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Thaw in relations between BP and Russia?

London Evening Standard image:

New Russian President Dmitry Medvedev (right) and BP CEO Tony Hayward

Thaw in relations between BP and Russia?

Will Stewart, Evening Standard
9 May 2008, 11:55am

It has never been easy doing business in Siberia’s oil and gas fields. But the biting winds that sweep across the frozen tundra are a minor problem compared with the air of malevolence that wafted towards BP from the Kremlin before new President Dmitry Medvedev took charge on Wednesday.

Under Vladimir Putin, Medvedev’s predecessor and great ally, BP had felt the full force of Moscow’s opprobrium to their joint venture, the third-largest oil production operation in Russia.

First, Slavneft, BP’s Russian joint venture with Gazprom Neft, saw its offices raided in February in an alleged tax probe. Then in March the FSB – successor to the KGB – raided BP’s Russian headquarters. And less than 24 hours later Oxford University-educated Ilya Zalavsky, a senior manager at the firm, was charged with stealing Russian commercial secrets and selling them to Ukraine.

Finally Moscow announced it was sending its environmental chief to probe the biggest field operated by BP in Russia. No-one at BP was unaware that Oleg Mitvol’s steely handling of international oil giant Royal Dutch Shell on Sakhalin Island two years ago had effectively forced them to sell up to Russian firm Gazprom.

The attack on BP sent shivers through the market, bringing back uncomfortable memories of the Kremlin’s assault on Yukos that led to its dismemberment. Yukos, once Russia’s largest oil company, was sold off in a series of auctions last year following back-tax claims amounting to around £14bn.

In effect, Yukos was re-nationalised. And there were fears before Medvedev came to power that BP may find its assets going the same way, with state gas monopoly Gazprom ready to take over at any time.

Now Medvedev, who is supposedly pro-Western and pro-business, is in charge. The question is, will he continue former President Putin’s purge on those who got rich quick in Russia? Or is Putin’s work done, and is it time for tempered dialogue with big Western firms?

When Putin took control of Russia he faced two challenges: the oligarchs who had seized billions of pounds of Sovietera state assets through the barrels of their Kalashnikovs or mastery of what might loosely be termed the legal system, and the investors – often foreign – who had piled into the tyranny of post-communist Russia and picked up assets on the cheap like children let loose in a sweetshop.

Putin did two things. With the oligarchs he demanded absolute loyalty. If given, questions would not be asked about exactly how they became rich so quickly, but they would be reined in and be expected to contribute some of their sudden wealth to the motherland. Those that opposed this were jailed, like Mikhail Khodorkovsky, or went into exile, like Boris Berezovsky.

Thus Roman Abramovich found himself Governor of Chukotka, a godforsaken ice shelf in the Russian Far East, where he spent millions of pounds of his own money improving infrastructure. Later, Chelsea owner Abramovich was prevailed on to bankroll the Russian Football Federationand build dozens of all-weather soccer pitches around the country.

Similarly, when metals tycoon Alisher Usmanov announced he had bought 23% of Arsenal in September 2007, it was quickly decided he would spend more than £20m on an art collection owned by the late Russian cellist Mstislav Rostropovich and donate it to the state.

Foreign companies such as Shell were effectively forced out of the region, and firms like Yukos – where investors were deemed to have made too much of a killing – were also taken back into the fold of the state.

Until this week that process appeared to be happening with BP. One Western diplomat in Moscow says: ‘There is a feeling that when the economy was a basket case under Boris Yeltsin, Russia was forced to go cap in hand to Western oil and gas giants and accept ludicrous terms.

‘To many, this was tantamount to colonialism and they think Russia is now powerful enough to function without being exploited on terms dictated in London by BP or Shell. This is why rules are being re-written but it would be crazy to think there is not a role here for the big British oil companies.’

So there is now a prevailing mood that foreign companies can no longer come in and cut great deals with Moscow, whatever their technical expertise. They may no longer face their assets being forcibly removed at the point of a gun, as happened to many foreign joint ventures in the 1990s, but the days of a quick billion bucks are also over.

Nonetheless, new President Medvedev has promised Western firms that his Russia will be a good place to do business in. Tellingly, the first day of his regime coincided with the decision by an arbitration court in Moscow to uphold a lower court’s ruling to refund £190m in overpaid taxes to BP.

It was the first good news from Russia for BP chief executive Tony Hayward for months – and not to be underestimated. The energy giant has spent millions building its own refining and exploitation infrastructure to levels far better than anyone else in the country. It is not budging. And with Medvedev in charge, the mood could be mellowing towards to BP.

http://www.thisismoney.co.uk/investing-and-markets/article.html?in_article_id=441356&in_page_id=3&position=moretopstories

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