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BP investment sounds unprecedented trust in Russian economy
February 12, 2003

British oil major BP has sounded an unprecedented vote of confidence in the Russian economy by announcing the largest ever foreign investment in that country to create Russia's third-biggest oil and gas company.

BP said Tuesday it is to spend 6.75 billion dollars (6.3 billion euros) over four years to launch a joint venture with Russian holdings Alfa Group Access Renova (AAR), which own TNK, until now Russia's fourth largest oil producer.

The news was splashed across the front pages Wednesday of all Russian newspapers, which hailed it as a hugely important development in the country's troubled post-Soviet history.

"A deal of the century!" trumpeted the Izvestia daily. "The key is that foreigners have now accepted that the investment climate in Russia has improved significantly and are willing to sink billions of dollars into the economy," it said.

The British group will own 50 percent of the new entity, whose name has not yet been disclosed.

BP's move was a major display of trust in the Russian economy, which has recovered spectacularly since its 1998 financial meltdown, despite a recent growth slowdown, analysts and industry insiders here said.

"Such a large deal is a first in this country," said Pavel Kushnir, a Moscow-based analyst with investment bank UFG.

Alfa Group chairman Mikhail Fridman agreed, describing the deal as a "major breakthrough" for Russia which showed that the country was back in "the international business community."

BP vice-president Robert Dudley, on a visit here to announce the launch of the new company, was also keen to stress the global significance of the deal for Russia.

"This deal demonstrates BP's growing confidence in an improving business climate in Russia," he said, referring to improvements in the legislation on bankruptcies and corporate taxes.

"Russia is an increasingly interesting place for investments," he added.

Analysts predicted that the BP deal would encourage other foreign companies to make major investments in Russia, in particular in the oil industry.

"The decision by one of the world's largest oil corporations to undertake a major investment in Russia is going to further legitimize Russia as an acceptable investment destination," the Aton brokerage said.

"We find it increasingly likely that other global oil players will turn their eyes to the Russian oil and gas industry," it added.

Russia, the world's second-largest crude producer after Saudi Arabia with immense untapped oil and gas reserves, needs to attract foreign investors to its oil sector, whose infrastructure remains extremely undeveloped.

But the unpredictable business climate and political turmoil in the decade following the 1991 break-up of the Soviet Union has discouraged foreign capital inflows, although President Vladimir Putin's election in 2000 has ushered in a period of economic and political stability.

Direct foreign investments in Russia are currently ten times lower than in China, where they amounted to 50 billion dollars (46.5 billion euros) last year, and have continued to decline in 2002.

Dudley said the deal had been a long time in the making, and had included a meeting between top BP officials and President Putin in London one year ago.

Top-level political support was essential for an operation involving a foreign company on such a scale, particularly since Russian authorities have traditionally been extremely protective of their national oil market, said Valery Nesterov, an analyst with Troika Dialog bank.

The fact that a foreign group will now control 50 percent of Russia's third-biggest oil company "is really a major step forward," Nesterov said.

BP's move was all the more significant as the British giant already made an investment in Russia five years ago, only to get its fingers burned.

After buying a 10-percent stake in oil company Sidanco, BP soon found itself at the centre of a feud between Russian oligarchs who, analysts recall, stripped Sidanco of its assets, before the rivals made their peace in 2001.

By a coincidence, one of BP's staunchest rivals back then for the control of Sidanco happened to be TNK, Nesterov said.

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