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Due West: The rules of the oil game in Russia

© Photo : KommersantKonstantin von Eggert
Konstantin von Eggert - Sputnik International
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The foreign business community in Moscow is very agitated. Quick on the heels of ExxonMobil’s unprecedented deal with Rosneft comes the Russian investigators’ raid on the offices of BP.

The foreign business community in Moscow is very agitated. Quick on the heels of ExxonMobil’s unprecedented deal with Rosneft comes the Russian investigators’ raid on the offices of BP. The company nearly became Rosneft’s preferred partner in Arctic exploration last December. The deal got a personal blessing by Prime Minister Vladimir Putin. However BP’s partners from TNK-BP (Viktor Vekselberg, Mikhail Fridman and Leonid Blavatnik) thought that BP broke its commitment to do business in Russia only via TNK-BP, which is co-owned by the British giant and the three oligarchs in question with about five per cent of the shares dispersed among minor shareholders.

What followed was a successful counterattack by Vekselberg, Fridman and Blavatnik. It ended with the international courts siding with the Russian plaintiffs and the Rosneft-BP deal collapsing. When in late spring or early summer two minor shareholders of TNK-BP from the Russian city of Tyumen filed a suit against BP, accusing it of undermining TNK-BP’s business interests with its attempt to hook up with Rosneft, few people thought that it would end with the Russian investigators paralyzing the work of BP’s office in Russia for what seems like an indefinite period of time.

BP supremo in Russia Jeremy Huck claims the Russian authorities are using the investigators to exert pressure on the company. Russian officialdom retorts that the investigators are just doing their job and no politics is involved. This, of course, no one believes. It is much more plausible that BP is being “softened up” in order to force the company to sell its share in TNK-BP to a partner that the Russian government (and TNK-BP Russian shareholders) already have in mind at a discounted price. Another alternative is that Vekselberg, Fridman and Blavatnik want to sell their share in TNK-BP to BP at an inflated price, but this looks much less plausible.

These latest developments lend more credence to the theory, advanced by some market analysts here at the beginning of BP’s misfortunes earlier this year: namely that the whole deal with Rosneft was a trap from the very beginning with the goal of either milking the British company for money or making it divest of its share in the Russian joint venture.

BP’s misfortunes illustrate a very important general rule for foreign investors in Russia. It is simple: there are no rules, especially when it comes to the so-called strategic sectors of the economy, of which the oil and gas industry is number one. Of course, there are laws that, in theory, create a framework for, say, offshore exploration and development.

International oil companies claim they are excessively harsh as they create unacceptable risks. Moreover, these laws are supplemented by myriads of circulars and ministerial instructions that interpret and re-interpret the laws until your head starts spinning.

Having worked for ExxonMobil, this week’s undisputed winner in Russia, I have witnessed countless attempts by foreign investors to make Russian bureaucracy make rules of operation in Russia more transparent and, what is even more important, more stable. “Conditions can be strict, but they should not change,” was the refrain I heard many times from colleagues in different oil companies.

However this is exactly what is not going to happen. The rule stipulating that there are no rules is a very effective political tool, keeping the Russian government in total control of its energy resources – frequently to the detriment of their development. The Russian political class ever since Putin’s advent to power is fixated with the idea of hydrocarbons as the only source of domestic political supremacy, foreign policy gravitas and, ultimately, the sole basis on which the political class can perpetuate itself in power indefinitely. The logical consequence of this approach is that every deal, especially with a major foreign company, is always in some way a “boutique,” made-to-measure unique arrangement, regardless of the official laws and regulations. This makes it easy for the government to turn the tables on its partners, for one reason or another, once these partners become unsuitable. This is actually rule number two for foreign investors in Russia: all partners are expendable.

Rosneft should be honored with its deal with ExxonMobil, an FT 500 number one company and a world champion in offshore drilling. This is a true coup for a Russian giant which still struggles with issues of technological development, business organization and continuing fallout from its dubious appropriation of former YUKOS assets. But for ExxonMobil, the world’s most prudent, most effective and law-abiding oil company, this may well be one of the most rewarding but at the same time also challenging deals in the emerging markets. That is if the two rules of operation in Russia are anything to come by.

The views expressed in this article are the author’s and may not necessarily represent those of RIA Novosti.

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What is Russia's place in this world? Unashamed and unreconstructed Atlanticist, Konstantin von Eggert believes his country to be part and parcel of the "global West." And while this is a minority view in Russia, the author is prepared to fight from his corner.

Konstantin Eggert is a commentator and host for radio Kommersant FM, Russia's first 24-hour news station. In the 1990s he was Diplomatic Correspondent for “Izvestia” and later the BBC Russian Service Moscow Bureau Editor. Konstantin has also spent some time working as ExxonMobil Vice-President in Russia. He was made Honorary Member of the Order of the British Empire by Queen Elizabeth II.

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