COMMENT: TNK-BP dispute gives Medvedev chance to assert power

By bne IntelliNews June 9, 2008

Lev Fach in St Petersburg -

Between his call in Berlin for new relations with Western Europe and his blunt critique in Petersburg of the US' role in the global financial crisis, Dmitry Medvedev's real thrust - to strengthen the rule of law in Russia - is already facing a test. And it is one that could define how investors see the first year of his presidency. Whatever Medvedev's rhetoric of the past week, it is an oligarch-led squabble over TNK-BP that could sandbag claims that Russia is becoming a safer place to invest.

Forget the barbs in his Petersburg speech on Saturday, June 7 aimed at the US and its "economic egotism" and "aggressive financial policies" that have left most of the world poorer. They were part two of a broader theme that began more softly in Berlin, where Medvedev sought to build on a "common heritage" to suggest that Russia's place is in "Europe civilisation." US pre-eminence in a uni-polar world remains the Kremlin's bugbear - for Western Europe, Medvedev is bearing olive branches.

But Medvedev knows that an end to Russia's "legal nihilism," as he terms it, is just as important for the country - and arguably more difficult than building bridges (and pipelines) to Europe. For average Russians, an end to endemic corruption in everyday life would transform Medvedev's reputation. Putin didn't manage it, despite similar rhetoric, so the attitude on the street about Medvedev's campaign is "wait and see," as one lawyer told bne. Take him at his word, though, and the domestic priority is clear: "It's the law, stupid." Investors agree, which is why TNK-BP will be a test case for the Kremlin's power.

Oil on troubled waters

In January, a clause preventing the Russian investors in TNK - Len Blavatnik's Access, Viktor Vekselberg's Renovo and Mikhail Fridman's Alfa, which forms the AAR consortium - from selling their stake in the company expired, effectively putting their 50% on the block. Gazprom early on declared its intention to buy the stake, when Alexander Medvedev, deputy chairman of the board of executive directors, told bne in November that the assets "would fit well" with those of the gas giant - though reports in St Petersburg on Sunday, June 8 said Gazprom would keep out of the dispute. Rosneft also wants to buy the stake.

But now TNK-BP is tearing itself apart in a shareholder battle. BP is understood to favour a deal with Gazprom. The two companies have already agreed a wide ranging, though as yet undefined, agreement as part of the sale of TNK-BP's stake in the Kovykta gasfield to Gazprom last year. That deal hasn't been completed, however, in part because of the cloudy future of TNK-BP. The motives of the AAR shareholders are less clear, with each having put different valuations on their stake, ranging from $15bn to $30bn. Troika-Dialog values the stake at around $20bn. One theory is that Fridman may be making a play to gain control of the company himself, though it is more likely to be a price-raising bluff.

And now the Russian shareholders have revealed some of their hand. Under the pretext that BP treats TNK-BP as a subsidiary and not a 50/50 joint venture, they have demanded the removal of the partnership's chief executive, Robert Dudley. BP has so far refused, but after the authorities raided the company's offices in March, the pressure has increased again in the last few weeks: the interior ministry has called Dudley in for questioning over alleged tax and labour law problems. And TNK-BP's foreign executives now face the threat of their visas expiring - sabotage by the Russian shareholders, claim some reports.

In St Petersburg on Saturday, June 7, BP boss Tony Hayward said he expected the "well-publicized" dispute to be resolved soon. He was understood to have met with Fridman during his visit to the city's investment forum. But the dispute is still rattling BP and other investors.

In a speech at the St Petersburg economic forum, Hayward called on Russia to encourage spending, respect property rights and apply the rule of law. Other energy executives echoed the plea. But if the actions of the interior ministry in its investigation of TNK-BP suggest a repeat of the political campaign in 2006 that saw Shell lose control of the Sakhalin-2 gas project, Medvedev's credibility will take a hit.

There are solutions in the air. Some of the forum gossip suggests that Dudley could be sacrificed. BP can afford to lose him, but not its stake in TNK-BP. The venture accounts for 24% of the UK major's global production and almost 20% of its reserves - and remains the only real growth opportunity in both categories, which remain the most important data for an oil company's valuation. Hayward's entire strategy in Russia - from acquiescent speechifying to Kremlin cheerleading - has been designed around keeping BP's position in the country intact.

But the real solution rests with the Kremlin, which is why TNK-BP has become a test case for Medvedev's presidency. Confusion about which of the two energy champions - Rosneft or Gazprom - will buy into the oil firm could be ended at a stroke by the president. If he can't do that, it suggests that the oil and gas factions beneath him remain ungovernable. On June 8, reports suggested that the Kremlin now favoured letting the shareholders "sort it out themselves" and that a Gazprom bid wasn't in the offing. That's the kind of signal that investors might have welcomed in some cases, but will worry BP in this one.

Meanwhile, any suspicions that the authorities are being used to execute the aims of oligarchs within TNK-BP offers an example of the very legal chaos that Medvedev has promised to end. That gives him an opportunity to exercise his power in support of the primacy of the law - and reassure the kind of investors Russia will need if it's to boost its flat-lining oil production. Either Medvedev has the power to do so, or he doesn't.

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