The Russian environmental agency, Rosprirodnadzor, is suing Royal Dutch/Shell, alleging that the oil supermajor has violated environmental regulations and failed to submit timely reports on its geological and prospecting work at the Sakhalin II
natural gas venture. While Shell has not been the ideal partner — nearly doubling costs at Sakhalin-II to approximately $20 billion and skirting safety practices — Moscow's concern is greater than that. Sakhalin II is the only energy project in Russia that is owned completely by foreign companies, and Shell is the only foreign company to own more than half of any significant energy project in Russia. This does not sit well with Moscow. The Kremlin is trying to consolidate its hold on power. Russia has recently adopted several policies that have made it even harder for foreign investors to enter the market. With its cut-off of natural gas
to Ukraine (and thereby to Europe), Moscow let the West know that it no longer cares to play nice. The latest regulations restrict foreign investment to less than a controlling interest in sectors the Kremlin declares strategic. Energy, defense, aviation, nuclear and others are included in this category. Another new law names state-controlled natural gas monopoly Gazprom as the sole legal exporter of natural gas from Russia. Energy has been used as an arm of Russian foreign policy to pressure and influence those who depend on Russian supplies. Primarily, this means Europe
. At the same time, this policy translates to exerting maximum control over production and transport in any energy project involving Russian state-affiliated energy companies. It has been, for example, Gazprom's practice to demand a controlling stake in a project, while refusing to provide financing commensurate with its share. This policy has stalled cooperation on projects with both China
. Flush with revenue due to the high energy prices, Russia is feeling more and more that it does not have to uphold agreements incompatible with its policy goals. Moreover, Russia's contradictory laws and complicated bureaucracy are conducive to finding ways out of undesirable agreements. The situation is exacerbated by the need to consolidate power before the parliamentary and presidential elections
of 2007 and 2008. President Vladimir Putin intends to retain a hold on power for a long time, whether by appointing a chosen successor and remaining in power behind the scenes or by gaining another term via a legal maneuver. His appointment to high office of individuals who also have connections to the energy industry — such as Gazprom Chairman and First Deputy Prime Minister Dmitry Medvedev
— shows his desire to build a power hub integrating both business and politics. It has never been easy for foreign companies to enter the Russian energy sector, but when the industry is being bluntly used as a political instrument, foreign influence (if not foreign money) is extraneous. In the case of Sakhalin, it was necessary to bring in foreign expertise and investment because Gazprom lacked both, but the company's improving fortunes have given it confidence to intimidate the foreigners. Russia operates on nationalistic and protectionist convictions even if its policies diminish long-term business prospects. Energy prices could drop and the capital that gives Gazprom its power might wane, but at the moment, Russia is more interested in being able to use its control over the industry for political purposes.