By: Glen Johnson

The urban landscape of contemporary Moscow is a far cry from its Marxist-Leninist days.  Indeed, one would now be hard-pressed to find a major American fast food company whose presence is not ubiquitous in Moscow; among more recent additions to the scene one will find Papa Johns, Wendy’s, and Burger King.  The same goes for major companies like Nike or Apple, which have stores in both the capital and many provincial cities as well.

Other spheres of American industry have fared less well.  Most notably, the attempts by major American energy firms to make headway into the Russian market have been largely frustrated.  Many of the difficulties in entering into its energy market are inherent to the state-corporatist model that Russia has adopted towards its energy sector: admitting foreign oil companies means a diminished level of control over its strategic and lucrative asset.  The foreign participation that is permitted is typically in the form of joint-ventures and often requires good (or at least not bad) political standing for success.  Given recent moves by Washington and Europe to free Russia’s neighbors from gas dependency on Russia (most successfully seen in the construction of the Baku-Tbilisi-Ceyhan pipeline which entirely circumvents Russia and Tehran), as well as a series of high-profile diplomatic spats in the Bush years, an annoyed Russia has been reluctant to award coveted contracts to American firms.  As such, the recent agreement between Exxon and Rosneft, a large state-owned energy company, is rightly viewed as at least partially symptomatic of the warming that has occurred since the reset of relations.

As for the specifics of the bargain, the deal is roughly as follows: Exxon is to receive a third of the venture’s revenue in the Kara and Black Seas, but is to bear all of the costs for the geological prospecting.  It also stands to receive significant relief from the daunting 76% tax imposed by the government on oil proceeds.  According to the head of Rosneft, Igor Sechin, Rosneft is to receive a proportional share (33.3%) in at least six projects in North America, including drilling operations in the Gulf of Mexico and Texas.

Ekaterina Debrilova analyzed the deal thoroughly for Vedomosti and demonstrated that a competing offer made by BP earlier this year was actually more lucrative for Rosneft than the one made by Exxon, since BP’s almost identical bid also included a stock offering, which Exxon declined to present.  So if the offer doesn’t make sense exclusively in business terms, then there must be some additional factor that entices the Russians; it is hard to imagine that it would be anything other than the prospect of gaining a major holding here in North America, with the concomitant influence that comes with (partial) ownership.  The Europeans are already heavily dependent on Russian oil and gas; it is probably with this in mind that PM Putin, who oversaw the whole affair, spoke of “new horizons” in his characterization of the deal.

Despite PM Putin’s expansive declarations, many observers have voiced skepticism given how foreign oil and gas have fared in the Putin era (most prominently the forcible sale of much of Royal Dutch Shell’s share in the Sakhalin project to Gazprom in 2006). The New York Times reported on a raid at BP’s Moscow headquarters the day following the conclusion of the Exxon deal, which was interpreted by the article’s author as a warning to Exxon to remind them who runs the show.

These are valid points, but one should bear in mind that as Russia becomes more invested here in North America it will become simultaneously less able to behave badly.  The case of Germany, which is one of Russia’s biggest and best customers in Europe, is instructive.   Rather than the confrontational approach to Russia taken by the newer EU member states, Germany has chosen a “change through engagement” tactic.  As a result of their intertwined status, Russia takes great measures to ensure that good relations continue.  We have seen during the second Putin term that Russia does not respond well to denunciations and inflammatory rhetoric, especially when it has little invested in the accuser.  Engagements based on mutual interest like the one made by Exxon stand the best chance of tempering behavior and curbing unwanted unilateralism.