July 1, 2008
Russia behaves badly to foreign investors again
Whatever expectations one has of the Russian government and civil institutions, they always disappoint. The abuse of tax and visa laws to eliminate BP’s hold on its Russian oil joint venture TNK-BP is the latest in a long line of doleful examples.
It has been obvious for some time that the rule of law does not apply in Russia to the international investors and companies which venture into the market in the hope of profiting from its natural resources.
Now comes news that the Moscow authorities, petitioned by BP’s Russian partners, with whom it has fallen out, are squeezing out BP executives by refusing them visas. It calls to mind the way in which Hermitage Capital Management and its founder William Browder have been harassed using visa and tax laws.
I feel a pang about BP because I wrote a column once asking whether it was wise to trust in its Russian joint venture and concluding that it was taking a reasonable chance. With hindsight, even my guarded optimism now looks naive.
It certainly does not seem that the ascension of Dmitry Medvedev to the Russian presidency and Vladimir Putin’s sideways move to become prime minister has improved matters.
Russia has always used as an excuse for its behaviour that the way in which the oligarchs gained control of many of its natural resources was unjust and it was justified in seizing them back. But as time passes, and the authorities show no evidence of becoming less arbitrary, that justification is wearing thin.
The question, of course, is whether economic self-interest will eventually lead to Russia’s government abandoning such legal abuses, for fear of sacrificing foreign investment. It may do, but it seems unlikely to happen as long as the boom in commodities continues.
There is so much wealth tied up in Russian oil and minerals now that the country is financially strong enough to disregard the international outcry at its tactics. It will probably continue to find foreign investors willing to take the risk of having their assets stripped from them if they become inconvenient.
I wish it were otherwise, but pessimism seems the most logical attitude to Russia’s business environment at the moment.
No doubt an articule like this will attrat a lot of like minded support but in a broader view it is worth considering just how savage the western press and foreign policies are towards Russia. They gloat over every failure and allow only a one way stream of information about the country. Russia has oil and talent but the western press are so hostile all they see is the oil.
Posted by: John H | July 1st, 2008 at 7:09 pm | Report this commentIf Mr Gapper is sincerely concerned about “government and civil institutions’ in the world then he should redirect his focus toward the USA where the Bush led Republicans have made a travesty of constitutional rights.
Posted by: Cristobal Senior | July 1st, 2008 at 9:31 pm | Report this commentHe should also come to terms with the fact that the years of rapacious imperial Brit ways are finished once and for all.
Regarding John H/Cristobal’s comments, the Western press have rightly given many leaders a pretty savage time - Bush, Blair, Brown, Berlusconi (excepting of course the media outlets he actually owns).
So too with Russia. Nothing qualitatively different going on, though the intensity of the media comment may be have been greater regarding Russia over recent years. However, that’s not altogether surprising when you consider the way democracy, rule of law etc are being manipulated there. Nor has Russia done anything to alleviate the genuine concerns many have about developments there.
The press’ job is to cover it all - America AND Russia, Italy AND Zimbabwe - rather than just arbitrarily focusing on pet topics.
Posted by: DKM | July 1st, 2008 at 9:52 pm | Report this commentOne suspects that much of the oil and mineral wealth in Russia is under the purview of China - not to mention the lebensraum. How unfortunate that, under the leadership of former communist bullies, Russia is presently unable to see that its true interests lie in working with the West.
Posted by: Derek | July 2nd, 2008 at 12:48 am | Report this commentThis visa story looks like a provocation, but at the moment it’s hard to clearly understand who is behind that. As I rememeber from previous messages TNK-BP’s HR director is a person totally loyal to AAR and Dudley failed to dismiss him. I hardly believe that Moscow city authorities would be brave enough to challenge Medvedev’s proclaimed policy of “non-interference”. So the problem comes whether with intentionally incorrect visa applications or with some top political “siloviki vs. liberals” struggle. Each scenario separately looks as dirty way of doing things.
Anyways, despite all the political dust around my view remains the same. 50%/50% ownership structure is something like a Lisbon treaty story. CEO of such a company may stand only as long as he/she recieves support from both sides. Once one set of shareholders (even being “oligarkhs”) cry foul, a new compromise figure should be elected.
So I would look at the situation not only from political perspective, but from the corporate governance perspective as well.
Posted by: Andrei, Russia | July 2nd, 2008 at 3:55 am | Report this commentI don’t know how much hands-on experience JG has of doing business with the former USSR.
But to me, working for a West German boss who had responsibility before and after Perestroika/Glasnost for all markets east of the BRD, the enormousness of the changeover from communism to post-communism was unbelievable, even in the smallest details.
Pre-1989, Russians had to get permission to make trips to the west and to send letters to the west. University professors benefitted: they were allowed to visit us, to make phone calls to our office, and I used to collect the beautiful stamps on their letters. My boss went to trade fairs in Moscow (and my year of Russian at univ. began to come in useful).
When president Medvedev said some weeks ago that he wanted Germany to help in modernising the Russian economy, he apparently included the areas of health*, the legal system and local authorities. The Russians have the money to spend on their infrastructure and clearly Germany has the best connections in the new Russia.
*Life expectancy has been falling in Russia, but the higher expectancy in some other countries is due to continuous improvements in public health.
Posted by: J.J. | July 2nd, 2008 at 8:26 am | Report this commentIf British (on the same position as Russian) in Russia get paid more - then NO VISA for him TO RUSSIA! I support no visa in this situation
Posted by: Igor | July 2nd, 2008 at 8:42 am | Report this commentVisa restrictions like these are obvious trade barriers and it is nothing new to Russia. With the opportunities in this country foreign companies are standing in line to get into the market and the Russians know it. I have worked in the country now for 10 years and the more things change the more they stay the same. About a month ago ALL work visa applications were stopped for ALL foreigners wanting to enter Russia so BP are not alone, but I have a strong feeling that once this TNK-BP visa story blows visa applications will again be granted.
To the bloggers who write that we should look at ourselves in the west before pointing fingers at Russia must understand that Two Wrongs do Not Make a Right. It is a pretext for explaining away wrongs and will never right anything.
PS All this bad publicity in the Western press about Russia is a trade barrier that foreign companies here enjoy to a large extend by keeping out foreign competitors. The real victims are the Russian consumers.
Posted by: S. Aage | July 2nd, 2008 at 9:41 am | Report this commentIt is understandable that Russia needs to hinder it’s economy from overheating due to excessive foreign investement. The Russian people has suffered for so long that they deserve to maximise from the profits that their country yeilds. Russias political body could be more tactful when dealing with the international community. The recent Estonian incident has shown that the Russian media is more untrustworthy than its western counterparts.
Give Russia time. It took time for Europe to evolve from a savage community into a civilised one.
Posted by: Filip Sundström | July 2nd, 2008 at 11:30 am | Report this commentTotally unsurprising, Russia does what Russia wants regardless of international norms. The bigger and more worrying issue at hand is the one of energy security for Europe. This should be the knife at our back pushing our alternative energy policy, it is a far more pressing issue than global warming. Make no mistake about it Russia would happily cut us off at the knees if it suited her, no matter how much cozying up we have been doing. (Mr G Schroder please stand up). I am pinning my hopes an Cold Fusion so we can tell OPEC and Russia where to stick their black gold (or just plain old Black as it will be know after the advent of cold fusion)
Posted by: Worried in Europe | July 2nd, 2008 at 4:13 pm | Report this commentLet’s not lie to ourselves here.This is NOT a one way street - BUT A TWO WAY STREET!
Iam an American but I believe if some foreign tried to take ownership of an American company (as BP is trying to take ownership of an independent entity -TNK-BP), the government and general public would act in favor of an American company. This has happened lately in regard to the takeover by a Belgium beer company which wanted to take over BUDWEISER as well as with other companies.
I cant understand who in their right mind regardless of whether you have a PHD in economics can convince me that TNK-BP can and will continue to operate when shareholders who hold 50% stake are not happy with the company direction LET ALONE THE COMPANY CEO!!!!!!
I actually think the Russian government for once needs some applause for once for staying out of the boardroom and keeping its hands off the plate of a private company (TNK-BP)- and instead leaving the shareholders to sort things out themselves. I think we have previously been complaining about the government intervening everyday in private business affairs - now it seems people are crying for the government failing to do what they have always said was wrong????!!!!!!
If TNK_BP shareholders fail to sort things out themselves, we all know where this is going to - with Gazprom coming in and essentially kicking BP out by demanding NOT 50% BUT 51% stake in the TNK-BP thereby turning it into a government corporation and diminishing the powers of any BP shareholders.
So let’s not make judgement on the government. We need to blame the TNK-BP shareholders who have failed to sort their mess out.
Posted by: Julius | July 2nd, 2008 at 9:33 pm | Report this commentJulius - Refusing to renew visas an excellent example of the Russian Government keeping out of it. As far as i am am aware the Russian Shareholders are not concerned with the direction of the company, surely they must be aligned BP’s, namely to get as much oil out of the ground as possible for the maximum profit. Your naivety is endearing, there is no such thing as a private company in Russia, Government and Oligarchs are one and the same
Posted by: Worried in Europe | July 3rd, 2008 at 1:57 pm | Report this commentYou can not even post your name? I guess you are actually showing how unsure you are about what you are talking about - so say, “there is no such a thing as private property in Russia”. I bet you havent heard of Western and Asian investor scrambling to get a pie of the pie in Russia evidenced in industrial growth and setups through companies like Toyota, Nissan,BMW, GM etc all opening new assembly lines in Russia. May be you will tell me with your lack of knowledge that they are all government owned! I wouldnt be surprised.
You have proved what a biased opinion you have - saying what you dont even know a thing about. You need alittle enlightenment, my friend.
Posted by: Julius | July 3rd, 2008 at 5:57 pm | Report this commentOh, my god. What do those Cold War era hawks do to the people.
1. “There is no such thing as private company in Russia”
2. “Russian shareholders are not concerned with the direction of the company”.
You’re definitely talking about another country, Worried in Europe. By the way Robert Dudley (TNK-BP’s controversal CEO) received his new visa on July, 2.
Posted by: Andrei, Russia | July 4th, 2008 at 4:32 am | Report this commentAndrei /Julius
Does the name really matter? Do you want to send the boys around to stifle the dissenting view? My point is not that there aren’t any private Russian companies, but they are all to a greater or lesser extent beholden to the state. Gazprom would be the most obvious example of this or am I misunderstanding Mr Medvedev’s role as head of state and vice chairman of Gazprom?
I am well aware of the scramble of investors to invest in Russia, these investors must at the very least be prepared to lose their investment and at worst look forward to some trumped up charges, if they in anyway disagree with the gangsters /politico’s or simply become caught up in a internal power struggle. Mikhail Khordovsky, William Browder, being the most obvious examples.
I didn’t say that Russian shareholders aren’t concerned with the direction of the company they obviously are, but only in so far as they want capital and expertise, as soon as they have these they suddenly become “concerned” with wresting control of the company back by any means possible usually helped by the legal system.
To paraphrase Charles de Gaulle – “Russia has no friends only interests” and should be treated by investors as such.
Posted by: Worried in Europe | July 4th, 2008 at 1:30 pm | Report this comment‘Worried in Europe’, thanks for the response. With the self-correction to your prior commentary and acknowledgement of some facts, I will as such say you have a valid argument(to some extent).
What I dont want you to think is that am supporting the Russian government in anyway - as expressed in my prior message. From my point of view, I dont think this TNK-BP issue has as much to do with the Russian government than it does with the corporate mismanagement as evidenced in the ongoing row among the stakeholders.
As far as your latest comments, I think you are missing the point/facts because its the CEO and BP trying to wrestle TNK-BP out of the hands of the rightful shareholders! The CEO is IMPOSING HIMSELF ON THE COMPANY! That is unheard of - atleast here in the center of the corporate world! The CEO CANT NOT hold a company hostage - he is just an employee and manager of the company on behalf of the stockholders! By doing so, he is only helping the Russian government to find a way of intervening (makes me think he may have been planted) - otherwise, he would have resigned by now.So the trumped up charges you are talking about will definitely pop up - thanks to the CEO working on behalf of the government and Gazprom.
So all in all, I can only thank you for coming my way and embrassing my point of view.
As for Charles de Gaulle’s comments that “Russia has no friends only interests” - Iam sure you are intelligent enough to know that is relative comment.
Posted by: Julius | July 5th, 2008 at 5:15 am | Report this commentI still can not agree at least as an employee of private public Russian company with significant foreign interest and zero government interest and influence. And this is how absolute majority of companies in this country now work.
You say “they are all to a greater or lesser extent beholden to the state”, which is a total misunderstanding of what is happening.
What actually happened for several years is a struggle between the state hawks and several key businessmen (oligarkhs), who lended money to Eltsin’s administration in 1996 for collateral of some key Russian energy and mining assets. As you probably know this debt was never repaid.
If you’re not a part of that non-transparent controversal deal then that is just not your show. That is a show of two groups of people and some neo-cons hawks abroad, who recieve unbelievable pleasure by presenting it as a general Russian corporate governance practice.
Posted by: Andrei, Russia | July 5th, 2008 at 5:45 am | Report this commentThis is not about neo-Soviet ambition, but energy. Both major alternative pipelines (BTC and BTE) to those owned or controlled by Russia from the Caspian Sea or Central Asia pass through Georgia. Coincidentally, BP, the operator of the pipelines shut them down yesterday as a “precaution.”
The Russian campaign should be seen in its wider and long term context. First, as an object lesson to the Ukraine and Belarus. Second, as pause for thought for those thinking about backing the EU/US sponsored Nabucco and Transcaspian pipelines, rather than signing-off on the Russian South Stream and Burgas-Alexandroupolis pipelines. This is all about European dependency on Russian energy going from 40% today, to 70% a decade from now. At that time, Europe will be totally beholden to the Kremlin.
Posted by: John Wood | August 13th, 2008 at 2:56 pm | Report this comment