The ongoing struggle over the management and future development of TNK-BP – Russia’s second-biggest foreign investment – between BP and its four Russian billionaire partners has come to exemplify the new global era of growing resource nationalism.
With oil and gas prices reaching historic highs, a trend has emerged among host nations to seek a significantly larger slice of the returns from the exploitation of their hydrocarbon reserves and Russia has been quick to embrace the potential of this new-found energy imperialism.
As Robert Amsterdam of Toronto-based Amsterdam & Peroff comments: “States are under tremendous pressure to seek larger shares in natural resources sectors, leading to partial and total expropriations and aggressive measures against foreign investors, often in unlawful contexts.”
Although he was not specifically speaking about TNK-BP – a company that pumps 25% of BP’s oil output worldwide – he might well have been.
The moves against BP’s Russian venture have seen a series of visa refusals and investigations launched by state agencies into alleged tax evasion and violations of employment law.
In June 2008, these actions were described as “a return to the corporate-raiding activities prevalent in Russia in the 1990s” by BP chairman Peter Sutherland, as the Russian partners charged BP with stifling growth and viewing TNK-BP as a subsidiary and not an independent company.
BP countered these allegations by asserting that the Russian oligarchs had orchestrated their recent troubles in an attempt to force the surrender of as much control as possible ahead of a sale of their stakes to one of the state-controlled companies.
This would scarcely be unprecedented; in recent years, Gazprom has gained a reputation for appropriating the majority holding in a number of foreign-controlled energy ventures that were the subject of potentially damaging scrutiny from various agencies of state.
A TROUBLED HISTORY
TNK-BP was created in the summer of 2003, as Vladimir Putin made the first state visit of a Russian leader to the UK since Tsar Alexander II in 1874.
The joint venture was brokered by then CEO of BP, Lord Browne, with the help of Tony Blair, then incumbent Prime Minister.
Four years on, the relationship had begun to sour, and in June 2007, TNK-BP surrendered its majority stake in the giant Kovykta gas field to Gazprom, in the wake of a concerted government campaign against the company’s licence.
The situation was to worsen further in the following October, when President Putin called for the expulsion of foreign managers from Russian companies in his speech to the Federation Council, leading many analysts to sense the resurgent spectre of resource nationalism.
In mid-March 2008, the Federal Security Service (FSB) raided the offices of both TNK-BP and BP in Moscow, having charged two brothers – one an employee of TNK-BP and the other president of a networking group under the patronage of the British Council – with industrial espionage.
A week later, BP was forced to suspend nearly 150 foreign staff seconded to the joint venture over an alleged “lack of clarity” regarding visas and the Russian Interior Ministry began a criminal investigation into allegations of “large-scale tax evasion”.
By April, news of a disagreement between BP and Mikhail Fridman, Viktor Vekselberg, German Khan and Len Blavatnik – its four Russian partners – had begun to surface, while Russia’s Natural Resources Ministry instigated inquiries into TNK-BP’s largest oil field.
On May 20, FSB raided BP’s Moscow office again and Tetlis – a virtually unknown brokerage, seemingly linked to Fridman and Khan’s Alfa Group – started legal action against BP over staff seconded to TNK-BP.
Alfa, however, denied a connection with Tetlis and distanced itself from the litigation.
Less than a week later, TNK-BP’s British chief executive, Robert Dudley, publicly acknowledged the earlier rumours of a division between BP and the Russian shareholders – comments they branded “deeply inappropriate”.
On May 29, BP rejected a call for Dudley’s resignation and, with the Russian partners boycotting a board meeting in response, the next day Jean-Luc Vermeulen – an independent director – resigned, citing his inability to help in any further attempts to resolve the widening divisions within the company.
June 2008 saw the company’s executives questioned by Moscow prosecutors, demanding extensive documentation for the ongoing inquiry into alleged employment violations, with Dudley subjected to lengthy questioning the following day.
In the subsequent fortnight, the Russian billionaires threatened to sue BP in Stockholm and Moscow and to strip BP-nominated directors of their powers, and accused BP of conspiring with the Kremlin to sell their shares to Gazprom.
At the end of the month, as EU trade commissioner Peter Mandelson warned of the damage being done to Russia’s image amid international investment circles, wrangles over work visas threatened to force a number of foreign specialists – including Dudley himself – to leave Russia.
The Federal Migration Service ultimately approved visas for 49 foreign workers, Dudley among them, but left BP to withdraw 88 employees seconded to TNK-BP.
At an emergency meeting on July 7, TNK-BP management voted against renewed demands to sack Dudley – though few expect this to be the end of attempts to see him removed.
The following day – just hours after the British Prime Minister Gordon Brown raised the treatment of the company with Russian President Dmitry Medvedev at the G8 conference in Japan – Russian tax inspectors hit TNK-BP with new demands for information, to be met within 10 days.
The saga seems set to continue.
RUSSIAN STRATEGIC INTEREST
There are clear parallels between the present campaign against TNK-BP and earlier events surrounding Royal Dutch Shell’s venture to develop the huge Sakhalin 2 gas field in Siberia.
In early 2007, amid threats of action from the tax authorities and alleged environmental violations, Shell and its international partners eventually opted to sell a part interest in the project to Gazprom.
This new, deliberate empowerment of Russian interests is widely viewed as an intentional move to return recently privatised strategic oil and gas assets to state control, which Fadel Gheit, an analyst at Oppenheimer, has likened to the Venezuelan programme of renationalisation.
The stand-off for control of TNK-BP reflects the growing belief that foreign investment should be replaced with more direct Russian involvement in developing the country’s major oil and gas projects.
Unsurprisingly, potential investors are watching these developments carefully.
The real question for the long term is; will the State’s best interest ultimately dictate the abandonment of what Mandelson termed “menacing behaviour” for fear of losing foreign investment?
How the TKN-BP wrangle eventually plays out may give a clue – but with Russian resources enjoying such global significance, it seems unlikely anytime soon.