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Arrest of Russian Oil Magnate Raises Investors' Concerns - 2003-10-29

The arrest of Russian oil magnate Mikhail Khordorkovsky for fraud and tax evasion on Monday has raised serious concerns for many international investors and companies involved in partnership arrangements with Russian counterparts in the oil industry. One prominent industry analyst believes the current situation in Moscow will scare away some investors, but that there will still be opportunities for foreign involvement in the Russian oil patch.

Rice University professor Amy Jaffe, a widely respected observer of the worldwide petroleum industry, says Russia will probably continue to attract foreign investors and strategic partners because of its ample oil reserves. But she says the arrest of Mr. Khordorkovsky and the subsequent turbulence in the Russian stock market will likely scare away some investors.

"When we come to talking about making $1 billion or $2 billion acquisition of shares in a Russian company, there is a cautionary setback when one worries about not just do I have to worry about the politics or other activities of my partners," she says. "But also there are concerns about the instability of the Russian stock market itself."

But Ms. Jaffe says the turmoil in Moscow may have little effect on some of the already existing partnerships between western oil companies and counterparts in Russia. She also notes that the Russians have gained technical help through production-sharing contracts and direct payment contracts with oil service companies from Houston and elsewhere. "I would expect a very optimistic course for the Russian companies and the Russian industries themselves, relying on what I call contract assistance [whereby] I can go out and hire a company to help me with technology and technology training," she says.

Ms. Jaffe says the Russian oil companies have used such contracts with western oil service companies to apply top-notch technology and expertise without having to sell shares to outside investors. "They do not really need to bring in western foreign direct investment to do get access to these kind of technologies," she says. "It is really only to do some of the far-flung resources like the northern Arctic or Sakhalin island, then it really requires some stronger partnerships."

Russia has the largest known oil reserves outside the Middle East and is now ranked seventh in the world among oil-rich nations. The Russian oil companies formed after the fall of the Soviet Union in the early 1990's when many state-owned industries were privatized. Utilizing foreign investment and partnerships, the Russian oil industry has increased production by more than 30 percent in the past few years.