By now, those that follow the oil industry and the relevant stocks in this sector know that Exxon Mobil is teaming up with OAO Rosneft, Russia's largest oil company, on a $3.2 billion Arctic exploration partnership that could prove to be very lucrative for both companies. Boiling things down to the nitty gritty, Exxon gets access to one of the world's last great untapped oil resources. The areas of the Kara Sea that Exxon and Rosneft will explore could hold up to 36 billion recoverable barrels of oil.
Of course, Rosneft gets something in return. Exxon will exchange stakes in various Gulf of Mexico and U.S. shale projects for the privilege of working with Rosneft in the Russian Arctic. That means Rosneft will become the first Russian company to have an interest in U.S. energy assets. Alright, so everything sounds pretty good to this point, right? Not so fast.
On Wednesday, masked Russian police officers armed with commando-style assault rifles raided the Moscow office of BP (BP), the company that Exxon replaced in the Rosneft partnership. For details on that fiasco go (HERE). For those that are not familiar with how business is conducted in Russia, the raid on BP's Moscow office is NOT a one-off event and it underscores the risks any Western company, Exxon included, faces when doing business in Russia.
Raids by police on the Moscow offices of Western companies are frequent enough that one unidentified BP staffer interviewed by the New York Times did not seem all that frightened by the event. Deutsche Bank's Moscow office was raided in February. There are other examples as well.
In other words, venturing into Russia's energy industry is no more pleasant for Western oil companies than dealing with Hugo Chavez in Venezuela, having to fret about rebel attacks in Nigeria or worrying about lost production due to political upheaval in the Middle East. In fact, doing business in Russia is arguably worse than exploring for oil in any of the aforementioned locales.
Most investors have probably heard that Russia is corrupt, but without putting that assertion into context, it almost appears as an ignorant Western theory. It is not. Every year, NGO Transparency International releases research that ranks the most corrupt countries in the world. When the last survey was released late last year, Russia ranked 146th out of 180 countries with 180 being the worst.
I am not making this up: An analyst from Transparency International that was quoted in a Reuters article after the research was published all but said Nigeria is less corrupt than Russia. So corrupt is Russia that bribe-taking is a $300 billion annual business in Russia, according to Transparency International. So corrupt is Russia that most of Africa, the Middle East and nearly all of the former Soviet republics received better corruption scores than Russia.
One word may sum up what Exxon (XOM) is going to be up against in Russia: Treacherous. That is the word used by Eurasia Group to describe the political dynamics of Russia's energy business. It is safe to say that Exxon knew all this before they signed on the dotted line with Roseneft and it is safe to say the allure of fresh oil reserves is too compelling to ignore no matter what a Western company has to deal with to get to that oil.