How to Stop Oil Companies From Propping Up Kleptocrats

This week, BP, Equinor, ExxonMobil, and Shell announced they will exit partnerships with state-owned Russian oil and gas companies, citing their opposition to Russia’s invasion of Ukraine. Shell’s CEO explained, “We cannot—and we will not—stand by.”

However, it was years of standing by that helped create the current situation, in which emboldened kleptocrats collected oil profits via legitimizing partnerships with international companies. For decades, major oil companies have insisted that partnering with corrupt dictators, including Russian President Vladimir Putin, is an unfortunate but unavoidable necessity. The war in Ukraine, with the climate crisis smoldering in the background, requires the industry and its financial backers to abandon this narrative.

Divestments by these Western oil companies contribute to the crisis now facing Russia’s oil and gas sector, one of the largest in the world. Even in the absence of sanctions on energy exports, oil companies as well as commodity traders, insurance providers, banks, and other industry players are backing away from the country. This leaves Russia without buyers for its crude oil and has sent the stock value of Russian oil companies plummeting. In the longer term, divestments could delay key projects, such as the ExxonMobil-operated Sakhalin oil and gas fields, and deprive the industry of the financing and technology it needs to sustain its growth.

Following reports that Russian national oil company Rosneft was supplying fuel to military convoys entering Ukraine, BP kicked off the departures, announcing it would exit its 19.75 percent holdings in the company. British officials had begun asking tough questions of BP, with at least one calling the company’s ties to the Kremlin “shocking.” But there wasn’t anything shocking about it. BP has owned one-fifth of Rosneft since 2013, and its financial reports openly showed how Rosneft boosts BP’s bottom line and other key metrics.

Like national oil companies in many countries, Rosneft is part of the machine by which Putin has gathered and deployed power. In its latest sanctions, the European Union explicitly calls out Rosneft’s role in Russian kleptocracy, describing the company’s CEO, Igor Sechin, as “among those people from Putin’s circle who receive financial gains and important assignments in return for subordination and loyalty. He has been tasked with important and difficult tasks by the President and rewarded with Rosneft leadership and great wealth. Igor Sechin’s Rosneft was involved in financing the vineyards of the palace complex near Gelendzhik, which is considered to be personally used by President Putin.”

That BP owned one-fifth of Rosneft, an entity so integral to Putin’s rule, should have proven to be just as untenable in 2014 as it is now.

But this finding is hardly new. For years, Putin has used Rosneft to bring privately held oil assets under state control and to pursue foreign-policy objectives, such as extending financial lifelines to Venezuela. Back in 2014, the U.S. government and EU recognized this reality and included Rosneft and Sechin on their lists of sanctioned entities following Russia’s invasion of Crimea.

That BP owned one-fifth of an entity so integral to Putin’s rule should have proven to be just as untenable then as it is now. However, the 2014 invasion of Crimea did not dissuade BP or its shareholders—nor did subsequent actions by the Kremlin, such as interference in the 2016 U.S. presidential elections, the poisoning of opposition figures (some on British soil), or the violent repression and arrests of democracy and anti-corruption protesters. And BP wasn’t the only actor willing to stomach this record. ExxonMobil and Shell maintained major joint ventures with Rosneft and state-owned Gazprom, respectively. In 2020, European commodity trading giants Trafigura and Vitol bought shares in a huge Rosneft-led Arctic oil project; and France’s TotalEnergies has large investments in Russia as well.

Along with profits from Russia’s enormous oil and gas industry, energy security dynamics help explain why it took so long for Western companies to cut ties with Putin. As the Ukrainian crisis has laid bare, Europe is heavily dependent on oil and gas imports, especially from Russia. It has been difficult to argue, therefore, that Western oil companies should disengage from the very supplier markets their home countries depend on.

Adding further geopolitical obstacles, Western companies hold positions that energy rivals from the East, particularly Chinese companies, would otherwise swiftly move to occupy. Should this occur, Western countries might lose access to oil and gas supplies as well as influence in producing countries and would see the industry’s profits enrich foreign firms instead of their own. Oil companies also use lobbyists, campaign donations, and other tools to influence policymakers and keep these narratives alive. As a result, U.S. and European governments often facilitate rather than discourage collaborations with oil-rich autocracies, contributing to the sense of normalcy these partnerships enjoy.

Due to these dynamics, Russia is not the only country where Western oil companies partner with corrupt and repressive governments. BP also leads the enormous Shah Deniz gas project in Azerbaijan; a recent Organized Crime and Corruption Reporting Project investigation revealed how that operation has enriched local political elites. The U.S. oil companies ExxonMobil, Kosmos Energy, and Marathon Oil partnered with the government of Equatorial Guinea, even though the United States and other authorities have seized California and Paris mansions, fleets of supercars, Michael Jackson tour memorabilia, and other luxury goods from the country’s vice president.

TotalEnergies and Italy’s Eni work closely with SNPC, the national oil company of the Republic of Congo, which is inseparable from that country’s kleptocratic regime. These partnerships appear unshaken by recent allegations, made by U.S. authorities, that top officials diverted money from SNPC’s accounts to pay for a Miami condo and other luxury goods—the latest in a string of troubling revelations.

Regarding Russia, however, several companies finally balked as opposition to the Ukraine invasion reached a fever pitch. Following these overdue divestments, progress in three areas can wind down the oil industry’s damaging partnerships with kleptocrats:

First, oil companies, shareholders, and investors should recognize, as BP, ExxonMobil, and Shell have belatedly done, that partnering with a regime enables its activities. When those activities become indefensible, as in a kleptocracy, the partnership should end. New Natural Resource Governance Institute guidance recommends that oil companies evaluate whether working with a country’s national oil company will propagate corruption or kleptocracy and avoid partnerships where the answer is yes.

Such assessments go deeper than the narrow due diligence checks companies currently undertake—and companies will only adopt them if shareholders, investors, and civil society activists insist. U.S. and European governments could adopt a similar approach and avoid the dissonant reality where they seize kleptocrats’ assets with one hand while glad-handing with the other.

Second, as investors and financial markets increasingly adopt environmental, social, and governance (ESG) criteria, they should treat oil assets controlled by corrupt dictators as toxic. Oil fields can literally be dirty investments due to their greenhouse gas emissions and environmental risks or, metaphorically, when corrupt elites illicitly capture the proceeds.

Investors should avoid projects that will enrich kleptocrats or solidify their holds on power, such as the recent gas projects in Azerbaijan and the 2020 buy-ins to Russia’s Arctic projects. ESG standards should evolve to be sure these investments are assigned the appropriate red flags. The oil industry’s complicity in Putin’s affairs shows what happens when energy security arguments trump common sense anti-corruption and governance considerations for too long.

Third, kleptocrats should be among the first to lose out in the oil industry’s eventual decline. Already, there are widespread calls for rich countries to go first in producing less oil and gas, as one key element of a just and equitable energy transition. Global negotiations around the sequencing of production declines should take democracy, anti-corruption, and human rights into greater account.

The price of oil is soaring, and that typically leads oil companies to tolerate even more corruption and political risks.

There is nothing just or equitable about allowing corrupt dictators to disingenuously cite the poverty of their people to justify forging ahead with oil production. As philosophy scholar Leif Wenar argued in his prescient book Blood Oil: Tyrants, Violence, and the Rules That Run the World, these unelected regimes are peddling goods stolen from their people. As demand for oil drops, these autocrats should be the first to feel the pinch.

Through these channels, the oil industry could move to disempower kleptocrats. But this effort faces some immediate hurdles. The price of oil is soaring, and that typically leads oil companies to tolerate even more corruption and political risks. One hundred-dollar oil could even motivate some Western companies to hang on in Russia. The spike in prices could also cause the industry’s players and investors to feel insulated from the energy transition, leaving them less likely to wind down their holdings. With Russia becoming more of a pariah, Western governments and companies seeking energy security may further embrace other kleptocratic oil producers.

Industry players will also likely try to frame Russia’s divestments narrowly: as reactions to a unique situation of military aggression. But Western oil companies supported the emergence of an emboldened, unaccountable Putin regime that enriched political insiders. As the industry reassesses what is acceptable in the wake of these historic events, oil company support for kleptocratic regimes should no longer be seen as normal, necessary, or permissible.