Russia Goes West with Its Oil Riches

Russian companies are interested in buying major stakes of European corporations and sports teams, but they're rarely greeted with open arms

It has been 12 years since the Russian army withdrew from Europe, following a defeat that was more economic than military. The lesson that money can be more powerful than tanks was not lost on Russia's current generation of leaders. They're back, this time armed with bank accounts bulging with energy wealth.

Reports on Nov. 1 that Moscow conglomerate Sistema is interested in acquiring a 25% stake in Deutsche Telekom (DT), Germany's dominant telco, were quickly denied by both companies. Still, it's clear that Russian companies are keenly interested in buying major corporate assets in Europe—and have the wherewithal to do so.

Earlier this year, for example, Russia's OAO Severstal tried unsuccessfully to snatch away Luxembourg steel giant Arcelor in the middle of its protracted acquisition by Mittal Steel (MT)(see, 6/20/06, "Arcelor: Beginning of the End?"). And in September, Russia's Vneshtorgbank acquired 5% in EADS, owner of planemaker Airbus. Vneshtorgbank has close ties to the Kremlin, which is looking for Western investment to help revive the Russian aircraft industry (see, 9/18/06, "Russia's Grand Plan to Restore Its Glory").

Hostile Reception

Also on the hunt is Russia's Alfa Group. On Nov. 2, The Times of London reported that the consortium has approached Vodafone about buying a 20% stake in the British mobile-phone company for $29 billion. Vodafone denied there are any talks with Alfa, but executives of the Russian company's mobile unit, Altimo, have made it clear they are seeking international partners and have held talks with several European companies.

Russian investors already have significant holdings in Europe, ranging from the Chelsea football club in England to Wingas, a German gas distributor 50% owned by Russian gas behemoth Gazprom. But attempts by Russian companies to acquire assets are almost always controversial. Gazprom provoked outright hostility when a company executive expressed interest in acquiring a stake in Centrica, owner of British gas, earlier this year.

It would be an exaggeration to say that Russian companies are plotting to avenge the Cold War by conquering European corporations. Rather, analysts say Russian companies are looking for ways to diversify their holdings, reduce their dependency on the domestic market, and increase the country's economic clout. Altimo, for example, would like a Western partner to help finance expansion outside the saturated Russian and Ukraine markets. Gazprom officials have indicated they want to get closer to end users of gas, where much of the profits are.

Nyet to Foreigners

At the same time, there are strong links between many companies and the Russian government, and the Kremlin has shown it will use its energy clout to advance Russian corporate interests abroad. Last month, Gazprom said it would exclude foreign partners from development of the Shtokman gas field, a blow to companies such as ConocoPhilips (COP) or Chevron (CVX), which had hoped to participate (see, 10/18/06, "Is Russia Capping the Cooperation Well?").

The decision "was a very clear signal that Europe cannot continue to get easy access to Russian energy if it isn't prepared not only to allow Russian energy companies to expand downstream, but in general [to let] Russian industry expand into Europe," says Chris Weafer, chief equity strategist at Alfa Bank in Moscow.

Indeed, Russia has often showed it can play rough. After Lithuania sold its only oil refinery to Poland's PKN Orlen rather than to several Russian suitors, the Russian state oil transport monopoly cut oil shipments. Russian officials said the pipeline to Lithuania was outdated and unsafe.

Government Concern

Though Russian companies are flush with cash, they prefer to make deals using asset swaps rather than outright purchases. According to German and Russian news reports, Sistema, which is advised by former Deutsche Telekom CEO Ron Sommer, hoped to swap its MTS mobile-phone unit for just over 25% of the German company.

A stake that large would give Sistema veto power over major decisions at Deutsche Telekom. Analysts said a DT linkup with Sistema is unlikely because the German government, which owns 31.7% of Deutsche Telekom, wouldn't allow it. A spokesman for Chancellor Angela Merkel denied reports that she discussed a Sistema-DT deal when she met with Russian President Vladimir Putin in October.

The prospect of a merger "is a nice story, but when you look at the statements by government representatives it seems improbable," says Ulrich Trabert, a telecommunications analyst at Bank Metzler in Frankfurt. A Sistema spokeswoman denied there is a deal with Deutsche Telekom, though she added it is possible there have been general discussions about the idea.

Feeding a Boom

Still, there is little doubt that the Russians want to do something with the estimated $170 billion in oil and gas exports they're expected to book this year. As of September, the country's 12-month current account surplus topped $101 billion, helping feed a domestic economic boom.

By searching for external investments, Russia isn't behaving any differently from other countries that have racked up big energy wealth. The emirate of Kuwait holds 7.2% of automaker DaimlerChrysler (DCX), making it the second-largest shareholder after Deutsche Bank. And until 2003, the government of Iran owned nearly 8% in German steelmaker ThyssenKrupp.

Besides wielding their energy resources as a club, the Russians have also discovered public relations. In October, Gazprom agreed to sponsor Schalke 04, a premier-league football team in Germany's Ruhr Valley. Schalke players will wear jerseys with the Gazprom logo.

Analysts don't expect the Russians to suddenly start making nice, though. "There is obviously a resistance to Russian companies taking strategic equity stakes, and it's up to the government to resolve that," says Alfa Bank's Weafer. "One way they're doing that is by playing the energy card."

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