Violent raid exposes risks for investors in Russia

Dmytro Firtash’s Ostchem holding will purchase 5 billion cubic metres (bcm) of gas to put into underground storage, at a 30-36 percent discount to the price Ukraine pays for Russian gas, the source added, confirming Russian newspaper reports. Gazprom CEO Alexei Miller has said the transit of Russian gas exports to Europe is at risk again due to low levels of gas in underground storage in Ukraine ahead of winter, when cold weather pushes up demand. “This deal with Ostchem will make it possible to increase the level of gas storage in Ukraine and provide for safe passage of Russian gas to Europe,” the source said. Ostchem declined to comment. Gazprom had no official comment. With the extra volumes purchased by Firtash, Ukraine will hold 19 bcm of gas in storage, “the level required to ensure trouble-free gas deliveries to Europe in the 2013-14 winter season,” Alfa Bank said in a note. Gazprom meets a quarter of Europe’s gas needs, and more than half of Russia’s gas exports to the European Union flows across Ukraine. The remainder traverses Belarus or goes via the Nord Stream pipeline under the Baltic Sea to Germany. The issue of Russian gas exports to Europe has come to the fore this week with reports that a London court froze $21.7 million out of a $75.8 million eurobond coupon payment by Ukraine’s state oil and gas company Naftogaz. Ukraine has $10.8 billion of foreign currency debt maturing through 2014. Its foreign currency reserves are just over $20 billion, but they are likely to keep falling, particularly if local Ukrainians try to buy foreign currency. A row between Moscow and Kiev in January 2009 over gas prices and debts led to several weeks of supply cuts that hit eastern European countries tied to Gazprom’s export pipeline network particularly hard. After the row, both countries signed a 10-year supply deal and eliminated Firtash’s company, RosUkrEnergo, from the role of intermediary between Gazprom and Naftogaz NAFTO.UL. Last year, Ukraine, the second-largest buyer of Russian gas after Germany, bought 32.9 bcm of gas from Gazprom. UKRAINE-EU DEAL Russian President Vladimir Putin said on Wednesday Ukraine would get the volumes for underground storage at a discount, paying $260 per 1,000 cubic metres (tcm).

The company logo of Russian natural gas producer Gazprom is seen on an advertisement in front of the White House in Moscow February 8, 2013. REUTERS/Maxim Shemetov

“The preliminary results of our audit, which Russian experts will conduct until October 12, have been unsatisfactory,” Interfax news agency quoted Federal Veterinary and Phytosanitary Monitoring Service chief Sergei Dankvert as saying. He said his Dutch counterparts approved the safety of Dutch dairy “without seeing the product”. Russia has often been accused of using trade as a diplomatic weapon. It banned dairy imports from rotating EU president Lithuania on Monday following the Baltic state’s attempt to draw ex-Soviet countries such as Ukraine closer to the 28-nation bloc. Tensions with the Netherlands first surfaced last week when the country filed a legal case against Russia’s arrest last month of the crew of a Dutch-flagged Greenpeace ship that was protesting Arctic oil drilling. The crew members — who come from 18 countries including Britain and the United States — have been charged with piracy and face jail terms of up to 15 years. Russia has shrugged off the Dutch legal move and has put the entire crew in pre-trial detention for two months pending an investigation. Relations deteriorated further on Tuesday when Russia accused the Dutch authorities of illegally detaining a top Moscow diplomat in The Hague over allegations of domestic abuse. Russian President Vladimir Putin called the detention at the weekend of diplomat Dmitry Borodin “the most gross breach of the Vienna Convention” and demanded a formal apology from the Netherlands. The Vienna Convention on Diplomatic Relations grants diplomats immunity from arrest. The Dutch side said it was investigating the incident and would only apologise “if the investigation shows that this was handled in a way that contravened the Vienna Convention.” The dairy spat risks testing ties even more, with Dankvert’s assistant Alexei Alexeyenko telling Moscow Echo radio that Russia this year has already placed 15 Dutch dairy producers “under special control” — a move observers say is often followed by product bans. zak/am/mfp

In half an hour, the Georgian restaurant Khachapuri had been repossessed in the kind of raid that was widespread in the 1990s when the Soviet collapse gave birth to capitalism and a lawlessness that allowed protection rackets to thrive. Such raids are now a rarity, but the violent closure of a business with a seven-year rental contract shows how Russia is failing to offer investors the kind of safe environment its president, Vladimir Putin, says is needed to kick start the economy and diversify it away from energy dependence. “They destroyed everything, they chucked us out on the street,” said Tatyana Melnikova, one of the three owners of Khachapuri, describing the raid that was filmed by staff and posted on YouTube. “There was blood on the floors.” The raid is being investigated by police and many details are unclear but the case does highlight the weak property laws and limited legal recourse that are among the most commonly cited obstacles for doing business in Russia. They particularly deter investors in small and medium-sized businesses which account for just 17 percent of gross domestic product compared with 50 percent in the United States. But big companies also fall foul of the system. McDonald’s, one of the first Western investors in Russia, has failed so far to defend its ownership of a building from the Moscow government which put it up for auction in November 2012. A spokesperson said the company had filed a claim to challenge Moscow city’s right to “own non-residential property built by CJSC ‘Moscow-McDonalds’ at the company’s own expense”. According to RAPSI, a legal newswire, the Moscow Commercial court ruled in favour of the government and against McDonald’s in February. It is not clear whether McDonald’s will appeal. BETTER “KRYSHA” Putin made improving Russia’s investment climate a priority when he returned to the Kremlin last year for a third term. He has since pushed through an amnesty on some economic crimes that has seen hundreds of entrepreneurs released from jail. Critics say the changes are cosmetic and that the weak rule of law and collusion between corrupt law enforcement and justice officials still mean that victims of corporate raids lack adequate recourse to defend their rights. Several small and medium-sized businesses in Moscow polled by Reuters for this article described an insecure environment with movable laws, weak enforcement and the threat of being targeted by government or law enforcement officials on the make. Only one felt Russia’s business climate was improving.