Thursday, July 7, 2011

How Russia is Ruled: Inights from the BP Failure

The failure of BP’s venture with Rosneft provides tantalizing hints about how Russia is governed and its 2012 Election. BP joins with Shell, Exxon, and other major international energy companies in chalking up yet another failure in Russia’s lawless investment climate. BP should have known better after losing management control of its TNK-BP venture to its Russian AAR partners. But this time, BP felt it had the right people on its side.

When BP signed with the Russian state oil company, Rosneft, to develop offshore arctic reserves, I expected this would prove to be yet another misadventure. But BP thought this deal would be different. It was negotiated with Putin’s right-hand man (Igor Sechin) and blessed by Putin himself at the signing ceremony. There was the small matter of an exclusivity agreement with BP’s billionaire-Russian partners in its TNK-BP venture, but BP thought that matter would be “taken care of” by the Russian side (a la Khodorkovsky?). Surely the Russian state would back a deal that could rejuvenate Russia’s lagging energy production and fill state coffers.

The oligarchs behind AAR -- Mikhail Fridman of Alfa Group, Len Blavatnik of Access Industries, and  Viktor Vekselberg of  Renova--  proved too formidable for BP. They also brought to the table an unusual weapon for Russian companies – a legal position that carried weight in international courts.  

Putin did not take care of the Russian side. The AAR partners took BP to court outside of Russia and won an injunction that quashed the whole deal. Fridman, Veksleberg, and Blavatnik did offer BP a “deal” early on  -- that they take half of BP’s half in the arctic venture with Rosneft.  BP first boycotted the meeting called to vote on this proposal and then vetoed it outright.

My first take was that “the Russian side” had set BP up from the very beginning. AAR, Sechin and Putin had agreed to squeeze BP’s share of the deal down to a quarter, leaving one half for Rosneft and  one quarter for the three billionaires. Maybe one quarter would be enough for a BP teetering in its recovery from its Gulf  oil spill disaster.

I was wrong. It appears there is no “Russian side.” The deal is dead. Sechin is mad  at the three billionaires and is threatening them. Rosneft has to find another partner, but what major oil company would get involved in such a mess now? BP is not out of the woods. Rosneft could sue it for damages resulting from the failed deal. This is clearly a deal gone bad for all parties. There are no winners – only losers.

BP’s saga gives us insights into how Putin’s Russia is run. Instead of  well-defined hierarchical relationships, the Russian system of governance is  comprised of swirling forces, competing against each other. Equilibrium is never reached. There are never any final victories over competitors. According to this interpretation, Russia is far from a “KGB state” of former KGB officials and allied oligarchs, who obey the “Master” Putin. Putin is the most important player, but one of many.