Sechin’s Decline and Political Risk in the Russian Energy Sector

What a difference a half year makes. Last January, then-Russian deputy prime minister and Rosneft chairman Igor Sechin was a portrait of confidence, kicking off the new year with blockbuster deals with international partners that seemed to place the company as a new market leader, while placating investors’ fears of corporate raiding in the Russian market. Six months later, both the BP deal and a recently planned joint venture with Chevron have fallen apart, and Sechin has been removed from Rosneft’s board, part of Russian President Dmitry Medvedev’s mandate to clear state company boards of government officials who are in charge of regulating the same sectors. The most shocking headline came on Friday, when Arkady Dvorkovich said that Rosneft might not even be a state-controlled company for much longer, as the government considers reducing its stake in the oil company to below 50%.

A post-mortem of the BP fiasco by Steve LeVine reveals miscues on both sides. From the outset the deal was hamstrung by the Russian consortium AAR, who own a 50-percent stake in the joint venture TNK-BP, and who blocked the deal with Rosneft in European courts. Amusingly, BP was first cornered into the TNK-BP deal with the understanding that partnering locally would protect them from corporate raiding, a lesson they learned the hard way when their future partners used Russia’s weak courts to seize BP’s investment in Sidanko. Fast forward to the attempted Rosneft share swap, and BP’s attempts to buy out AAR have since failed. The saga’s downward spiral recently culminated in a failed bluff worthy of a late night poker tournament, in which BP lawyers trying to extricate the company from the stranglehold of AAR claimed BP could bypass an exclusivity agreement if even “one share of [BP’s] 50 per cent stake” were sold.

AAR didn’t blink. BP stepped away. “We’re moving on,” said BP’s Bob Dudley, wearing the bruises (yet again) from his flawed Russia strategy. Sechin didn’t hesitate to lay the blame on BP, commenting that they should’ve taken care of all their agreements with AAR on their own, adding: “We don’t know anything of their corporate agreements.” A bit ironic, considering that Sechin was their shepherd during the TNK-BP crisis of 2008.

If the BP episode underscores why ambition and initiative so often fail enterprising foreign investors in Russia, the Chevron situation seems to suggest a straightforward case of cold feet. And for that reason might send an even more disconcerting message to Rosneft, because it means foreign companies are starting to think: “doing business in Russia just isn’t worth the effort.

The company had a $1 billion agreement with Rosneft to explore Shatsky Ridge, in a deepwater portion of the Black Sea, home to an estimated 6 billion barrels of oil. In public, the breakdown of the deal was tied to a disagreement with geologists over the size of the alleged bounty. But Chevron had other reasons to be concerned: the deal entitled Chevron to just a 33 percent stake in the operating company, but (lucky Chevron!) they had to cover 100 percent of the exploration costs. As David Lee Smith points out in a recent column in The Motley Fool, “Indeed, it’s precisely that sort of one-sidedness that has frustrated Western companies in Russia for a couple of decades now. It just might prevent Rosneft from gaining the sort of respect shared among the world’s oil and gas companies…

As Smith’s column shows, these two most recent failings are by no means anomalies or aberrant examples. Rosneft and other Russian companies seeking money from abroad have long sought foreign “partnerships” that more resemble one-sided bargains, which similarly claimed victims such as Royal Dutch Shell at Sakhalin and a number of other smaller producers and service providers.

According to a recent profile of Sechin published by Richard Sakwa, the Deputy Prime Minister’s silovik instincts eventually did him in, pushing for more involvement of the state (and his own bank account) against the current of a new, albeit limited, reformist minded economic policy of President Medvedev, who believed (rightly) that the predominance of state-controlled companies was dragging down economic competitiveness and growth.

Sechin’s pre-eminence in Russian politics symbolises the power of the old Soviet establishment, and although it has undoubtedly evolved over the course of the last two decades, this particular faction of the old elite still bears a heavy baggage,” Sakwa writes. “The need for business transparency, independent courts and a genuinely competitive political environment does not come easily to them.

But perhaps the most interesting feature of Sechin’s slow (and likely not permanent) decline is the willingness on behalf of foreign investors to believe that his threat to the security of their business activities is limited to the “strategic sectors” of oil, gas, minerals, nuclear, media and defense industries. Instead, what poses the political risk is the system of weak courts, arbitrary abuses by bureaucracy, and calculated instability that Sechin and co. helped nurture, develop, and install in Russia. These vulnerabilities, naturally, are exacerbated by even the slightest power struggle and reshuffling of cabinets, with the biggest question residing on whether or not it will be Putin or Medvedev as the next president (despite the real policy outcomes being identical).

As noted by Catherine Belton in the FT, competing forces, such as AAR’s Mikhail Fridman, are taking advantage of the uncertain political environment to advance their agenda (i.e. – breaking up the Rosneft-BP deal). Others such as Oleg Deripaska are salivating over the possibility of new corporate governance laws from Medvedev that may help him finally solve the Norilsk Nickel disputes, writes Belton.

The lesson to draw from this confusing series of broken business deals is that nobody can take a promise seriously from anyone in the Russian government, and that we should avoid all assumptions about any unitary “agreements” among all competing parties under such a flawed and lawless power structure. Interests often do align temporarily, as was the case during Sechin’s heyday, but it’s hardly the basis upon which anyone can make a 20-year multi-billion dollar investment – which is a great pity, as this is precisely what Russia needs to leap up to the next level of development and survive a surging China on its depopulated border.

As for Igor Sechin the man, he remains almost a complete cipher. Various attempts to interview him and understand him haven’t ever gotten close to capturing something of substance. Rumors abound that he’s dealing with serious illness, that he’s a workaholic that hasn’t yet spent a penny of the billions he stole from Yukos, his Viktor Bout connection, that he engineered recklessly antagonist policies in Venezuela, Iran, and Cuba, and so on. And while although his role in government and business may be diminished for the moment, he’s certainly left quite an ugly mark on the post-Soviet transition of Russian market, one that will be remembered – and experienced – for many more years to come.