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Analysis & Opinion
15.04.11 Has BP Got Ensnared In Russian Politics?
Introduced by Vladimir Frolov

Contributors: Vladimir Belaeff, Elena Miskova, Alexander Rahr

The New York Times reported last week that the British oil giant BP suffered a major setback last Friday, when “an arbitration tribunal upheld an injunction that indefinitely blocks its share-swap agreement with the state-owned oil company Rosneft.” Last January Prime Minister Vladimir Putin approved the BP deal with Rosneft, which called for the companies “to invest in each other through a stock swap representing about five percent of BP and 9.8 percent of Rosneft, and to also jointly explore new oil fields in the Russian Arctic.” Is there a larger story behind the troubled
BP-Rosneft deal? Has BP really become victim to the power struggle between the Russian elites? Is Medvedev using the corporate conflict between TNK-BP and BP-Rosneft to weaken Putin’s key allies?

BP's management, and particularly its new CEO Robert Dudley, may have misread Kremlin politics and may have ensnared the company in a deadly fight between rivaling Kremlin clans.

The BP-Rosneft deal clearly violated the terms of the shareholder agreement between BP and its partners in a separate and private joint venture in Russia (TNK-BP), a group of billionaires led by Mikhail Fridman of Alfa Group.

That group, known as the ARR Consortium (controls 50 percent of TNK-BP) won an injunction two weeks ago from an arbitration tribunal in Sweden, arguing that the deal with Rosneft violated BP's obligation to pursue any new business ventures in Russia solely through TNK-BP.

BP's bet was that the deal was so strongly in Russia's national interest and that it was backed by such powerful Russian government officials as Igor Sechin, the deputy prime minister in charge of energy and the chairman of Rosneft's Board of Directors, that the Russian government would “discourage the Russian shareholders in TNK-BP from making trouble.” In doing so, BP may have unknowingly stepped into Russian presidential politics.

It appears that President Dmitry Medvedev and his team decided to back the Russian shareholders in TNK-BP in an effort to thwart Sechin and consequently Putin's circle from gaining too much power and control over energy financial flows in preparation for the presidential race of 2012.

Not only did the Kremlin give official blessing to the ARR Consortium to start international litigation against the BP-Rosneft deal (with ARR having a strong legal position), but it also moved to drastically curtail Sechin's power when president Medvedev demanded last week that he, together with other senior government officials, resign from their corporate board positions in major Russian state companies to “avoid a conflict of interest.”

Russia’s New Times weekly reported last week that this was a deliberate decision on the part of Medvedev to weaken Putin’s position and to win powerful business allies, like billionaires Mikhail Fridman (Alfa Group) and Viktor Vekselberg (Renova), for his own presidential bid: “TNK-BP shareholders made their choice, and Medvedev in Magnitogorsk all but said that he was offering them protection. In return for support, of course. The message was sent. The message was heard,” the weekly wrote.

The New Times speculates that, in the spat over the BP-Rosneft deal and the decision to remove Sechin and other Putin allies from major state companies, Medvedev’s camp may be setting the scene for further confrontation with Putin that would allow Medvedev to dismiss Putin and his government: “The country is waiting for Putin's reaction. What will he do? Execute the president's order to remove Sechin and company from the oil and gas industry? Defy the president? And if it is the latter, then what will the president do? Will he take the next step and dissolve the government? Medvedev has to strip his rival of financial and administrative leverage that goes with the premier's job.”
Is there a larger story behind the troubled BP-Rosneft deal? Has BP really fallen victim to a power struggle between the Russian elites? Is Medvedev using the corporate conflict between TNK-BP and BP-Rosneft to weaken Putin’s key allies and deny Putin’s camp the resources and international backing before the presidential elections of 2012? Is Medvedev really setting the stage for firing Putin from his job as prime minister? Does he still have the legal power to do this before the State Duma elections in December 2011? If he did fire Putin, what could be the latter’s response? What will happen to the BP-Rosneft deal now that Medvedev has jumped into the fray and sided with Sechin’s enemies? What was BP thinking?

Alexander Rahr, Director, Berthold-Beitz Center for Russia, Ukraine, Belarus and Central Asia Studies, Berlin:
Dmitry Medvedev, not Vladimir Putin, is now the number one contender for the presidency in 2012. What a surprise. Medvedev has waited for three years in Putin’s shadow, without provoking or fighting his powerful mentor. But now he has begun his offensive. The day after Medvedev scored his first decisive goal in firing Igor Sechin from Rosneft, he openly criticized Putin as yesterday's man in an interview with the Chinese press. The power struggle has broken out. It started with the president's order to all government officials to leave the directors' boards in the state companies.

The move was directed at Sechin, who, as the ultimate boss of Rosneft and deputy prime minister, wielded tremendous powers over the energy complex in Russia. Sechin appeared to be one of the main obstacles for a prolongation of Medvedev's presidency. In previous statements, Medvedev wanted government officials to leave state companies by May, and then he changed the date to October, making observers think that Putin had intervened on behalf of Sechin.

But Sechin decided not to stay in his job till October and left. He obviously didn't want to become the subject of constant quarrels between Putin and Medvedev because the question of whether Sechin would stay or leave had the potential of becoming the main intrigue in Russian politics in the ensuing months.

Sechin's departure signified a serious blow to Putin. Medvedev has demonstrated his ability to fire any political heavyweight he wanted – Tatarstan's President Mintimer Shaimiev, Moscow's Mayor Yuri Luzhkov, and now Sechin. Could Putin be next on the list?

Medvedev indicated in Beijing that he does not want to wait for Putin to decide on the candidacy in autumn. The country needs the decision earlier, he stated, and he as the president claims the right to make the first choice. Putin has to respond immediately. So far Medvedev's tactics have played brilliantly. Nobody expected him to appear so vigorously out of the blue. The president appears to be overtaking the prime minister on the final stretch.

Vladimir Belaeff, Global Society Institute, Inc., San Francisco, CA:

The insistent search for conflict among the senior leaders of Russia is beginning to raise eyebrows. Questions arise: is this political “pranksterism” or Kremlinology a la celebrity tabloid newspaper or an attempt to practice that ancient Roman technique of divide et impera?

During the BRICS meeting in April in China, Medvedev was asked by Chinese journalists point blank about his relationship with Putin. Very explicitly and clearly Medvedev pointed out that the relationship was cordial and collegial, and that it goes back 20 years. There is absolutely no reason to disbelieve the president of Russia, who has demonstrated directness and frankness. Certainly, he has not displayed the kind of tergiversation for which many White House occupants – all liked and highly respected – have been know for decades. One only needs to remember how President Dwight Eisenhower lied to deny U-2 flights over the Soviet Union (the Gary Powers incident.)
Furthermore, the Chinese hosts of the BRICS meeting, and others, can easily verify the candor of Medvedev’s assertions through their own intelligence, and for Medvedev it would be insane to offend and undermine his credibility with a strategic partner by means of a petty lie. The duplicity uncovered by WikiLeaks in U.S. diplomatic correspondence has everyone on their toes.

So we should take Medvedev at his word regarding his relationship with Putin. Differences in opinion and style are not in themselves evidence of opposition of principles.

The activities of the TNK-BP investor grouping known as ARR are now of long standing and interference of ARR in the BP-Rosneft deal is not surprising. ARR has been litigating over many TNK-BP issues for years now, much before the newly struck deal. The determination of legal right should be made by a court of law – one does not believe it is appropriate for a political analysis forum to claim which side is legally right in any commercial dispute.

To presume that the TNK-BP and BP-Rosneft issue is somehow connected with supposed internal intrigues in the Kremlin is rather a stretch of the imagination. William of Occam would suggest looking at the simpler explanation: money. Billions of dollars are involved, certainly worth a purely commercial dust up on the part of ARR, who could expect substantial pecuniary benefit should it prevail in some form. Politics should be left out of this, particularly Russian electoral gambits.

The removal of ministers from boards of state-owned corporations also has been discussed in Russia for quite some time. A period of 12 months has been now set for this change, although recently Medvedev has spoken about accelerating this process.

The guiding concept behind this action is the dominant (and quite erroneous) belief that civil servants and governments are not suitable business managers from a structural point of view. Commercial managers are supposed to be structurally more efficient. Of course, anyone familiar with the workings of a modern corporation knows that its bureaucracy and management are indistinguishable from governmental institutions, up to and including the lack of accountability and inefficiency. Of course, business promoters and ideologues of the so-called “free market” present a different narrative – but that is only propaganda.

The effectiveness of any organization is due to the quality of the people in it. Good, competent, qualified government managers will make a government agency work as efficiently as a business. The root cause is how organization charts in the government are populated. All governments often staff with personnel chosen for party loyalty, cronyism, nepotism and other attributes non-germane to the positions. Such practices would be ruinous to any organization, public or commercial.

Elena Miskova, Managing Partner, LEFF GROUP: Government and Public Relations, Moscow:

BP’s senior management made a calculated bet, based on its recent experience in Russia -- that close connections to senior government officials trump the rule of law in this country. It was as sound a judgment as anybody could make after strenuous negotiations with someone as powerful as Russian Deputy Prime Minister Igor Sechin.

What BP has failed to grasp is that in Russia, selective application of justice could sometime work to enforce the rule of law if this benefits the right set of players. And this time they have found themselves on the wrong side of the rule of law in Russia by clearly violating their shareholder agreement with their TNK-BP billionaire partners. What were they thinking?

Of course, BP’s latest travails have nothing to do with Russian presidential politics. ARR’s legal action against BP has been cleared with both Medvedev and Putin. Igor Sechin has not been at war with Mikhail Fridman, Viktor Vekselberg and Leonard Blavatnik, rather, they have all enjoyed a very productive relationship.

Allowing ARR to sue BP could be a calculated bet by the Kremlin and the Russian government to squeeze the international major into an even more generous share-swap with the Russians, as is currently envisioned by the BP-Rosneft deal. Now BP is likely to buy out their Russian partners in TNK-BP with cash and BP shares, as well as allowing Rosneft to buy into TNK-BP. As a result, Rosneft and Russian private shareholders would accumulate enough BP shares to secure one or even two seats on BP’s board of directors. Not a small feat and a clear triumph of the rule of law.

As for Sechin’s leaving Rosneft’s chairmanship, its political significance can be seen more clearly in the choice of his replacement – Sergei Shishin, a former senior FSB general and currently a vice president at VTB.
He will be Sechin’s lingering shadow at Rosneft.
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