Fund managers are keeping their cool in the face of Russian political risk as western oil majors come under pressure and state control of business grows.

Concern over Anglo Dutch oil giant Royal Dutch Shell's Sakhalin 2 energy deal was high on Britain's diplomatic agenda this week when its Foreign Secretary Margaret Beckett challenged her Russian counterpart Sergei Lavrov in New York.

But investors enjoying double digit returns from Russia's oil fuelled boom say they are not surprised by the risks to Sakhalin, Russia's largest foreign investment, where Shell is building the world's biggest plant to liquefy gas.

We are seeing the Russification of the strategic energy assets. This is going to continue until it is finished, said Martin Taylor, hedge fund manager at London's Thames River capital with $8.5 billion (4.5 billion pounds) of assets under management.

Whilst distasteful, none of this has been a surprise for anyone following the increase in Russian government's growing control of energy assets.

Emerging markets guru Mark Mobius, in charge of $30 billion of assets at Templeton, said ripping up a $20 billion contract with Shell and its two Japanese partners would be a step too far, and expected the issue to be settled behind closed doors.

Frankly, I'm not that bothered, he told Reuters. He said his outlook had not changed: We're still positive on Russia.

This kind of thing happens every day in other countries. It'll be worked out in the end. I don't think the Shell affair is going to have a big impact, Mobius said.

The world's second largest oil exporter, Russia has reaped a huge bonanza from the commodity boom of the past five years, transforming itself from emerging market pariah after its 1998 debt default to a virtually debt free investor darling.

Russia has the fifth largest foreign exchange reserves in the world on the back of record high prices for oil and metals, and all three major ratings agencies rank it investment grade.

Net private capital inflows were $12 billion in the first half and $3 billion in each month of the third quarter compared with just $0.3 billion in 2005, the first year since the Soviet collapse that the country had a full year's net inflow.

CONFUSION

Mobius said what worried him more was Russia's seemingly fragmented decision making and its competing centres of power.

There is a feeling among investors that the central government cannot push buttons. There is the question of whether the central government is in control, Mobius said.

Obviously they can't be (in control) if they have a huge bureaucracy where there are very important silos of control of power, and where the stakes are huge.

Confusion still reigns over the Shell affair.

The natural resources ministry said on Monday it cancelled a permit for the Shell project over environmental irregularities.

But the liberal Economy Minister German Gref has said such production sharing agreements as those underlying Sakhalin 2 as well as ExxonMobil led Sakhalin 1 and the Total led Kharyaga project in the west of Siberia should be honoured, and his deputy Kirill Androsov has said he saw no reason to suspend the licence.

Some fund managers are pessimistic in the longer term, with Sakhalin-1 and Kharyaga project also facing problems.

What's happening raises questions about how safe a place Russia is to do business, said Samuel Oubadia, an ING Bank fund manager running $1 billion of assets in Russia and East Europe.

It calls into question what property rights mean in Russia and how the government treats foreign investors in the future.

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