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. Last Updated: 07/27/2016

Investors Take Note Of TNK Oil Deal




Last week's controversial auction of bankrupted Sidanko subsidiary Chernogorneft is the signal to foreign investors: Time to cut your losses.


Or so says BP Amoco, 10 percent owner of Sidanko, which has portrayed the Chernogorneft auction to Russia's Tyumen Oil Co., or TNK, as the last straw for Russia's beleaguered foreign investors.


"We believe the bankruptcy process was seriously flawed. BP Amoco will be carefully reviewing its business position in Russia in the light of this sale," BP Amoco spokesman Howard Chase said Friday.


While TNK officials defended the auction, BP Amoco and its allies slammed the sale as illegal, saying the external managers at Chernogorneft had manipulated affairs to favor BP Amoco's rival. TNK bought Chernogorneft - which had sales in 1998 of $1.1 billion - for $176 million.


BP Amoco - which called the sale a major blow to foreign investor confidence in Russia - must now decide whether to make good on its veiled threats to retreat from Russia.


But even as they expressed their concern at BP Amoco's plight, many foreign investors and expatriate businessmen in Moscow said it will take more than one or two headline-grabbing horror stories to dislodge them.


In a straw poll taken this week, investment experts and local managers of foreign company operations in Moscow said they watched with trepidation as Chernogorneft went on the block.


But none of them felt surprise - and neither did the sale make them want to pack up and leave.


"That sort of stuff has been going on for a long time. Shareholder rights - that's been a dangerous game from day one," said the general manager of a Western consumer goods company. "I wouldn't say in general that we should see one or two or three disputes as an indication of what we should all do."


"There are always one or two cases like this" in emerging markets, said Ari Tolpannen, chairman of the European Venture Capital Association, which last week presented a white paper of recommendations on how to attract capital to Russia.


That is not to say foreign investors are not worried about their position here. But what worries them most are the day-to-day trials of doing business: perennial tax and customs trouble, anti-competitive practices and corruption.


Many of the managers said they were actually hungry to expand their business in Russia. But some said cash for new projects is often stopped at the source as their proposals are met with increasing skepticism from their home offices, they said.


"The ability of local management to deal with home offices is a big problem," said Karl Johansson, the managing partner of Ernst & Young's CIS operations. "If a company is looking at a project and they can do it in Russia or somewhere else, you have to get a very compelling case to get capital [to Russia]."


Johansson was recently surprised by a phone call from reporters checking up on a claim by the tax police that his company had failed to pay millions of rubles in taxes.


The tax police had claimed that Johansson fled the country to escape a pending criminal charge that could land him in jail. His office spent days sorting out the dispute with the tax police as he tried to calm down alarmed clients.


The petty travails experienced by many foreign businesses who operate here are the stuff of local lore in Moscow, but Johansson said word of corruption and poor governance have gotten back to the West and damaged Russia's reputation.


His comments were echoed by other expatriates.


"It's just like, 'Oh God! Russia!,'" said a representative at one multinational, describing the response of his bosses when local managers have tried to lobby for expansion in Russia.


No one would attempt to put a dollar figure on the amount of money Russia was losing to shoddy treatment of investors. But the figures available are grim. Russia has one of the lowest levels of per capita foreign direct investment in the region, a fraction of what its neighbors in Eastern Europe and the Baltics receive each year.


Foreign direct investment has fallen sharply from its peak level of $3.75 billion - a pathetic $25.60 per capita - in 1997. According to statistics published last month by the European Bank for Reconstruction and Development, the figure fell to $1.2 billion in 1998 in the wake of the Aug. 17, 1998 crash and should hit $3.5 billion in 1999. In figures released this month, the Economics Ministry put its projections slightly lower, at $3.4 billion.


One influence is investors' sense that the government is unwilling to protect them even from the petty, everyday hassles of business life in a land where bureaucracy and corruption reign well-nigh supreme.


Scott Anstel, a tax partner at Arthur Andersen who heads the American Chamber of Commerce investment committee, said he warned potential investors to stay out of Russia if they weren't prepared to spend money and management time coping with such hassles, one of which he called "the unquantifiable taxes of being here."


For example, one Moscow restaurant, grateful to city electricians for their quick response to a power outage, gave them a free meal. They were rather less happy when the power went back off within a week.


"It took them five minutes to go someplace and flick a switch and turn it back on. We paid them and gave them dinner and it happened again five days later," said the restaurant's Western director.


A more major hassle were the customs officials who spiked a multinational company's planned appearance at a recent industry exhibition.


The company, which did not want to be identified, said it had its samples held up by customs official in spite of legal guarantees that foreign investors can temporarily import property as samples.


"We took the decision to let the samples [remain in customs hands] instead of bribing them," said a member of the company's foreign management in Moscow.


Many members of the foreign business community are now saying it is up to the government to prove Russia is a worthwhile place to do business.


"Does the state want foreign investment?" Anstel said. "If they do, it's time to show me."