The Oil and the Glory
Is BP’s latest fiasco evidence of Russian law or Russian chess?
Are we to believe President Dmitry Medvedev, who says that the collapse of BP’s blockbuster oil deal in Russia is all a simple matter of the rule of law — that CEO Bob Dudley was violating a contract, and that isn’t done in Russia? One might reply, Since when? But this is what is baffling ...
Are we to believe President Dmitry Medvedev, who says that the collapse of BP’s blockbuster oil deal in Russia is all a simple matter of the rule of law — that CEO Bob Dudley was violating a contract, and that isn’t done in Russia? One might reply, Since when? But this is what is baffling about the latest turn in BP’s long saga of suffering — one does not know whether Russia has suddenly gone legal, or whether we are watching a dimension of the run-up to the country’s 2012 presidential election.
For BP, this was all about recovering its mettle from last year’s disastrous Gulf of Mexico oil spill. Earning street cred in Big Oil isn’t the same as a lot of other businesses — there is comparatively little in the way of razzamatazz, branding, or product breakthroughs. Instead, it’s all about being quick off the mark in acquiring property and finding hydrocarbons. Yet even there, as BP has learned, the going isn’t what it used to be: Dudley was plenty fast pivoting off the spill, and obtaining a superlatively rich new deal to help develop Russia’s Arctic. The details were tantalizing — already the most active Big Oil company on the Russia patch, BP would double-down by forming a marriage-type arrangement with state-owned Rosneft. The two companies would swap a significant number of shares, and then explore the extravagantly rich oil fields of the Arctic. Tens of billions of barrels of oil were at stake, and at once BP seemed to be back in the game.
Only, BP already had a Russian spouse — four oligarchs collectively known as AAR — with which it had an exclusive, first-right-of refusal agreement for any dealings on Russian soil. AAR obtained European injunctions against the deal, so Dudley had to scrape and grovel in order to try to persuade AAR to be bought out, and Rosneft to help provide the funds (one reason being that Prime Minister Vladimir Putin — superior in rank to Medvedev — would never allow a foreigner to own 100 percent of a Russian oil company; the other reason being that, even if Putin would, BP didn’t have $30 billion in cash at its disposal, apart from the $30 billion and more that it’s collecting to pay off victims of the spill).
As of Monday night, BP and AAR had agreed on a $32 billion buyout (Sylvia Pfeifer and Catherine Belton of the Financial Times have assembled a good chronology). But in the end, the deal was upended by deep-seated mistrust between the Russians — those at Rosneft, and the four oligarchs. In terms of the sequence of events, AAR wanted its cash first, before BP and Rosneft proceeded with their tie-up; Rosneft rejected that idea, and wanted the oligarchs to be paid only after the rest of the deal went through. They failed to bridge the gap, and the deal died.
In a two-hour press conference today, Medvedev talked a lot about the difficulty of modernizing Russia’s economy. In that context, Medvedev has attempted to persuade the world that Russia is now a safe place to do business; sticking it to BP — whose Rosneft deal was based on a relationship with Putin’s right-hand man, Igor Sechin — may have been part of that show.
The BP case is just part of the record. Earlier this month, two ultranationalists received long prison terms for the 2009 murders of human rights lawyer Stanislav Markelov and journalist Anastasia Baburova.
But one thing that could better signal Medvedev’s direction is resolution of the death of Sergei Magnitsky, a Russian lawyer who died in prison in 2009 after accusing Interior Ministry officials of stealing $230 million from the state treasury. Medvedev said an investigation he ordered is almost complete. Yet Swiss authorities have already frozen accounts linked to some of those named by Magnitsky. Russia’s human rights commission says the charges against Magnitsky were fabricated. William Browder, an American investment advisor for whom Magnitsky was working, has assembled evidence that he says proves that four Russian officials and a spouse used the proceeds of the allegedly stolen money to buy real estate in Dubai, Montenegro, and Russia. One wonders what is taking Medvedev’s investigators so long to make their own determination; whether the conclusions will be politically bent, as has occurred in previous high-profile adjudications; and, whatever the case, whether the results will be convincing.
What would indisputably demonstrate a new day in Russia — and perhaps attract a lot of new foreign investment — would be a release of Mikhail Khodorkovsky, former chairman of the Yukos oil company, who remains imprisoned because of a blood feud with Putin. Asked whether Khodorkovsky would pose any danger to the public if he were released, Medvedev said "absolutely no danger." Whatever reforms Medvedev has initiated, Khodorkovsky has been a red line with Putin. So there would have to be a significant intellectual shift in Putin himself — the ultimate authority in Russia — for such a release to take place.
The main event is the 2012 election. We do not know whom Putin will anoint as the next president — Medvedev, or himself. The actions of both men are often seen by analysts as electioneering. I personally think that line of thought is overdone — the men will decide what comes next peacefully, in my view. Yet even in that context, BP may be playing its own bit part. If the loss of the Rosneft deal is part of the election campaign, BP yet again finds itself a pawn in Russian games.