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Russia-Venezuela: Contracts under threat?

RIA Novosti/ Sergey Guneev

Dmitry Medvedev, president of Russia and Hugo Chavez, president of Venezuela

By Pedro M. Burelli

It is refreshing to read this article in Russia's state-owned news service RIA Novosti (see below). This might very well be intended to reflect the split that exists among Russian officials about murky dealings with Bolivarian Venezuela. 
On the one side there is the team headed by Igor Sechin, Deputy Prime Minister and Energy Zar, that believes they have to take full advantage of a weak government in Caracas in order to sign as many contracts as possible ("The next guys will be inclined to sign deals only with US companies" goes their storyline). 

On the other side, there are Foreign Ministry officials and international advisers to the Kremlin more attune to the risks posed by dealing with a government that has unilaterally changed the terms of all pre-existing oil contracts and nationalized hundreds of companies. This tug of war has been going on for at least 6 years and it is clear that Sechin's group has made huge inroads into Venezuela as the regime desperately seeks funds and allies to survive its own administrative incompetence and moral recklessness. 

The hope of the "lets take advantage (lets get rich) group", as expressed by one of the individuals interviewed for this article, is that these contracts are treated as "State to State contracts" and not as contracts signed by various Russian entities with a particularly corrupt and indecent government. However, as was the case with Saddam Hussein's Iraq and Gaddafi's Libya, the flaw in this approach is that contracts signed in haste with crumbling regimes are particularly vulnerable. Past experience notwithstanding, t he monies involved for promoters and intermediaries is too tempting to pass up and might in itself justify brokering and signing these deals independent of their eventual fate.

Hundreds of millions of Venezuela's and Russia's easy-earned oil dollars are probably already in secret accounts of crafty functionaries on both ends of these hurried deals.  

From my conversation with leading opposition political figures in Venezuela, there is absolutely no intention to break LEGAL commitments that serve the real interests of a free and truly democratic Venezuela, but at the same time there is a clear expectation that grown ups - whether they speak Russian, Mandarin or Brazilian Portuguese - will understand perfectly well when the music stops and it is time for them to leave the party owing up for junk debt, broken down air crafts, rusty tanks and 'misplaced' silverware. 

In order to ally misperceptions and fears, I have reminded many in Russia's establishment that the Chinese oil companies came into Venezuela prior to Chávez's election in 1998. They were awarded contracts in open and transparent processes in which they outbid some of the largest companies in the world - including most of the US based oil majors. Russian companies were invited by PDVSA to participate in these bidding rounds and it was the Russian government that banned them from doing so as the main priority then was to channel scarce funds into Russia's crumbling Soviet-age oil infrastructure. So it is not true that an opposition led government will blackball Russian energy companies as a matter of principle. And at the same time they must remember that Chávez unilaterally changed the terms of the Chinese contracts and treated them with the same heavy handedness he treated Conoco and Exxon. 
I hope this article is well read in the Kremlin and surrounding buildings. There is much to be learnt about 11th hour greed.

PS: a little know fact about April 11th 2002 is that the Russian Federation was the first country to issue a statement expressing their desire to maintain good relations with the Carmona administration. Trace of that statement disappeared a few days later from the Russian Foreign Ministry web site, but it remains forever archived in the digital files of news agencies too lazy to point this relevant factoid out. 

What Russia stands to lose if Venezuela sees regime change

By Natalia Karnova / Ria Novosti

Multi-billion dollar contracts between Russia and Venezuela, sponsored by Hugo Chavez, the incumbent president of this Latin American country, may be under threat. The health of the 57-year-old Venezuelan leader, who has ruled his country for almost 13 years, is deteriorating. This development comes not long before Venezuelans vote in presidential elections.

A number of experts have been polled by Prime on what could, potentially, happen to Russian contracts in arms, oil, gas, energy, transport and agriculture, and what might be in store for the companies that concluded these contracts and are working in this Latin American country if Chavez goes.

Investment and plans

The Civilian Association Citizen Control for Security, Defense and Armed Forces reports that over the past six years the country has spent $15 billion on weapons and military equipment, with Russia accounting for $9.5 billion of that sum.

Last week, a Russian delegation led by Deputy Prime Minister Igor Sechin visited Venezuela and signed an agreement on granting the Bolivarian Republic a $4 billion loan to continue this military-technical cooperation with Russia. Two billion will be allocated next year, and two more in 2013, Chavez explained.

Development of the Junin 6 and Junin 3 oilfields on the Orinoco River is one of the major joint venture projects involving the two countries. Junin 6 is being developed by Russia's National Oil Consortium, which includes, on a parity basis, Gazprom Neft, Lukoil, Rosneft, Surgutneftegaz and TNK-BP, together with Venezuela's state company PDVSA. Junin 3 is being developed by Lukoil.

Russian energy giant Inter RAO UES is planning to build a petroleum coke-fired power plant in Venezuela and is also interested in other projects. Russia is contemplating supplying more machines and equipment to this Latin American country and importing bananas and other agricultural produce.

Does it all hang on Chavez?

Experts interviewed by RIA Novosti have expressed varying views. Vladimir Sudarev, deputy director at the Russian Academy of Sciences' Latin American Studies Institute, does not believe the situation, especially regarding Chavez's health, should be overdramatized. "The main problem is that the regime itself is unstable, there is no successor, and the mood among Venezuela's top brass and army is not quite clear," he said. But extreme scenarios like a military coup are ruled out because that era in Latin American history is long gone, he believes.

In his view, whatever the situation, most of the contracts have been concluded with the Venezuelan state, not Chavez personally. Should the opposition suddenly take over, it may of course annul them, but it is a point of honor for any government to pay what it owes, especially as otherwise the Hague Court might step in.

"It is true that many of the contracts concluded with Caracas are linked to Chavez, but many people around him have backed them, too," argues Dmitry Abzalov, a leading expert from the Center for Current Politics. "This offers the country's authorities the chance to maintain a balance between the interests of North America, the destination for a lot of Venezuelan oil, and other partners, including Russia."

Russian oil and gas companies are understood to be firmly settled in Venezuela and the main risk they face would be power falling into the hands of individuals from the anti-Chavez northern provinces. Under this scenario, many nationalization projects and programs would be abandoned, companies would revert to their former owners, and Russia might find itself back at square one, the expert believes.

Konstantin Simonov, general director of the Foundation for National Energy Security, is confident that "judging from the Libyan experience, our contracts in Venezuela are likely to meet an unenviable fate." In his day, Chavez drove Western companies out of the country and refused to pay them compensation, so any new government would most likely invite them back, while simultaneously meting out the same harsh treatment to these Russian partners, who would later be said "to have cooperated with a criminal regime," he believes.

No to arms - yes to oil

What will happen to specific contracts? In Sudarev's opinion, if the opposition comes to power in Caracas, it will start by canceling the arms contracts with Russia. "We are partly to blame for this - although we offer sophisticated weapons, we do not back that up with any maintenance services," he said.

However, he downplays the impact any reduction in Russia's military contracts with Venezuela would have, pointing out that they already total nearly $10 billion, plus another four billion loaned by Russia, with half set to be used for military purposes. Therefore going forward the country is not particularly likely to need further armaments.

Oil and gas cooperation is likely to survive because it benefits Venezuela. Russia does not charge heavily and has positive experience in this field. "If reasonable people come to power in Caracas, they will be unlikely to shoot from the hip," Sudarev believes.

On the whole, in Sudarev's view, Russia should focus on the high-tech sector and nuclear energy rather than on car exports to Latin America, because the car market there is already cornered by Chinese and Korean manufacturers.

Abzalov of the Center for Current Politics agrees that some contracts may be revoked. "We will have a chance to retain our positions if pro-active steps are taken, as has happened with a number of Lukoil projects in Iraq," he noted. "Here Russia should both uphold general trends on the continent and look out for its own interests since, in a number of areas, Venezuela is our rival."

How much does Russia need this Caribbean foothold?

Experts agree that Venezuela is a promising country on the whole. This applies especially to the Orinoco deposits, in which China has already expressed an active interest, Abzalov noted. "Then there are the mineral resources and transport infrastructure, for example, the construction of a gas pipeline stretching across Latin America, to which Russia might like to contribute," he said.

"The fact that we are now established in Venezuela benefits us, including in terms of contacts with its neighbors," Sudarev believes. "It is a regional leader. It would therefore be wrong to pull out of it voluntarily."

Abzalov argues that if Russia wants to retain its positions, it should put down strong roots in Venezuela and cultivate cooperation with other countries in the region - Brazil, Argentina and Chile. "The important thing now is to reach an agreement with Venezuela's elite, Chavez's potential successors and, as far as I am aware, contacts are already being pursued through defense and defense industry channels," he said. "We may soon find out about talks ongoing on exactly this."

Simonov, on the other hand, does not believe that Russia should invest tens of billions of dollars in the Bolivarian Republic and cherish dreams about a global partnership. It is better to spend the money on developing deposits in Eastern Russia. "Bizarrely, we have paid about a billion dollars just for the right to invest in Venezuela," he said.

The problem is that Russia, as it seeks entry into foreign markets, chooses the most roguish regimes as partners and consequently runs terrible political risks. "Projects in Venezuela are set to last ten years, not a year or two, and this is a period when something is bound to happen to Chavez," he argues. In countries like this, regime change equals changing project participants, yet Russia stubbornly walks into the same trap time and again, Simonov concludes.

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Pedro M. Burelli is a financial consultant, a former member of PDVSA board of director and ex head of JPMorgan Capital Corporation Latin America. Most of his articles can be read at Natalia Karnova is a Russian journalist. Petroleumworld does not necessarily share these views.

Editor's Note: The commentary by Natalia Karnova was originally published by Ria Novosti, on Sep. 11, 2011.The views expressed in the article are the author's and do not necessarily represent those of RIA Novosti Petroleumworld reprint this article in the interest of our readers.

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