BP and Russia Play a High Stakes Poker Game

RelevanceBP and Russia are playing a high stakes poker game over TNK-BP, which neither can afford to lose. BP identified years ago that if you want to be a growing oil major then you need to be in 2 locations: the Middle East and Russia. The company backed its judgment with the biggest foreign investment in any industry sector in Russia through the joint venture with TNK. The deal was blessed by both Blair and Putin. The TNK deal, BP’s largest Russian investment, was followed by others, notably a stake in Rosneft. Other Western oil majors have followed. The key feature of the TNK spat is that this time it is local oligarchs that are corrupting the judicial and political processes to achieve their aims, rather than central government. Putin and his side-kick Medvedev must be looking on in horror (if not, they should be). If BP fails then Russian foreign investment will collapse. Other majors may take satisfaction at BP’s suffering, but they are wrong: they need to be in Russia too.

AnalysisIt’s not for nothing that Russia has earned the reputation as the “Wild East” of the business world. Westerners that have invested there describe doing business in Russia as capitalism, but not as we know it. At times it can be brutal. BP has recently had its Moscow office raided by Russia’s security services, senior managers arrested on charges of espionage, work permits denied and has suffered the forced sale of Kovykta. Whereas the Kovykta sale was at the behest of Putin, and executed through Gazprom, the state owned gas giant, the latest rumblings over TNK look far more sinister. It now appears that local oligarchs, through their political and judicial influence, are causing the latest round of trouble for a foreign investor. If so, this is very troubling for both Russia and its investors. The latter must be asking themselves who, if anyone, is in control in Russia?

Russian business practices are often appear horribly bad, as seen through the lens of a Western investor, and politics usually plays a large part in the process. Such corporate raiding to seize control of companies was common business practice in the Russia of the 1990s, and Putin had taken great pride in the fact that he had stamped it out. But TNK-BP shows that such raids are still prevalent. The problem for Putin in the case of TNK-BP is that this joint venture represents a very large commitment by a foreign investor in Russia’s politically charged oil and gas sector, and will thus apply a very powerful microscope on the investment climate in Russia for the rest of the world.

Russia can ill afford a further deterioration in its image for outside oil and gas investors. While the country demonstrated impressive growth in oil production over the last 10 years or so, effectively supplying the equivalent to the whole of China’s increase in demand during that period, growth has since stagnated. Indeed, Russian oil production has started to decline and many in the industry there predict that it will never again reach 10mmbd.

Oil and gas was the bedrock of Putin’s regime, and is the prime area of focus for his successor Medvedev. Oil industry concerns that production is over taxed in Russia, leading to reduced investment, are starting to be given serious credence by the politicians. Russia has become over dependent on oil and now needs outside investment and technology to recover production growth.

President Medvedev has stated that he will give a priority to the rule of law in Russia. BP-TNK provides a test case for him to demonstrate his resolve. The world is watching.


13 June 2008

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