IKEA to Russia: Drop Dead!

The Russia Monitor reports:

Earlier this year I wrote about IKEA’s corruption problems in Russia.  Two senior managers were fired after Swedish media reported that the managers had approved a bribe payment by their general contractor in order to obtain electricity service for a St. Petersburg Mega-Mall.  IKEA had been powering the mall with rented generators, but changed its approach once it found that an employee allegedly received kickbacks from the generator company in exchange for paying inflated rental rates. As we now know, Plan B did not work out so well.

This week IKEA Russia’s new chief Per Wendschlag announced that IKEA would “focus on existing stores” and that it the Swedish company was halting constructionof a $1 billion mall near Moscow (Europe’s would-be largest shopping mall), which was just announced in April 2010 (right after the corruption scandal in February).  At first glance, this seems like a prudent strategy – some of IKEA’s problems have arisen from its previous balls out expansion strategy.  The resulting construction has at times been shoddy and has caused accidents.

A Fairynightmare: Russia and the Golden Goose

The Moscow Times reports on how Russia is pathologically savaging the last vestiges of its credibility among foreign investors:

A lawyer for Farimex Products said Friday that it did not want Telenor to sell its stake in VimpelCom, a perhaps surprising admission given that Farimex has spent the past few months fighting in court to make Telenor pay close to the very value of that stake.

The now three-year saga, which has drawn comparisons to the attack on Yukos and the drama last year at TNK-BP, stands alone for the questions it has raised regarding the hierarchy of competing verdicts — and the might of individual shareholders.

One “Raped” Investor gets Wise to Russia

Writing on Seeking Alpha, in a column entitled “From Russia with Bitterness,” international investor Eric Roseman sees the light (the Motley Fool has similar sentiments):

One of my biggest mistakes a few years ago was placing a bet on one of Russia’s largest oil companies. In hindsight, despite the incredible value still offered by this investment, I’ve lost more than 50% of my capital…and not strictly because of plunging oil prices.

Russia is not governed by market capitalism. The market has evolved into a twisted version of despot capitalism whereby Vladimir Putin sets the tone for the market, deciding which companies should be nationalized (a.k.a. victimized), purged, and eventually placed under full or partial state control. The government typically targets natural resource companies for this exercise and doesn’t care if foreign investors get caught in the middle of this confusing web of intervention.

The Sunday Business Section: Another One Bites the Dust (Investor in Russia, that is)

Forbes reports on what happens when you invest in Russia: The Kremlin steals your investment, and you leave feeling lucky it didn’t burn down your house as well. When you leave the Russian market, your stock price jumps even if you lost your shirt. The Kremlin continues its practice of systemmatically driving out all foreign influence from Russia, still believing after so many failures that it can be successful on its own.

BP played Russian roulette, and if it didn’t exactly win, it also didn’t lose. It will have to hand control of the Russian Kovykta gas fields to state-controlled Gazprom, but it will get paid $900 million, a far better outcome than might have been expected. Gazprom (other-otc: OGZPY – news – people ) announced that it would be buying TNK-BP’s 62.7% stake in Rusia Petroleum, the company that holds the license for the eastern Siberian gas fields. The deal also invovles TNK-BP (other-otc: TNKBF – news – people ) selling its 50.0% interest in Eastern Siberian Gas, which is building the project. TNK-BP is a joint venture between the British oil company and the Russian consortium the Alfa Group, controlled by billionaire Michael Fridman. Though not unexpected, the news is a blow for BP (nyse: BP – news – people ), which has invested $600 million in the project so far. The project, which is expected to cost a total of $20 billion, would also have brought BP substantial gains, as the fields’ gas reserves are estimated at 1,900 billion cubic meters. Still BP and its joint venture could have got a far worse deal than they have. Though $900 million significantly undervalues the gas fields, things could have been a lot worse, had the Kremlin just confiscated the stake.

“$900 million is a lot better than $0,” Andrew Neff, an analyst at Global Insight told Forbes.com.

Since the Kremlin threatened to withdraw TNK-BP’s license for Kovykta earlier this year, furious negotiations have been under way to work out a deal that could benefit both parties. Under the agreement that has been reached, TNK-BP will be able to acquire a 25.0% stake in the gas fields. In addition, without revealing specifics, Gazprom, has announced that the companies are launching a $3 billion global venture. According to Neff, Gazprom, will have its eyes on BP’s liquefied natural gas assets, and downstream gas distribution network in Europe. So far European Union states have been wary of giving Russia a large stake in downstream gas distribution. A joint venture with BP would give Gazprom access to this market, in return for maintaining a minority presence in Russia. Since the saga began, BP has been keen to stress that as the project is in the very early stages, the loss of Kovykta doesn’t have an impact on the company’s current valuation. “The gas fields are a plum asset but are not easily developed and monetized tomorrow,” agreed Neff. BP’s troubles in Russia began earlier this year when Kremlin threatened to withdraw the company’s license for Kovykta, saying that it was not meeting production targets. The field is currently producing 2.5 billion cubic meters a year, rather than the 9 billion it is meant to under its contract. However, regulators had indicated that if Gazprom were allowed to join the project the licensing issues would disappear, reinforcing the view that Kremlin’s concerns were political and largely to do with a recent drive to push foreign energy giants out of Russia.

Market insecurities about investments in Russia have been heightened by the frosty relations between Britain and the Kremlin since the poisoning of a former KGB operative in London. But even before that Royal Dutch Shell (nyse: RDS-B – news – people )and its Japanese partners Mitsui (other-otc: MITSF – news – people ) and Mitsubishi (other-otc: MSBHY – news – people ) were forced to drastically reduce their stake in the Sakhalin-2 energy site in eastern Russia. In January, the Russian cabinet approved a bill preventing majority foreign ownership of companies that are categorized as “strategic” including energy. (See: ” BP Losing Grasp On Siberian Gas”). Shares in BP were up 5.50 pence (11 cents), or 0.9%, to £5.85 ($11.69), in early afternoon trading in London.

Thanks for reading La Russophobe !

Invest in Russia? The Savvy Capitalist says "No, Thanks!"

InTheNews reports:

International, the owner of electronics retailers Currys and Dixons, has opted against entering the Russian market, the firm said today. In a statement accompanying its annual results, DSG admitted the poor performance of rival companies pursuing interests in Russia had discouraged it from proceeding with an agreed ten per cent share buyout of Eldorado. Commenting on the decision to back out of the agreed deal with Eldorado, the largest electronics retailer in Russia and Ukraine, DSG chief executive John Clare said: “Russia remains an interesting and exciting market and we will continue to watch the developments there, both commercially and politically, and I expect the group to re-examine opportunities for entering this market in the future. “In view of this decision the board now plans to return up to £100 million to shareholders through a share buy back programme over the next 12 months, representing the capital that would have been invested in the first tranche of Eldorado shares.” DSG also today announced a slide in its full-year pre-tax profits to £295.1 million from £311 million last year. At the same time the group’s sales rose 14 per cent to £7,929 million, with international sales accounting for 41 per cent of the firm’s total. Mr Clare said that the last year had seen “many of the foundations for future growth” laid out. “However, our overall group result was disappointing, largely because of a weak performance in Italy,” he added.

Thanks for reading La Russophobe !