August 31, 2011 / 1:58 PM / in 8 years

ANALYSIS-Exxon deal sets stage for Putin return to Kremlin

MOSCOW, Aug 31 (Reuters) - Prime Minister Vladimir Putin’s blessing of a deal with U.S. company ExxonMobil to extract oil and gas from the Russian Arctic sends a strong signal that he will return to the Kremlin in an election next year.

Neither Putin, 58, who was president from 2000 to 2008, nor President Dmitry Medvedev, 45, has announced whether they will run for the presidency next March.

But Putin demonstrated he is firmly in charge and ready to remain Russia’s paramount leader by securing the deal with Exxon after rivalries in Russia’s dual power structure wrecked a similar agreement this year with British oil company BP .

“It confirms my personal view that Putin is coming back. He can guarantee the deal much more effectively if he is ensconced back in the Kremlin,” said Vladimir Frolov, president of LEFF Group, a government relations and PR firm based in Moscow.

Putin made clear he was the key figure behind Rosneft’s deal with Exxon by attending the signing ceremony on Tuesday and saying it would open “new horizons”. The Kremlin made no comment, with officials saying it was a government matter.

In cutting a deal with Putin rather than Medvedev, Exxon is betting that the presidential election will put a formal seal on Putin’s authority. He could then serve for 12 more years because the presidential term has been increased to six years.

As premier, Putin ranks below Medvedev, but is more influential under a power-sharing agreement worked out when he helped usher his protege into the Kremlin in 2008 because the constitution did not allow him a third successive term.

Exxon will hope Putin’s backing can help it avoid the mistakes BP made in its attempted alliance with state-controlled Rosneft this year.

The British company was sued by the wealthy partners in its existing Russian venture, TNK-BP , after it forged its alliance with Rosneft.

“The previous deal with BP unraveled because there were competing groups. It’s no secret that Medvedev’s people supported (the TNK-BP partners) and encouraged them to sue,” said Frolov.

“For Exxon, political risk is much reduced compared to what BP faced — there are no Russian oligarchs in the Exxon deal structure.”


Senior political sources told Reuters in July that Putin was close to a decision to seek to return to Russia’s highest office even if he has not yet made a final decision.

Polls show either he or Medvedev would be likely to win the March election comfortably. They are unlikely to run against each other or to both step aside in favour of a third candidate, the sources said.

The Exxon-Rosneft deal has clearly confirmed Putin’s dominance over Medvedev, profiling him as a leader with a long-term strategy to strengthen Russia as a global energy power.

And by giving his blessing to the Exxon deal, Putin has strayed into Medvedev’s foreign policy competence and puts his own stamp on the ‘reset’ in bilateral relations with the United States sought by President Barack Obama.

“Putin is demonstrating that he is the person in charge and if Exxon Mobil had tried to make the deal with Medvedev, nothing would have happened,” said Pavel Salin, an analyst at Russia’s Centre for Current Politics.

“Even if they had got something with Medvedev, the deal could have collapsed at any time, whereas Putin will be the guarantor.”

The Exxon-Rosneft deal also marks a comeback for Putin’s energy lieutenant, Deputy Prime Minister Igor Sechin, who was forced to resign as Rosneft chairman this year in a purge of ministers from the boards of state firms ordered by Medvedev.

Sechin is widely regarded as the informal leader of the so-called “siloviki”, a group of top officials with a security-service background that is often at odds with a liberal faction that backs Medvedev’s modernisation agenda.

Although Sechin quickly hired an ally to be Rosneft chairman and retained control of strategy, the Exxon deal delivers a strong political riposte after Medvedev, who criticised the government in May for failing to do due diligence on the BP-Rosneft deal.

That agreement foundered on a non-compete clause in the TNK-BP shareholder agreement, and was not a result of the political risk of doing business in Russia, said Karen Kostanian, energy analyst at Bank of America-Merrill Lynch in Moscow.

“The assumption behind the BP deal was that they could violate the TNK-BP shareholder agreement and then have dinner with Putin, who would club the oligarchs over the head,” said Kostanian.

“Why investors assigned an equity risk premium to Russia, and not BP, escapes me. It was a BP screw-up, and the Russian government did not meddle.”

Analysts played down the risks to Exxon of staking a multi-billion-dollar wager on Putin’s ability to uphold a deal that would probably not deliver any significant flows of Arctic oil even if he serves another two terms.

They noted that the up-front costs of the exploration effort, at $3.2 billion, represented a relatively small down-payment on total investments that Russian officials say could run into the hundreds of billions of dollars.

“Which is more risky today: Iran, Libya or Russia?” said Kostanian. “As long as Russia needs technology and Exxon needs access to reserves, these people are safe for several years to come.” (Writing by Douglas Busvine, Additional reporting by Guy Faulconbridge, Steve Gutterman and Denis Dyomkin; Editing by Jon Boyle)

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