Punish who?

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Not All Russian Billionaires Are Putin Cronies

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Perhaps it should come as no surprise that a Russian billionaire seeking to invest capital beyond President Vladimir Putin's reach and against his public advice has run into trouble. Less understandable is that the problems are being created by the British government, not Putin.

The U.K. is trying to block Mikhail Fridman's acquisition of Dea, the oil and gas subsidiary of German utility RWE, through his Luxembourg vehicle LetterOne. Although Germany has approved the acquisition, Dea extracts oil and gas from fields in British-controlled areas of the North Sea. U.K. energy minister Ed Davey has "raised concerns with the respective companies about the effect that possible future sanctions imposed on LetterOne may have on the continued operation of these twelve fields and the serious health and safety and environmental risks that may result."

In other words, Davey doesn't like the deal because of possible future sanctions against Fridman.

It's hard to imagine what kind of argument Davey could make about this in a court of law (Fridman is litigious). The bigger problem is that the U.K. government is being patently unfair and shooting itself in the foot to do so.

The ideology behind the current Ukraine-related sanctions imposed on Russian individuals and entities by the U.S. and the European Union is that they impose a cost on Putin's regime for continuing to prey on a country that resists his meddling. Within this logic, it makes sense to impose restrictions on companies that belong to Putin's close friends and the Russian state. Sanctioning LetterOne would not impose any cost on the Kremlin.

Fridman, who was born in Ukraine and lavishly funds Jewish causes there, has a remarkable talent for survival. He started out in business in the late 1980s, when Soviet liberalization allowed him to open a window-washing firm. Under President Boris Yeltsin, Fridman built Russia's biggest private bank, Alfa Bank. Unlike any of the competing financial institutions set up by his fellow oligarchs, Alfa is still around, with a big, sophisticated retail operation and $40 billion in assets. 

Fridman watched Putin's cronies get rich on government contracts and giant state corporations rise to dominate previously fragmented markets, and he kept a respectful distance. His business empire, however, was too big for him to avoid a clash with the new order.

Fridman was a partner in TNK BP, a 50-50 joint venture between a consortium of Russian investors and BP, the U.K.-based oil company. The union was blessed by former U.K. Prime Minister Tony Blair and Putin in 2003. In his book, "Beyond Business," then-chief executive of BP Lord John Browne wrote:

I tried to push for 51 per cent of TNK but Putin and Fridman both told me we could not have it. I knew if we had 49 per cent we would have no power whatsoever. So in the end the only option was to go for a 50:50 deal. Putin said: "It's up to you. An equal split never works." Over the years he reminded me of this statement again and again.

He had reason to do so: The joint venture was constantly at risk of falling apart because of squabbling between the British and Russian shareholders, even as TNK BP expanded and made billions in profit. 

Then Igor Sechin, Putin's close friend, took an interest in the unstable situation and arranged to buy out BP's share for the state company Rosneft, which Sechin runs. "We never wanted to stay one-on-one with Sechin in TNK BP," a Russian consortium member told the Russian edition of Forbes at the time. Fridman and partners agreed to sell their share to Rosneft, too.

This wasn't something Fridman wanted to do, but he ended up with $14 billion in proceeds from the mammoth $55 billion deal -- and ultimately emerged better from it than BP. The U.K. company ended up with 20 percent of Rosneft, a shrinking asset now that the Russian stock market is toxic to most serious investors. Fridman, however, ignored government calls to take some of his payout in Rosneft shares. That made it necessary for the state behemoth to borrow heavily to pay him.

He and his partners received the money offshore, which worried Putin. The Russian president told a press conference in December, 2012:

I would very much like them to invest these funds or a large part of them in the Russian economy. But we must create good conditions for that. On the whole, I know my colleagues from the government and some of our companies are in touch with the participants in that deal -- I hope they decide in favor of investing in the Russian economy.

This polite expression of Putin's "hope" wasn't easily ignored. Still, Fridman was stubborn. He set up LetterOne and started looking for non-Russian assets to set up a new energy company. RWE, overburdened with debt and eager to get out of traditional power generation, which has been making less and less money, couldn't resist Fridman's offer: He outbid the nearest competitor by almost 50 percent, agreeing to assume a 600 million euro chunk of RWE's debt. Germany approved the Dea deal last year, just a month after Russian-backed separatists shot down a passenger airliner over eastern Ukraine. German officials were mature enough to understand that Fridman was the opposite of a Putin proxy and that RWE could not have done better than to sell Dea to him.

Knowing this backstory, it's hard to understand what Davey's problem could be. Even Lord Browne, who has had a stormy relationship with Fridman, is backing him now: He has accepted an appointment as LetterOne's executive chairman. Browne, of all people, knows Fridman is a gifted entrepreneur and that his company is not a Kremlin tentacle.

It's also hard to see what the U.K. could gain by discriminating against Fridman solely on the basis of his Russian passport. Other companies, including BP, are divesting their North Sea assets. Would the U.K. prefer Fridman to pick up some of that slack or to invest his cash in Russia, as Putin has asked, thereby aiding a regime the West wants to bleed economically through sanctions? Blocking Fridman's investment can only undermine the sanctions strategy, which makes no sense.

The U.K. government has enough experience with wealthy Russians, many of whom live and do business in London, to understand they are not all pillars of the Putin regime. It should leave Fridman alone: He's investing in Western Europe because he sees the same Russian risks that Western nations have seen since last year.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Marc Champion at mchampion7@bloomberg.net