Russian tripartite meetings -- Good for Euro funds

September 27, 2006

Russian President Vladimir Putin met with French President Jacques Chirac and German Chancellor Angela Merkel last weekend. At the meeting, President Putin:

• Calmed anxiety about any potential Russian attempt to gain greater control over EADS and Airbus. A Russian bank bought 5% of French Airbus parent European Aeronautic Defense and Space Company (EADS).
• Assuaged French concerns that its oil company, Total, may lose its license to operate in the Russian Kharyaga oil field.
• Signed agreements totaling $10 billion, such as one that allows the French construction company Vinci to build a highway between Moscow and St. Petersburg.
• Agreed to send some Russian military engineers to Lebanon as an adjunct to the UN peacekeeping mission.

What It Means:
Russia supplies 30% of Europe’s oil and 50% of its natural gas. Gazprom, Russia’s state-owned gas company, is now the world’s third largest company behind GE and ExxonMobil, as measured by its total stock value of $300 billion.

Russia has been using its energy revenues to diversify into other European businesses, while putting pressure on existing energy contractors to increase their profit-sharing to Russia. For example, Russia has:

• Changed its agreements with Royal Dutch Shell and ExxonMobil,
• Granted a license to the Russian-owned oil company Rosneft to operate in ExxonMobil’s area,
• Revoked Shell’s license for a $20 billion Liquified Natural Gas project at the Sakhalin-2 island.

Earlier this year, Russia cut off gas supplies to the Ukraine, through which Europe’s gas must flow, in a successful bid to charge higher prices.

On the other hand, the European Union is concerned that Russia will not have the infrastructure to meet Europe’s future energy needs. To do that, Russia needs $738 billion in investment by 2020. In addition, Russia wants to increase France’s investment in Russia, which was only $905 million in 2005. These ongoing tripartite discussions are excellent communication vehicles to support the development of Russia’s infrastructure to meet the EU’s energy needs.

Action Steps:
Continue to maintain allocations of European and energy mutual funds. Both have been down in value recently, so this may be a good time to add. Work with your financial planner to check your asset allocation goals in these areas.

Source: Radio Free Europe/RadioLiberty web site, President of Russia web site, Mosnews web site