Arrest of Russian Billionaire Captures Attention of Germany

New York Times ^ | November 1, 2003 | MARK LANDLER

[OESY]

FRANKFURT - The shock waves from last week's arrest of the Russian billionaire Mikhail B. Khodorkovsky have spread widely, but not evenly, through the club of international investors.

Here in Germany, Russia's largest trading partner, large-scale investors said that they remained committed to the country. That is hardly surprising, given that they have poured billions of euros into energy-distribution deals, pipeline projects and even equity investments in Russian companies.

But experts say would-be investors within Europe, particularly midsize companies, are likely to shelve their plans until the legal storm surrounding Mr. Khodorkovsky and his oil company, Yukos, dies down.

"This comes at a very unfortunate time," said Alexander de Faria, the chairman of the East-West Development Group, which advises European companies on investing in Russia. "Middle-sized companies had been lining up to go to Russia. Those investments are going to be deferred."

Mr. de Faria said the confusion stirred by the arrest, and the Russian government's freezing of $12 billion in Yukos shares, could reverse many of the country's recent strides in attracting investors.

Russia's sovereign credit rating, he said, had recently been lifted to investment grade by Moody's Investors Service. The German financial press had begun writing about Russia's robust growth and the stable government of President Vladimir V. Putin, rather than seamy tales of corrupt oligarchs.

"German investors always say they worry about the mafia or about having their property expropriated," Mr. de Faria said. "But that attitude was relaxing. People were calling to ask me about Russia."

In the wake of the Yukos affair, they may revert to their old fear of Russia as a political tinderbox.

"Investors have been paying too much attention to the improvement in Russia's credit ratings, and too little to domestic political tension," Jonathan Garner, the managing director of global equity strategy at Credit Suisse First Boston, said in a conference call on Friday with clients.

A German retreat would hurt Moscow more than Berlin. Germany is Russia's fifth-largest foreign direct investor, accounting for 8 percent of its $19.4 billion in cumulative foreign investment, according to the European Bank for Reconstruction and Development.

More important, Germany is Russia's largest trading partner, soaking up 20 percent of its exports in 2002, much of it natural gas. Russia, by contrast, is Germany's 14th-largest trading partner, trailing France, the United States and even the Czech Republic.

Germany does rely heavily on Russia for imported gas, which may explain why the German natural gas distributor, Ruhrgas, played down the effect of the Yukos crisis on its Russian supply lines.

"Our cooperation with Russia is of a long-term nature and has never been disturbed in the past by isolated events," Burckhard Bergmann, the chairman of Ruhrgas, said in a statement. "It is not possible to objectively judge the Yukos case without knowledge of the facts."

A spokeswoman for Ruhrgas, Astrid Zimmermann, noted that the company had imported gas from Russia without interruption since 1973 - weathering an oil crisis, cold war tensions, the dissolution of the Soviet Union and the economic and political dislocations of the 1990's.

In 1998, Ruhrgas bought a stake in the Russian gas giant, Gazprom, which has since grown to 6.5 percent. That stake jumped in value on Friday after President Putin pledged to lift restrictions on the foreign ownership of Gazprom's stock, sending the company's shares soaring.

Mr. Putin also named the chairman of Gazprom's board, Dmitri A. Medvedev, as his new chief of staff, replacing Aleksandr S. Voloshin, who had resigned to protest the arrest of Mr. Khodorkovsky.

Ruhrgas, part of the E.ON group, is currently negotiating with Gazprom to build a $5.7 billion gas pipeline that will snake from Russia, under the Baltic Sea, to Germany and other parts of Western Europe.

The divergent fortunes of Gazprom and Yukos suggest to some foreign investors that this crisis is a personal feud between Mr. Putin and Mr. Khodorkovsky, not the start of a campaign by the government to renationalize all the assets it sold to the oligarchs during the Yeltsin era.

"Some of these oligarchs were more pushy than the others," Mr. de Faria said. "Khodorkovsky was one of the pushy ones."

Some German executives noted ruefully that they had hoped Mr. Putin would crack down on corruption in business, particularly the role of the oligarchs. The arrest of Mr. Khodorkovsky, with its political overtones, illustrates the old saying "be careful what you wish for."

"Investors just have to swallow some things," said Werner Hein, a lawyer who represents German companies investing in Russia. "The situation goes up and down, and one has to take the long view."

The damage from the Yukos affair could flow both ways. While some German investors question their plans to go to Russia, Russian companies with international ambitions worry that they will be tainted.

Christoph Walther, a German public relations executive who handled the 1998 merger of DaimlerChrysler, spent this week in Moscow, meeting with Russian companies who are interested in expanding abroad or raising capital from foreign investors. The subject of Yukos dominated his meetings.

"They are definitely concerned that this could have long-lasting negative effects on how they are perceived," Mr. Walther said.

[OESY]

The Russian stock market, which has been outperforming all others, just dropped 20%. Will it rebound? Should Putin attempt to control the oligarchs when they meddle in politics -- the untold story? Are there investment opportunities remaining in Russia?

[theFIRMbss]

>Should Putin attempt to control the oligarchs when they meddle in politics

Maybe we can trade:
Let Ka-dork-ski go, and send
Martha to gulag...