Roland Nash from Verno Capital comments a BP - Rosneft issue
An arbitration panel ruled on Mar. 24 that the interim injunction
issued on the deal between BP and Rosneft should continue, casting doubt on the
$16 billion deal between the giants. But what's next - another showdown between
the Kremlin and the oligarchs, or a buyout?
The injunction on the deal - issued by London's High Court last month - was
sought by AAR, which owns 50 percent of BP’s joint-venture TNK-BP. AAR claimed
that the tie-up between BP and Rosneft violated a shareholder agreement inside
the joint-venture that either partner must run all Russian projects via TNK-BP.
BP and Rosneft agreed on a $16 billion share swap deal on Jan. 14 in which
Rosneft agreed to exchange 9.5 percent of its stock for 5 percent in BP. The
two firms also agreed to jointly undertake exploration and development projects
on the Russian Arctic shelf.
Bloomberg reported that AAR CEO Stan Polovets sent an e-mailed statement saying:
"Willfully ignoring the provisions of the shareholder agreement was a
serious misjudgment by BP that has severely damaged the relationship between
the TNK-BP shareholders; it has also harmed BP's reputation in Russia. We
expect Bob Dudley to make every effort to rectify the situation and rebuild the
trust that has been lost."
For its part, BP said it "has always been and remains, fully committed to
investing in Russia" and would look for ways to carry out the deal with
Rosneft despite the injunction, reported RIA Novosti. "BP will now apply
for a determination whether the share swap may proceed on its own," the
company said in a press release posted on its website. It added that it hopes
to: "[find] a way to resolve its differences with its Russian partners to
allow these important Russian Arctic developments to proceed in future."
With the PR out of the way, the question is: What is next for a deal that the Kremlin trumpeted as a major step in its modernization drive? Attracting foreign investment is a crucial element in that strategy, and the BP/Rosneft deal had officials beaming. Set up by Deputy Prime
Minister and Rosneft
chairman Igor Sechin, it was also personally blessed by both Prime Minister
Vladimir Putin and President Dmitry Medvedev.
The Kremlin is unlikely to want a fight with the oligarchs of AAR, even if they
are guaranteed a win. As Roland Nash of Verno Capital suggested to bne in
January: "If you were putting money on it, then you'd probably back [AAR’s
Mikhail] Fridman in a fight with [former BP CEO] Tony Hayward, but Fridman
versus Sechin... no contest."
The problem the Kremlin faces is that it looks damned if it does and damned if
it doesn't in terms of PR to international investors. If the deal does break
down, investors will point to the unfettered power of the likes of Fridman -
who is renowned for beating international partners into a cocked hat. However,
a crack down on three or more of Russia's most powerful tycoons risks even
worse: another Khordorkovsky.
That hasn't stopped Rosneft making a series of statements containing warnings
reminiscent of sound bites from a gangster film. "Any activities aimed at
disrupting the deal that cause damage to Rosneft will be closely
examined," the company said in a statement on Mar. 11. "Based on such
examination, Rosneft will undertake all measures to defend the rights of its
shareholders, with all the resulting consequences."
Still, the success of AAR's legal action is more likely to be just another
fillip for its return when selling out its 50 percent in TNK-BP. The Russians
likely realized that their days in the joint-venture were numbered as soon as
the BP/Rosneft agreement was announced. The state company won't want to share
the marital bed with a third partner. The more trouble AAR can cause, the more
desperate BP and Rosneft will be to see the back of them, and the higher a
price they can ask to get out of the way.
The scenario that AAR claims it is pushing—for TNK-BP to replace BP in the
tie-up with Rosneft makes little sense. On one hand, the oligarchs of AAR made
their cash from quick and high returns on land they know well. There seems
little reason to believe that they're now desperate to start paddling out to
the Arctic—when they've never even been offshore before—and wait 20 years for a
This reluctance is matched on the other side as well. The attraction of the
tie-up with BP for Rosneft is the British company's offshore experience and
exposure to international markets. TNK-BP offers neither, as Rosneft has
repeatedly reminded it.
"Rosneft again underscores that it neither conducted nor is conducting any negotiations with AAR or TNK-BP regarding a change of partners in the project. TNK-BP was never considered as a possible participant in the alliance due to its lack of the relevant competence, and TNK-BP never made any proposals to Rosneft expressing its interest in working on the shelf,” said Rosneft via a statement on Mar. 11.
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