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TNK-BP as a Corporate Foreign Policy Case Study

I wrote up this short blog post over at my Corporate Foreign Policy (CFP) website, and I thought it might be of interest to some readers over here. To learn about what CFP means, read this post or this post. The new blog is a work in progress, but I have big plans to build upon this subject area. In many ways, we have an ideal case study of corporate foreign policy in action with the TNK-BP situation, all unfolding before our eyes as the executives consider their options. The irony of BP’s difficulties with the Russian government is that this joint venture was specifically designed and structured to protect against government interference by partnering with local interests. The company is 50% owned by the Russian businesses Access/Renova Group and Alfa Group – personally controlled by the influential Mikhail Fridman and Viktor Vekselberg. The presence and political clout of these two men was thought to help protect BP from the state abuses suffered by other oil companies such as Yukos, but as Gazprom and Rosneft took over more and more majority stakes in critical energy production projects (such as the maneuver pulled against Royal Dutch Shell at Sakhalin-2), trouble began to brew.

We saw the first indication that the state was interested in acquiring a big stake in TNK-BP as far back as two years ago, when negotiations began over a possible acquisition of the Russian-owned shares by Gazprom – however neither Fridman or Vekselberg seemed to appreciate the state’s artificially low valuation – they continue to hold out for the full $60 billion valuation before giving up control to the state.Then, slowly, the government launched a series of bureaucratic and regulatory pressures against TNK-BP, including environmental violations which crippled the company’s ability to produce gas at its largest field, Kovykta, in Eastern Siberia. These pressures escalated dramatically last week with the arrests of one employee and his brother under charges of “corporate oil espionage”, a police raid on the BP offices in Moscow, and the launch of a crippling, new environmental audit.How BP decides to react to the onslaught is largely an area of corporate foreign policy – and so far we can see that they are following the troubling principle of opacity in their negotiations with the Russian government. There are certain natural resources corporations which choose to adapt to the business culture of local government – and in the case of Russia, these companies have observed that the state prefers to conduct their affairs behind closed doors, with personal relationships and power meaning much more than rules or law. For example, if BP were to experience a regulatory hurdle in the United Kingdom or any other Western nation, it seems unlikely that their shareholders would remain quite as under-informed about how the company is working to resolve the issue. If BP were indeed experiencing an unlawful series of attacks from a government in a rule of law country, it would seem natural for them to give the state a vigorous fight in the court of public opinion as well as a court of law.However BP has been advised in this case to stay quiet, and has not responded to any questions from reporters, nor have they disclosed any information of value on their website. It would seem to me to be problematic that the company is wholly unwilling to even recognize that they are navigating through a serious political risk problem – and despite all their assurances, along with those of the Russian state, that indeed the arrests, office raids, and regulatory sanctions are all part of a coordinated attempt to drive down the market capitalization and force shareholders to pass control to Gazprom at a reduced price. To say that this is not what is happening is not honest or respectful. The most troubling part of acquiescence of foreign oil and gas companies under the pressure of the Russian state is that it further encourages the bureaucrats to continue with the same tactics despite the law – something that ultimately keeps the country’s economic potential suppressed.It will be very interesting to see how this problem will be play out – no doubt that the authorities will be able to extract some kind of “payment” in exchange for allowing TNK-BP to resume normal operations, however whether that payment includes asset and share swaps or the use of BP as a lobbyist for Russian interests within the EU, remains to be seen. It would not be surprising to very soon find CEO Tony Hayward vigorously arguing against the unbundling initiative from the anti-trust authorities in the EU, or asking Prime Minister Gordon Brown to stop antagonizing Moscow over the Litvinenko affair. I do hope to be proven wrong on this one, but the track record of this government in managing energy affairs does not leave me with much optimism.