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Russian energy companies target foreign expansion

The credit crunch is hitting Russian companies hard, but it has not put a brake on their international ambitions. Latin America is its newest target

It was quite a trip. Ostensibly in South America to attend a summit of the Asia Pacific Economic Cooperation countries in Peru, President Dmitry Medvedev led an entourage of Russian businessmen across the continent, trailing arms and oil deals in his wake. One can only guess at the air miles accumulated.

While its economy flounders at home, Russia is stepping up its business activities abroad. Not just in Latin America, either: Medvedev followed up the junket in November with a trip last month to India, promising to help the country fight against terrorists. In other words, Russia will renew weapons trading with an old customer.

In Europe, meanwhile, Lukoil's attempt to buy a 30% stake in Spain's Repsol YPF gave EU politicians another excuse to worry about Russian influence in their continent's energy market. A leaked report from Spain's secret service, the CNI, claimed Russia was trying to "isolate" the country and sew up energy supplies into southern Europe, the only region of the continent where its influence has been weak.

That could be a consequence of Lukoil's move for a stake in Repsol YPF: the privately owned Russian firm already has a strong North African presence. But it is not the end game of the company, say analysts. Instead, Lukoil considers the Spanish firm to be a launching pad to advance its energy interests in South America, which is responsible for almost all of Repsol YPF's reserves of 2.3bn barrels of oil equivalent.

Indeed, following Medvedev's trip across the continent, it is hard to escape the impression that Russia is zoning in on the region. The president confirmed as much in a press conference at the end of his visit: "This is not simply a tour for the Russian president, his colleagues and a pool of journalists," he told reporters. "This is a serious geopolitical decision. We will develop our relations with the countries of Latin America and the Caribbean." In this, as in everything else, Medvedev's policy reflects that of his predecessor Vladimir Putin. The Russian prime minister said in September that Latin America was "an obvious link in the chain making up a multi-polar world," adding that Russia would "allocate more and more attention to this vector of our economics and foreign policy".

"New Russia is still in search of its new place in the world," says Valery Nesterov, an analyst at Troika Dialog, in Moscow, of the recent focus on South America. After another spate of disagreements with the West, the country has been "forced to look for new friends – India, Iran, China, Latin America – to try to set up a new centre of power in the world".

The trend has been under way for some time. Rarely a month goes by without an announcement from Gazprom, the state-controlled gas company, saying it has entered into a new heads of agreement with a foreign state. The difference now is the oil price. While the market was pushing crude prices along their eight-year bull run, Russia had the money to spread its influence. But now Russians are asking why their companies should be looking at foreign assets when its own energy sector is running short of investment.

Lukoil's willingness to spend $6.3bn for a 30% stake of Repsol YPF is a case in point. The company must have received some encouragement from the Kremlin to pursue the Spanish firm, says Nesterov. Although it is Russia's largest independent energy company, Lukoil was established partly to expand the country's foreign energy reach. But opposition to the Repsol YPF deal has since emerged from within the Russian government. Lukoil was one of the companies that sought assistance from the Kremlin in October as the global financial crisis threatened to paralyse the financing arrangements of Russia's largest energy firms. The money offered, says Nesterov, was meant to mitigate the companies' exposure to foreign debt – not to be used to finance acquisitions abroad. Lukoil is said to have debts of almost $2bn maturing next year.

Spanish opposition

Last month, Lukoil was trying to overcome Spanish opposition to the deal. Repsol YPF's chief executive, Antoni Brufau, says he will resign if the company does not remain in Spanish control. Central to Lukoil's bid is the fate of Spanish construction company Sacyr Vallehermoso, which is groaning under heavy debts as the country's construction boom turns to bust. Sacyr is Repsol YPF's largest shareholder, with a 20% stake. If Sacyr sells it to Lukoil, La Caixa, a Catalan bank, says it will also sell part of its 12.5% shareholding in Repsol YPF. Both companies were negotiating with Lukoil last month.

Repsol YPF's statutes mean that any company that buys a 30% stake must launch a full take-over bid. Lukoil has not stated publicly that it wants to buy the company outright, but, whether it does or not, Brufau is not keen: "Losing control of the company as a result of a transaction that doesn't involve a take-over bid will not have me at the forefront [of that company]."

Spain may yet find ways to resist the Russian overtures – Sacyr last month said it would welcome financial assistance from the government allowing it to retain its stake in Repsol YPF. The company has some justification in asking for help, given that the government encouraged Sacyr to build up its stake in 2006 – part of an effort to resist Lukoil when it made its first approach two years ago.

But in South America, a base for the Spanish firm since 1999, when Repsol bought Argentina's YPF, politicians are preparing for Lukoil's arrival (the company already holds assets in Venezuela). Argentina's president, Cristina Kirchner, for example, was due in Moscow last month to discuss closer energy ties between her country and Russia. She follows a path to the Kremlin that has been well trodden by other South American leaders and one that was made more welcoming by Medvedev's tour of the continent.

Venezuela has been the beachhead for Russian energy relations in South America. PdV, the national oil company, has signed agreements with Russian companies eager to do business in an oil and gas sector where the Western majors are unwelcome. According to Russia's energy minister, Sergei Shmatko, another fellow traveller on Medvedev's November tango tour, a new consortium headed by PdV and including Gazprom, Rosneft, TNK-BP, Surgutneftegaz, and Lukoil will spend "tens of billions of dollars" developing the country's natural gas sector; this might involve realising President Hugo Chavez' dream project to pipe gas through South America: a 9,000 km project that would export Venezuelan gas to and through Brazil, ending up in Argentina, and which could cost up to $25bn.

More specifically, Gazprom and PdV also signed an agreement to assess the oil potential of the Ayacucho 3 block in the Orinoco heavy-oil belt. Gazprom already holds rights, acquired in 2005, to produce gas from the Rafael Urdaneta field, offshore Venezuela's western coast, as well as the development rights to the nearby Urumaco 1 and 2 blocks.

Russian companies are also now eagerly turning their attention to Brazil, where the government's ambitions to renew the country's armed forces has attracted the Kremlin's attention. There is also an energy motive. "Brazil could have oil exports greater than Russia's by 2015," says one analyst. "That is also in the back of Russia's mind." Medvedev and Brazil's president, Luiz Inácio Lula da Silva, concluded the former's visit with a heads of agreement covering energy, technological and military co-operation.

Gazprom, meanwhile, announced that Brazil would host the country's new Latin American headquarters. The boss of the company's export division, Alexander Medvedev, who travelled with his namesake to Latin America, suggested Gazprom would seek partnerships with state-controlled Petrobras in the country's upstream, including "offshore fields recently discovered" and "promising onshore fields".

Alexander Medvedev also emphasised that the company was seeking to use the financial crisis to expand its international presence. "The crisis has positive aspects as well, as the cost of services, materials and equipment will decline, and this will help us employ our funds more efficiently." He added: "No crises could divert us from the path of turning into a global energy company."

For Russia's many critics, that sounds ominous. Robert Amsterdam, an outspoken critic of the country's energy policy, says Western consumers should be wary. "Russia's actions abroad will just give more power to those who want to distort energy markets," he says. Corporate expansion abroad, claims Amsterdam, is of a piece with the plans of Igor Sechin, chairman of Rosneft and first deputy prime minister with oversight of Russia's oil sector, for Russia to co-operate with Opec and build a natural gas cartel with Iran and Qatar.

Financial squeeze

Few of those policies have yet borne fruit, however. And the financial squeeze on Russian companies at home could yet undermine their international ambitions, suggests Troika Dialog's Nesterov. Whether Gazprom's overseas partnerships mean the company begins spending heavily on those ventures is questionable. Gazprom is already struggling to invest sufficiently in some of the world's largest untapped fields, in northern Russia, which would feed a guaranteed premium market on its own doorstep in Europe.

It also has plans, reaffirmed last month, to enter a partnership with ConocoPhillips and BP on the Denali gas pipeline project in Alaska. And it signed a deal last month with Abu Dhabi's Taqa – another state controlled energy firm eager to expand internationally – to develop the Bergermeer gas-storage facility in the Netherlands. In other words, it has its hands full.

Moreover, for all the attention on Latin America that has followed Lukoil's interest in Repsol YPF and Medvedev's recent tour there, Russia is starting from a position of economic weakness in the continent. Chavez and Putin may share a geopolitical perspective, but in hard business terms Russia remains a pygmy in South America.

The Kremlin wants trade between Russia and South America to reach $20bn by 2020 – but for trade between the continent and the US the figure is already over $0.5 trillion a year, points out Richard Weitz, a senior fellow at the Hudson Institute, a conservative think tank in Washington. Trade with EU and China ($250bn and $100bn in 2007) also dwarfs that with Russia, he says. Russia has plenty of work to do if it is to transform its international energy ambitions into genuine international energy expansion.

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