Oil Deals Make Putin Immune to Sanctions

Those who believe meaningful economic sanctions against Russia are possible should watch the deal-making activity of the giant state oil company Rosneft OAO.

Rosneft Chief Executive Officer Igor Sechin, one of President Vladimir Putin's closest associates and one of the biggest names onthe U.S. sanctions list, has been busy insulating the company from the effects of any further U.S. actions. Today, for example, Rosneft announced it would pay $500 million for the Russian and Venezuelan drilling assets of Weatherford International Plc, an oilfield services company based in Geneva. As Western oilfield services companies go, Weatherford is second only to Houston-based Schlumberger Ltd. in Russia. Its Russian revenues are about double those of U.S. giant Halliburton Co.

With the Weatherford deal, Sechin ensures that even if the U.S. decides to ban imports of U.S. oilfield technologies to Russia, projects will not stall. Aside from cementing Rosneft's partnership with Weatherford, which needed the cash, the deal will add more than 8,000 employees to Rosneft's rapidly growing in-house service operation, RN Burenie OOO. Rosneft and natural gas monopoly Gazprom OAO are also stepping up equipment orders in China and at Russian factories.

Consider, too, Rosneft's other recent acquisition -- a 26.2 percent stake in Pirelli & C. SpA, which allowed Chairman and Chief Executive Officer Marco Tronchetti Provera to consolidate his position at the Italian tiremaker. Sechin nowsits on Pirelli's boardalong with three other Rosneft representatives and Andrei Kostin, head of the state-controlled VTB Bank OJSC.

Provera is one of Italy's most influential businessmen, a famed turnaround artist and a former head of Telecom Italia SpA. Doing business with him is worth more than the measly $680 million Rosneft paid for the Pirelli stake (the Russian company had$21 billion in cash and other short-term financial assets on its books at the end of the first quarter). The lobbying power of the Italian business elite helps make sure Italy will resist any European Union efforts to introduce meaningful sanctions against Russia. So far, Italy hascome thoughfor Putin and his friends, arguing that sanctions -- which require the support of all 28 EU member states -- could plunge it back into recession.

Then there's the newdealwith U.K.-based BP Plc, already a major partner, which owns a piece of Rosneft. BP agreed to buy as much as $1.5 billion in oil products from the Russian company on a prepayment basis, supplying Rosneft with more cash needed to pay off debts as Western banks and investors shy away from Russian borrowers. The scheme also gives BP, with its considerable lobbying power, a big incentive to oppose sanctions so that it can get what it paid for from Rosneft.

Rosneft had sales of $40 billion in the first quarter, about 8.6 percent of Russia's gross domestic product. For all intents and purposes, the oil company is a proxy for Putin's government when it comes to making well-timed, politically motivated investments. The fact that Sechin is not sanctioned by European governments -- even U.S. citizen Robert Dudley, BP's chief executive officer, continues to meet with Sechin because he is a Rosneft board member -- suggests that its efforts are appreciated in Europe.

Whatever Putin does in Ukraine, it will be hard for the U.S. administration to get the EU, and some of its individual members, on board for a broadside against Russia, in part because of Rosneft's successful European deal making. Realistically, the West has a better chance of making a cynical deal with Putin, handing him some control over Ukraine, than of forcing him to stop destabilizing the neighboring country. The only reason such a deal has not been made so far is Washington's unwillingness to admit that it cannot get Europe to toe the line.