A New Start for TNK-BP
At last, a piece of good news out of Russia. On Sept. 4 the shareholders of Anglo-Russian oil venture TNK-BP (TNBPI.RTS) announced they had struck a deal to settle their long-running dispute. In a memorandum of understanding signed in Moscow, BP (BP) and its Russian partner, Alfa Access Renova, have effectively agreed to bury the hatchet, ending months of acrimonious conflict.
Under the terms of the deal, Robert Dudley, TNK-BP's current chief executive, will step down before the end of the year. He will be replaced by an independent CEO, to be nominated by BP but requiring the unanimous approval of the TNK-BP board. Two other independent directors also will join the TNK-BP board. The agreement also includes an option to sell up to 20% of the company (through a subsidiary) on an international stock exchange.
A Russian Victory?
On the face of it, the deal represents a victory for TNK-BP's Russian shareholders, Mikhail Fridman, Viktor Vekselberg, and Leonid Blavatnik. For months they have been pressing for Dudley's resignation, accusing him of managing the company in the interests of BP. Alfa Access Renova (AAR) argued that under Dudley, TNK-BP was ignoring attractive energy projects outside Russia, employing too many expensive expatriate employees seconded from BP, and providing inadequate returns to shareholders.
Those accusations drew angry responses from BP, which in turn accused the Russian partners of trying to bleed cash out of the company through high dividend payments, at the expense of capital expenditure needed for future growth. BP argued that attempts to change the company's internal governance structures in effect represented a hostile corporate takeover (BusinessWeek, 7/31/08).
Now, though, BP appears to have softened its position, conceding that there was some justice to the Russian shareholders' demands for a rebalancing of power within the company. At any rate, both parties have enthusiastically welcomed the deal, saying that the new structure safeguards the interests of both parties. "This is a victory for TNK-BP, for BP, for AAR, and for minority shareholders. The best way to look at it is as a sensible compromise," says Stan Polovets, the CEO of Alfa Access Renova and a member of the TNK-BP board.
And while BP has made concessions, the deal appears to have scotched some of the negative rumors that have been flying around the company in recent months. Many analysts had assumed that the conflict at TNK-BP would end with some form of renationalization, with one of the Russian state energy companies, Gazprom (GAZP.RTS) or Rosneft (ROSN.RTS), acquiring a controlling stake in the company.
Now there no longer seems much danger that BP will be forced to sell its investment. The British oil giant is once again talking up the attractiveness of Russia as an investment destination, and playing down its recent difficulties. "We don't have any regrets whatsoever about our Russian investment," says BP spokesman Toby Odone. He points out that BP, which put $8.5 billion into TNK-BP five years ago, has already received $10 billion in dividends from the company.
The resolution of the long-running spat is certainly an encouraging message for other foreign investors, who have been closely following the situation at TNK-BP as a bellwether of Russia's overall investment climate. Over recent months, Russia's image among investors has taken one knock after another (BusinessWeek.com, 8/27/08).
Concerns About State Pressure
But though welcome, the deal certainly doesn't address all of the concerns raised by the dispute. As it was raging, BP and the expat staff at TNK-BP faced pressure from numerous state investigations. This began with accusations of spying against a TNK-BP manager, as a result of which BP's Moscow offices were raided by police (BusinessWeek.com, 3/20/08). The drama reached a crescendo this summer with the expulsion of Dudley (BusinessWeek.com, 7/24/08) from the country for two years, allegedly for violations of labor legislation.
Although BP may now well find that the administrative pressure eases, this will only add to the suspicion that its hassles were indeed linked to the commercial dispute with AAR. As such, it implies that other foreign investors who also fall out with local partners could potentially encounter similar difficulties in the future.
Indeed, the peace agreement at TNK-BP is in many ways reminiscent of the agreement that paved the way for TNK-BP's creation in the first place. Back in 1999, BP was involved in a public and damaging dispute with the same Russian tycoons over the fate of BP's investment in Siberian oil company Sidanco. After months of threats and name-calling, the two parties not only settled the dispute but also agreed to form a wider partnership that culminated in the creation of TNK-BP.
Such flexibility shows that hardened investors in Russia know how to roll with the punches. But after two highly public bust-ups, cynics will inevitably wonder if the latest agreement may one day prove to be as brittle as the previous one.