Last year, the arrogance of British Petroleum took the form of a devastating and preventable oil spill in the Gulf of Mexico. This year, it is manifest by BP doubling down on its Russian escapade.
BP’s new CEO, Robert Dudley – an American, no less – seemed to believe that his own extensive trial-by-fire Russia experience made him the right foreigner to go toe-to-toe with the Russians at their own game. A few months ago, BP signed an $8 billion stock-swap agreement with Russia’s government-owned oil giant Rosneft. An arbitration panel has now ruled that the swap can’t go through because BP has prior commitments to its local partners, TNK-BP.
When BP originally invested with TNK-BP, the idea was to develop oil fields and market position using local partners who knew the right people and Russian business culture. It’s an open secret that most Russian billionaires made their fortunes by being brilliant and by having the right connections high up in the Russian government. They carved up state assets like oil, minerals and infrastructure, at bargain prices, and otherwise low-income bureaucrats got upgraded to trust fund babies and members of the board. By American standards, that’s either a kickback or a "conflict of interest", or both.
The unwritten understanding between Russia’s oligarchs and the Kremlin are that privatized enterprises will serve the interests of the state, and that the state and its officials will profit. TNK-BP has leveraged its local influence to win earlier judgments in Russian courts and gain control over what was supposed to be an equal partnership with the UK-based parent company. And if BP was looking to recoup its oil-spill losses by gobbling up Russian opportunities, TNK-BP has been using BP's post-spill weakness to start moving in on BP's own core holdings. What's Russian for "chess"?
Russia’s intimate and implicit dynamic between state and business pre-dated the Communists and it has survived them. It is closed to outsiders, and especially to Westerners. The most riskiest business decisions are made by Westerners who think they have what it takes to win in Russia on their own terms. The trick to engaging or investing in Russia is to realize that Russians will be calling the shots and that – one way or another – they will get the better end of the deal.
BP’s leadership was so invested in the Russia option that it thought it could go around TNK and cut its own deal with the Kremlin. For the Kremlin, it was a win-win – if the BP deal went through, the Kremlin would get its cut; if TNK-BP gets to keep its role as BP’s Russian agent, the Kremlin makes money on the back end (see above). When Russian Prime Minister muttered his doubts as to whether TNK-BP would allow the swap deal to go through, he was both serious and unconcerned, because the house always wins.
BP’s new CEO, Robert Dudley – an American, no less – seemed to believe that his own extensive trial-by-fire Russia experience made him the right foreigner to go toe-to-toe with the Russians at their own game. A few months ago, BP signed an $8 billion stock-swap agreement with Russia’s government-owned oil giant Rosneft. An arbitration panel has now ruled that the swap can’t go through because BP has prior commitments to its local partners, TNK-BP.
When BP originally invested with TNK-BP, the idea was to develop oil fields and market position using local partners who knew the right people and Russian business culture. It’s an open secret that most Russian billionaires made their fortunes by being brilliant and by having the right connections high up in the Russian government. They carved up state assets like oil, minerals and infrastructure, at bargain prices, and otherwise low-income bureaucrats got upgraded to trust fund babies and members of the board. By American standards, that’s either a kickback or a "conflict of interest", or both.
The unwritten understanding between Russia’s oligarchs and the Kremlin are that privatized enterprises will serve the interests of the state, and that the state and its officials will profit. TNK-BP has leveraged its local influence to win earlier judgments in Russian courts and gain control over what was supposed to be an equal partnership with the UK-based parent company. And if BP was looking to recoup its oil-spill losses by gobbling up Russian opportunities, TNK-BP has been using BP's post-spill weakness to start moving in on BP's own core holdings. What's Russian for "chess"?
Russia’s intimate and implicit dynamic between state and business pre-dated the Communists and it has survived them. It is closed to outsiders, and especially to Westerners. The most riskiest business decisions are made by Westerners who think they have what it takes to win in Russia on their own terms. The trick to engaging or investing in Russia is to realize that Russians will be calling the shots and that – one way or another – they will get the better end of the deal.
BP’s leadership was so invested in the Russia option that it thought it could go around TNK and cut its own deal with the Kremlin. For the Kremlin, it was a win-win – if the BP deal went through, the Kremlin would get its cut; if TNK-BP gets to keep its role as BP’s Russian agent, the Kremlin makes money on the back end (see above). When Russian Prime Minister muttered his doubts as to whether TNK-BP would allow the swap deal to go through, he was both serious and unconcerned, because the house always wins.
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