Significance of Exxon-Russia Deal

The oil development deal announced yesterday by ExxonMobil and Russian prime minister Vladimir Putin is important from many points of view. First of all there are the terms of the deal itself:

--a partnership between Russia’s state-owned Rosneft oil company and the top private oil company

--$3.2 billion in immediate investment by the two partners, mainly to explore and develop reserves in Russia's Kara Sea in the Arctic and in the Black Sea

--$450 million for a joint Arctic research center in St. Petersburg

--stakes for Rosneft in Exxon field operations in the Gulf of Mexico, Texas, and elsewhere

The agreement will give Russia access to advanced offshore oil drilling and onshore hydraulic fracturing  technology. It represents a mending of fences between Russia and Exxon, which have been sparring for years over the terms of developing Sakhalin 1 off eastern Siberia, and a definitive end to negotiations between Russian oligarchs and the joint venture TNK-BP, which had sought the same kind of deal involving the same three Kara Sea fields to be explored by Exxon and Rosneft. (Perhaps not coincidentally, BP's Moscow offices were raided the day following announcement of the Exxon agreement, as the business press declared BP's "Arctic dream" over.)

Just as important is the larger political and economic context. Especially since the arrest of former Russian oil tycoon Mikhail Khodorkovsky and his re-conviction at the beginning of this year, foreign investors have been extremely reluctant to risk money in Russia. At the same time, there has been a great deal of capital flight, indicated by negative net investment flows. That troublesome situation has been probably the most important element in the ongoing struggle over who will take the country's six-year presidency next year--Putin or his protegé Medvedev--as Medvedev has styled himself as a reformer more eager to embrace standard free-enterprise business rules.

The Exxon deal, inasmuch as it was announced by Putin personally with a beaming Exxon  CEO by his side signals that it is he who will stay as the paramount leader next year. So too the prominent role in the deal-making by Putin loyalist Igor Sechin, deputy prime minister for energy, who suffered something of a demotion at Medvedev's hands earlier this year. (Medvedev decreed that he an others could not serve in top government jobs while at the same time holding positions in government-owned corporations.) Over the next decade, Sechin claims, the deal could involve hundreds of billions of dollars in oil investment. The deal says loud and clear that Putin doesn't need Medvedev to get big money from abroad.

When Putin sent his cops to arrest Khodorkovsky in 2003, one of the counts against the Yukos chieftain was that he had been discussing a joint venture with Exxon without first getting the Kremlin's permission. With yesterday's deal, the story comes full circle, Using as his vehicle Rosneft, which acquired the Yukos assets stripped from Khodorkovsy (and a lot of private investors), Putin has reached the kind of agreement that Khodorkovsky would have liked to make.

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