Streetwise Professor

The BP drama in Russia slouches on.  One interpretation of these events that has been advanced is that this represents something of a step forward for Russia, in that it is respecting the legal rules and the contract between the TNK-BP partners.  Maybe.

Here’s an interpretation that I consider equally likely, and arguably more so: hiding behind the contract was just a convenient way for Putin to exercise his discretion to achieve a desired outcome.  Exactly why he desires this outcome is difficult to divine, but money almost certainly has something to do with it.  That, and maintaining the political equilibrium in the natural state.

BP thought it was playing by Russian rules.  It made a deal with a powerful representative of the state commonly believed to be Putin’s alter ego.  But the real Russian rule is that there are no rules.  Or that the rules change without warning.

Moreover, BP may have overlooked something very important: that it is possible to be too powerful in Russia.  Putin’s essential task is to maintain a balance between rivals; he can’t let anybody get too powerful.  Stalin played the same game, only using more ruthless means.

In brief, Russia is akin to a lobster tank.  Once it looks like one lobster is going to climb out, others pull it back in.  In this instance, Fridman et al grabbed Sechin by the tail.

Indeed, the big problem with the BP deal for Putin may well be that it would have greatly strengthened Sechin if it had gone through.  By allowing it to be torpedoed at the last moment Putin also cut Sechin down to size.  That is, the deal would have made Sechin too powerful had it succeeded, but provided the perfect opportunity to undercut him.  This lends credence to the view that Putin is perfectly fine with Medvedev’s demand that Sechin leave his directorship at Rosneft.

The most recent development is that AAR is planning to sue BP for damages for violating the TNK-BP shareholder agreement.  This seems like a legal stretch: an injunction seems the appropriate remedy for BP’s breach, and it is difficult to see how TNK-BP would be damaged if the deal doesn’t go forward.  Instead ,this lawsuit–along with 2 others apparently in the works–are likely intended to turn up the heat on BP and force a buyout of the AAR partners on favorable terms, or alternatively to force a buy in of TNK-BP into the joint venture with Rosneft.

Prior to his departure (from the front of the scenes, although there are suspicions he is still involved behind them), Sechin growled menacingly that if the BP deal failed, Rosneft would seek damages.   Even if Sechin is not the decider on this, it is likely that whoever is will decide that this is worth pursuing.  It would permit Rosneft to extract some major money from BP in the here and now.  As for the Arctic venture, that was and remains a highly uncertain, long term prospect.  Moreover, there are other companies who could step in for BP–even if they would be unlikely to engage in a share swap.  Given the way that the Russian leadership discounts the future, a trade of some cash today for a pig in the poke tomorrow is a no brainer.

Whether this would be mere opportunism, making the best of an unexpected situation, or whether it was part of the plan all along is impossible to say.  This whole situation is so murky that it is impossible to tell what the exact sequence of events was, and what was the knowledge and intent of the key parties.  I am convinced, however, that (a) Putin was aware of that AAR had grounds to fight, (b) Putin knew AAR would fight if he did not stop it, and likely win, and (c) that Putin could have readily found a way, a carrot and/or a stick, to get AAR to back down if he wanted them to.  That things have developed the way that they have means that he wanted it to work out that way.  Just why is more difficult to know.

Thus, I think that BP’s travails are just beginning.  Even if it tries to walk, it will be tied up in court for years.  Every option they have looks very, very costly.

That’s the risk you take when you invest in Russia.  You think you are playing by the rules, and then find that those rules are no longer operative.  You think you’ve figured out the power relationships, only to find out that they’ve changed–and indeed, your actions might be the impetus for that change.

So, believe if you like that Putin’s apparent deference to a contract represents a move towards the rule of law.  I certainly wouldn’t put a red cent on the line based on that belief.  For remember: the very devil himself can cite scripture for his purpose.