Streetwise Professor

In a stroke of good fortune for BP shareholders, the deal with Rosneft is apparently dead because BP, its TNK-BP AAR “partners”, and Rosneft were unable to come to terms on buying out AAR.   And although reports are somewhat murky (go figure!) apparently price wasn’t the issue.  Trust was.  Between the Russians.

In particular, the AAR Russians wanted the Rosneft Russians to provide legal guarantees that the buyout of AAR from TNK-BP would proceed after TNK-BP agreed to let the BP-Rosneft share swap and Arctic JV proceed.  There is an issue of asynchronous performance here, and AAR evidently doesn’t trust Rosneft to follow through on its part of the deal once AAR gave its approval to the BP-Rosneft tie-up that is contrary to the current TNK-BP shareholder agreement:

“We made some progress but not enough,” a person close to the Russian shareholders said. A key sticking point was AAR’s insistence on guarantees that the buyout would be completed if AAR let BP and Rosneft proceed with their planned swap and arctic partnership first, the people close to the talks said. They said Rosneft was uncomfortable with that demand.

This is especially amusing in light of the way that Putin’s and the government’s (which amounts to the same thing) failure to force AAR to concede its rights is being spun:

One person close to the process says the Russian shareholders’ ability to defend their position is not to do with Mr Sechin’s waning power, but is connected to a concerted new drive by the Russian president and the government to improve the investment climate.

“The president and the government demonstrated that Russia is a place where rule of law and the sanctity of contracts is respected by not interfering, no matter how high or powerful a politician is steering the deal, and by saying that the parties should resolve their differences in London’s High Court.”

I had to clean off my computer screen and keyboard after reading that bit. (Note to self: never take a gulp of coffee when reading something where the subject of Russia’s adherence to “rule of law and sanctity of contracts” might be mentioned.)

First, “the president” doesn’t really have much to do with it, really.  If you’ve been paying the least bit of attention in recent weeks, you will have noted a dramatic ramping up of efforts to make Medvedev look like a total chump.  Not that those efforts were ever absent, or that it’s all that difficult to do: Just that the efforts have been put into overdrive recently: the “Popular Front” effort is just the most obvious manifestation of that, and the release of the Medvedev dance video the most entertaining and embarrassing.  Really, his theme song should be Otis Redding’s Mr. Pitiful.

Meaning that if Putin really felt that this was an issue on which Medvedev was trying to put is stamp, and was using to appear presidential and to establish his credentials as an independent leader, it would have been exactly the issue on which Putin would have intervened as obnoxiously as possible.  No, if things are happening this way, it is because Putin wants it to happen this way, and that if anything Medvedev’s preferences would cut the other way.

That’s why I think this is a more reasonable interpretation:

But other observers say the collapse of the talks are more an indication of the power of the AAR group of shareholders, led by Mikhail Fridman, in Russia’s political hierarchy, while once again casting foreign investors into uncertainty as to whether investment security lies with partnering with the state.

Which mainly leaves the question of the source of the power of Fridman et al, or what deal they’ve made with Putin.

Second, evidently even AAR doesn’t believe that this is a harbinger of the rule of law.  If it did, why wouldn’t it trust Rosneft to adhere to an agreement?

Third, that whole improving the investment climate thing isn’t working out so well, is it?  Witness the continued capital flight.  Note especially that Russians are at the head of the pack when it comes to getting their money out of the country: there’s that Russians-not-trusting-Russians thing again.  Witness too the spate of canceled Russian IPOs due to lack of demand: there are six including the five mentioned in this article plus ChelPipe.  All this in the face of a sharply higher oil price, which in 2006-2008 led to boom times in Russia.  Not now: economic growth has actually slowed to an anemic 4.1 percent.  (Anemic by comparison to what would be expected in the aftermath of a major decline in the economy in 2008-2009, and in comparison to the growth rates observed the last time oil prices spiked.)

Fourth, even if the hands-off approach to AAR’s assertion of its contractual rights is indeed an attempt to convince the world that Russia is endeavoring to adhere to the rule of law, in fact it just adds to the unpredictability of the place.  BP thought it knew how the game is played.  It didn’t.  It thought a roof was necessary and sufficient, and that Sechin could be its roof.  Wrong.  So anybody watching has to ask: Is this a one off?  Is it just the result of some unknown deal between Fridman et al and Putin?  How is this game played?

As long as the system remains institutionally undeveloped and intensely personalized, foreign investors will tread with trepidation.  There has to be some certainty that commitments made by the state are credible: AAR’s reluctance to trust Rosneft makes it clear that not even powerful Russians believe that they are so.

Fifth, if you follow the news, you’ll see many more discordant notes that completely contradict the meme of Russia’s newfound commitment to the rule of law.  For instance, the prosecution of Alexei Navalny or the continued efforts to prosecute William Browder–efforts spearheaded by the very tax cheats who robbed his company and effectively murdered his employee who attempted to fight the robbery, and who the Russian government is incapable of or more likely is completely uninterested in prosecuting.

Rosneft is now considering approaching another international oil company, such as Shell or ExxonMobil, to partner with in Arctic exploration.  The whole BP fiasco is hardly calculated to make them jump at the chance.  Again, who even knows what the rules are?  What’s more, post-Mocando, BP was desperate–Shell and XOM aren’t.  BP was a fool that rushed in where angels fear to tread, and it would take an even greater fool to follow in its footsteps.  Rex Tillerson is not a fool.  The Chinese have also been mooted as potential partners, but (a) they don’t have the Arctic expertise needed, and (b) if you haven’t noticed, Rosneft (with Transneft acting as the stalking horse) and China are already at loggerheads over a relatively simple pipeline/oil sale deal.

No, it is is becoming increasingly clear that Putin intends to dominate Russian politics and government for the foreseeable future (even if he can’t start a new Lada!), and people are drawing the appropriate implications from that.  The hamster wheel from hell will keep spinning.  Putin’s Purgatory will continue, and indeed will become even more stifling and static.  It is conventional wisdom that Russians pine for stability.  Be careful what you pine for.