Who Is Behind TNK-BP's Trouble?

For nearly two months, Russia's third largest privately-owned oil company TNK-BP (a joint venture between the international oil major BP and four Russian billionaires), has been sliding into a nasty shareholder brawl, just as the Medvedev-Putin team embarks on a major campaign to warm up Russia's investor-friendly climate. Are the Russian owners of the company simply fighting for control to drive up the value of their stock before its eventual sale to state-owned Gazprom or Rosneft? Are the Russian tycoons freelancing for the Kremlin? What does the current stand-off mean for Russia's image among international investors?

Contributors: Stephan Blank, Ethan Burger, Vlad Ivanenko

The news surrounding TNK-BP could not have sounded grimmer: federal security bureau raids in their corporate headquarters; BP's foreign personnel, employed at the TNK-BP's oil fields, barred from entering Russia by the Russian Immigration Service; TNK-BP's President Robert Dudley repeatedly summoned for hour-long questioning sessions to the Russian Interior Ministry as a witness in a tax-evasion suit against former senior TNK officials.

TNK-BP's Russian shareholders (the AAR Consortium representing the interests of Mikhail Friedman, Herman Khan, Victor Vekselberg and Leonard Blavatnik) have called for replacing Dudley as the company's CEO, accusing him of acting in the interests of only one shareholder - BP, and filed a suit at the Stockholm International Arbitration Court against BP, when the BP management refused to accommodate their demand for equal representation on TNK-BP's board of directors.

Russian shareholders also claim that TNK-BP has placed too many foreigners in top-management positions, and that AAR has been given insufficient say in strategic decisions.

Russia's Prime Minister Vladimir Putin helpfully waded in with his public comments, having warned the BP management back in 2003 that the TNK-BP 50-50 shareholder structure was untenable, and would lead to a conflict sooner or later. Putin explicitly advised the TNK-BP shareholders to rearrange the ownership structure to give one side - either BP or AAR-majority control.

Over the weekend, BP's Chairman Peter Sutherland made some controversial comments that have infuriated the Russian shareholders and are bound to escalate the conflict. "It is unfortunately a much simpler dispute over control, and perhaps ultimately ownership of the company. This is just a return to the corporate raiding activities that were prevalent in Russia in the 1990s," he said.

Sutherland noted that the Russian leadership is standing by and allowing the tycoons to push forward with their takeover attempt. "Prime minister Putin has referred to such 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," he said.

Friedman immediately accused Sutherland of insulting the Russian leaders. "We find Sutherland's comment unhelpful and, frankly, insulting to the Russian leadership." He said that Sutherland should stop lecturing the Russian government, and instead work to improve corporate governance at TNK-BP.

Analysts have supposed that the dispute could result in Russia's third-largest oil company being bought up by state-controlled Gazprom or Rosneft, as part of the Kremlin's campaign to toughen its grip on the oil and gas sector.

However, the Russian government (Igor Sechin and Igor Shuvalov) repeatedly said that it does not intend to intervene in the shareholder dispute. To quell rumors about Gazprom buying out AAR's stake in TNK-BP, a senior government official (supposedly Shuvalov) said on Friday that the Russian government would object to such an acquisition valued at around $20 billion by a debt-laden Gazprom.

It now appears that BP and AAR are discussing a long-term purchasing arrangement, in which AAR's shares in TNK-BP would be converted into BP shares, while BP would simultaneously secure a strategic partnership agreement with a Russian state owned company, Gazprom or Rosneft, allowing for a future asset swap. BP's CEO Tony Hayward is reported to have discussed such a deal with Deputy Prime Minister Igor Sechin and Gazprom's CEO Alexei Miller.

So what is really going on with TNK-BP? Are the Russian owners of the company simply fighting for control to drive up the value of their holding in the company before the eventual sale, or is it indeed a disagreement between the shareholders over the company's long-term strategy? Are the Russian tycoons doing this on their own, or are they also freelancing for the Kremlin, as well by putting pressure on BP to make it more willing to engage in strategic partnerships with Gazprom or Rosneft?

Is a merger between BP and Gazprom or Rosneft feasible in the long run (BP is a minority shareholder in Rosneft)? Would such a deal make strategic sense for either of them? What does the current stand-off mean for Russia's image among international investors and Medvedev's efforts to sell Russia as a good place to do business?


Vlad Ivanenko, economics PhD, Ottawa:

Commenting in May on the commercial dispute between two groups of TNK-BP shareholders - BP and Alfa Access Renova (AAR), prime minister Putin mentioned that "We [the Russian government] don't mind if it's BP or the Russian side of the joint venture [that gets control over the company]," but urged the two sides to come to a speedy agreement, because the current situation was unacceptable.

He seems to have a point. In spite of the tendency to bring Russian natural resource assets under national control, a reference to which can be found in the concept of a "sovereign democracy," the case of TNK-BP is different. Being a wWestern company, BP is arguably the most "pro-Russian" among its peers, whereas such formally Russian nationals as Friedman, Vekselberg, or Blavatnik, perfectly fit the definition of what Kremlin ideologists derisively call the "offshore aristocracy." Thus, BP's policy of reinvesting TNK-BP profits in Russia is more in line with the Kremlin's priorities than the desire of its Russian partners to move capitals offshore.

Neither does the argument that the conflict was spurred by one of the state-controlled companies - Gazprom or Rosneft - to buy TNK-BP's controlling stake cheaply hold water. BP has developed rapport with both firms, in one of which it has a minority stake and in the other - an agreement to form a joint venture. Even if one of the state majors wants to buy a stake, it is more likely to buy the AAR part than the other way around: clearly, BP is a more valuable partner for Gazprom.

Thus, the current bout of legalistic activities and threats is likely to be caused by internal disagreements among the current stakeholders, with outsiders keeping careful watch on when to jump in to secure a good deal.

The trials and tribulations that TNK-BP is going through have incidentally revealed several institutional deficiencies that businesses face in this country. First, the sides felt necessary to involve administrative authorities in a purely commercial conflict. BP sought (and, apparently, received) assurances that the Kremlin was not behind this move, and would interfere if AAR puts pressure upon the judges.
The latter concern is valid. While many independent observers agree that the Russian legal system operates decently in low-key lawsuits, it fails to perform when heavyweights get engaged. Secondly, bureaucrats of all ranks appear to have been animated by the ongoing conflict. Quite likely, few office holders - be they from the tax police or environmental protection agencies -sensed an opportunity for private gain, in the form of pecuniary rewards or career promotion. The danger of their independent action that exploits legal loopholes is quite real. In global comparative assessments, the Russian public service ranks one of the worst offenders in terms of corruptibility. Such actions, if they take place, could be interpreted as a sign of government involvement, as partaking agents are, technically, representatives of the government.

Regarding the prospects of conflict resolution, I expect that AAR will eventually sell its stake either directly to a state-owned company, most likely to Gazprom, or to BP, with subsequent resale to the same final purchaser. AAR is unlikely to succeed because its heavy-handed tactics play against the Kremlin's strategy. However, the truly unfortunate comment by John Sutherland, who essentially "dared" Putin to intervene, may prolong AAR's resilience.


Ethan S. Burger, Adjunct Professor, Georgetown University Law Center & Scholar-in-Residence, School of International Service, American University, Washington, D.C. :

British Petroleum (BP) has played a key role in the development of the Russian energy sector. I consider it unlikely that the Russian shareholders in BP-TNK would have opted to take legal action against BP without the Kremlin's/Gazprom's blessing.
BP's difficulties in procuring visas for its personnel suggest that the relevant Russian governmental authorities are undertaking yet another step to place the country's resources under their direct or indirect control. To be fair, I do not have the relevant information to have an informed opinion with respect to any alleged tax evasion by BP or its personnel.

Over the years, BP has bitten its lip as other foreign investors in Russia have had difficulty with their projects - it probably thought it was "buying" immunity at the expense of its competitors. Of course, senior Russian governmental officials may have some room for deniability if they choose to blame lower level officials and private individuals for actions that harm BP.

Those individuals who discount the risks of investing in Russia do so at their own peril (and may expose themselves to shareholder lawsuits if they are acting on behalf of public companies). The economic consequences of the drying-up of foreign investment or willingness to cooperate with foreign corporations may be great.

There is one silver lining to this situation. Since the Russian shareholders have filed an arbitration claim with the Stockholm Chamber of Commerce, should BP prevail on the merits - the entire world will have a chance to see if the Russian court system will enforce international arbitral awards against Russian individuals and corporations controlled by Russian individuals. If a Russian court disingenuously invents a rationale to violate the 1958 United Nations Convention on the Recognition and Enforcement of International Arbitral Awards, Western corporate counsels could not perform competently if they sign off on a transaction where there is no advance payment or strict escrow arrangements.

The non-enforcement of the 1958 Convention would have far reaching consequences: discouraging large-scale trade with and investment in Russia. It would mean that Russia had failed the litmus test of being capable of creating a rule of law in the country.

Perhaps of greatest significance is that it might unleash an "economic war" among Russian real parties and interests (including state bodies) that may have prevailed in disputes with the assistance of the Russian courts or government. If a foreign party were to have lost a dispute in Russia, it could well have a basis to pursue asset forfeiture actions or civil racketeering/conspiracy claims against Russian parties, or to demand that money-laundering charges be brought against them. It could get quite ugly, particularly if Russia chose to retaliate using its "energy weapon."

The present BP-TNK disputes may lend themselves to resolution by mediation, because the risk of undesirable economic/political escalation is great. For example, some countries could severely restrict trade and investment by Russian individuals and entities with their own business entities, such as in the case with certain "pariah" states.

Professor Stephan Blank, the U.S. Army War College, Carlyle Barracks, PA:

This issue raises many questions, but it does not seem that this is a dispute merely regarding company policy. Whether Gazprom or Rosneft takes over TNK-BP directly or at some later date through a multistage process of asset swaps, the Russian state will have swallowed it up like it did previous BP holdings and other Western firms. That interpretation does not contradict the fact that Friedman and his cronies are possibly seeking to fatten their share of the company, before selling it to the Russian government. But outside observers have seen nothing to justify their complaints. And given Gazprom's and Rosneft's mismanagement and corruption, it is highly unlikely that the Russian team could do better.

This episode also casts lurid light on Medvedev's talk of legal reform, and is more indicative of the legal nihilism that he has decried. It also speaks volumes about the self-serving autarchic drives that are sweeping through Russia's economy, which facilitates Kremlin bigwigs' and favored oligarchs' takeover of otherwise private companies, as described by Oleg Shvartsman in November 2007. While a merger with Rosneft or Gazprom is certainly possible, it recalls Vladimir Lenin's metaphor of a hungry man merging with a piece of bread. Such shenanigans contribute little or nothing to Russia's enrichment, though they make insiders even richer. But they reveal the dangers waiting or lurking for foreign investors (one would have expected BP, which has been fleeced by Moscow twice already, to have been smarter), and can only result in continuing sub-optimal performance of the Russian economy.





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