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Kremlin leaves BP shaken, but it won’t stir logo

Kremlin leaves BP shaken, but it won’t stir

Amid Bond-style scheming, Russia is muscling in on oil company TNK

Ian Fleming’s James Bond novel From Russia With Love follows a series of plots and counter-plots between British and Russian intelligence agencies, the shady machinations of Smersh, the Soviet assassination agency, and a predicable plan to trap Bond by setting him up with an attractive Russian blonde.

The battle for the future of oil firm TNK-BP has many of those ingredients (though not the femme fatale) and involves the reputations of some of the most powerful men in business and politics. Among the cast of characters are Russia’s new President, Dmitri Medvedev, and Prime Minister Vladimir Putin; BP’s boss, Tony Hayward; and a triumvirate of billionaires who are BP’s Russian partners: Viktor Vekselberg, Mikhail Fridman and Len Blavatnik.

TNK-BP is a joint venture set up by these oligarchs and the British multinational in 2003, but its viability is in doubt as it is widely believed that the Kremlin wants to transfer control of the operation to Gazprom, the state-owned energy company. The ploy is part of a campaign to partially renationalise assets Russia considers to be too strategically important to be in foreign hands.

Medvedev has to tread carefully: he does not want to frighten away foreign investment because the country still needs Western technological know-how to develop vast reserves of oil and gas that could one day see it overtake Saudi Arabia as the world’s biggest energy exporter.

Recently, however, the huge Russian governmental and regulatory machine has been ratcheting up the pressure on BP. TNK-BP’s offices were raided by the FSB, the successor to the KGB, after claims that one of its employees had passed on ‘classified information’ to foreign executives. There have also been allegations about visa breaches and infringements of corporate law that remind observers of the campaign waged two years ago against Shell, which reluctantly surrendered control of a huge oil project on the Russian island of Sakhalin.

Last week, the TNK-BP tale took a dramatic twist when Robert Dudley, the head of the firm, was summoned to the interior ministry as part of a criminal investigation into alleged large-scale tax evasion.

In Britain, the dispute is viewed as a critical test for Hayward, the relatively new leader of the British oil group, which is battling to restore its international reputation after suffering a series of safety and environmental setbacks when it was headed by Lord Browne.

BP’s Russian operation accounts for about a quarter of its global production and 13 per cent of profits; if BP is squeezed out of TNK, it could be a severe financial blow and a personal embarrassment for Hayward. The struggle is a test, too, for the power-sharing arrangement between Putin and his successor. Putin cannot be seen to undermine the authority of Medvedev at a time when his former protégé is trying to project a softer image of Russia abroad.

That said, Russia is committed to pursuing aggressively its national interests: in February it passed legislation that mining and oil companies should be controlled by a Russian shareholder. Potentially, that puts Medvedev’s new government on a collision course with BP, its biggest foreign investor and the third-biggest Russian energy company after Gazprom and Rosneft.

Still, the situation is anything but straightforward. As one analyst explains: ‘TNK-BP was set up under Putin’s watch. No one can pretend it was something that happened during the Yeltsin era when – it is argued – assets were sold off at knock-down prices to a small group of Kremlin cronies.’

The spotlight has recently turned on BP’s partners in its Russian joint venture – Vekselberg, Fridman and Blavatnik – who many believe are waging a proxy war on behalf of the Kremlin.

The partners boycotted a board meeting last week after BP rejected their demand for the resignation of Dudley, who they claim serves only BP’s interests. They are also understood to want BP to pay out more money in dividends.

‘Are state and [Russian] private interests colluding? Quite possibly,’ says Mark Medish of the Carnegie Endowment for International Peace in Washington. ‘On the other hand, you don’t have to go to Russia to find acrimonious business disputes.’

But this row has an entirely different flavour as it also involves a reassertion of Russian economic and political power. Medish says Russia wants to review deals that were concluded when it was weaker, long before the oil price hit $125 a barrel. But it can’t look like a ‘land grab’. And here, the Russians have proved to be ‘diabolically clever’, Medish adds. ‘They are folding back democracy, but not enough to put Russia off limits to foreign investment.’

They are making it look as if BP’s joint venture is coming apart because of its clumsy ownership structure. To push the point home, Putin told Le Monde that he had warned against a 50-50 partnership when TNK-BP was set up. ‘When they did it, and I was present when they signed the papers, I told them: “You shouldn’t do it. You should decide between the two of you who will have a controlling stake.” Now they have problems,’ he said.

Certainly, the dispute seems to have reached ‘a watershed’, according to Dudley. But is there a neat way out for BP? Analysts in London reckon things don’t have to end too badly for Hayward. One says: ‘The Russians need Western expertise, so BP could stay in any new venture as a minority partner.’

If that were to happen, it would be easier for Hayward to sell to shareholders if he could show that the new venture could potentially offer more lucrative returns than the old one. Up to now, however, BP has shown no sign of wanting to abandon TNK, but the odds are stacked against it. Unfortunately for BP, says Medish, ‘it lacks political cover’ at a time when relations between London and Moscow have iced over. The poisoning of former spy Alexander Litvinenko in London in a suspected Russian plot and the resulting tit-for-tat diplomatic expulsions mean that BP is virtually friendless in Russia as Anglo-Russian relations hit rock bottom.

Oil prospecting, by its nature, is a risky business, but especially for Western multinationals operating away from home. Last week, the Bolivian government seized control of Transredes, a pipeline company partly owned by Royal Dutch Shell, and in Venezuela, President Hugo Chávez has nationalised the oil industry as part of a plan to redistribute wealth to the poor.

Richard Griffith, oil analyst at Evolution Securities, says ‘the pendulum has swung against international oil companies’ as developing countries seek to extract more cash from the energy boom either by renegotiating profit-share arrangements or by outright nationalisation.

But Margot Light, a professor of international relations at the London School of Economics, says there has been no fall-off in foreign investment in Russia because Western companies can operate in the country – and make good profits – as long as they are prepared to ‘play by a different set of rules’.

Medish says he is reminded of an old Greek proverb that says: ‘It is better to eat and drink with your relatives, but do business with strangers.’ Quite.


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