Report

Caught in the Crossfire

Caught in the Crossfire

If Russia and the United States really launch the economic war both countries are threatening, American companies operating in Russia could find themselves caught in the crossfire. But Russia itself might end up being the biggest victim, scaring away would-be investors in its crucial energy sector and making it a far less appealing destination for the Western business leaders who have long seen it as a lucrative but largely untapped market.

U.S. companies have invested billions of dollars in Russia in recent years in industries ranging from food production to oil exploration. General Motors rolls out nearly 100,000 SUVs a year from factories in St. Petersburg and Togliatti. Coca-Cola Co. is part owner of a bottling company that employs 13,000 people and produces Coke products as well as local brands like Fruktime from Moscow to Vladivostok. PepsiCo gets about 7 percent of its overall revenue from Russia and spent more than $5 billion in 2010 to buy Russian dairy company Wimm-Bill-Dann Foods. Boeing plans to spend more than $20 billion in Russia over the next seven years securing much-needed supplies of titanium, among other investments.

Those American firms, some of the world’s biggest, now have to worry about being squeezed at both ends. Washington is threatening to impose sanctions that could limit U.S. firms’ business in Russia. The companies could also be hit by the Russian government in retaliation. Goldman Sachs chief executive officer Lloyd Blankfein warned Wednesday that the rising tensions between the United States and Russia threatened to ignite a "vicious circle" that could damage the global economy.

"Actions invite counter-reactions," Blankfein said in an interview on CNN Wednesday. "We want to make sure that people understand the context and how severe those ramifications could be."

The U.S. companies that would feel the pain of Russian retaliation most directly, and most strongly, would be the energy companies that have poured billions of dollars into oil and gas production projects across Russia. The firms, including U.S. giant Exxon Mobil Corp., hope to spend billions more tapping virgin fields in the Black Sea, Arctic, and off the Pacific Coast.

U.S. officials have been threatening sanctions after Russian troops moved into Ukraine’s Crimea region over the weekend, but it’s still unclear what shape they would take. Many analysts see the U.S. starting with a small symbolic step such as revoking visas, like it did with Ukrainian officials allegedly responsible for a violent crackdown on protesters. If Russia is unresponsive, the U.S. could ramp up the pressure by freezing the assets of Russian individuals, companies, and banks that are close to the government of Russian strongman Vladimir Putin.

Russian lawmakers seem poised to strike back. According to Russian news reports, members of Russia’s parliament are considering legislation that would allow them to seize the assets of American and European companies in Russia if the U.S. moves ahead with sanctions. The threats ring hollow to many experts, who point out that punishing American firms has the potential of devastating the fragile Russian economy. Trade lawyer Doug Jacobson, with Jacobson Burton law firm, said that moderate American sanctions on Russian firms would be merely a shot over the bow, but seizing the assets of American companies would be the economic equivalent of using a nuclear weapon.

"When you do something like that you lose the confidence of the entire global economy," Jacobson said. "No one wants to invest in a country where you have the potential to be nationalized."

To be sure, numerous countries have seized the assets of foreign firms, usually as part of a domestic economic program rooted in socialism or communism. Russia itself nationalized swathes of foreign industry in the wake of the 1917 revolution. Cuba famously nationalized big chunks of the island’s economy, including iconic brands such as Bacardi, after its own revolution. More recently, countries including Venezuela, Bolivia, and Argentina have incurred the wrath of foreign investors by expropriating businesses, especially in the energy sector.

For Russia, though, striking back at the U.S. by hitting American energy firms could be a double-edged sword. Exxon has a 30 percent stake in Sakhalin-1, a major Russian oil and gas project. Sakhalin is at the heart of Russia’s plans to become a bigger gas supplier to Japan, which has been desperately in need of new sources of energy since shutting down its nuclear plants after the 2011 Fukushima accident.

More recently, Exxon teamed up with Rosneft, Russia’s largest oil company, to invest billions of dollars into efforts to find oil in the Arctic and in the Black Sea. Exxon calls the scheduled startup of a big offshore oil and gas platform in Russia one of its most significant projects of 2014.

The reason Moscow may have to tread carefully when dealing with energy firms? It needs the technology and expertise Western, and especially U.S., firms have in coaxing oil and gas out of challenging environments, such as offshore or from shale formations. Oil production in Russia plummeted for a decade after the fall of the Soviet Union. While it has steadily crept upward in recent years, aging oil fields put a premium on using the latest technology to tap the country’s potential hydrocarbon riches.

As Rosneft boss Igor Sechin made clear when he signed the Siberian deal with Exxon, "Developing tight oil reserves in Western Siberia is becoming increasingly important for the company and the country in general, as it will boost oil production volumes in Russia." He especially highlighted the use of "Exxon Mobil’s experience and technologies" in tight-oil production.

An Exxon spokesman declined to comment about Russia or the possibility of sanctions complicating its business there.

To be sure, energy companies are used to a little political drama wherever they operate. Argentina, for example, just lured Chevron back even before the country resolved the expropriation fight with Spain’s Repsol. Shell was undeterred by Russian hardball tactics and last year signed a new deal for Arctic exploration with Gazprom.

For now, even as the rhetoric escalates, executives can do little but wait and see.

"We’re watching the situation very closely on all fronts to be prepared to act," GM President Dan Amman told Bloomberg. "It’s a big market for us."