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Russian political risk constrains oil and gas sector - Fitch

LONDON. Sept 27 (Interfax) - Politically driven event risk in Russia continues to constrain the creditworthiness of the oil and gas companies, Fitch Ratings said in a press release.

Companies with close government links or significant state ownership may benefit in the medium term, but uncertainties stemming from increasing taxation and the unproven license environment persist, the international rating agency said.

Fitch views perceived political risk as an important factor in its credit analysis, and in Russia's case, a decrease is a precondition to improving the creditworthiness of oil companies. However, as Russia becomes an increasingly important player in global energy, the relationship between the industry and the government will continue to grow in importance.

"Those companies working side-by-side with the government are likely to benefit in the medium term. Those perceived to be working counter to state interests are likely to experience greater obstacles to obtaining and maintaining items such as licenses and find that their executives and assets are subject to increased scrutiny from the state," said Jeffrey Woodruff, Director in Fitch's Energy Group.

Ever since the Yukos affair unfolded, investors have watched with increasing concern the growing influence of the state over the country's oil and gas assets. Many felt that the deal struck between BP and TNK last year marked the beginning of a new era in private foreign investment inflow for Russia's key industry.

This has largely not materialized yet due to the Yukos affair. Given the global distribution of known hydrocarbon reserves, Russia will undoubtedly remain a key area of future development for major oil companies. However, the timing and scope of these future investments depends on greater certainty that all investors will be treated equally, be they foreign or domestic.

It appears that natural resource companies without significant state involvement are more exposed to political event risk. The majority of other industrial companies benefit from good relationships with the current government. Such favorable relations could provide these companies with specific business advantages, in areas such as contract negotiations, hence improving their business risk profile.

Given the current attitude towards the natural resources industry, increased state involvement will in some cases positively affect how the companies determine their domestic pricing and their ability to influence legislation. It could also strengthen management control, and secure production licensing of their respective businesses. Additionally, it is likely to increase the government's vested interest in keeping such companies as going concerns.