The Oil and the Glory
The last free oligarch
No Russian oligarch has had a longer career stretch than Mikhail Fridman — enfant terrible, tormentor of foreign titans and, according to Forbes, the 43d richest man in the world. Now, this last pillar of no-holds-barred Russian capitalism is under threat, at least in the oil industry, where he has earned many of his billions ...
No Russian oligarch has had a longer career stretch than Mikhail Fridman — enfant terrible, tormentor of foreign titans and, according to Forbes, the 43d richest man in the world. Now, this last pillar of no-holds-barred Russian capitalism is under threat, at least in the oil industry, where he has earned many of his billions — challenged in the early stages of his latest unsentimental caper. Are we witnessing the final act in two decades of some of the world’s rawest displays of capitalism? If so, it will be another sign of President Vladimir Putin’s crusade to wring out the disorder that has always vexed him. Russia may become more boring with a tamer Fridman. But in Putin’s view, that is a small price to pay for the predictability he cherishes.
The crisis for the 48-year-old Fridman, a pudgy man with an impish grin, has unfolded over the last few days. Last week, he unveiled a typically breathtaking resolution to a long-standing row with BP, his long-time partner on the Russian oil patch. If it worked, AAR, a financial group he leads, would end up with probably the largest single shareholding of the British oil company. And Fridman seemed sure it would — people close to the Russian told me that Fridman enjoyed the Kremlin’s blessing. Only, Fridman seems to have been misinformed: On Monday, his initiative was contested by Rosneft, Russia’s powerful state oil company. Rosneft chairman Igor Sechin, Putin’s chief oil advisor, announced that he would bid for BP’s share of TNK-BP, the nation’s third-largest oil producer, in which AAR and the British company are 50-50 partners. Sechin released a bland statement calling acquisition of BP’s stake "an attractive commercial proposition" that will "complement [Rosneft’s] existing portfolio and create value for all stakeholders." But for those who speak business Russian, the message was clear — "bid," when it comes to a Putin-linked company, means "buy."
Playing on the Russian oil patch is a definitively courageous act – Putin regards it as a state preserve, and Fridman’s 50-50 partnership with BP always crossed the line. The Rosneft move appears to be a signal of game over, according to close observers of the Russian industry with whom I’ve spoken — the Fridman group’s share of TNK-BP seems likely to be swallowed up by Rosneft along with BP’s, with terms to be determined, and he subsequently will be pushed entirely out of the oil sector.
Should this scenario play out, it would not be your standard oligarch hanging, the string of untimely departures witnessed in the early years of Putin’s first turn at leadership — the 2000 flights of media tycoon Vladimir Gusinsky and industrialist Boris Berezovsky, and of course the 2003 imprisoning of oilman Mikhail Khodorkovsky. Fridman would retain the bulk of his fortune, his financial and telecoms empire, and most important his freedom and right to move unencumbered in and out of Russia. The same would go for Fridman’s three partners in the AAR consortium — Russian-American industrialist Len Blavatnik, German Khan and Viktor Vekselberg. Yet, by circumscribing Fridman’s activities, Putin would arguably draw a final line under the age of the iconic post-Soviet oligarch, the hard-bitten, ultra-opportunistic, and ruthless men who came to symbolize Russia’s chaotic 1990s, and were demonized once Putin took power in 1999. Putin is "totally fed up with [Fridman’s] behavior," said a Moscow-based banker who did not want to be quoted by name. He went on in an email exchange: "Fridman has miscalculated Putin’s reaction here. Putin does not like nor trust the belligerent and (his mind) unreliable oligarchs. He wants them out of the oil business."
In most annals of the era, Khodorkovsky’s arrest — after Putin decided he had been double-crossed — marks the start of the post-oligarch era. In their place are approved oligarchs — gas magnate Gennady Timchenko, metals titans Oleg Deripaska and Mikhail Prokhorov, among others — who either serve specific purposes for Putin, or whose latitude is confined. Then there is Fridman, who traveled with the 1990s outcasts but managed to survive and keep up his devil-may-care ways, even in the most strategic sector of all — oil — always careful to assure Putin that he was only conducting tough business.
According to Chrystia Freeland’s classic Sale of the Century, a history of the oligarchs, Fridman had already become a millionaire by the time of the 1991 Soviet breakup through ventures such as ticket scalping and oil exporting. Growing up an outsider in the Ukranian city of Lviv, he became one of Russia’s top oligarchs, plotting and sharing equally in the landmark loans-for-shares scheme that made all billionaires, and enabled Boris Yeltsin’s 1996 re-election as president.
The following year, Fridman intersected with BP, which along with all the world’s major oil companies was attempting to strike lucrative deals across the former Soviet space. In 1997, the British company paid $571 million for 10 percent of a Siberian oil company called Sidanko. Only, in a typical post-Soviet raid, BP went on to lose the share to Fridman, who carried out a series of fixed courtroom maneuvers that resulted two years later in BP effectively losing everything.
The Sidanko episode seemed to sum up Russia’s 1990s business environment, but in Freeland’s account, BP was not in fact the target of Fridman’s shenanigans. Not that it matters in terms of the results, but it was an unintentional victim of a vendetta against fellow oligarch Vladimir Potanin. "The tragedy of the situation was that we took aggressive measures against Sidanko, wanting to go to battle against Potanin, but we ended up fighting with BP," Fridman told Freeland. "We never wanted to go to war with BP. We wanted to go to war with Potanin."
The dustup foreshadowed a long, turbulent partnership between Fridman and BP. In 2003, BP, putting the past behind it, paid $6.75 billion to AAR for 50 percent of TNK-BP, an oil vehicle that included Sidanko and a few other oil enterprises. Over the subsequent nine years, AAR and BP each earned $19 billion in dividends from what turned out to be a cash cow. But they also often — in Fridman’s earlier language — went to war. Judging by his actions, Fridman seemed to see BP as weak and irresistible prey.
In 2008, the relationship became fraught over disagreements opaque to the outside world but clear enough to the partners. Bob Dudley, then the Moscow-based head of TNK-BP, fled underground incognito for several months in what BP officials said was fear for his safety.
The current state of play traces back to a row early last year, when BP and Rosneft announced a blockbuster deal: They would swap large blocks of shares and partner up in oil and gas drilling in the Arctic and other unidentified places around the world where BP did business. Negotiated directly by Sechin, the agreement had the Russian leader’s explicit approval.
But Fridman had other ideas. He went to court in Europe and persuaded multiple judges that the BP-Rosneft agreement violated a covenant under which AAR and BP had mutual rights of first refusal for any business done in Russia. The deal was scuppered.
Meanwhile, the war continued between the AAR partners. Fridman seemed to smell blood. The climax came in May, when he resigned as CEO of TNK-BP, saying he could no longer work with BP. Something had to give — one of the partners needed to take charge. A few days later, BP seemed to bow to Fridman’s demarche — it announced that it had received unsolicited offers to sell its half of the enterprise, and that it was prepared to seriously consider the idea.
Over the next few weeks, Fridman responded to BP’s initiative with a charm offensive. He visited large BP shareholders in Boston, London, and New York, attempting to demonstrate both that he was not demonic, as some might think, and that TNK-BP was a central pillar of BP’s profitability. In fact without TNK-BP, he said, BP would earn almost no profit.
Fridman’s objective was to persuade the shareholders to back his drive to negotiate a BP buyout of AAR’s 50 percent share of the partnership. He had a prize in mind — an unspecified sum of cash plus a 10-12 percent piece of the British company, which seemed likely to make AAR its largest shareholder. Fridman and his partners would be a key part of an international oil company, with global possibilities. Alternatively, Fridman told the BP shareholders before him, AAR was willing to buy half of BP’s holding — or 25 percent of TNK-BP — but for the current share price, absent the traditional premium paid in large acquisitions. Clearly, the former suggestion was preferable, Fridman said. In response, BP said it would negotiate in good faith with AAR, as well as with anyone else who wished to bid. The suggestion was that competitive bidders — it intimated a Russian state actor — were waiting in the wings.
People close to AAR told me flatly that BP was bluffing — there was no other bidder. BP would end up doing the deal with AAR. As for Putin, who all along has insisted that Russian oil companies must remain in majority Russian hands, he had signaled that "under certain circumstances" he would approve 100 percent BP ownership of TNK-BP. The people close to AAR did not say what circumstances Putin meant.
What happened in the intervening days isn’t publicly known. But it is clear that the banker with whom I spoke is right — Fridman miscalculated. The Kremlin did not approve of his latest scheme. Why? Putin does seem to want Fridman out of the oil patch.
A scenario that would appeal to BP would be a resurrection of a form of last year’s cash-for-shares deal with Rosneft in which it ends up again with prime Arctic acreage and a global joint-venture arrangement with the state oil company.
As for AAR, it seems likely that Fridman and his partners will be forced to sell at least some of their shares to Rosneft, so as to become minority owners, or perhaps all of them. No one can say whether Putin will force AAR to sell at a knock-down price, but I’d venture that the deal will be fair to the oligarchs. As one of Fridman’s long-time Western observers told me: "I’ve been a great admirer of Mikhail’s survival skills." Fridman will survive. He will simply be the last free oligarch in Russia’s most lucrative and powerful industry.