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. Last Updated: 07/27/2016

Energy Giants Take Global Strides

LONDON — Russia's giant energy firms, armed with cash stockpiles from the oil price rally, are on the march with acquisitions in mind — from the United States to Ukraine.

But the advance into neighboring countries may be summoning up unsettling memories in East Europe, analysts say.

"Given the amount of money the Russians made in the past two years, they have enough money to go through with expansion," said Charles Saunders, emerging market analyst at Nomura.

"But the Eastern Europeans are nervous … we are seeing bald-faced moves from governments and companies to keep them out."

LUKoil, the largest and most aggressive of the Russian oil majors, already operates a 1,300-strong filling station network in the United States, and is on the prowl for a U.S. refinery as well as retail networks in Canada and Mexico.

"Our enormous reserves and growing crude production are forcing us to expand our downstream operations in Europe and the United States," LUKoil Europe head Ralif Safin said on a recent visit to London. "We are wary of only depending heavily on crude exports."

The company may snap up Austrian Avanti's chain of filling stations and is starting to look at Yugoslavia's Novy Sad refinery having already brought refineries in Bulgaria, Romania and Ukraine.

Gas giant Gazprom hit the headlines last month after firms allied to it bought 50 percent of Hungary's Borsodchem. It also indirectly owns part of the strategic TVK petrochemicals group.

The mysterious Gazprom-affiliated trader Itera last week inked a deal with Spain's Union Fenosa, allowing them to jointly bid on electricity privatizations in Eastern Europe.

And Crown Resources, a Swiss entity owned by Alfa Group, took over the high-profile commodities trader Marc Rich Investment, getting a foothold in metals trade as well as broader geographic coverage of oil trading, from Middle Eastern to West African crude.

Suddenly the Russians seem to be everywhere.

"Itera's deal with Fenosa is potentially very important as this is the first time they are stepping out of the Commonwealth of Independent States," said Jonathan Stern of Gas Strategies.

Other Russian firms too are starting to get in on the act. Slavneft and Rosneft jointly operate a network of gas stations in Bulgaria and Romania, while Nafta Moscow does the same in Finland. The Tyumen Oil Co. has two refineries and a filling station chain in Ukraine.

Russian oil majors are finding their home market cramped. Soaring oil prices gave the sector a free cash flow of $16 billion in 2000 and the figure for this year is put at $11 billion.

"There is not a sufficient number of attractive assets left in Russia for these companies to invest in," said Dmitry Avdeyev, oil analyst at United Financial Group brokerage.

The 1998 financial crisis and crashing oil prices later proved that a constant flow of hard currency revenues needed to be balanced by diversifying beyond crude exports.

Low incomes in Russia prevent downstream revenues from rising much. Domestic oil prices are also lower than world prices and companies often have trouble collecting on payments.

But some analysts question if there is a strategy behind overseas acquisitions.

Gas Strategies' Stern said Gazprom needed to concentrate currently on developing its productive assets.

"European utility privatizations are for rich people and Gazprom is not rich," he said. "It should concentrate on projects such as Blue Stream [pipeline to ship gas to Turkey] instead of expensive acquisitions which could be speculative."

However, U.S. expansion plans looked less viable, UFG's Avdeyev said, adding: "It remains to be seen if LUKoil can get a synergy between its Timan-Pechora field in Russia and the U.S. market."

And the path abroad is not hurdle-free. Despite booming revenues now, Russian companies cannot compete with Western rivals as far as cost of capital is concerned. But the biggest hurdle could be what analysts refer to as the Russia problem.

The Russia tag is not popular. LUKoil markets its oil in the United States under the name of Getty Petroleum and says it has to be careful about being perceived as a Russian firm. Most overseas purchases by Russian energy firms are in other names.

And their expansion is making many people in Eastern Europe very uneasy. In Poland and the Czech Republic, LUKoil was shut out of refinery privatizations. In Hungary, the BorsodChem takeover prompted the government to toughen corporate takeover rules.

Hungarian energy firm MOL and Poland's PKN Orlen have forged an alliance seen as key to ward off takeover bids by a Russian company.

"History is working against the Russians," said Nomura's Saunders. "The East Europeans are scared to the extent that firms like MOL have changed their charters to force people holding over 2 percent of shares to reveal their ownership.'