Streetwise Professor

July 28, 2008

They Want to ‘Git while the Gittin’s Good

Filed under: Economics,Energy,Politics,Russia — The Professor @ 5:47 am

The battle royale between BP and the AAR Group over BP-TNK is reaching a climax with Robert Dudley’s decision to leave Russia and attempt to run the country from an undisclosed location (shades of Dick Cheney, circa 2001). Like many things that happen in Russia, the events are somewhat inscrutable. This London Times article seems to offer the most sensible interpretation: namely, the Russians want their money out of Russia.

It explains many of the details that have emerged from the murk. For instance, one bone of contention between the parties is allegedly that BP wants to manage the BP-TNK properties for the long term, investing substantial amounts in new technology and using more conservative production techniques, whereas the AAR gang has been looking to maximize output even though this compromises the long term productivity of the company’s wells. Relatedly, BP technical staff has been a particular focus of official harassment. Furthermore, another argument has raged over investment outside of Russia. BP wants to focus on inside Russia, the AAR oligarchs are pressing to invest outside of the country. A last clue is that one proposal floated by the Russian side to end the stalemate–an exchange of TNK shares for BP shares.

All of this is consistent with a desire by the Russian partners to maximize short term cash flow and/or get their money out–and out of the country. If that doesn’t speak volumes about the rule of law and the security of property in Russia, I don’t know what does.

The game being played by the Kremlin/White House (theirs, not ours) is more difficult to fathom. One hypothesis, advanced in Steve LeVine’s excellent blog is that AAR believes/believed that BP is trying to sell them out by doing a deal with Gazprom. I think that most likely that the government isn’t taking one side or the other, but is setting the two against one another like scorpions in a bottle. Once the battle is over, the government/Gazprom/Rosneft or some combination thereof will swoop in to claim the spoils. Or perhaps the relatively standoffish approach of officialdom reflects a stalemate in a battle between contending clans.

One thing for certain is that in the end, BP will emerge bloodied, and perhaps, as LeVine posits, a takeover target. Another is that the end of legal nihilism is far, far into the future.

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