The Developments at TNK-BP

Anybody who has been paying attention to the business climate in Russia over the past few years will not be much surprised about the latest round of nonsense in the TNK-BP row:

Russia’s migration service said today it would not grant a visa to TNK-BP chief executive Robert Dudley before he presents a valid contract, saying it believed his previous contract had expired.

“We cannot grant a visa to Mr Dudley before he presents a valid contract. The previous contract expired and we have no proof that it has been prolonged,” Konstantin Poltoranin, a spokesman at the Federal Migration Service (FMS), told Reuters.

Dudley’s contract expired last year but BP says it is still valid under Russian law because it has never been officially terminated and as a result rolls over automatically.

Mikhail Fridman, Lev Blavatnik, Viktor Vekselberg and German Khan, TNK-BP’s four Russian billionaire co-owners, who want to sack Dudley as part of their dispute with BP over the company’s strategy and management control, say the contract has never been officially renewed and is therefore no longer valid.

Dudley is also facing penalties from a judge after a labour inspector found some minor violations, the TNK-BP source said. These could include suspending him from his post for a period of up to three years.

So even if Dudley’s contract is proven valid and his work permit is renewed, there is a Plan B – and probably a Plan C, D, E, F, and G – to ensure he can get booted out of his post anyway.  I noted in April that the Russian government had pretty much abandoned any pretence to subtlety in its dealings with TNK-BP, even though an outsider would wonder why the Russian government is getting involved in the managerial disputes of a private company in the first place.  An outsider, that is, who hasn’t been paying attention.

One thing which doesn’t seem to have been picked up on much is that the dispute seems to have changed from one whereby the Russian government were trying to force the Russian owners of TNK-BP to concede their half to the current situation where it is BP which is looking like being kicked out.  This is from June 2007:

Many believe the Kovykta tangle is just a skirmish before the real battle over the Kremlin’s desire to seize the half share in TNK-BP that is currently held by Russian oligarchs and perhaps more.

A lock-in period under which Access-Renova and the other Russian owners must hold on to their shares in TNK-BP comes to an end in December. It seems inevitable that the Kremlin might use that period to put pressure on them to sell out, paving the way for a state-owned operator such as Gazprom or Rosneft to take control.

It is hard to tell what exactly happened a year ago during the arguments over Kovykta, but I got the impression that BP helped the four Russian oligarchs resist the Kremlin pressure to sell their stake to Rosneft or Gazprom.  Now the Russian government is assisting the oligarchs in forcing BP to cede control of the company.  There are two interesting aspects to this.

Firstly, the oligarchs have probably found themselves faced with the choice of either helping the Russian government get rid of BP, or being got rid of themselves.  Well aware of the fate of Mikhail Khodorkovsky, I know which way I’d turn.  I doubt this volte-face will go unnoticed by potential and current foreign investors.

Secondly, supposing the oligarchs do succeed in getting rid of BP, what will be their fate thereafter?  Will Gazprom or Rosneft take the BP half and be content with sharing the rest with the oligarchs, or will the Kremlin simply move its gunsights to the other side of the boardroom table?  Divide and conquer is not a new or original strategy, but I wonder if the Russian owners of TNK-BP are aware of it.

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18 Responses to The Developments at TNK-BP

  1. Pingback: Global Voices Online » Russia, UK: TNK-BP Battle

  2. mitya says:

    Tim, there is still an argument to be made (isn’t there?) that Fridman et al are just successfully gaming the broken legal system in order to get the best possible buyout deal from BP, while the government *is* actually staying out of it because they know that Gazprom will get half of the company in the end no matter what. The state has already shown that it doesn’t care too much about international perceptions, and I can easily imagine some nationalist camp that a) doesn’t particularly mind if a group of Russians squeeze a few million more out of some hated Brits and b) see the public crisis at the company at simply “bolstering the case” for a state-owned company (which will be “better behaved” than the oligarchs) to step in as BP’s parter in the endgame.

  3. Alphast says:

    It does not really matter anymore. Any foreign company with investments in infrastructure, energy or anything vaguely strategic is now provisioning for future losses and cover of political risk. Russian has simply become an investment too risky in these times of restricted access to funds. More over, any company with a decent market intelligence section has now shelved any project for investing in Russia. Again, most Russians are too nationalist or economically naive to care, but I am afraid Russia will pay dearly this denial of justice in the long term.

  4. daniel says:

    I don’t know the finer details of this particular piece of political theft but, the key point here is how it looks to the potential investors ,not for the sake of big business or any other westerner but the ordinary Russians who take the hit every time for there leaders stupidity/greed.

    Russia desperately needs an injection of business acumen and methodology and the only way they will get it is through every day contact with those who have had previous experience , on whatever level,top to bottom.

    Thats the real crime here ,, BP wanted to play with the bear it should have taken a big gun to the party.

    If anyone wants to know the outcome of any of these situations,stand outside the Duma in Moscow,look at the people coming and going.

    Check out the family connections around Putin, his collegues their Sons, daughters, Uncles, aunts and in laws etc . look at the positions they hold in business and government.

    A joke from the Kremlin Putin, Medvedev and the cabinet go to a restaurant, Putin orders steak and the waiter asks “and the vegetables sir ”

    Yes they will take steak as also.

    But in Putin’s words “we have our own special model for the way to do things here”

    http://daniels-wanderings.blogspot.com/

  5. Tim Newman says:

    Tim, there is still an argument to be made (isnt there?) that Fridman et al are just successfully gaming the broken legal system in order to get the best possible buyout deal from BP, while the government *is* actually staying out of it because they know that Gazprom will get half of the company in the end no matter what.

    Agreed, that is an argument with some merit. As I said, the oligarchs were between a rock and a hard place, both courtesy of the Russian government.

  6. varske says:

    That joke about the vegetables was first heard of about Thatcher. And probably before her too.

    For a country that needs expertise to get gas and oil output up, yet lacks the expertise to manage this itself, this situation seems to be an own goal in the long term

  7. Marco says:

    Tim, you might recall that some time ago I forecasted that PetroChina or Gazprom will make a hostile bid for the largest of the Big Oil companies. They will not be allowed to, of course, but the point would have been made. PetroChina is now the most profitable company in Asia and without Gazprom Europe would freeze. And more to come.

    One cannot expect in 2008 that a foreign company can own such basic stuff as oil, gas or water for the benefit of a few foreign shareholders. My forecast re TNK-BP, is that BP will end up with some 25%-30% of the company. I don’t think that the “four Russian oligarchs” will control the company because Russians think that they are neither Russian nor oligarchs but deserve to be locked up.

    Whilst corruption certainly exists in Russia let’s not forget the progress they have made after the disasters of Yeltsin. And when I hear that the Archbishop of Canterbury and Britain’s Chief Justice want shariah law in Britain, that the politicians in the Commons voted for retaining their snouts in the trough, and hear Berezovsky invited as an honoured guest in a political programme talking about democracy I am reminded of the the Italian saying ” tutto il mondo paese” – everywhere it’s the same.

  8. ZEFO says:

    Medvedev has stated that he intends to improve Russia’s legal system. He also needs to diversify the economy and get the commodities out of the ground. He is unlikely to let a few oligarchs, who seem less and less Russian by the day, dictate how the enenomy is run. This dispute is credited with a fall of 6% overnight in russian stock values (greater than the value of TNK BP.)
    When the AAR lock-in period expires, the Kremlin may get 50% of TNK-BP at a knockdown price. Effectively there is no incentive for Medvedev to intervene as the shareholders continue to weaken each other.

  9. Tim Newman says:

    Tim, you might recall that some time ago I forecasted that PetroChina or Gazprom will make a hostile bid for the largest of the Big Oil companies.

    I do recall. Hopefully you’ll recall my response to that.

    PetroChina is now the most profitable company in Asia…

    Really? Where did you get this from?

    …and without Gazprom Europe would freeze.

    Indeed, and if Gazprom was setting out to reassure Europeans that it can be relied upon to keep them warm for the next few decades, it has taken a rather odd route to doing so. I’m not sure how long the Europeans are going to keep their dependency on Russia so high.

    One cannot expect in 2008 that a foreign company can own such basic stuff as oil, gas or water for the benefit of a few foreign shareholders.

    No. But that does not describe the situation at TNK-BP, who had paid for the development license and was being taxed on production, all for the benefit of the Russian people (assuming, of course, the money actually reached the Russian people and didn’t get diverted into a few more fancy dachas for a few lucky politicians).

  10. Dee says:

    Tim, I have something important to ask you. Could you please send me an email at the address above? Thanks,
    Dee

  11. Marco says:

    “Really? Where did you get this from?” (re PetroChina)

    Tim,I got it from Wikipedia(blush) but also see last year’s BBC report. http://news.bbc.co.uk/1/hi/business/7078518.stm. I hate to put a patina of debate on your cheerful, informative and honest blog, but different countries have different ways. China has lifted 500 million out of poverty and had a growth rate of 11% for the past 25 years. In a few weeks Americans will be impressed by the sight of an enormous number of gleaming skyscrapers, none Arab-owned, and by the number of medals they will win (more than the Americans)., although 30 of their Athens gold-winners have not been selected now.

    I graduated in economics and work as a chartered accountant yet have been bitten badly twice by share “bubbles”. Now I question everything I read especially if it is the NY Times, FT, The Economist and the BBC. In your industry I ascribe to King Hubbert’s “peak oil” theory and believe wars will be started (by the Americans or proxies) because a basic element of American might – cheap oil – is not available and a second element – the dolar as a medium of exchange especially in the oil exchanges which means selling dollars for the cost of the dollar paper and its printing – is being eroded.

    Like you I like the Russians, admire the beauty of their women, congratulate them for reclaiming the television medium from the oligarchs and generally see Russia as a large European, Christian country incredibly endowed with resources.

    When you finish your new employment it would be interesting to read your comments about the changes in your time in Russia. I would love to go to Sochi in 1912 and perhaps even in Abkhazia.

  12. Tim Newman says:

    In your industry I ascribe to King Hubberts peak oil theory and believe wars will be started (by the Americans or proxies) because a basic element of American might – cheap oil – is not available and a second element – the dolar as a medium of exchange especially in the oil exchanges which means selling dollars for the cost of the dollar paper and its printing – is being eroded.

    I can’t see the US fighting wars over oil whilst it bans itself from drilling in most of its own territory. For all the supposed American desperation for oil, it is awfully reluctant to expand its own E&P activities in places like Colorado, Alasaka, and offshore California. And besides, I really don’t agree that American might is founded on cheap oil.

  13. Dee says:

    China has an appalling environmental record. Human rights are routinely ignored. Female babies are abandoned on the streets every single day. I do not see why anyone would admire that country.

    Marco, communism fell in Russia and elsewhere because of a basic human need, called FREEDOM. I have been to Russia and Kazakhstan many times and lived there for brief periods while I was adopting my children, and I can tell you, the desire to be free will always trump whatever temporary benefits communism provides.

    If you study history instead of economics you will see the truth of my statements.

    Speaking as an American, I can tell you that despite its flaws, America is a great country because we care about individual freedom.

  14. L.S says:

    I totally agree with Dee that China is not that impressive country in the way Marco described it. Many admired the Soviet Union from a distance and it also looked formidable and unbreakable but to forget that oppressed people are never the best way to build a long-lasting system and a successful one.
    And for the record,Marco, Russia is not purely a Christian country and it has ethnic minorities (not immigrants) from different religions. To describe it as a “Christian European country” is not correct in two ways, it’s not purely European and it’s purely Christian. That’s what makes it Russia.

  15. R S says:

    All the politics said and done, as a 50% shareholder the AAR shareholders have a right to question why the management is turning down investment opportunities that other Russian Oil majors (Lukoil, Rosneft etc) are taking, and making huge profits on, (in West and North Africa, Northern gulf, South America etc) simply because it would be competition for the other 50% of sharholders other business interests.
    If BP wanted a daughter company that they controlled then agreeing to 50% shareholding (with no single controlling party) was foolish to say the least.
    Lets not forget that in the West, if a company was seen not to act in the best interest of the shareholders, the non-exec directors would be expected to (duty/legally bound to) act. As an individual shareholder you would question why the executive directors (of the joint company) are satisfied with returns significantly less than those available on the market, and those achieved by competitors.

  16. Tim Newman says:

    <em>All the politics said and done, as a 50% shareholder the AAR shareholders have a right to question why the management is turning down investment opportunities that other Russian Oil majors (Lukoil, Rosneft etc) are taking, and making huge profits on, (in West and North Africa, Northern gulf, South America etc) simply because it would be competition for the other 50% of sharholders other business interests.</em>

    I agree with the first part, about the right of AAR to question the management. But insofar as I can make out, the reluctance of the TNK-BP management to invest abroad being simply because it would be competitionfor BP in those areasseems to be purespeculation. I’ve had a hunt around for any statement made which would confirm this, and found none.

    Or course, most of what I’m writing is speculation after the fact, so I’ll keep it up for a bit longer. I can think of one or two other reasons why TNK-BP might not be expanding abroad, the main one perhaps coming at the time TNK-BP’s management asked who is going to provide the capital for these new investments, who is going to provide the technical and contract management expertise, and what exactly are AAR going to contribute in South America? A gang of Russian oligarchs might be useful to a company in Russia, I’m not sure what they can contribute elsewhere. It may be that BP thought the TNK-BP corporate structure would not work outside of Russia, something they are probably in a better position to judge than AAR.

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