducting business with the Russian regime, certain Western firms seem to relish it, even going so far as to lobby for the regime’s interests at home. These firms employ or are even led by Western politicians and public figures. Former public officials, legislators, and even prime ministers have also joined the boards of Russian state and private corporations. (…) Unable to modernize Russia, its elite has shown exceptional imagination when it comes to co-opting the West to sustain itself.”

One of the most famous examples of Russia’s use of state business for political influence was the relationship developed between Gazprom and the former Chancellor of Germany Gerhard Schroder, who used his powers of office to push the Nord Stream pipeline through, and later took a 600,000 euro annual salary to sit on the board. Similarly the company’s partnerships with Eni and Enel helped them utilize powerful lobbying networks in Italy, while further business relationships opened up Brussels to hold back the “unbundling” measures from the European Commission, which proposes to separate ownership of supply and distribution companies for natural gas.

The willingness of Western companies to lobby on Russia’s behalf has greatly facilitated state corruption. Writing in the Washington Post in 2010, Mikhail Khodorkovsky pointed out, “It is especially interesting that the theft of Yukos was defended by certain German politicians, while a large Italian company played a central role as purchaser of some of the stolen assets.”

And of course, the ultimate irony here is that it was Exxon whose interest in purchasing the majority of shares in Yukos which is said to have been one of the primary motivations behind Vladimir Putin’s campaign to destroy and steal the company and imprison the defendants. Now he stands to benefit from the sale of something he stole from the original seller – at a marked up price of course.

There are numerous reasons to doubt the earlier conclusions that this deal will be nothing but smooth sailing for Exxon. The focused refusal to do a direct share swap is likely connected to investor fears of buying shares while Rosneft is still embroiled in litigation by former Yukos shareholders, who are suing Russia for unlawfully expropriating the company. This is part and parcel with Russia’s biggest dilemma heading into a presidential election that many see as crucial to continue the country’s economic modernization drive: convincing international investors to look past the culture of corruption embodied in the latest raids against BP, and place profits at all costs.

(For it’s part, Exxon seems unconcerned. “Others can weigh in on the legitimacy of various governments,” Exxon spokesman Alan Jeffers told CNN. “We are not doing business, as far as I’m aware of, with anyone with which we are prohibited from doing so.”)

The subtext here is that in finalizing a much-needed deal to explore the arctic, and improving Rosneft’s chances for competing globally, Putin has in effect demonstrated his ability to carry out Russian President Dmitry Medvedev’s economic agenda by himself, a calling card that could set the stage for his return to the presidency.

“Putin is demonstrating that he is the person in charge and if Exxon Mobil had tried to make the deal with Medvedev, nothing would have happened,” Pavel Salin, an analyst at Russia’s Centre for Current Politics, told Reuters. “Even if they had got something with Medvedev, the deal could have collapsed at any time, whereas Putin will be the guarantor.” Of course that could all change tomorrow, like anything in this electoral season.

But returning to the core question of whether or not the mighty Exxon will become just another humble servant, lobbying to Washington at Moscow’s instruction, will remain to be seen. First, one would assume, Rosneft will have to allow the American company to invest a sufficient amount into Arctic operations that the prospect of losing it becomes unacceptable, and then the leverage will begin.

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James Kimer

James Kimer is a Washington DC-based web editor and social media consultant. He writes for RobertAmsterdam.com among other online publications with a focus on emerging markets. James holds Masters in Journalism and Latin American Studies from New York University.

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