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TNK-BP Is Hurting Russia

BP_art.jpgThe drama continues to peak in the unfortunate shareholder dispute currently unraveling with TNK-BP. We have Robert Dudley undergoing “interrogations” by the tax authorities, Gazprom first denying then expressing interest in taking over a stake, and the Russian shareholders launching a new lawsuit. BP Chairman Peter Sutherland just kicked it up a notch: “This is just a return to the corporate raiding activities that were prevalent in Russia in the 1990s. (…) Prime minister [Vladimir] Putin has referred to these tactics as relics of the 1990s but unfortunately our partners continue to use them and the leaders of the country seem unwilling or unable to step in and stop them. (…) This is bad for us, bad for the company and of course very bad for Russia.” I couldn’t agree more.

No one watching this boardroom brawl can take any joy from it, and no one concerned about human rights should ignore the lawless plight of the arrested employees. Anyone who loves Russia and is looking toward its future development as a prosperous, successful, and productive country cannot help but wince in pain before these events. TNK-BP’s ongoing troubles, and intimate involvement of the government (as detailed in the excellent Wall Street Journal article I have excerpted), undermines all the positive reforms that Dmitry Medvedev says he wants to make, and undermines this entire new rule of law and anti-corruption narrative now coming from the Kremlin.The dispute is also a clear illustration of several things we’ve been arguing: the instability at the very top of the Russian leadership, the instrumentalization of the legal process for private gains, and the fact that these bureaucrats and siloviki most closely involved in energy are more interested in preserving their ability to steal assets than they are in fighting for the future of the country. Let them not fly the patriotism flag again.Perhaps most important is the lesson the world is learning about complicity with corrupt practices of local governments – in the end, it never pays off.From the Wall Street Journal:

BP offered in recent weeks to buy the Russians out. Publicly, the Russians say they have no plans to sell, but people close to the talks say they’ve discussed the possibility of swapping their TNK-BP shares for shares of BP. The British side has said that as part of such a deal, it would quickly resell a majority stake in TNK-BP to a Russian state-owned giant such as OAO Gazprom.BP’s bear-hug strategy was a gamble from the beginning. In the late 1990s, the company was embroiled in a string of commercial catfights with three Russian billionaires — Mikhail Fridman of Alfa Group, Len Blavatnik of Access Industries and Renova’s Viktor Vekselberg. The trio had used Russia’s weak courts to seize assets from BP’s Russian venture, a company called Sidanko. BP lined up support from top officials in Washington and London but still wound up writing off half of its investment.[Graphic]Yet in 2003, BP decided to team up with a holding company owned by the same three businessmen, called AAR, to create a British-Russian oil giant. “Of course we had qualms, given the history,” says a BP executive. “But sometimes you don’t get the chance to choose your partners. It was the only deal available.” (…)The confrontation has been the most serious strategic challenge to Mr. Hayward, the pragmatic and low-profile BP veteran who replaced Lord Browne as CEO last year. In private, Mr. Hayward and his colleagues were livid about their partners’ behavior. Mr. Hayward called Mr. Fridman and the others repeatedly to complain. BP officials also bemoaned their plight to Russian officials, but got little sympathy.Mr. Hayward didn’t want to go on an open offensive, for fear of jeopardizing BP’s good relationship with the Kremlin, say people close to the company.On June 5, a week after the blow-up at the Cyprus board meeting, Mr. Hayward headed to Moscow on a previously scheduled trip. He hoped to meet top government officials, as well as the Russian shareholders, to work a way out of the impasse. Mr. Hayward kept his public comments deferential.Mr. Hayward complained more openly in a private meeting with Igor Sechin, who is the chairman of the board of Russian oil major Rosneft’s board and, as deputy prime minister, Russia’s top oil official. Mr. Hayward told him that BP’s Russian partners were causing havoc at TNK-BP. According to people familiar with the meeting, Mr. Hayward cited BP’s suspicions that the partners were behind the lawsuits and other pressure.Mr. Sechin, a close confidant of Mr. Putin who is considered one of Russia’s most influential people, called in Mr. Khan and another partner from Alfa. After both sides laid out their versions of the conflict, Mr. Sechin promised BP that while he could only do so much, he would try to prevent the most extreme misuses of regulators and courts. But he told both sides that they were “big boys and would have to sort it out,” according to a person familiar with the meeting.Mr. Sechin declined repeated requests for comment.Mr. Hayward and his colleagues emerged from that encounter encouraged that their position had been heard. The Alfa partners interpreted Mr. Sechin’s warning as a formality, say people familiar with their thinking.”Mr. Hayward is a new CEO and it’s not easy for him,” says Mr. Fridman. “That’s one of the fundamental reasons for the difficulties.”BP’s message clearly wasn’t getting through. Top Russian officials echoed Russian shareholders’ allegation that BP was holding back TNK-BP from international expansion to avoid competition. A senior government official told reporters BP “probably did not understand who they formed a partnership with.” He warned that pressure on the company was likely to increase, suggesting that BP’s efforts to get the Kremlin to help rein AAR in had failed.Pressure on the venture resumed early this week, when prosecutors demanded boxes of personnel records, responding to a complaint by a union about overpaid expatriate workers of TNK-BP.The next day, Mr. Dudley spent five hours with investigators being questioned about a back-tax case concerning the venture’s Russian predecessor company. BP says it is still hoping AAR will accept its proposals, including a move to restructure TNK-BP’s management and an arrangement to ease out Mr. Dudley.Mr. Fridman says the Russian shareholders want to replace management at TNK-BP with new, independent executives, and add outside directors to the board. “We don’t plan to leave and I don’t think that they plan to leave,” Mr. Fridman said. “So ultimately we’re destined to come to some agreement.”