Never do business with Putin’s gangster state

The enforced nationalisation of foreign-owned assets is the desperate act of a despotic regime – and an uninvestable basket case

More than a decade and a half ago, Vladimir Putin masterminded the seizure of privately-owned oil behemoth Yukos from its major shareholder Mikhail Khodorkovsky.

It was a turning point in Putin’s rule. But little did the world know that it would become the playbook for what is now taking place with increasing regularity inside Russia, as he punishes Western multinationals for wanting to pull out of the country in protest at the invasion of Ukraine.

Undeterred by a ruling in the Court of Arbitration in the Hague in 2014 that the Kremlin must pay $50bn (£44bn) in damages – the world’s largest ever such award – to Yukos’s former shareholders, the Kremlin has since been busy seizing the assets of foreigners as well as Russian businesses.

This week, the $400bn energy titan Exxon Mobil has become the latest victim of Putin’s kleptocracy, announcing that it had exited Russia after the state’s “expropriation” of the vast Sakhalin-1 oil and gas project in the far east of the country. Exxon said Russia had “unilaterally terminated” its interest in the oilfield, transferring it to a domestic operator.

With no mention from Exxon or the Kremlin of plans to compensate the Texas-based corporation, it is safe to assume that it will be left billions of pounds out of pocket as a result of Russia’s actions. Exxon booked a $4.6bn pre-tax charge on the loss of its Russian arm in April, the majority of which relates to the Sakhalin venture.

Exxon knew that it was coming. Within weeks of the invasion, Putin had warned foreign businesses looking to exit that they could lose everything in Russia.

Then, in July, Shell and other shareholders lost control of the Sakhalin-2 sister project to the same methods that have befallen Exxon. Others have suffered a similar fate, while Exxon was blocked from selling out in the normal way.

Dmitry Medvedev, the former Russian president, has described its actions as a “symmetrical response” to the sanctions imposed by the West. He also told overseas firms planning to flee: “it will not be easy to return to our market”.

It was a feeble attempt at a bluff. You can’t scare someone by threatening to take away something they don’t want. There will be no queue to get back into Russia while Putin remains in charge. The invasion of Ukraine has already done immeasurable damage to the country’s standing. But by declaring the expropriation of private property to be a legitimate tool of the state, Putin has hammered the final nail in the coffin of Russia as an international economy.

Enforced nationalisation of foreign-owned assets is the desperate act of a despotic regime. It relegates Russia into an exclusive club of pariah states alongside the likes of Venezuela, North Korea and Cuba. With Moscow isolated, perhaps the Kremlin has decided that there is no route back, no reputation left to damage, and therefore little to lose.

Or perhaps Putin is betting that with Europe struggling to unhook itself from Russian supplies of oil and gas, realpolitik will ensure that international ties ultimately prevail – or can be quickly rebuilt where they don’t. There are certainly questions over whether European leaders are willing to inflict the sacrifices on voters that will be required to make a clean break from Russian imports. There are doubts too about whether European solidarity can survive the strain caused by the energy crunch.

Countries have tried desperately to maintain a united front but with energy prices pushing the Continent to the brink of recession and households being asked to curb consumption, cracks have been appearing in relations. The coming winter will be the ultimate test. The head of the International Energy Agency (IEA) has warned European countries against a scramble for energy security in the coming months. Fatih Birol, the IEA’S executive director, said he feared “a wild west scenario” that threatens to disrupt unity among EU member states and trigger social unrest in which European countries stop collaborating with each other on energy supplies.

Yesterday, the global energy watchdog issued a fresh plea: Europe must slash its gas consumption by more than a tenth to prevent the risk of power rationing and widespread blackouts.

But the problem with the IEA’S warning is that it is based explicitly on a “worse-case scenario”, which immediately reduces the urgency to act. There is a tendency for defeatism too, that says Putin is right about the continent needing Russia.

A more rational approach is needed in which the West runs in the opposite direction and cuts the Kremlin out of the system entirely. Of course it will be painful but with replenished gas storage facilities, ramped up LNG supplies from North America and Qatar, and energy efficiency measures, it can be done.

Indeed, with European LNG imports expected to jump 40pc over the coming months, those shipments, along with natural demand destruction from higher gas prices, are enough to cover a complete halt in Russian pipeline flows, research from Bloomberg has found.

The other assumption that Putin appears to have made is that he will remain in power. Yet, with Russian troops retreating across swathes of Ukraine, thoughts have inevitably turned to a world without its leader of the past 22 years.

Short of regime change, there is no way back. Putin’s gangsterism has turned his country into an uninvestable basket case.

‘There will be no queue to get back into Russia while Putin remains in charge’