Frank Discussion of Mugging and Robbing

Published in Tbilisi 24 Saati July 29, 2008

David J. Smith*

Citing “sustained harassment” by Russian authorities, Robert Dudley, CEO of TNK-BP, Russia’s third largest company, fled the country last week. He will run TNK-BP, he says, from an undisclosed location outside Russia, a prospect more likely to fail than his effort to direct the company from Moscow. Kremlin kleptocrats have won this round in their match against the behemoth British Petroleum. “The steady erosion of the rule of law in Russia,” writes The Wall Street Journal, “is a distressing sign of the times there.”

TNK-BP was launched five years ago with a posh City of London banquet attended by then British Prime Minister Tony Blair and Russian President now Prime Minister Vladimir Putin. It was a 50-50, $14 billion joint venture between BP and Alpha-Access-Renova (AAR), a conglomerate owned by Russian oligarchs Mikhail Fridman, Viktor Vekselberg and Len Blavatnik. “Together we can achieve our mutual goals of global stability, economic growth and international development,” said Blair.

TNK-BP’s economic growth was spectacular. Operating 1,600 retail outlets and oilfields from the Volga region, to the Ural Mountains and throughout Siberia, the company multiplied its value between two and three times, paying dividends of $18 billion. TNK-BP accounts for 23% of BP’s total oil and gas production.

“Then,” writes The Wall Street Journal, “the same old thing happened: someone in Russia wondered, why share the spoils with foreigners? And BP found itself defenseless in the wild east.”

“TNK-BP has been kept on the back foot,” reports BBC News, “by a series of lawsuits, visa rows, industrial spying claims, staff contract investigations and arguments over investment and the future of chief executive Robert Dudley.”

Last March, Russian police questioned TNK-BP employee Ilya Zaslavsky on allegations of industrial espionage. A week later, they raided TNK-BP headquarters and BP’s Moscow office. Labor, health and safety inspections of TNK-BP followed.

Senior Russian managers of TNK-BP sued Dudley for discrimination. Meanwhile, minor shareholders, conspiring with Russian authorities, challenged the labor contracts and visa status of TNK-BP’s 148 foreign employees.

Last week, police again raided TNK-BP and BP offices in Moscow. BP withdrew all remaining foreign employees and Dudley slinked out of town.

There are two apparent motivations for the Kremlin’s behavior. First, having pressured BP last year to sell its interest in the Siberian Kovytka gas field to Gazprom, Kremlin kleptocrats are now bearing down for a bargain-basement price.

Second, the kleptocrats are pushing TNK-BP onto the chopping block where BP will agree to sell some or all of its interest to a state-controlled energy company such as Gazprom or Rosneft.

1 These explanations fit with the pattern of mugging and robbing that has earned the label, “resource nationalism.”

In 2006, for instance, Russian environmental authorities hounded Royal Dutch Shell into selling its majority interest in the Sakhalin-2 gas operation to, yes, Gazprom.

Today, while TNK-BP’s Dudley hides, Kremlin kleptocrats are shaking down ExxonMobil’s Sakhalin-1 gas project. The Russian government has blocked sale of Sakhalin-1 gas abroad while Gazprom offers the American giant half the domestic price for its gas. If ExxonMobil fails agree, it can expect Mafioso tactics similar to those directed at TNK-BP.

“Today, writes The Wall Street Journal, “No one who puts serious cash in Vladimir Putin’s realm, not least in its flush gas and oil fields, can be surprised to find himself fleeced, run out of town, jailed in a Siberian gulag or worse.”

The Russian Government, of course, feigns neutrality. Deputy Prime Minister Igor Sechin even praises BP for bringing Russia “new principles of corporate governance, new technology, training and transparency.” Sechin doubles as chairman of Rosneft, the state-owned company that in late 2004 gobbled up the bits of Yukos as they fell from the chopping block in what then Putin economic adviser Andrei Illarianov dubbed “the scam of the year.”

And Russian President Dmitry Medvedev—the former Gazprom chairman who honed the company’s acquisitive skills—dismissed British Prime Minister Gordon Brown’s attempt to discuss TNK-BP at the recent G-8 Summit on the Japanese island of Hokkaido.

Brown also confronted Medvedev with Moscow’s shuttering of British Council offices in Saint Petersburg and Ekaterinaburg and with its hampering of the investigation into the London radiation poisoning of former KGB agent Alexander Litvinenko.

In the diplomatic equivalent of an obscene gesture toward Brown, Medvedev aide Sergey Prikhodko said that the two leaders had “frank discussions, and they did not avoid any sharp discussions.”

Why the rough retort on behalf of Medvedev at his G-8 debut? Because Moscow knows the west is awakening to the fact that its churlish behavior is not a series of one-off blunders from an inexperienced player on the world stage. Rather, it is systematic contempt for rules at home and abroad from a player steeped in the experience of seven decades of Soviet chicanery.

“Mr. Putin,” writes The Wall Street Journal, “complains of not getting the proper respect from the west. Forcing the president of a major western oil company to literally flee Russia earns respect in no one’s land.”

*David J. Smith is Director, Georgian Security Analysis Center, Tbilisi, and Senior Fellow, Potomac Institute for Policy Studies, Washington. His weekly column will resume on September 1.