Yukos oils a special relationship

THE unfolding story that is Yukos sends shock waves through the oil market on a daily basis. Yes, there are plenty of other factors driving oil prices — strong demand, short supply and the threat of terrorism to name but three. But Yukos is up there with a part to play which is at least as critical. Since the world economy is fuelled by oil, this makes the fate of the much troubled Russian resources company, and Mikhail Khodorkovsky, its deposed chief, relevant to almost everyone on the planet.

When the history books come to be written, however, the Yukos affair might be afforded an importance that surpasses the impact on the price of oil. The market value of the black stuff is notoriously volatile and it is possible, although unlikely, that having marched up to the top of the hill in the last three years, oil will now march back down. No, the truly long-lasting importance of the Yukos imbroglio might well be the way it brings change in the way the American and Chinese leaders, and US and Chinese companies, seek to influence the world’s economic order.

It seems that Condoleezza Rice, the US National Security Adviser, has made telephone contact with officials close to Vladimir Putin, Russia’s President, expressing concern at the way that the Yukos affair is being handled. At the same time, Beijing representatives have written to their opposite numbers in Moscow seeking assurances that supplies of oil will continue to flow despite the action being taken against Yukos by the Russian Government. Since China gets 7 per cent of its oil requirements from Yukos, it has plenty of reasons to be concerned.

How will the powers that be in Moscow receive the approaches from Washington and Beijing? Will they be brusquely brushed aside? Will they be politely entertained and then ignored? Will the Americans be treated differently to the Chinese? And if they are, how differently will they be treated? The outcome may set the tone for trade relations between America and Russia, and between China and Russia, for many years to come. Russia is a large and populous country rich in mineral wealth. It is, and will increasingly be, an economy in which all sorts of companies and countries will find it worth cultivating profitable commercial relationships.

Beside the economic superpowers that are China and the US, however, Russia is a minnow. So the most intriguing part of the Yukos affair will be to try to ascertain how the US and China will seek to do business with each other and how they might vie for influence over other economies, and other economic issues. It is tempting to assume that the two countries will steer independent courses of action and assiduously work with self-interest uppermost in their minds. The US authorities, with voters at home preparing to decide who gets to inhabit the White House from 2005 to 2009, will be tempted to focus all efforts on protecting consumers in their own backyard. Meanwhile, the Chinese economy, while growing strongly, is vulnerable to shocks and the inclination of the Beijing leaders may be to protect it in order to thrive.

It would be unrealistic to expect the US and China to co-ordinate their actions like a couple of peas in a pod. But the coming months will deliver vital clues as to whether the US and China believe it is in their own respective interests to work in tandem. If they do, knotty problems such as those raised by the Yukos affair might be resolved more quickly and more successfully. The end of the Yukos affair may only be the beginning.

Europe should keep champagne on ice

FRANCE’S ambitious Finance Minister, Nicolas Sarkozy, understandably seized on yesterday’s better than expected news for his country’s economy as a cause for celebration.

With M Sarkozy nursing presidential ambitions, it was little surprise that he was cracking open the champagne after France’s second-quarter growth matched the strong performance of the first quarter — the best for almost four years. In Germany, too, there was cheer as Europe’s biggest economy recorded its strongest expansion for three years.

But eurozone policymakers would be wise to keep their celebrations in check. For one thing, the decent but unspectacular growth now being reported comes after three dismal years, so there is little to boast about. More importantly, the harsh reality is that the unspectacular revival looks likely to be as good as it will get for the eurozone. Even as Alan Greenspan is proclaiming his confidence that America is emerging from its “soft patch”, the eurozone is at risk of heading back into the economic morass from which it has only recently emerged.

After growing by 0.6 per cent in the first quarter, eurozone GDP numbers, due to be published today, will probably show a loss of momentum, with a weaker expansion of 0.5 per cent. It is worth bearing in mind that, even in Mr Greenspan’s soft patch, the US is growing by more like 0.75 per cent. Worse still, the Netherlands has suffered a surprise relapse, with falling output in the second quarter.

French consumers may be spending again, but the fundamental problem remains the absence of a sustainable domestic demand. With growth dependent on exports, the eurozone is dangerously exposed to any global slowdown. Perversely, the European Central Bank insists that structural reform by eurozone governments is needed as a stepping stone to stronger consumer confidence. In fact, the opposite is true. Fears over the impact of reform inhibit consumers, while the weaker growth that results limits the scope to press ahead with change. If the ECB did lower interest rates it would buoy confidence, rekindle spending, and foster the growth needed to give governments the room to manoeuvre to deliver reform. It was speculated that Jean-Claude Trichet, ECB president, tried to persuade his colleagues to cut rates in April. Now the opportunity for action seems to have slipped away.

Different dealings weaken Shell group

SIR PHIL WATTS and Walter van de Vijver were ejected from the Royal Dutch/Shell group at the same time. They were deemed responsible for the same horrendously damaging issue of cutting corners on reported proven oil and gas reserves.

Mr Van de Vijver, we now learn, is to receive a £2.5 million payoff, more than twice as much as his former boss, as well as a deferred pension of £257,000 a year. Perfectly rational arguments could be made for this seemingly inconsistent treatment. The reality, however, is that although both superficially worked for the same integrated organisation, Mr Van de Vijver is a Royal Dutch man, treated according to Dutch law and practice, while Sir Phil was a Shell Transport chap and so dealt with in Anglo Saxon ways.

This little miniature speaks as much as the volumes of consultants reports, on the underlying issue exposed by the great reserves affair. It shows how proper consistent governance is now undermined at Royal Dutch/Shell by the traditional differences between the two holding companies and their consequential lack of an effective role in the joint operating management company.

This is clearly now going to change. The issue is only whether the two holding companies should be parallel entities with the same directors or whether they should be merged into one. If sterling had joined the euro, a full merger would have made sense. As it has not, a merger would create yet more losers among investors.

HERE