All happy families are alike, wrote Leo Tolstoy; each unhappy family is unhappy in its own way. When assessing BP’s likely exit from its troubled Russian tie-up TNK-BP and what this says about Russia’s investment climate more broadly, investors should keep Tolstoy’s aphorism in mind.
Seeing BP pull the plug on Russia’s largest foreign investment, after all the bust-ups with its partners, there is a danger investors will conclude this is a sad end to a sorry episode. BP’s shares rose when it announced it was exploring a sale of its 50 per cent stake in the venture.
Investors might even be tempted to see the whole thing as a signal to steer clear of Russia. Either conclusion is wrong.
First, for all the shareholder blow-ups, and the flaws inherent in its 50/50 ownership, TNK-BP has been hugely successful, operationally and financially.
BP has extracted $19bn in dividends – including $3.7bn last year alone, not far short of its own entire dividend payout.
Market declines mean BP may struggle to achieve the $34bn for its stake that it offered to buy out its Russian partners, AAR, for last year. But even a lower-end mooted exit value of $21bn would be three times its $7bn investment in 2003. Could it have earned higher returns anywhere else?
Second, BP is in the oil and gas industry which is subject in Russia – as in many other emerging markets – to special rules and treatment. Investors in, say, retail or consumer goods have had an easier ride, even if Ikea, one of the biggest, has rightly griped about corruption and red tape.
BP also chose, in Mikhail Fridman’s Alfa Group – the first “A” in the AAR consortium – a partner prepared to defend its interests with particular aggression. Norway’s Telenor, one of the few non-oil foreign investors to have had as bumpy a ride in Russia as BP, also partnered with part of Alfa.
While Alfa’s occasionally bare-knuckle tactics at home might not be seen as acceptable outside Russia, they were not necessarily unjustified. The UK High Court last year issued an injunction blocking BP’s attempted $16bn share swap with state-controlled Rosneft, after AAR claimed it breached TNK-BP’s shareholder agreement.
But, as Shamil Yenikeyeff, a Russian oil expert, noted in a paper for the Oxford Institute for Energy Studies, AAR was in some ways an astute choice of partner.
Some of its oligarch members have close ties to president Vladimir Putin and senior Kremlin officials. That helped AAR safeguard its – and BP’s – investment, even as other tycoons such as Mikhail Khodorkovsky came under assault, and the climate shifted in favour of state-controlled groups. TNK-BP’s 50/50 structure stuck out as an anomaly as Russia later limited foreign investors to minority stakes in strategic oil companies.
By stymieing last year’s attempted BP-Rosneft tie up, AAR even proved that Igor Sechin – Russia’s energy “tsar”, Putin confidant and architect of that deal – is not invincible. Few other groups would have dared risk such a confrontation.
Yet even AAR could not entirely hold back the tide in favour of state-controlled oil companies. TNK-BP has been essentially shut out of bidding to develop the most promising offshore resources – now reserved for state-backed players.
So here is the final reason why BP’s sale move should not be seen as negative for Russian investment. It seems to have chosen a divorce because relations with its TNK-BP co-owners have broken down, and because this might help it ally with a new state-controlled partner with access to those resources – as it tried last year.
It may be no coincidence that this is happening just as Mr Sechin has moved to a new hands-on role as chief executive of Rosneft. But BP is not being squeezed out of TNK-BP, or of Russia. This is no Argentina-style nationalisation.
Russia knows that to exploit its hugely challenging Arctic waters successfully, it needs BP-type knowhow.
Assuming BP is not enmeshed in litigation for a long period by AAR – which cannot be guaranteed – a deal with a Russian state player would be more in line with BP’s strategy elsewhere of cosying up to the national oil companies that now control 90 per cent of world oil reserves and three-quarters of production.
Investors might question whether a new tie-up with Rosneft risks swapping the frying pan for the fire. But this is what oil majors do – go into challenging geographical or political environments, taking calculated risks to seek rewards.
With TNK-BP, while BP has made mistakes and suffered some bloody noses, the financial gamble has, broadly, paid off. It has not always been a story of happy families. But it should not be seen as a cautionary tale.
Neil Buckley is the FT’s Eastern Europe Editor
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