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THE WALL STREET JOURNAL: Russia Probes BP Venture

By GUY CHAZAN
March 26, 2008; Page B3

Putting more pressure on BP PLC’s Russian joint venture, Russian authorities disclosed a tax-evasion probe into one of its units five days after charging an employee with industrial espionage.

The probe, which came as TNK-BP admitted it was having trouble obtaining visas for 148 employees, casts further doubt over the company’s future. It coincides with a sharp rift in diplomatic relations between Russia and Britain and rising Kremlin pressure on Western oil companies as the Russian state seeks to increase its sway over the country’s mineral wealth.

The Russian Interior Ministry said it was investigating tax evasion of about one billion rubles, or about $40 million, involving Sidanko, a company that was merged into TNK-BP when the joint venture was formed in 2003 and later liquidated. It said the case had been opened in mid-2007. The disclosure came after the ministry closed for business Tuesday; officials there couldn’t be reached.

In 2005, the authorities slapped a $790 million claim for back taxes on the company, though this was later reduced to $250 million under appeal.

“This is by no means the first inquiry into the tax practices of our heritage companies,” said a TNK-BP spokeswoman, Marina Dracheva. “In the past we have always cooperated with the authorities and arrived at an amicable solution.”

The announcement came five days after Russian authorities said they had detained two brothers on charges of industrial espionage. One of the brothers is a TNK-BP employee.

Also last week, Russia’s environmental agency said it would inspect a Siberian oil field operated by TNK-BP. The inquiry will be led by Oleg Mitvol, who spearheaded an investigation into alleged environmental violations at Sakhalin II, the oil-and-gas venture in Russia’s Far East operated by Royal Dutch Shell PLC. That ended with Shell forced to sell half of its stake to the state-run gas company OAO Gazprom.

Some observers say it is only a matter of time before TNK-BP undergoes a change of ownership, with Gazprom or another state-run company replacing its private Russian shareholders and BP forced to reduce its stake. TNK-BP accounts for a quarter of BP’s total oil production.

Analysts say the tactics against TNK-BP may be engineered by state-run Gazprom, which has been frustrated at the slow pace of negotiations on forming a strategic alliance with BP. Gazprom denied involvement. “We don’t believe in using law-enforcement agencies to resolve issues related to our business,” a spokesman said. “That’s not our way of working.”

Ms. Dracheva also confirmed that TNK-BP was struggling to renew visas for 148 employees sent by BP to work temporarily at the Russian joint venture. Ms. Dracheva said they had been “temporarily withdrawn” from TNK-BP due to a “lack of clarity regarding their visa status,” though they would remain in Russia.

Write to Guy Chazan at [email protected]

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