In BP’s Russia Crisis, Cui Bono?

It may have been Deepthroat’s sage advice to “follow the money” that led Woodward and Bernstein to take down the Nixon administration, but for those seeking to understand the prolonged crisis plaguing BP with regard to subsidiary TNK-BP in Russia, the better strategy would be to “follow the assets.” So goes the question, cui bono in the TNK-BP collapse? The answer comes back unequivocally (even from some shareholders themselves), the Russian state – with either Rosneft or Gazprom taking over a sizable stake in the company. This is frequently denied by both sides (although less so today), who point simply to seemingly irreconcilable differences between the Russian billionaire shareholders and BP, with whom they split the company 50-50. However, these “differences” are acknowledged to be based upon a disagreement over who should have to give up a stake to the state – because once the Kremlin asks, it seems you cannot say no. Further, the same ones telling us that this is purely a shareholder dispute tend to also argue that the multiple office raids, arrests, and tax cases have nothing to do with it. Yet here is the really, really frustrating part – everyone still wants to pretend that this isn’t a Yukos redux right before our eyes. Perhaps the tipping point is here: TNK-BP CEO Robert Dudley has been called in for interrogation on tax invasion by the Interior Ministry, and as a result, the previously diplomatic and quiet BP head Tony Hayward dropped a bomb in today’s Rosneft shareholder meeting, demanding that Russia respect rule of law. Ouch. That sounds more like a creeping expropriation problem than a shareholders’ dispute.

We’ve been blogging about the struggles of TNK-BP for quite a while now, and also about Gazprom’s successful assault and capture of the Kovykta field. However it’s only in the last number of weeks that we have seen a dramatic reversal in attitude. First, it was Robert Dudley who broke the company’s silence that there was any problem (this is even after the office raids and arrests). This led to a gradual tit-for-tat escalation detailed so exhaustively in the media, culminating with Hayward’s dramatic and direct comments during the Rosneft meeting.To appreciate the degree to which this is a sea change for BP’s approach to Russia, I point to the many instances of “complicity” in Russia’s descent into lawlessness that was formerly BP’s company line. One of the reasons that Tony Hayward was present at the Rosneft meeting today is that his company was pressured into making a big investment in the state firm back in 2006 during its controversial initial public offering – throwing $1 billion not toward energy stocks, but rather the purchase of permission to continue doing business in Russia. Rosneft badly needed a supermajor energy firm lend its name and legitimacy to the deal, as it had acted illegally to acquire its chief asset Yuganskneftegaz – something being proven now in courts from Switzerland to Amsterdam to Strasbourg.However the Rosneft acquisition was not enough – the siloviki had further tasks for BP – which was of course the 2007 participation in fixed auction for Yukos assets. Of course BP did not acquire the stolen properties – those were reserved for the state – however their presence in the room served an asset laundering purpose (no one else would go near, except later on with the Italian Eni and Enel). BP ended up spending less then 10 minutes in the auction, then leaving the floor open to Rosneft as the sole bidder – raising concerns among shareholders over what in the world the company’s intentions were there. In an article at the time for the Independent, I was quoted as saying “BP is rewarding the Russians for taking hostages. First they took Khodorkovsky. Now they’re holding Kovykta. It is extortion … We are walking into the Munich of energy appeasement.“Then of course we remember Lord Browne’s historic visit to pay homage to Putin, and introduce his successor, Hayward. The torch had been passed in quite a symbolic fashion, and the corporation was to rely upon a personal relationship, based upon preferences and favors rather than rights and rules. The strategy was clear – ingratiate yourself before the company, never admit anything to the public, and rely on proximity to power. It was the Russian way, it seemed.But we’ve come a long way since that honeymoon – and not long after that the Kovykta episode blew up in BP’s face. Are we learning yet?With TNK-BP, there is of course a genuine grievance on behalf of the other shareholders, best detailed by a new Economist article. The Russians claim that BP treats the company as a wholly owned subsidiary, and that there are disagreements about spending on international experts, as well as dividend payouts (the Russians want more now, BP wants to sink it into future production). However the problem lies in the use of the Gazprom/Rosneft threat as an instrument of leverage, as well as the unjust application of bureaucratic law.An editorial on the matter by the FT states it quite succinctly:

The Kremlin may not be the sole author of TNK-BP’s problems, but its policies create the atmosphere in which obligations can be made worthless.The government has encouraged officials to make arbitrary use of the law in a number of cases, most notoriously on Yukos. It cannot now be surprised that public servants are also selective in their application of the law.When institutions of state can harass foreign companies and private individuals can avoid their contractual obligations, governments cannot simply dismiss this as being merely an issue for the shareholders.

The lesson of the day is clear: complicity doesn’t pay, and the structural damages to the legal system incurred during the Yukos affair can affect anybody doing business in Russia – not just the strategic sectors either. Hayward’s dramatic reversal is already causing some major waves. The Times of London headline really nails it for tomorrow: “TONY HAYWARD LETS KREMLIN KNOW THAT ITS REPUTATION IS AT RISK OVER BITTER TNK-BP STRUGGLE.“We can only regret that it took BP so long to agree with what we have been saying for years, and can only hope they have good luck battling a monster that they so actively fed.