BP’s New Russian Nightmare? Imagined Conversations

A meeting in the Senate Building of the Kremlin between Igor Sechin (Vladimir Putin’s Deputy Prime Minister and Chairman of the state oil company Rosneft) and Mikhail Fridman (Chairman of Alfa Group and President of the TNK-BP joint venture). Both are ultimate Kremlin insiders. They know each other inside out.

Sechin (to Fridman): We can understand that you and your associates want in on Rosneft’s deal with BP. Maybe you do have some kind of shareholder’s agreement with them that raises questions about our new deal with them. Exactly what do you suggest?

Fridman: Well, we propose to substitute TNK-BP in place of BP as Rosneft’s partner. This means that this “national Champion” project will be owned 75 percent by Russians and only one quarter by foreigners. BP really should not get half anyway. These reserves are Russian national treasures. If this is done, we’ll withdraw our objections to the deal, and everyone will be happy except BP.

Sechin: But we need BP’s capital and arctic drilling technology. What is to prevent them from withdrawing from the deal entirely?

Fridman: BP desperately needs this deal to replace the reserves it lost in paying for the Gulf spill disaster. Getting a quarter of the deal for them is better than nothing. We already know that BP caves in when we play hardball. They gave us the management of TNK-BP when we refused to grant their Robert Dudley (then President of TNK-BP) a visa and harassed their lawyers. They’ll cave again in this case.

Sechin: What if they don’t cave this time? Is there anything else we can do to be sure they will go along?

Fridman: It’s very simple. You can threaten to sue TNK-BP for damages to Rosneft if the deal does not go through. You know better than anyone how to get a huge fine out of our courts. As fifty percent owner of TNK-BP, BP is liable for half of this fine. That should scare them to death. Their liability could be as great as the Gulf coast spill. We can work out among ourselves the “damages” that we pay.

Sechin: But will not this be bad for our image among international investors? We need them now. Medvedev was already getting a lot of flak in Davos over the Khodorkovsky case. And the Hermitage Capital guy was mouthing off against Russia again.

Fridman: You should present this as a Kremlin split. After all we are private investors looking after our own interests. You can publicly warn us not to do this in the name of the Russian government. We’ll just ignore what you say, and the international press will play this as a real split between the Russian state and Alfa Group. We already have prepared as press statement for you. Here it is:

“I hope all the misunderstandings will be eliminated, but, if the deal fails, Rosneft will calculate its losses from the failed deal and will ask for compensation from those who would have inflicted the losses.”

Sechin: I think I can convince the Boss to go along with this. I assume there will be the usual financial arrangements.

Fridman: Yes, of course.

Sechin: One final word: This scheme may not work out as planned. BP may hold a wild card in its deck. If we conclude that you have to retreat, you will follow our orders. We need not remind you of what happened to your former colleague Khodorkovsky.

An imagined conversation in BP headquarters (London)

Dudley: It looks like the Russians have us backed into a corner. Our TNK partners have called a meeting in Berlin to approve the substitution of TNK-BP for BP in the BP-Rosneft deal. They want it in Berlin so their “independent” director Gerhard Schroeder (former German Chancellor) can give it the cover of respectability

BP lawyer: If there are fines, BP will have to pay as a law abiding company. There will really be no way to determine whether our TNK partners will also pay up.

Dudley: So what do you suggest?

BP lawyer: The only thing we can do now is not attend the Berlin meeting to avoid a quorum. Maybe we can think of something.

Both conversations are fictional. They may seem far fetched but anyone doing business in Russia encounters such things routinely. Even if these conversations never took place, they will be imagined by Western parties who know that the worst can happen to them in Russia.