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FT: Moscow Rules

From the Financial Times:

Moscow rules The Financial Times March 29 2007 There is something unsettling about BP, Britain’s largest company, publicly co-operating with the Kremlin by allowing TNK-BP, its Russian joint venture, to join state-run Rosneft in this week’s auction of assets from the bankrupt Yukos group. To nobody’s surprise, there were no other participants and Rosneft won, paying just $7.59bn for a chunk of its own equity with a stock market value of $8.4bn. TNK-BP abandoned its bid after less than 10 minutes. But it insisted it had participated in good faith – and pulled out only because it could not match Rosneft on price. The company failed to convince analysts, who said that from the start the auction was designed to favour Rosneft. Under Russian law, an auction must have at least two bidders to be legal. So TNK-BP’s participation was helpful to the sale process. To be fair, oil and gas companies often have to operate in countries with the most difficult political conditions. Russia is no exception. Under President Vladimir Putin, the state has openly re-established control of natural resources and squeezed down private companies. Russian officials argue that they are merely correcting the wrongs of the 1990s, when domestic oligarchs and foreign speculators took advantage of a country in turmoil. The biggest victim has been Yukos, which has been broken up following tax and fraud probes and the jailing of Mikhail Khodorkovsky, its founder. Foreign companies have also been hit, notably Royal Dutch Shell, which was forced to sell control of the $22bn Sakhalin-2 gas venture to state-run Gazprom. In this environment, it would not be surprising if TNK-BP was keen to curry favour with Mr Putin, not least because the Kremlin is considering revoking the licence for the huge Kovykta gas field. In itself, participating in a quick-fire auction is a small price to pay for edging up an inch or two in Mr Putin’s estimation. Companies around the world try to ingratiate themselves with governments. But it is not a pretty sight, even in developed democracies, where the authorities claim to tolerate a measure of criticism. In emerging economies, particularly big rich authoritarian countries such as Russia, the spectacle can be demeaning. A measure of play-acting is perhaps essential for success in this imperfect world, not least in business. Grovelling has its place, as do fawning and flattery. But executives must remember that there are costs as well as benefits. A company that lowers its standards may find it more difficult to observe high standards in future. It could become harder to resist political and bureaucratic pressures and for a company to disentangle its interests from those of the regimes under which it operates. The public image of the company suffers – and so does the image of business in general.