Why Russia's Oligarchs Saved BP, But Georgia Will Not Join NATO

About a week and a half ago, four Russian oligarchs abruptly called off a months-long seige that had BP on the ropes, and gave the British company a settlement that it could have only dreamed of just a day earlier. The company was allowed to keep its 50% holding in the Russian oil company TNK-BP in exchange for concessions that were relatively minor compared with the worst-case scenario -- that, with a loss of much of its Russian holdings, BP might have to merge with Shell or some other Big Oil rival.

Why did take-no-prisoners oligarchs like Viktor Vekselberg and Mikhail Fridman throw BP the lifeline? And why should this not be seen as a case study into how vulnerable Russia is to market forces?

A glance at Russia's current straits is a fairly clear answer to the first question: Russia's stock markets are in free fall. Dollars are pulling out of the country -- some $35 billion since last month's fighting in Georgia. Russia's billionaire oligarchs are in a panic.

The parties claim that they had reached a tentative agreement in July. The Russians claimed that the Kremlin played no role. These strain credulity, particularly the latter. Not to put too fine a point on it, the oligarchs' public announcement of the deal included remarks by First Deputy Prime Minister Igor Sechin and Kremlin economic aide Arkady Dvorkovich.

The likeliest scenario is that the oligarchs got spooked by their exposure to the already-plunging Russian market, that the Kremlin was blind-sided by the magnitude of Western dismay over Georgia, and that both groups decided that they could do with one less scandal on their hands.

But this does not mean that Russia is going to bend -- certainly any time soon -- on Georgia. Prime Minister Vladimir Putin has effectively acknowledged that he overplayed his hand by seizing Georgian territory. But by pulling troops back from Georgia proper and occupying just the breakaway Georgian republics of Abkhazia and South Ossetia, he is merely obtaining what he wanted in the first place.

What is that? When I visited Kazakhstan over the last couple of weeks, I was told that Western oilmen see Russia now holding "psychological control" over the oil-and-natural-gas pipeline corridor through Georgia. It doesn't mean that Russia will attack the lines -- the re-use of force is unlikely, I think, though that threat isn't dismissed by Azerbaijan or Georgia. But it does mean that Russia holds an effective veto over any expansion of them. And, given Russia's influence over Germany, France and Italy, Moscow also holds an effective veto over NATO accession for both Georgia and Ukraine.

And that is an immense Russian achievement -- an erosion in the corridor's previous western-protected status.

Catfights and Bystanders in Russia

Russia is getting harder and harder for BP, whose executives are now getting kicked out of the country. That's not wholly surprising, since the British company is still operating by the old, pre-Putin-era rules that allowed Big Oil to own half or more of a large oil field. But there's something different about this dust-up, and that's that the Kremlin isn't stepping in to make clear the price of peace. The reason may be that the price isn't yet clear because the Dmitry Medvedev Kremlin hasn't decided who is going to control the spoils of the state.

The normal course of business when a western oil company has been shellacked in Russia is that it's been communicated a relatively clear state objective (usually that the Kremlin wants control of the field to go to Gazprom or Rosneft). BP knows this, since almost exactly a year ago it voluntarily agreed to a shellacking when it sold a 63% holding in Kovytka, a huge natural gas field, to Gazprom. (BP also was shellacked involuntarily by its current Russian partners in 1999.)
This time, BP says it's received no such alert. Indeed, the Kremlin says it's staying completely out of what it calls an internal matter between BP and its Russian partners in TNK-BP, which accounts for a full quarter of the British company's annual production.

Today, BP's Robert Dudley, who is CEO of TNK-BP, said his visa hasn't been renewed, and that he'll probably have to leave Russia by the end of July. It's the same for around 79 foreign BP employees.

The Russian partners -- oligarchs Mikhail Fridman, Viktor Vekselberg, Len Blavatnik and German Khan -- say they are simply seeking a larger say in how TNK-BP does business.

I talked to a BP adviser who asked that his name not be used. What he reckons is that we are watching a defensive maneuver.

It goes like this: All parties know that eventually the Kremlin is going to insist on TNK-BP being controlled by Gazprom or Rosneft. There also seems to be a presumption -- although I personally am not convinced of this -- that it's the Russian oligarchs who will be forced out, since they bring only money and no expertise to the oilfields. So, according to this scenario, the oligarchs are seeking to get control of some or all of BP's holding so that when, say, Gazprom comes along, they command a "control premium" in the negotiations, and can demand more money.

For the record, one of the oligarchs has told me by email that this scenario is inaccurate. "The aim is to have a bit more [of an] independent company and get liquidity options with much higher valuation than now (within the next 1-2 years)," he said. In other words, TNK-BP could be worth much more in a couple of years than now, when the Russians could think about selling out.

However, for argument's sake, sticking with the BP adviser's assertion: if Gazprom or Rosneft are to step in, where are they? And why are their executives claiming they aren't interested?

According to this BP adviser, it's because of a power struggle within the Kremlin between officials associated with Gazprom, and those associated with Rosneft. The outcome will decide "who is advantaged in the Kremlin."

I found this explanation compelling. Why else would the Kremlin stand aside and let this go on?

Photo: gaborcselle
Rights: Creative Commons