FRANKFURT - Russian writer Fyodor Dostoevsky may have been a luckless gambler at German casinos, but his countrymen can always count on having better luck when the game is energy investment, rather than roulette.
Russia's vast oil and gas resources are its main trump card at trade talks, but the fact that it needs to play largely with foreign money brought its business chiefs and politicians to the German-Russian Energy Congress in Hanover last month. Just days earlier, Russia's President Vladimir Putin warned the West during a meeting with German Chancellor Gerhard Schroeder that he would exploit its dependence on Russian energy if it failed to treat his country as an equal.
Russia is the world's biggest gas shipper, No. 2 oil exporter and fourth largest power producer by installed capacity.
Referring to Germany and Russia's 30-year-old cooperation in the energy sector, German Economics Minister Werner Mueller was the first to stroke Russia's ego.
"Much of our industry would not function without Russian gas and many of our flats would be cold were it not for Russian gas," he told the energy summit. Germany gets a third of its gas and a quarter of its oil from Russia.
Russia admitted that it needed a decade's worth of foreign investment annually.
"Russia's energy sector has received $20 billion over the last 10 years, but needs $20 billion a year until 2020. That's not just in Russia's interest but in the interests of the West in securing energy supply," Vladimir Katrenko, chairman of the Russian State Duma's energy committee, told Reuters.
One of the biggest problems is a lack of investment in new Russian gas fields.
Alexei Miller, chairman of gas giant Gazprom said recently that the huge new Zapolyarnoye field in Western Siberia, brought onstream last October, was Gazprom's last hope of finding a large field in its traditional producing region and that the firm needed to develop new areas.
But a cut in exports would hit the company hard as export prices (around $90 per cubic metre) are six times higher than subsidised domestic prices.
The chairman of Germany's biggest gas supplier Ruhrgas, Burckhard Bergmann, told the congress Russia needed to "send a new signal" on the issue of subsidising domestic consumers.
Gazprom's foreign relations chief Stanislav Tsygankov told Reuters he was confident the government would allow his firm to increase domestic gas prices by up to 35 percent by year-end.
The firm, which provides one third of Europe's imports, is looking for an alternative to its main export route, via Ukraine, as it accuses the republic of stealing gas.
But plans to expand the Yamal-Europe pipeline link from Russia to the West and running via Belarus, Poland and Germany have run into financing difficulties and disputes over taxes.
RUSSIA NEEDS TO DEAL OUT REFORMS
Delegates said Russia also needed to speed up banking reform to inspire investor confidence in the energy sector and help banks develop their lending to industrial enterprises.
Through the reform, the European Bank for Reconstruction and Development (EBRD) will back up its funding of Russian energy by taking a stake in soon-to-be privatised Vnesheconombank (VEB).
The EBRD invested $450 million in Russian and eastern European energy sectors in 2001, with the bulk going to Russia.
"I think $400 million a year would be a reasonable estimate for EBRD's investment in Russia until 2005," Charlotte Philipps, EBRD senior banker, natural resources, told Reuters, adding that the bank's current exposure to Russia was $2 billion.
A lack of sufficient credit from Russian banks means international bond markets provide the main source of longer term finance for oil firms Rosneft and Sibneft , while Gazprom issued its first paper last month.
Some companies need to clean up their act before attracting investors. Gazprom says asset-stripping by its former managers has cost the firm $2 billion a year in the past decade.
PRIVATISATION UNEQUAL
Russia's oil industry has now been largely privatised, though the government still retains some control over domestic flows through the state-owned Transneft pipeline monopoly.
But delegates said Russia's agreement with OPEC in March to cut exports by 150,000 barrels a day was burdensome, since high oil income is needed to encourage investment projects.
They added there was a lack of motivation in mining Russian coal, however, while prices were much higher for gas and large restructuring of Russian railways was needed.
Russia has talked of unbundling Gazprom's transport and production units to free up gas pipeline access to all producers and aims to carve up the power sector by 2010.
Standard and Poor's said in a recent report that Russia's electricity industry needed $5-10 billion in annual investment until 2010, adding that half of its total 200,000 megawatt generation assets had passed their intended productive lifetime.
Electricity monopoly United Energy Systems (UES) also needs investment to expand export to Western Europe and Asia, which requires new grid lines, the ratings agency added.
Gas, coal and oil account for 67 percent of Russian power generation, while hydro and nuclear provide the remainder.
As part of its fledgling climate policy, Russia will increase the share of nuclear, which has minimal emissions of damaging carbon dioxide gases, in its power mix to 25 percent from 15 percent by 2020, Katrenko said.:
