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Last Updated: Jul 2, 2009 - 9:54:57 AM |
An economist would normally criticize Deputy Prime Minister Igor
Sechin. He rarely says anything meaningful in terms of economics. But
twice in the past two weeks, it was necessary to come to Sechin's
defense. First, he was right in saying that Russia does not need a
production sharing agreement, or PSA. Second, claims that Russia's
agreement to provide China with oil is unprofitable for Russia might
really turn out to be groundless. But the lack of understanding on the
subject and the controversy surrounding it attests to the lack of
transparency in the agreement. This is an unacceptable situation,
particularly when it involves such an important strategic interest.
Russia currently has three PSAs that are intended to protect foreign
investors from political risks. Such agreements were specially created
to allow major international corporations to sign long-term contracts
with unpredictable, authoritarian regimes. In many countries, these
PSAs have proven at least partially successful at protecting foreign
investors from changes in leadership. But there is a certain stigma
attached to them since they are only needed in unstable countries. In
stable states with a safe investment climate, foreign investors do not
require special protection because all investors are protected equally.
Although Russia does not need insure foreigners against risks connected
with its own behavior, it might need to insure itself against the risks
involved in deals with other countries.
Thus, there might be good reason to consider Russia's agreement to sell
oil to China at $55 to $60 per barrel as some form of insurance,
considering that the deal only becomes profitable at a price of $80 per
barrel. The idea of any insurance policy is that it chews up a certain
percent of the profit when everything is going well but saves the
insured party from major losses if things go badly.
Of course, the insurance premiums themselves can prove to be the cause
of financial loss. When a driver has accumulated enough years without
an accident, the total amount of paid insurance premiums can often
exceed the original cost of the car. Thus, criticism rained down on
Sechin from all sides for having orchestrated an unprofitable agreement
with China. But its profitability can only be gauged once all the terms
of the agreement are finally made public.
That disclosure process should happen as soon as possible. The rules
are very simple: If an economic agreement is signed in the best
interests of the country, there is no reason to hide anything. If the
agreement is sound, it will naturally withstand criticism from
political opponents, analysts and the press. The fact that leaders are
afraid to reveal the terms is probably a sign that the agreement has
problems. If the agreement with China is flawless, why keep it secret?
Russia already has enough corruption without adding speculation about
whether the agreement with China was on the up and up. If, however,
anything underhanded is involved here and the agreement is not sound,
Sechin's contract with China might go down in history like the
notorious privatization auctions of the early 1990s.
Source:Ocnus.net 2009
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