WORLD / Wall Street Journal Exclusive

US criticism threatens Russian deals
By GREGORY L. WHITE (WSJ)
Updated: 2006-05-19 15:29

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MOSCOW -- The deepening chill in relations between Washington and Moscow is threatening U.S. companies' chances of winning at least two multibillion-dollar business deals in Russia, according to Russian officials and others close to the discussions.

Kremlin officials have made clear that U.S. agreement on a significant deal on Russia's entry into the World Trade Organization would improve the odds for the U.S. companies. But they also warn that increasingly strident criticism of President Vladimir Putin from U.S. officials threatens to spill over into business.

"When these kinds of things happen," Igor Shuvalov, a top Kremlin economic aide, said this week, referring to the rising rhetorical tension between Washington and Moscow, "they start to affect all spheres of life."

He specifically mentioned two deals that could be affected: the $12 billion Shtokman natural-gas project, in which Chevron Corp. and ConocoPhillips are vying to win stakes alongside France's Total SA and Norway's Statoil ASA and Norsk Hydro ASA, and a $3 billion airliner purchase by OAO Aeroflot, where Boeing Co.'s 787 is competing against Europe's Airbus. They would be among the largest deals between the U.S. and Russia.

Until the past few weeks, the U.S. companies had been optimistic about winning both deals, according to people close to the talks. But expected announcements of the selections by both OAO Gazprom, the Russian gas monopoly, and Aeroflot, the state airline, have now been pushed back.

The delays come as the WTO talks have dragged out and Washington has stepped up criticism of Mr. Putin for undermining Russia's democratic institutions and using the country's energy resources as political weapons. The harshest attack came in a speech by Vice President Dick Cheney in Lithuania earlier this month.

Russian officials have warned that further attacks -- coming as Moscow is trying to polish its international image ahead of a Group of Eight leading nations summit in St. Petersburg in July -- could trigger retaliation against the U.S. companies.

In public, Mr. Shuvalov cast the issue in a more positive light, saying, "I think the leaders still have a chance to fix" the situation and boost U.S. companies' chances.

In private, however, Russian officials have been tougher, according to people familiar with the discussions. "They're drawing a very clear linkage between U.S. government statements and punishing a company," said a Washington-based consultant close to the discussions. Moscow also had hoped to wrap up the WTO negotiations, a Putin priority, before the summit.

With the Kremlin increasing the state's role in Russia's economy, analysts say its ability to use business as a political lever is increasing. The boards at Gazprom and Aeroflot are dominated by government officials.

"Aeroflot's management bases its decision on purely technical and financial criteria, but for the government, political factors will also inevitably play a role," said Lev Koshlyakov, deputy chief executive at Aeroflot. "It's obvious the chill in relations will affect any decision on which planes to buy."

The decision had been expected this month, but Aeroflot officials have since indicated it isn't likely until June.

Analysts and diplomats point out that politics could be only one of several motivations for the delays, which also serve to put pressure on all of the potential Western partners to improve their offers.

A senior Gazprom executive this week insisted the choice of partners for Shtokman, one of the largest undeveloped gas fields in the world, would be made exclusively on economic grounds. Company officials have said the complexity of assessing the potential partners' bids accounts for the repeated delays. Gazprom originally had planned to announce them a year ago, and then this spring. Yesterday, a senior government official said the news would come "this summer."

Boeing and Chevron declined to comment. ConocoPhillips said it supports Russian membership in the WTO.