#5 - JRL 7061
February 13, 2003
BP's Crash Course in Doing Business
The general take on BP's decision to put $6.75 billion into Russia after getting so badly burned the first time around is that it shows how Russia has changed.
BP Group vice president Robert Dudley said reforms in the past two years, particularly in taxation and bankruptcy procedures, gave BP the confidence to make the investment, the largest ever in Russia.
In commenting on BP's willingness to join up with TNK's shareholders to create a global oil producer, UFG's Stephen Sullivan said it sends a signal that "Russia is a very different place under Putin than it was under Yeltsin."
It also says something about BP and how it has learned from its crash course on how to do business in Russia.
BP displayed a mixture of naivete and arrogance in 1997 when it made its first major investment in Russia, paying $471 million for a 10 percent stake in Sidanco, which at the time was controlled by Vladimir Potanin's Interros. (Naivete in thinking that purchasing a 10 percent stake gave it control of anything in Russia; arrogance in believing that because it was BP and one of the largest companies in the world, no one would dare to mess with it.)
Therefore, it came as no great surprise when it came a cropper. In 1999, TNK managed to seize control of Sidanco's biggest field through bankruptcy proceedings that BP claimed TNK had rigged.
Back then during the bankruptcy proceedings, BP would regularly announce that if the next court ruling went against it, it would pull out of Russia completely. And if BP walked out and slammed the door on Russia, then Russia could forget about foreign investors for the foreseeable future. That is to say, if people see that a company as big as BP can be screwed, then they'll understand that no foreign investor is safe in Russia.
BP never made good on its threat, although it had to write off a large part of its investment. (Perhaps spending a couple hundred million dollars on learning how to do business in Russia is just pocket change for the likes of BP.) In the end it found some modus vivendi with TNK, and soon Interros dropped out of the picture when it was bought out.
This time round, BP is coming to the deal with five hard years of experience doing business in Russia and it seems to be much the wiser (and perhaps a bit humbler).
For a start, it has taken a 50 percent stake in the new, as yet unnamed company, and has made sure it has equal control over management. Any serious disagreements are to be subject to international arbitration in Sweden.
Second, BP has been careful to structure the deal to minimize the incentives for TNK to try any funny stuff: by paying less than half in cash and then the rest in BP shares over a period of three years.
The BP/TNK creation still needs to be approved by the Anti-Monopoly Ministry, but it seems clear the deal was well-oiled politically and will slide right through. Notice we haven't heard a peep out of the State Duma about the selling off of Russia's jewels.
If the deal is seen through to completion, the implications for Russia could be considerable.
The demonstration effect of a successful deal of this magnitude between a major Western player and Russian business group could have a profound impact, spurring on other big players to follow the trail blazed by BP.
However, it the deal falls apart or goes sour, the implications could be equally serious -- dealing a blow to Russia's investment image that would take a long time to recover from.
Ironically, BP's self-serving prophecy in 1999-2000, when it said that if BP pulled out of Russia then Russia could forget about foreign investment, may be closer to the mark this time round. If this deal goes wrong ...