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Western investment growing in Russia despite sanctions

The appetite of Western majors for Russian assets is perking up again, despite rules that still aim to stop them investing

DEAL-MAKING involving Russia's oil and gas companies is starting to froth in the wake of President Vladimir Putin's annual St Petersburg investment forum - something like a Russian Davos-on-Neva - and hopes that sanctions may soon be relaxed.

The world's oil industry is alive to the opportunity. Senior executives, including ExxonMobil chief executive Rex Tillerson and Shell boss Ben van Beurden, descended on the annual international economic forum in mid-June. Even their turning up was a mood indicator. Tillerson was back at the three-day event after a two-year hiatus. Senior executives from BP, Total, Eni and Schlumberger also made the trip.

The 75% rise in Brent oil prices since January has geed up investors, and Russian energy firms are closing deals that have been in gestation for the past year. The biggest was between Gazprom and Shell, which used the forum to sign a letter of intent for a $10bn project to build a liquefied natural gas plant on Russia's Baltic Sea coast. It would have capacity of 15m tonnes a year and come on stream in 2021.

Russian energy companies have been whiplashed over the past three years by a combination of sanctions and plummeting oil prices

Gazprom chief executive Alexey Miller also sat down with Peter Loescher, chairman of Austria's OMV, to negotiate scientific and technical cooperation and partnership between the companies. The Russian gas monopoly intends to finalise the asset swap deal with both Anglo-Dutch Shell and OMV by the end of this year. Gazprom may gain control of some assets Shell acquired earlier this year from BG Group, while the deal with OMV would see the Russian gas firm pick up some OMV-owned assets in the North and Norwegian Seas.

Privitisation revival

A revival of Russia's privatisation programme, which involves asset sales in oil producers Rosneft and Bashneft, is also attracting strategic investors from India and China - a move first mentioned in Petroleum Economist in April. Rosneft also said in June it would sell a 24% stake in its Vankor oilfield to a consortium of oil companies including state-run Indian Oil Corporation and Bharat PetroResources, just a month after offloading a 15% stake in Vankorneft, the subsidiary that runs the field, to ONGC, another Indian firm.

Russian energy companies have been whiplashed over the past three years by a combination of sanctions and plummeting oil prices. While oil's decline was cushioned by the ruble's depreciation, the weaker currency had an impact on the overall economy, hurting domestic demand. Financial sanctions, which were introduced over Russia's involvement in the Ukraine conflict, have restricted access to capital markets while sectoral sanctions have frightened off international players from taking part in new exploration.

The St Petersburg forum, in Putin's hometown, is the showcase event in Russia's business calendar, giving investors a chance to seek the Kremlin's blessing for their projects. In the past few years, the guest list became a barometer of international investor appetite for Russian assets. At this year's event, Putin met personally with Tillerson and van Beurden.

Tillerson's presence in St Petersburg was especially significant. In 2014, the sanctions forced US firm Exxon to suspend its joint operations with Rosneft in the Arctic Kara Sea, where they had already carried out some drilling. The sanctions prohibit Western companies from giving Russia technology for Arctic offshore, deep-water and shale oil development. Rosneft has not resumed drilling in the region since Exxon withdrew, blaming the embargo.

M&A activity picks up

The sanctions haven't been lifted, but mergers and acquisitions activity has perked up nonetheless. The official deal count at this year's forum more than tripled to 332, worth RUB1 trillion ($15.4bn).

The number of leading Western investors and politicians coming to the Petersburg forum dropped off sharply in 2014, after Russia annexed Ukraine's Crimea Peninsula and backed pro-Russian separatists in eastern Ukraine. But the politics in Europe are shifting. Alongside the oil sector's big names, Italian prime minister Matteo Renzi attended the forum, as did European Commission President Jean-Claude Juncker, who mapped out a path for normalisation of relations with Russia.

Western governments say in public that the sanctions will not be eased until an internationally-brokered peace deal on eastern Ukraine, the Minsk Agreement, is fully implemented.

The deal count at this year's forum more than tripled to 332, worth RUB1 trillion ($15.4bn)

In private, they talk differently. Diplomats admit that the deal is unlikely ever to be implemented - an admission of both Russian intransigence and the intractability of the eastern Ukraine problem. At the same time, big European firms have lobbied hard for Russia's market to be reopened to them; keen to re-enter its economy as it emerges from a two-year-long recession.

Pressure to ditch some of the sanctions has been building inside Europe, according to officials with EU member states. Italy and France have led this argument. Patrick Pouyanné, chief executive of French oil major Total, said his country had maintained the highest rate of investment in Russia among all Western countries during sanctions. Italian premier Renzi said €1bn worth of deals were closed with Italy alone at the forum including new cooperation between Rosneft and Italian energy major Eni and shipbuilding company Fincantieri on designing and building a new vessel. Russian gas producer Novatek signed two separate deals with Italy's Saipem and Nuovo Pignone on co-operation on LNG projects

Pouyanné claimed that political rapprochement was in the air, partly because France and Russia had learned to cooperate over the conflict in Syria. "The forum is clearly more active this year. I'm meeting more people this year," he told delegates in Petersburg. "People are adapting."

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