[R-G] BP Makes Deep Concessions in Agreement with Russian Partner

[Yoshie Furuhashi]

<http://www.nytimes.com/2008/09/05/business/worldbusiness/05venture.html>
September 5, 2008
BP Makes Deep Concessions in Agreement With Russian Partner
By ANDREW E. KRAMER

MOSCOW — In a deal that will allow BP to keep a crucial asset, but at
a cost of ceding some control, the company came to an agreement with
its Russian partners Thursday over its joint oil venture here, ending
months of acrimony and threats.

In the end, BP agreed to dismiss the American chief executive it had
appointed to head the joint venture and give some board seats to its
Russian partners. In exchange, BP will retain its stake in the joint
venture, TNK-BP, and with it, access to the large oil fields of
Siberia.

Although BP ceded to every demand from its partners, analysts said the
outcome could have been worse for the company. Indeed, for months it
looked as if BP would lose all or part of its Russian assets in a
forced sale to a state company. Now that prospect looks less likely.

But the relief is relative. "Just like when somebody comes and puts a
gun to your back and says, 'Your wallet or your life,' and you are
glad you got out with your life," Caius Rapanu, chief analyst at Kit
Finance in Moscow said in a telephone interview.

Both the Russian oil giant Yukos and Shell's Sakhalin Island
development were part of forced sales to state companies.

BP's stock climbed more than 3 percent on news of the compromise.

Though BP was compelled to make concessions, senior Russian officials
were quick to cast the deal as a positive signal to Western investors
in the wake of the war in Georgia, in a move meant to counter a slide
in the Russian stock market and in investor confidence.

But the resolution of the conflict — for now at least — also
underlines Russia's significant sway over Western interests, 17 years
after the collapse of the Soviet Union and its joining the world
economy.

Like China, another country that sometimes falls from favor
politically, trade has made it integral to the profits of many
American and European companies, even outside oil and gas.

Boeing and Airbus, for example, rely on Russia for more than 50
percent of the titanium in their airplanes, including such critical
parts as the landing gear on the new 787 Dreamliner, scheduled to make
its maiden flights this fall.

"Russia wants to have an open economy, believe it or not," Roland
Nash, head of research at Renaissance Capital, said. "Russia really
wants to have foreign investment."

Since the war in Georgia, though, relations with the West have grown
increasingly contentious. The first warnings of a possible trade war
came soon after the guns went quiet.

Russia bowed out of negotiations to join the World Trade Organization
and will remain the world's largest economy that is not part of the
group. Frozen chicken thighs, a major American export to Russia,
quickly rose to the attention of Prime Minister Vladimir V. Putin, who
said suppliers including Tyson Chicken of Arkansas would be banned,
ostensibly on health grounds.

The Bush administration signaled it would halt work on a deal to allow
Russia to export nuclear reactor fuel to the United States.

Yet current customers of Russian nuclear reactor fuel, including
Switzerland, France and Germany, did not raise the prospect of halting
this business. Russia's Tvel company supplies 17 percent of the
world's low-enriched uranium fuel, mostly to Eastern Europe, China and
India.

Thanks to globalization, Avisma, a formerly closed military plant in
the Ural Mountains, now supplies titanium to both Boeing and Airbus,
and is a major supplier to the jet engine makers Pratt & Whitney,
General Electric and Rolls-Royce.

"Severing the business would be catastrophic for either side," Marina
V. Alekseyenkova, an industrial analyst at Renaissance Capital in
Moscow, said. "There is mutual dependence."

The European Union, which has a generally softer line on Russia than
the United States does, accounts for 50 percent of Russia's trade,
principally gas and oil; the United States accounts for 5 percent.

But Russia's vulnerabilities are longer term. The country is pursing
an economic diversification plan called 2020, hoping to escape the
boom and bust commodity cycles that plagued the Soviet Union and
Russia for decades. To do so, its businesses must both globalize and
attract foreign investment and expertise into Russia. Energy revenue
now accounts for 70 percent of exports and 60 percent of the budget.

The oil wealth, however, has made Russia a major buyer of dollar bonds
for its Central Bank and sovereign wealth funds, including bonds of
mortgage backed securities. The country has the largest reserves after
China and Japan, and dumping these bonds could weaken an already
troubled American banking system.

"I don't think Russia would suffer much," Ivan Tchakarov, vice
president for emerging market research at Lehman Brothers, said in a
telephone interview of the outcome of any trade war after the real
war. "The West would suffer more."

Under the BP deal, the American chief executive, Robert Dudley, will
resign before the end of the year. He will be replaced by a director
nominated by BP and approved by the board under a memorandum of
understanding BP signed with the consortium of Russian billionaires
that owns 50 percent of the joint venture, known as TNK-BP.

In addition, there will be three independent seats on the board,
though how they will be appointed is unclear. BP and the Russians
partners will each appoint four other representatives.

The value to BP of retaining the licenses held by the joint venture
could hardly be overestimated at a time when oil companies are
struggling to find new reserves. TNK-BP is Russia's third-largest oil
producer and accounts for about a quarter of BP's worldwide oil
output. It is also one of Russia's most high-profile foreign
investments.

Russian authorities said flatly the deal should signal to investors
that Russia welcomes their business.

"The participants in the talks arrived at an agreement on the level of
shareholders, without the involvement of third parties, such as the
government," deputy prime minister Igor I. Sechin said in a statement
released by the Russian partners. "This is the right signal to the
whole market."

Mr. Sechin, when he was a member of Mr. Putin's presidential
administration, was seen as instrumental in the dismantling of Yukos.

To be sure, businesses are still on edge. The RTS stock market dropped
to a two-year low on Thursday. And the government's bellicose tone is
spooking investors, at a time when dropping oil prices are already
making Russia a less attractive investment case.

"They've thrown the rule book out the window," said one banker, who
did not want to be quoted criticizing the government. "Now they say,
'If you don't like it, what are you going to do about it?' "

Many big investors were skeptical that this dispute was really over.

"It's a neat compromise, but the proof of the pudding will be in the
eating," said Alan Beaney, a senior fund manager at Principal
Investment Management in Sevenoaks, England, said of the BP
settlement.

"Whether the new C.E.O. will satisfy both sides is a big question," he
added. "In essence it's a good company, but do you want to be caught
in between those two sides? I don't think we've seen the end of it
yet."