India to reap reward as Russia's friend

By bne IntelliNews January 25, 2007

Ben Aris in Berlin -

The Kremlin rewards its friends and while the Strasbourg-based Parliamentary Assembly of the Council of Europe was whingeing again about Russia's unreliability as an energy partner on Tuesday, the Indians should show they have a better grasp of how the Kremlin works on Thursday when President Vladimir Putin arrives in Delhi.

Like Europe, India is keen to get more access to Russia's oil wealth, but rather than trying to lock Russia into energy agreements by using political pressure, it is doing what the Kremlin really wants - bailing it out when it is short of cash and promising to help in the drive to develop and diversify the Russian economy.

The Kremlin lent on all its "friends" in July last year to ensure the success of state-owned Rosneft's historic $10.4bn IPO. However, this was not an IPO so much as a private placement.

International investment funds shunned the sale because of political and legislative risks threatened by the owners of Yukos oil company, who lost their best production facility to Rosneft in a controversial auction in December 2004. Alexander Termenko, a former Yukos vice president, said in a commentary in bne this week that the London Stock Exchange would have refused to accept Rosneft's shares in the normal course of things.

Unlike China, "India does not have any energy relationship with Russia. It is curious that prior to the Rosneft IPO, the Indian state-owned ONGC had been lobbying very hard for access to Russian energy, but since then the silence has been deafening. Of the four strategic investors in the Rosneft IPO, one remains unidentified," says Chris Weafer, chief strategist at Alfa Bank.

The consensus amongst analysts is that ONGC was the mystery buyer and Dehli is now going to reap its reward for lending a helping hand with the IPO.

India currently imports 110m tonnes of crude oil a year and is targeted at attaining 200m by 2015, of which Russia may cover 50m of this growth, India's Oil and Gas Minister Murli Deora said in November during a trip to Russia.

Deputy Prime Minister Sergei Ivanov on Monday, who arrived in India three days ahead of Putin to prepare the ground, indicated ONGC would be invited to join Rosneft in a new oil and gas venture on Sakhalin Island. Moscow is "interested in the participation of Indian capital in the development of Sakhalin-3 project," Itar-Tass quoted Ivanov as saying.

More than oil and gas

However, the Kremlin will probably not limit itself to a strict quid pro quo attangement. India may well get a slice of the Sakhalin deposits as a direct result of buying a stake in Rosneft, but this deal could be just the start of the relations the Kremlin has in mind for its friends.

"The Kremlin is using its energy resources to strike a new deal with other countries. It is concerned with developing the economy and boosting the sale of Russian-made goods overseas. What is going on is the Kremlin is prepared to sign energy supply contracts with other countries, but in return those countries are expected to buy Russian goods and invest in the economy," Weafer says.

There is a grand strategy at work here, where Russia is pressing its friends to participate in a broad plan to accelerate the development of the Russian economy.

In line with the Kremlin's overall energy strategy, part of this cooperation will be the construction of building more units for the Kudankulam nuclear power plant and other nuclear plants in India, according to comments made by Ivanov on Monday.

"We intend to expand our technological and economic cooperation in the construction of nuclear power plants in India and in other spheres of the civilian nuclear energy sector in keeping with the international obligations of the two countries," Ivanov said.

Presidential economic advisor Igor Shuvalov told bne at a lunch last week that Russia intends to massively increase its nuclear power generating capacity and the cost of building more than 40 nuclear power stations over the next 20 years would be partly offset by selling this technology to other countries.

Private companies friendly to the Kremlin are also being roped into the effort. Independent gas trader Itera announced it was willing to reship Russian gas to India last week by building a 5m-tonne re-gasification terminal for liquid natural gas (LNG) in India at a cost of $500m together with its partner Sun Group, which owns a blocking share in Itera. The two companies have set up a 50-50 joint venture called Suntera, which will carry out the work together with India's state-run Gujarat State Petroleum Corp (GSPC).

India has no gas reserves of its own, but already has two such terminals in Gujarat and demand for LNG is expected to reach 24.8m tonnes in 2007, according to the Indian state's estimates.

A Gujarat company also took a 40% in a joint venture with Russia's leading oil and gas pipe manufacture TMK in October to produce pipes, investing $150m in the joint venture in the form of technical know-how.

Arms for alms

Energy deals are only the point of departure for the Kremlin's policy of reshaping its diplomatic relations and arms sales are the first stop on that diplomatic route.

India is already one of Russia's best customers and Putin has a second job as Russia's best arms salesman. In the wake of most of Putin's overseas trips in the last six years, a major arms deal has appeared a few months after he returns home - and dozens of Russian-Indian deals have already been announced in the run-up to this trip.

Russia earned $6bn from arms exports in 2006, according to Putin, and is restructuring the sector to improve on this performance. Just this week, the state-owned arms export Rosoboronexport was given the official monopoly over arms exports, after accounting for $5.2bn of last year's sales.

The arms exporter has also been used as a holding company for several of the state's acquisitions, such as the repossession of AvtoVAZ shares and owns the United Aviation Company, which only underscores the increasing ties between the Kremlin's energy deal offers and the investment into Russia's economy it expects in exchange. Indeed, a closer look at the deals in the offing in India reveals that Rosoboronexport is usually lurking in the background.

Ivanov, who is clearly putting the finishing touches to several deals ahead of Putin's arrival, said contracts had already been drawn up on a joint venture to build a fifth-generation transport plane by 2009, worth several billion dollars. He also said India was the "only country Russia would accept in developing a Global Navigation Satellite System," a pet Kremlin project.

In December, it was reported that India was in the market to buy 300 Russian-made T-90 tanks for a total of $866m, which are to be supplied in the next two years. India already bought 140 tanks in 2002 and has a contract to make 186 more in India under license.

Another significant deal announced last year was an agreement for a Russian-Indian joint venture to produce 1,000 BrahMos missiles over the next 10 years, 500 of which will be sold to third countries.

Currently, the BrahMos joint venture produces about 100 anti-ship missiles a year, but with $300m earmarked for investments, the number and types of missiles is expected to rapidly expand. This year, the joint venture plans to start deployment of a ground version of the missiles on mobile launchers and work on integrating the missiles into the Su-30 fighter's armament.

Still up for grabs is an Indian contract for fighter jets; the Kremlin is hoping to sell 126 MiG-35 combat jets to Delhi. To sweeten the offer an Indian company has been given the go ahead to manufacture jet engines for the MiG-29 fighter, India's Foreign Minister Pranab Mukherjee said last week, a deal that has already been approved by the government and is expected to one of the many Putin will sign in the next two days.

Technology swap

Energy and arms are clearly closely interlinked in Putin's administration, as the Siloviki , a group with close ties to the security services, has tight control over both sectors. However, Alfa's Weafer says the plan is to use the energy deals to lever open relations to the entire gamut of industrial sectors. The comments Kremlin officials have made on the upcoming trip all highlight hopes for deeper cooperation in sectors that the Kremlin has marked out special attention, such as bolstering Russia's high-tech capacity.

"India is already a major buyer of Russian defence equipment and the Kremlin is particularly keen to encourage India to be a major investor, and partner, in both aviation and technology," says Weafer.

Putin singled out more cooperation in high-tech spheres, notably aerospace, power engineering, communications and shipbuilding. In an interview on Monday with the Indian press he said the two countries "can not only exchange end-products and services, but also jointly emerge on the markets of other countries" in the high-tech sphere.

The Kremlin also intends to make payment easy, by using some of India's sovereign debt to Russia as investment funds by Russia into the Indian economy. There are already plans to use $230m of this money to fund a titanium plant in the southern Indian state of Orissa with the state-owned bank VTB acting on the Russian government's behalf and the Kremlin-connected Technokhim Holding in charge of the operations.

However, there is a long way still to go to integration. Despite the hoopla that will surround Putin's trip, cooperation between the two countries remains small.

Last year saw a number of Russian banks bought up by international bank groups, but the only significant Indian bank operating in Russia is ICIC, which is in the top 100 with assets of $225m, less than half the average for this group.

In general, Indian direct investments into Russia accounted for only 2.2% of the total in the first half of last year, although this still puts it ahead of the likes of France and Japan. But Putin said Wednesday that in general he expects bilateral trade between the two countries to more than triple by 2010 from $2.6bn in 2006.

"We could boost our trade to $100bn by 2010," Putin said Tuesday in an interview with an Indian TV channel and a news agency. "We could increase it by 200-300% and to double it by 2015

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