Russia may have lost the Cold War but it's out to regain respect by leveraging its oil and gas reserves. Its 350 billion barrels of such reserves are the world's largest and President Vladimir Putin wants to use those resources to bring his country into the modern world and to increase its influence on global concerns. With war and political turmoil plaguing the Middle East, Russia and some other nations of the former Soviet Union have become increasingly luring as a source for oil and gas. And in those areas, more than half the reserves remain untapped.

"Today, with oil more than $60 a barrel, the returns are above normal," says David Zaiken, CEO of Siberian Energy, which is a U.S.-based company with all of its assets in Russia. "That's why the Russian government can spend enough money to support increased production." Zaiken, whose publicly-traded exploration company is expected to own 1.3 million acres in Western Siberia and begin drilling in the coming months, says that Russia is geared up to increase production to 11 million barrels a day.

Just two years ago on Oct. 25, 2003, the Russian investment climate seemed in disarray. Western capitalists watched as Mikhail Khodorkovsky -- formerly CEO of Yukos and Russia's wealthiest man -- was arrested and indicted for his alleged role in stealing national wealth. Many outsiders construed the events as harsh and unwelcoming -- the settling of a political vendetta at the expense of winning foreign capital.

But Russian-born Zaiken says that the matter is far more complicated. When President Putin came to power in 2000, he summoned to the Kremlin the nation's oligarchs that controlled 70 percent of Russia's finances. In essence, he made them a deal that if they stayed away from politics then he would not interfere with their businesses. All apparently abided by this code, except Khodorkovsky. He supposedly was determined to prop up the old-line Communists and others in the legislative Duma who had been running the country for 70 years prior to Democracy, says Zaiken.

Putin didn't just fire back at Khodorkovsky, who was convicted in May 2005 and sentenced to nine years in prison. The president made sure the Russian government regained control of Yukos. Yukos, which is the biggest oil producer in the country and the fourth largest in the world, was purchased by Khodorkovsky and others for pennies on the dollar in the mid 1990s. But late last year, Yukos' major asset that comprises 40-50 percent of the company, was sold to Rosneft, a government-owned oil enterprise. At the same time, Sibneft, which was Russia's fifth largest oil producer and which had been controlled by another powerful oligarch, was sold to government-owned Gazprom.

New Reassurance

Western investors are left to wonder whether Russia's corporate community is still battling the Kremlin. According to Zaiken, Putin's government said it acted out of necessity -- the preservation of both economic fairness and the maintenance of sound government, all in the wake of oligarchs who were extending their sphere of influence.

The Kremin has learned that its actions were misunderstood and that it failed to properly explain them to Westerners, he adds. While such moves have alienated the Western world, Zaiken insists that the government there is back on track and that investors can be reassured Putin won't create the same false illusions again.

"The chances are less than one percent," says Zaiken. "We know why the Yukos affair happened. We know why it didn't happen to other companies. We know the role it has played with the current investment climate." He points to UK-based BP, which formed a joint venture with privately-owned Russian oil giant TNK. BP has said the economic situation has improved and that the Yukos incident was an isolated event. At the same time, all the ratings services now give Russia investment grade bond ratings.

Indeed, foreign investors are feeling a bit more welcome. ChevronTexaco said it would consider investing up to $10 billion in Russia. Meantime, Russia's Lukoil Holdings sold a 7.8 percent ownership stake to ConocoPhillips for nearly $2 billion. The American company says it would like to acquire up to 20 percent. Meantime, ExxonMobil now has a 30 percent stake in Sakhalin-1 that holds 2.3 billion barrels of oil and 17 trillion cubic feet of natural gas while Shell holds a notable stake in Sakhalin-2.

To be sure, Russia is still an uncertain investment. Foreign companies cannot own more than half of any enterprise there while restrictions also exist as it relates to major oil and gas auctions. In cases where there are more than 100 millions tons of oil or gas to be produced and eventually sold only Russian companies can bid. Some experts say that rules are formalities, given that it's not wise to enter an emerging market alone and that partnering is the best way to learn about government and culture.

In any event, the United States would like access to Russia's oil fields as well as its pipelines. It's already hard at work getting pipelines constructed along the Caspian Sea and along Turkey's Mediterranean coast to help feed America's energy appetite. Becoming active investors also provides access to a plethora of oil and gas resources and some ability to influence corporate affairs. Russia, meanwhile, wants to double the size of its gross domestic product by 2010 and it recognizes that the goal would be impossible without foreign investment.

Transparent Processes

Russia is working toward achieving its goal, says Siberian Energy's Zaiken. Like others, he predicts that the country will become the world's top oil producer by 2009. Production there is growing by 10 percent annually. More access to Russian oil would ease the supply crunch and hence the current high prices. At the same time, the United States wants to wean itself from Middle Eastern oil dependence.

"Saudi Arabia is under constant threat," he says. "I'm sure the U.S. will bring in more oil and especially more liquefied natural gas from Russia. The Russian government is ready to take it to the next level. Hopefully, the American government and big business will recognize that Russia brings a transparent structure to the table and we can discuss more mega-projects with Westerners. Russian assets are undervalued right now."

Russia has made real progress, especially remarkable since the Iron Curtain once blocked any access to it. Ideal partnerships would not just bring together businesses' capital resources but they would also harness their technological expertise and create forward momentum in terms of linking the futures of Russia and the global community.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

Copyright © 1996-2005 by CyberTech, Inc. All rights reserved.