The recent deal between Rosneft and BP confirmed a few things that many people were assuming anyway. The first is that it is only possible to do big business in Russia with the assistance of the state. The second is the emergence of a new type of business deal, which we shall call “triumphs of Russian business”. The third is that Russian business “triumphs” only when foreign contractors find themselves in difficulties. And finally, that the state has recognised the failure of its “strategic resource” rhetoric; and once again, "those" foreigners will have access to “our” natural resources.
Last Friday's deal between BP and Rosneft is a recognition of failure — the reality of BP's continuing image problems and Russia's ineffective state monopolies
The deal, signed last Friday by Rosneft president Eduard Khudainatov and BP chief Bob Dudley, is in substance a share exchange. Rosneft will receive 5% of BP’s capital, with BP becoming the owner of 9.5% of Rosneft’s shares. When added to the share blocks that BP bought with the acquisition of Rosneft’s IPO in 2006, the share of the British oil and gas giant in the Russian company will grow to 10.79%. The notional value of the shares being exchanged is around $8 billion.
Additionally, however, the companies also agreed to create a joint enterprise to work on the Arctic shelf. There will be “Arctic Technology Centre”, which will develop a program on the safe development of hydrocarbon resources of the Arctic.
While it is difficult to understand BP’s exact motivation with any precision, we can be fairly certain the British company’s recent and continuing image problems played a key role in the deal. The oil spill in the Gulf of Mexico cost the company billions, and a loss of 40% in the company’s share value. The deal, in fact, only became became possible following such corporate losses. Putin himself made reference to this, when he talked of the company’s “considerable experience in matters of the continental shelf” and later cited the Russian proverb “one beaten man is worth two unbeaten” [in English translation “failure teaches success” - ed].
A mixed response
The BP - Rosneft agreement on the joint development of the Arctic shelf is clearly part of a strategy to turn Rosneft into an international energy holding. This much was confirmed by Deputy Prime Minister and Chairman of the Rosneft Board Igor Sechin in an interview with state-sponsored broadcaster Russia Today.
Not everyone in Russia is happy, however. According to the London Times, the deal means BP are are possibly reneging on an agreement with their existing Russian partners, Alfa-Access-Renova (owned by several leading Russian oligarchs including Viktor Vekselberg, Mikhail Fridman and German Khan). AAR believe that their existing agreement obliges BP to make use of opportunities in Russia exclusively through their common TNK-BP vehicle. Only with the express permission of both parties may the condition be violated. As such, AAR assert they may have the right to veto the deal.
The Times article argued that serious negotiations are now required. This is likely to be an exaggeration: even if there exists a quarrel among TNK-BP shareholders, their grievances should not have serious consequences, since the deal was approved by the Russian authorities.
The reaction from abroad was equally intense. The deal drew anger from both sides of the American political divide. There were calls to start an congressional investigation. One congressman suggested that the company should change its name from “British Petroleum” to “Bolshoi Petroleum”. This did not prevent shareholders greeting the news optimistically (and 39% of BP’s shareholders are American). Following the deal, BP’s shares increased by 2.5%, and Rosneft’s shares by 3.5%.
The deal highlights two clear truths. The first is that Russian state companies like to exploit foreigners’ difficulties. It is not the first time this has happened. The weapons maker EADS was, for example, in great trouble when the Russian state bank VTB seized a 5 % share in it five years ago. Then there was much talk about the “triumph of Russian arms”, with state spokesmen proudly boasting of their plans to increase shareholding in the company. The Europeans shrugged them off, saying they were prepared for cooperation but with no corresponding offer to allow the Russians near the management levers.
The 2006 proposal between steel giants Arcelor and Severstal was done on a clearer market basis (though in Russia politics and business are never entirely separate). This deal would have seen Severstal owner Alexei Mordashov relinquish 89.6% of his shares in Severstal, further shares in Severstal North America and the Italian steelmakers Lucchini, and €1.25 billion cash, all in exchange for 32.2% of the struggling Arcelor. Management liked the Russian proposal, but many minority shareholders did not. In the end, Mittal Steel outbid the Russians, and Mordashov received 140 million in compensation. On Russian television, the incident was portrayed as the work of “perfidious Albion”.
The second thing that emerges from Rosneft-BP deal is the dumping of the grand Russian pre-crisis strategy, which affirmed “the (Arctic) shelf is everything to us”. It was a strategy that encouraged Russian oil and gas companies to secure “Russian” fields away from foreigners. In May 2008, authorities passed a bill that expanded the list of “strategic industries” where foreign investment is expressly limited. The 42 sectors included the nuclear industry, weapons manufacture and sale, cryptography, airline safety, the space industry, fishing and the geological study of minerals. Further amendments detailed exactly which minerals were considered of federal significance: uranium, diamonds, rare-earth metals, nickel, cobalt, beryllium, lithium, any minerals on the state balance sheet, and also extractable reserves of oil over 70 million tons, gas over 50 billion cubic meters, gold over 50 tons and copper over 500,000 tons.
But reality took its bite. Russian companies, it seems, had neither the technology nor motivation to develop the Arctic shelf. It was a story that had oh-so-many parallels with the controversial saga surrounding the Shtokman gas field, where Gazprom was forced bring in partners from France (Total) and Norway (Statoil). The Norwegian partners are already threatening to leave that project, allegedly due the growth of corruption within Gazprom. A Wikileaks cable dated December 2009 documents a conversation between the US ambassador and Helge Lund, executive director of Statoil. “Lund said that he was very concerned about corruption, and that in his opinion that situation was getting worse” the US ambassador wrote. Lund believed that Shtokman was laced with difficulties “because of the undeveloped local infrastructure [..] the requirements of Russian tax legislation, the risk of low prices for natural gas because of the appearance of shale gas, and also political risks in general”.
Russians have returned to working with foreigners developing other shelf projects too, with crisis provided a necessary impulse to for Russian players to finally reject the prevalent quasi-state rhetoric. How long ago now seems May 2008, when prices looked as though they would keep rising forever, and Gazprom boss Alexei Miller predicted a price of around $250 per barrel by the end of 2008. After the crisis hit, of course, the price of oil fell and companies ran out of cash, turning the “strategic” Arctic shelf into a useless technological burden. By mid 2009, natural resources minister Yury Trutnev announced the need to make changes to legislation “directed towards raising the investment attractiveness in the field of mineral management, including for foreign companies”.
Of course, in examining any deal, it should be remembered that sometimes business is just business. And that mergers are always more beneficial than hostile takeovers or unhealthy competition. It is a feature of conversations such as these that default phrases ring out: “Russian defence triumph”, “giving away our resources to the enemy”, “total corruption”, “collapse of industry”. Such talk is often meaningless and essentially little more than an echo of the Cold War.