Russia: Nobel, Browder, and the Annals of the Pull to Gamble

Some nine decades ago, Emanuel Nobel, a nephew of Alfred Nobel -- founder of the prizes being awarded this week in Oslo -- fled Baku disguised as a peasant in order to escape the Bolshevik Revolution. As O&G readers know, Alfred Nobels' brothers were the biggest oil barons of all in Baku's 19th-century heyday. In the end, for the Nobels all was lost.

It wasn't a huge surprise. The story of Western investment in Russia is that of a crapshoot. Pockets laden with cash, all say they are entering with a realistic grasp of the country's perils. All say they are therefore taking precautions. Yet the outcome is always the same -- on the way out, some are wealthier than anyone could dream; others, no longer cash-laden, are wearing no shirt. The trick has been to avoid being the latter.

So the narrative continues. Hermitage kingpin Bill Browder had been on a soapbox about Russian investment even before Moscow kicked him out of the country three years ago. Now, he is out with a glossy new, 10-minute video detailing his fall as Russia's biggest foreign investor, to his current status as victim of Russia's unpredictable winds.



The release of the video coincides with a story in yesterday's Kommersant that the Russians intend to issue an international arrest warrant against him. Over at the Reuters blog, my former Business Week colleague Jason Bush notes that Kommersant claimed the very same thing last year, only for the Moscow police to repudiate the report. Still, the public brinksmanship well illustrates the stakes at play in the country.

Update: Jason Bush has just emailed me an MVD report -- Browder is indeed on Russia's international warrant list for arrest.

This is a big news week for foreign investors in Russia. On Monday, Norway's Telenor aped the throw-up-your-arms strategy of BP, and caved in to Alfa Group's Mikhail Fridman. After a prolonged court battle in which Telenor initially seemed ultra-confident that it would prevail, it has changed its mind and will embrace the original peace agreement offered by Alfa, its business partner, which will now run the show. As regards BP, the following day, Reuters' Dmitry Zhdannikov reported that the British oil company is resigned to letting Alfa run their partnership as well -- the oil company TNP-BP. Over at aptly named Seeking Alpha, Craig Pirrong calls this a "marriage made in hell," but corporate honeymoons are usually quite short in Russia.

One thing is for sure -- Moscow is certain that foreign investors will keep returning. On Sunday, Prime Minister Vladimir Putin signaled that Russia would embark on yet another bout of privatization next year. Get out the champagne.

The indicators are that Putin's confidence is well-placed. In Business Week, Carol Matlack writes that western companies continue to flock to Russia despite the perils. Their rationale is similar to what drives gamblers to Vegas: the excitement (never underestimate the appetite of brio-seeking westerners to seek street cred by working in Russia; as a corollary, do not underestimate the Russians' capacity to notice) , and the long-shot prospect of big, big wealth.

Take a look at Business Week's "How to Play It" feature in the same issue as the Matlack story. I hadn't noticed this myself, but after last year's breathtaking nosedive, Russian markets are -- at least of now -- doing extremely well in 2009.

Craps anyone?


Credit: BusinessWeek

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.

Ripple From Russia: R.I.P. BP?

The stewards of Big Oil have to be watching the latest brawl in Russia with a sense of dread. For their brother, BP, is fighting not merely to save its assets in Russia; it's fighting for its life.

BP itself is rapidly becoming vulnerable as an acquisition target. And for the handful of companies of Big Oil, that's a picture of their own possible future.

For months now, we've been treated to a spectacle of three or four Russian oligarchs making BP miserable. These fellows -- the billionaire oligarchs and BP -- are 50-50 partners in a highly lucrative oil concern that they call TNK-BP. The company accounts for a full quarter of BP's entire global production, and a fifth of its reserves.

The oligarchs want something from the Brits, and the result has been the usual Russian treatment: visits from countless inspectors, summonses to the prosecutor's office, visa trouble.

Yet the TNK-BP dustup no longer has the ring of expropriation as usual.

In the latest development, the concern's BP-appointed CEO, Robert Dudley, fled Russia in secret and is now hiding out in some undisclosed place, prepared, according to BP, to continue running TNK-BP from a distance. I asked a BP adviser why Dudley is behaving so mysteriously. Couldn't he have set up shop like a normal CEO in London? Perhaps this is part of the antagonists' PR war? "I do not know anything about the location except that he is operating as CEO for both [the Russians and BP], and London might not be the most appropriate location," he emailed me in response.

After some three decades of petro-nationalism in the Middle East and elsewhere, Big Oil is accustomed to the puffed-out chest, the boot, and picking up the pieces. It has found a modus vivendi in most cases.

Recall previous bouts of trouble in Russia: In December 2006, Shell responded to a similar onslaught at Sakhalin II -- at the time the world's largest combined oil and natural gas project -- by going to the Kremlin and crying uncle. The response was some advice -- sell half your shares at below-market rates to Gazprom. The result is that Shell, now with 27% of Sakhalin II instead of 55%, is still in business in Russia. And just six months later, BP was forced to sell out entirely from Kovytka, a supergiant natural gas field. BP sold its expulsion publicly as a fair deal, considering that in exchange it was embarking on a worldwide partnership with Gazprom. This partnership was crucial, because BP and the rest of Big Oil is finding it almost impossible to acquire new reserves to replenish what they pump each year; combinations with national energy companies like Gazprom are one way of maintaining one's bulk.

But not so fast. That BP-Gazprom partnership has yet to materialize. Indeed, BP's hopes for this partnership seem not just wishful, but hubristic. Because part of its calculus appeared to be ceding control of TNK-BP to Gazprom, which ostensibly would buy out the oligarchs while leaving BP with a sizeable remaining chunk.

TNK-BP was never a stable grouping, and seems always to have been bound for divorce court. But BP's talks with Gazprom appear to have accelerated the estrangement. The oligarchs seem to have believed that BP planned to sell them out in exchange for a global lifeline from Gazprom.

And, as Yulia Latynina, the respected Russian commentator puts it, the oligarchs responded "in the most brutal manner. They effectively said ..., 'We're the big guys around here.' [What followed] was a shoot-out. The other side shot better."

Here is where the gunfight appears to diverge from Big Oil's prior confrontations in Russia. Previously, the Kremlin has halted the hostilities once a targeted Big Oil company surrenders. But not in this case: BP has made clear that it's prepared to surrender control to one of the state-owned Russian companies, yet that's not been enough.

One is led to the conclusion that control in fact isn't good enough. It looks like Russia may want all of TNK-BP. And it also may not mind Big Oil understanding that, even if the state stands aside in a turf battle, the BPs of the world aren't tough enough to hold their own in Russia's brutal business environment. It may be a warning to all foreigners doing business there.

Richard Gordon, an experienced observer of Russian oil, sees it slightly differently. He told me last week that the Russians want BP to reduce its share considerably -- to 25% or less. At that point, Gordon said, it's up to BP to decide whether it has faith that TNK-BP would be run well enough, and, "if they don't have faith in the company, why remain a partner?"

In The Guardian today, Oppenheimer's Fadel Gheit, one of Wall Street's most seasoned oil analysts, advised BP to get out. "It's a bit like Manchester United losing Ronaldo," Gheit said. "It would take time to recover -- a blow but not fatal."

What happens next? Wall Street would pummel BP's share price were it to lose or leave TNK-BP, which would make the company a highly attractive target for acquisition. In that case, Gheit thinks that ExxonMobil is the only Big Oil company with deep enough pockets to buy BP.

But both Gordon and Gheit think that BP might act first and seek out its own merger partner because, as Gordon put it, it's better to "do a deal than be done to." Gheit told The Guardian that a logical BP partner would be Shell, "with [BP CEO] Tony Hayward running both companies."

Yet why are the Big Oil companies the only perceived merger partners? As Big Oil seeks access to China and the Middle East, wouldn't their national companies and sovereign wealth funds seek equal treatment?

Harvard Business School will no doubt chronicle the brawl as a case for how the game of energy is changing. But Big Oil is observing more closely, because this is its own future.

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The British Experience: Oil and Murder

The end game looks near for the British in one of their pair of bouts of brinksmanship with Russia.

The two countries have been circling one another for months over oil and murder -- in one case, over who will control TNK-BP, the rich Russian oil company; and in the second, over whether British citizens can be murdered with impunity, allegedly by Russian visitors.

The latter issue, over the 2006 nuclear poisoning in London of KGB defector Alexander Litvinenko, may never be resolved. But the former question is highly active at the moment. It involves an attempt by a trio of Russian oligarchs to squeeze BP in their highly lucrativem five-year-old TNK-BP oil partnership. Those observing the dustup debate what the objective is, but there's no doubt that matters took a turn against BP today, when Russian bureaucrats barred Robert Dudley, BP-appointed head of TNK-BP, from working in the country. Visa officials are siding so far with the oligarchs, who in their effort to push Dudley out of the company have said his employment contract has expired.

But that's just the beginning. Last week, 16 senior Russian managers at TNK-BP filed suit for alleged discrimination. These are not billionaires -- they would not have done so were they not fairly sure of cover. Either they are certain that the oligarchs are going to emerge triumphant; they were recompensed generously for possibly risking their jobs; or they are certain they cannot be retaliated against. Whatever the case, things generally go bad for the foreign partner in the former Soviet Union as soon as the issues hit the courtroom.

In a story over the weekend by Andrew Kramer at The New York Times, unnamed analysts suggest that we are watching a new tactic in a now-accustomed Russian strategy of exerting state control over the country's prime energy assets. In this case, the article suggests, the Kremlin has effectively directed the oligarchs to do their worst, the aim being a renegotiation of the 2003 deal.

Indeed, according to my own sources in BP, the company has already resigned itself to losing control of TNK-BP; only, it wants to hand over that control to the state, and not to the oligarchs, who it thinks will simply raid the assets, as they did in a previous dustup in the late 1990s.

I think that's true too -- the Russian state at some point soon will take control of the majority of TNK-BP's assets. The questions are what is going on in the meantime, and how much will BP lose? The prevailing wisdom is that the company will keep most of its share. But is that definite? Will the oligarchs be completely out of the arrangement?

While the New York Times piece is interesting, I don't find it ultimately convincing. Over the last eight years of oil nationalism, Vladimir Putin has made a deliberate attempt to make the country appear governable again. Tax inspectors have swooped in, along with environmental bureaucrats, but the objective was clear, and the targeted Big Oil companies knew what it was; once they elected to surrender control, the rest was quite orderly. That's not the case here. And I find it hard to believe that the Kremlin is now going in reverse, and intentionally making Russia look entirely unmanaged by encouraging the oligarchs to run rampant over BP.

A more compelling argument, made earlier on O and G, is that the Kremlin is simply in turmoil and hasn't decided yet which power group will be the winner of assets such as TNK-BP; will it be Gazprom or Rosneft?

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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?

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What BP Has to Fear

Why are we hearing BP chairman Peter Sutherland accuse his Russian partners of being thieves? Is the latest oil drama in Moscow truly a rough, 1990s-style grab for assets, as BP has cast its dustup with the Russian oligarchs Mikhail Fridman, Viktor Vekselberg and Len Blavatnik?

The short answer seems to be no.

On the first question, BP's public indignance appears to reflect an understanding that it faces a threat not just to its Russian assets, which comprise a third of the company's entire worldwide reserves, but to control of BP itself. And in the second case, the oligarchs have stated -- and I think it's true -- that they simply disagree with how BP has managed their joint company, called TNK-BP. As 50% owners of the company, they want a greater say in its operation, including an expansion overseas. And they want the current CEO, Robert Dudley, to be sacked.

BP could simply accede to these demands, and get on with business. That doesn't currently seem likely, one reason being that Sutherland could have difficulty climbing down after taking the altercation so personally.

Short of such a concession, one finds two potential outcomes, neither of them pleasant for BP:

In the worst case (for BP), the largest single block of its own shares -- about 10% of them -- will come to be owned by the four Russian oligarchs. That is one suggestion by the oligarchs -- that the dispute be settled by an exchange of their TNK-BP shares for BP shares. In this scenario, BP has said that it would sell control of TNK-BP to a Russian state company, probably Gazprom or Rosneft. The takeaway from this outcome is BP culture could be forced to change by such assertive new shareholders. Imagine Carl Icahn on steroids.

In the less unfavorable outcome, BP would cut its losses and sell out its half-interest in TNK-BP. The buyer again would be either Gazprom or Rosneft, and the price would be far less than the generally quoted market value of $20 billion-$25 billion. BP would argue that any sum above $7 billion -- appoximately the price it paid for its share five years ago -- would be gravy. But in fact, it would be fleeing a genuine fear of the first scenario.

By its hands-off behavior, the Kremlin seems happy to watch BP twisting. Don't look for assistance from President Dmitry Medvedev.

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Putin's Wealth

The FT's Catherine Belton and Neil Buckley weigh in with an impressive story that attempts to penetrate the question of Vladimir Putin's personal fortune. This enterprise -- the documentation of what Putin is worth -- will require a long, ongoing and determined effort. But Belton and Buckley try to peal away a layer.

The piece involves Gunvor, the Swiss-based oil trading company that has miraculously (Hey, we're just really good businessmen) grabbed control of a third of Russia's oil exports. One public owner of Gunvor is Gennady Timchenko, a reclusive and long-time buddy of Putin's. The FT links Timchenko to Surgutneftegas, which Russian polical analyst Stanislav Belkovsky has asserted to many of us for over a year partly belongs to Putin. As the FT reports, when Bill Browder -- until a couple years ago Russia's biggest foreign cheerleader as the head of Hermitage Capital Management -- sought to find out who really owned Surgutneftegas, he suddenly could no longer get a visa.

Putin swats away suggestions regarding his personal share of Russia's economic boom. But those who have hung around the former Soviet Union for awhile know that his dismissals are not exceedingly convincing. Personal wealth is a prerequisite to rule in this rough neighborhood; one simply is not taken seriously among former Soviet power brokers unless one has one's own, enormous cash stash. But the hard evidence is almost impossible to obtain; I think the only case of such proof has involved Kazakhstan's Nursultan Nazarbayev, and that emerged only after a perfect storm of bungling.

The trouble at BP: For some time, it has appeared that BP could lose control of its main asset in Russia, its share of TNK-BP. The thinking has been that Gazprom is intent on grabbing control of TNK-BP, by either forcing out BP or its Russian partners. The arrival of tax inspectors at TNK-BP's offices in recent months seemed to buttress this view, given that that's precisely what signaled trouble for Shell before it was forced to hand over control of the gigantic Sakhalin-II natural gas field to Gazprom.

But my former colleagues Guy Chazan and Greg White at The Wall Street Journal have a piece that embraces a contrarian view: that Gazprom isn't the villain; the partners themselves are in a catfight. Igor Yurgens, the adviser to President Dmitri Medvedev, told me the same thing in a phone chat a couple of weeks ago.

Robert Amsterdam does a good job of explaining the probable bigger picture -- perhaps there is infighting; but Gazprom is likely still pulling the strings behind the scenes. This Reuters piece about a phantom company suddenly suing TNK-BP is more evidence of this.

Gazprom's goal -- as expressed by Putin himself -- is to obtain energy assets overseas. In order to land a traditional oil deal in Russia today -- one that involves ownership of actual oil or natural gas reserves -- one has to give up similar assets abroad. BP is trying to work such a deal with Gazprom, and the trouble at TNK-BP seems a piece of that negotiation.

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