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  • beneped01 beneped01 Sep 4, 2008 1:15 PM Flag

    end of BP in Russia from Stratfor

    TNK-BP: The End Begins
    Stratfor Today » September 4, 2008 | 1453 GMT

    Summary

    After much bickering, representatives from the British and Russian sides of joint energy venture TNK-BP agreed to a deal Sept. 4 that spells the beginning of the end for British involvement in the Russian energy sector.
    Analysis

    After a year of acrimonious back-and-forth, representatives from the British and Russian sides of energy major TNK-BP agreed to a deal Sept. 4 that heralds the beginning of the United Kingdom’s formal retreat from the Russian energy sector.

    TNK-BP was created in 2003 when then-British Prime Minister Tony Blair and then-Russian President Vladimir Putin played matchmaker for two of their countries’ energy players: BP and Alfa-Access/Renova (AAR), the Russian holding company for energy firm TNK. Under the terms of the deal, the two firms would merge nearly all of their Russian operations, BP would drop in a large dollop of cash, and a BP man would lead the operation as chief executive officer. The logic was that TNK had more in-country assets, but that BP had the technology and downstream assets necessary to sell the oil produced. TNK-BP accounts for almost a quarter of BP’s global output.


    All went well for a while until the Russian oligarchs linked to the TNK side — Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik — decided they wanted more. Officially, they wanted TNK-BP to go international and thus compete with BP directly. Unofficially, they felt they had gotten enough technology out of BP to run the operation on their own. But officially or otherwise, BP realized that the oligarchs were edging them out, and the British were not pleased. Months of rancorous negotiations ensued, and the oligarchs found it very easy to get Moscow — in the form of Putin and current President Dmitri Medvedev — on their side. Since the venture’s assets were in Russia, the Russian version of rule of law is what prevailed. Several of TNK-BP’s British executives were forced to flee the country.

    According to the Sept. 4 deal, TNK-BP CEO Robert Dudley will resign and leave his post by the end of 2008, to be replaced by a fluent Russian speaker. TNK-BP will expand its board to bring in three independent members and hold an open share sale of an as-yet undetermined portion of the firm to bring in new investors.

    Officially, this is a friendly end to a nasty negotiation, but it essentially amounts to BP caving.

    While the agreement does not explicitly note that the new CEO must actually be a Russian, in practice the Russian oligarchs will not settle for anything but someone on their existing payroll. Right now, each side holds exactly 50 percent of TNK-BP’s shares. In offering additional shares on the open market, the Russians will ensure, by hook or by crook, that they will get at least one more than half of the new shares available. Getting 50 percent plus one share of the total would allow the oligarchs to ramrod their plans through, even without needing the Kremlin to do some arm-twisting. (What arm-twisting that will take place will be done to prevent state energy mammoth Gazprom from gobbling up as many of the shares as possible — but this is an inter-Russian dispute.)

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    • Once the shares are secured, BP will need to decide how much time, money and manpower it wants to keep pouring into a venture that it no longer controls. The British might well stay for a while, as long as the oil keeps flowing, but they will have to weigh any benefits against a lack of managerial control, an absence of guarantees on their holdings and co-owners who have publicly stated their intention to use the firm to compete with BP internationally.

      At this point, the strategic issue has already been settled. The “BP” in TNK-BP soon will become silent, and it will be up to the Russians to run the company as they see fit. There will be more drama to come, of course, but it will primarily take place among the Russian stockholders. The folks at AAR are attempting to jettison one of their own — Fridman — and that particular corporate dispute will make the TNK-BP spat seem like a tea party in comparison.

      The Sept. 4 developments mark the final chapter of major Western foreign investment into the Russian economy. BP was the firm that by far sunk the most effort into Russia, and while it would be an overstatement to say that BP has had its shirt handed to it, the experience has been more than merely uncomfortable. Russian rule of law simply does not value contracts unless those contracts are convenient at the time, and the government reserves the right to overturn any decision at any time. If a megafirm like BP — with the formal and expressed blessing and backing of Downing Street — cannot ensure its investment, then no one can.

      For the Russians, this is no big deal. The Kremlin is concerned with keeping a hold on national security and control, so robust economic development has never been viewed as a particularly important goal. But there will be consequences. Foreign investment into Russia has been draining away impressively for months now (the TNK-BP “deal” and the Georgia war will only accelerate that trend), but considering the Russians’ priorities, this is something they can live with

 
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