beyondbrics

BP shareholders breathed a sigh of relief on Tuesday on the collapse of the Rosneft deal talks, with the stock climbing over 1 per cent.

And quite right too. In its original form, the deal with the Russian state’s oil champion was a high-risk venture hard to sell to shareholders. But not impossible, given the potential rewards in developing the Russian Arctic.

The final version, involving a costly and awkward compromise with BP’s existing Russian partners, was fatally flawed. But BP must not give up on the Arctic. It should try again  – perhaps after Russia’s 2012 presidential election.

A lot of the recent public discussion of the deal has concentrated on whether BP could manage to get around the objections of its oligarch partners in its TNK-BP joint venture by buying them out.  In the end, the attempt failed. Even though BP/ Rosneft and the oligarchs were nearing agreement on a price of arounf $32bn for the oligarchs’ 50 per cent  stake, they could not settled other terms, such as the oligarchs’ demands for a legally-binding Rosneft guarantee on the deal.

But money and the contract technicalities were not – and are not – the only issues.  The politics really matters.  BP’s campaign ran into trouble when it emerged that the deal’s most prominent political backer – deputy prime minister and Rosneft chairman Igor Sechin – had to stand down from the company on president Dmitry Medvedev’s orders. Medvedev was publicly aiming at all ministers holding state company jobs, but it was clear to anybody following Moscow politics that Sechin was the main target.

Next,  the TNK-BP partners, headed by Mikhail Fridman, forced themselves centre stage. Arguing that their interests would be undermined if BP switched from TNK-BP to Rosneft as its principal Russian partner, they won arbitration court rulings blocking the BP-Rosneft deal.

BP admitted defeat and, together with Rosneft, tried to buy out Fridman and co. Ostensibly they failed because they could not agree financial and legal terms. But is that all there is to it? What about the politics?

The deal has developed in the context of mounting electoral campaigns by both Medvedev and prime minister Vladimir Putin.  Medvedev wants to stay in the Kremlin, as does Mrs Medvedev. Putin has not announced his intentions – but his recent public appearances look very much like campaigning.

Putin remains the most powerful man in Russia and he will decide who runs. But he doesn’t have an entirely free hand – he must balance his own ambitions, the competing claims of senior allies (including Sechin) and their followers,  Russia’s state interests and – to an extent – the position of the great Russian public. Whoever is the official candidate, the election will be managed to secure for him a thumping popular majority. But the elite wants it managed well – to give the winner the appearance of a genuine popular mandate.

So, public concerns are taken into account – not least the serious popular disgust at corruption and at Russia’s gross financial inequalities. The two are blurred given that those close to power have in the past 20 years have often become very rich.

Russians are particularly angry that a small group of people – oligarchs – have become billionaires by securing control of the country’s natural resources, mostly through cut-price privatisations in the 1990s.

In this context, the question of a possible buy out by BP/Rosneft of the TNK-BP oligarchs becomes very sensitive. Yes, they are rich already. But if they receive cash and BP stock (as was proposed) those riches are suddenly crystallised into numbers that everybody can read in a newspaper or internet headline. And, with Rosneft involved, it looks like the state – headed de facto by Putin – is backing the deal.

It’s easy to see how all this could provide ammunition to opposition parties, including the liberal groups such as Solidarity headed by former deputy prime minister Boris Nemtsov, right-wing nationalist organisations and the not-dead-yet Communist Party.

None of these could conceivably mount a serious challenge to the official presidential candidate. But the ruling elite won’t want to be on the defensive over payouts to oligarchs.

Putin in particular could be exposed with his close links to Sechin and therefore Rosneft. Medvedev, by removing Sechin, has publicly distanced himself from the deal. Putin will not want to be portrayed as the deal’s supporter if it is linked in the public mind to oligarchs profiting from the nation’s natural resources.

But, when all is said and done, Russia needs an international oil group and its technical skills to develop the Arctic. Rosneft hinted on Tuesday that it was now talking to Exxon, Shell, Chevron and Chinese groups.

But BP could still be in with a chance. A successful presidential election (from the ruling elite’s view point) could reduce the political temperature and create better conditions for a deal with BP. After all no foreign group knows Russia as well as BP – or has made such a success of its investments, despite all the manifest difficulties.

Related reading
In depth: Oil
BP-Rosneft: battle of the billions, beyondbrics
Editorial Comment: Oligarchs call BP’s bluff,FT
Dudley faces backlash over Russia, FT