Investments are not just about the rates of return – they are also about stability and predictability. Sometimes, even highest rates of return are not attractive enough to lure in potential investors, who take into account many other things, including the protection of property rights, political stability, and regulatory barriers (a more complete list of issues is available in Twelve Commandments for International Investors put together some time ago by the U.S. Chamber of Commerce).
The Economist takes a closer look at the most recent investment scandal in Russia, involving two global giants – Royal Dutch Shell and Gazprom. The scandal reinforces the point that there are many different issues that impact the sustainability of investments and high rates of return should not be and are not the only determining factor in investment decisions. In short, Shell has invested in developing natural-gas fields only to see the project go into the hands of the state-controlled Gazprom. The process was facilitated by some new regulations from the Russian government, which made it harder to Shell to continue its project. As the article notes, although some of the regulations may have been valid and the Russian government may have had the right to re-negotiate the deal,
…instead it has resorted to intimidation. Shell had few negotiating levers and had little option but to back down. Though the details of the deal are not clear, some analysts suggest that Shell and its Japanese partners might get $4 billion for the half of Sakhalin II that they will hand over. At least it seems that Russia has not yet torn up the PSA, so Shell can still expect returns on its huge investment.
And, back to the point on rates of return and risk:
The government is getting a name for disregarding or unilaterally rewriting agreements when the mood strikes. With global demand for energy so high, oil firms may well decide that the risk is still worth it in Russia. But foreign companies considering investment in other sectors may think again. Investors eyeing a slew of forthcoming IPOs (among energy firms and others) may now be discouraged. That is not what Russia needs.
Published Date: December 12, 2006