BP, Khodorkovsky and how Russia is ruled

The upside of BP’s latest brawl in Russia is how much we are learning about how the place works.

As you recall, in January BP CEO Bob Dudley trotted out a bodacious deal in which BP and Russia’s state-owned Rosneft would swap shares — thus owning $8 billion in each other’s company — and go on to develop the completely untapped motherlode of oil underneath the Arctic Sea. Only, this aggravated BP’s Russian partners — four oligarchs collectively calling themselves AAR — who said BP had violated a monogamy covenant, and persuaded two European tribunals to halt the deal. One immediate victim was Igor Sechin, Putin’s right-hand man and the holder of dual posts as deputy prime minister and Rosneft CEO. When the deal went south, Russian President Dmitry Medvedev kicked the corpse (pictured above, neither looks thrilled to be in the other’s company) with an order prohibiting Sechin or anyone else from holding a simultaneous position in government and a state-owned company.

Though Medvedev’s was a wholly reasonable directive, inRussia conflicts of interest can be a novel and even controversial idea, especially when it regards members of Putin’s entourage. So it is that one prominent narrative out there right now is that the whole affair demonstrates not ethics, but Medvedev’s political strength — the rug, Reuters suggests, has been partly pulled out from under Putin. Medvedev’s purge of Putin’s allies at state-owned enterprises, it is said, is all part and parcel of Medvedev and his own allies preparing him for a run at re-election next year.

We have two things going on at once. One is that BP’s Dudley wholly misunderstood Russia’s apportionment of power (That’s not a categorical black mark, because so did Sechin.). In this video, the Financial Times’ perspicacious John Authers and Vincent Boland say that the Rosneft fiasco is as bad for BP as was last year’s Gulf of Mexico oil spill. Dudley had perceived a company saver, but instead derived yet another symbol of BP’s executive mismanagement. Now, not only does BP seem unlikely to capture prize Arctic acreage, but Dudley has seriously annoyed his Russian partners in the TNK-BP partnership, which comprises a full quarter of BP’s total global reserves.

BP cannot afford to jeopardize the partnership. It is very simple. Unless Dudley gets his Russian affairs under control by a Thursday deadline, both BP and he — emphasis on the latter — are in real trouble. Chris Weafer, the uber-analyst at UralSib Bank, expects a deal to be cut, if not voluntarily by the principals in the deal, then by force — that’s how important the stakes are."There will be a lot more pressure applied this week," Weafer wrote in a briefing he emailed me, "and if no agreement is reached by Thursday, then [there will be] direct intervention by the state." But if these steps still don’t work, among the dangers, some say, is that again BP risks a hostile takeover. This piece from the Daily Telegraph in London suggests that former BP CEO Tony Hayward may lose his current position as a board member at TNK-BP. But the biggest news right now is that Dudley could lose his job. So poor has his judgment and execution been. Read on for the Russian political angle.

The second thing going on is Russian politics. In my ownview, Medvedev’s dispatch of Sechin is not a show of force, but one of respect — self-respect by Medvedev, and a demonstration of plain-old respect from Putin.

The backdrop is the 2012 Russian presidential elections.There is not genuine tension between Putin and Medvedev. These two actors work well together, each knowing his place — Medvedev firmly and willingly ensconced as an understudy — and talking regularly through policy and decisions. What Sechin’s loss of his position at Rosneft shows that there are just two important figures on the Russian political scene — Putin and Medvedev. Literally everyone else — including appendages to Putin such as Sechin — is peripheral.

Medvedev was kept out of the loop on the BP-Rosneft tie-up. If this had happened a year ago, perhaps Medvedev would not have reacted at all — the proximity of the elections is the active factor. When he learned of the deal, he must have felt that Putin’s circle was imposing on his turf. The humor around Russia is that Sechin is more powerful than Medvedev, but Medvedev was going to demonstrate the price of such delusion. Putin — understanding that in fact his man Sechin, and he himself, had crossed the invisible delineation of power in Russia’s ruling tandem — went along with the embarrassment of his top personal lieutenant.

That is a powerful window into power: Closeness to Putin does not impute entitlement. Medvedev has a sphere of potent authority, one that Putin respects — something that has been a subject of dispute for a long time.

Putin is important for Russia, but he understands that his approach is one-dimensional — it does not encompass all that Russia requires for its future. Putin relies on Medvedev to compensate for what’s missing. The bow to Medvedev, and the sacrifice of Sechin, are signs of that.

Finally, examining these events, I can’t help but think about Mikhail Khordorkovsky, the imprisoned former oligarch. Notwithstanding the reams of charges and long testimony against him, Khodorkovsky is in prison for one violation — seriously crossing Putin. At the time, Khodorkovsky — then chairman of the now-dismantled Yukos oil company, was trying to form a tie-up very much resembling the TNK-BP/Rosneft deal. He was speaking in that regard with both Chevron and Exxon, and my information is that Chevron had won out; Chevron had gone as far as to seek and obtain Putin’s direct approval of a share swap with Yukos. But then everything went awry in a giant cloud of dust that included Khodorkovsky’s political activities. When that dust died down, Khodorkovsky was in hand-cuffs, and you know the rest. Simply put, as long as Putin is still teed off, Khodorkovsky is going to languish in prison. And as far as we know, he is still teed off.

Since then, Khodorkovsky’s imprisonment has served as a signpost that reads, "Do not cross this line," the unstated underline being,"Or end up like Khodorkovsky." But is that a valid threat? Can Putin really throw anyone into the pokey, and toss away the key?

We may be seeing in the Sechin case that the answer is no. At the time of the signing of the deal at his home, Putin reportedly intimated to Dudley that, should there be legal warfare from his Russian partners, he — meaning Dudley — would have to fight it out himself.  The FT’s StefanWagstyl and Catherine Belton write that Putin was signaling that he "wasn’t all-powerful and couldn’t simply deliver the Russian side of the deal."

But why couldn’t Putin simply deliver the Russian side of the deal? Isn’t that precisely the idea that he has been conveying to the world for the last decade — that, when it comes to Russia, he is all-powerful, and that he brooks guff from no one? With the specter of Khodorkovsky in the gaol looming over, that has been the message to Russia’s politicians and business people. So what about the AAR oligarchs — Mikhail Fridman, Viktor Vekselberg and German Khan (the fourth, Len Blavatnik, is actually an American citizen and lives in New York)? Are they exceptions to the Khodorkovsky Rule?

One possibility is that they are — that for publicly unknown reasons these oligarchs have managed to carry out their very public rowdiness over the last few years because they have some unspoken hold over Putin.

The other possibility is that the Khodorkovsky Rule is not a rule at all — that Putin could do that once, but that if he throws another oligarch in prison — particularly these oligarchs — he’ll start looking like Ivan the Terrible, and what would happen to Russia’s efforts to attract foreign investment then? Perhaps both are true. Whatever the case, the bulldogs are quite busy underneath that rug.