#13 - JRL 7063
The Economist (UK)
February 15-21, 2003
Not beyond petroleum
Votes of confidence do not come much bigger. The $6.75 billion that British Petroleum (BP) this week said it would pay for half of the Tyumen Oil Company (TNK), Russia's fourth-largest oil producer, is a huge boost for Russia. It is the biggest single foreign purchase of Russian equity ever, on its own worth more than double last year's total foreign direct investment in the country.
In recent months, Russia has been moving on to the radar screens of a growing number of deal-minded foreign corporate executives and investors--not just in the oil industry--in most cases for the first time since foreigners were badly burnt by Russia's devaluation and default in 1998. BP's deal is being seen, both in Russia and abroad, as stamping a seal of approval on the country's progress since the financial crisis of 1998 and, more broadly, since the asset-grabbing chaos of the early post-Soviet years. Other multinationals are now expected to take a closer look at Russia, and Russian firms will certainly increase their efforts to tap multinationals for their expertise and money. It is not just the fact of BP's investment that is significant; it is its manner. Rather than a cautious 25% plus one share--the minimum blocking stake--BP went for an equal partnership with the Russians, probably the maximum foreign ownership that is politically acceptable in Russia. (Strictly, BP is not buying half of TNK, but joining it as half-owners of a new firm that will include all of the existing TNK plus BP's existing Russian assets.)
Nor can anyone accuse BP of naivety, given its past experience of Russia and its new partner. In 1997 it bought a stake in Sidanco, a small oil firm, only to end up in a bitter fight with TNK over some of Sidanco's assets--a fight that highlighted the crookedness then commonplace in Russian business and the loopholes in Russian law. BP lost the battle, and some of its money. For BP to return to strike a deal with its former foe, surely things must have changed fundamentally in Russia?
Up to a point. BP's experience means that it may be better placed than most foreign firms to navigate the still risky Russian business world. Other oil giants, such as ExxonMobil and Royal Dutch Shell, have a handful of joint ventures and production-sharing projects in Russia, but none has yet braved partial ownership, as BP began to do six years ago. Minority-shareholder abuse, although less common than it was, remains a big factor scaring outsiders away from Russian companies.
BP's investment may also say as much about the difficulties facing the oil giant as about the joys of Russia. BP badly needs new reserves. Recently, its share price has been battered by investors due to its failure to meet oil-production forecasts, which it lowered three times in eight weeks last autumn. Between September and January, BP's market value fell by around a quarter, or $45 billion. This embarrassed its boss, Lord Browne, whose carefully polished reputation as the golden boy of British business lost some of its shine. Investors concluded that, although Lord Browne's strategy of cuddling up to the green lobby with his talk of taking the firm "beyond petroleum" was all well and good, they did not want it to be at the expense of producing lots of oil (and profits) in the meantime.
BP has old, declining and relatively less profitable fields in places such as Alaska and the North Sea which it has been trying to replace with new, more profitable fields in emerging locations beyond the grasp of OPEC--notably Azerbaijan, Angola, Trinidad, West Papua and in the Gulf of Mexico. In January, it sold its Forties field in the North Sea plus other ageing assets in the Gulf of Mexico for $1.3 billion. Now, with its stake in TNK, 30% of BP's reserves will be in Russia--positioning it well, in the long run, to pump oil into China.
Any oil firms tempted to follow BP's lead may not have much to choose from, however--even assuming that Russia's political establishment is willing to allow more foreign ownership. Only one decent-sized Russian oil firm, Sibneft--TNK's nearest rival--seems open to selling a stake to a foreigner anytime soon. Yukos, which has become the biggest Russian oil producer, ahead of Lukoil, has talked in the past of selling a small stake. But thanks to high oil prices it now has spare cash and seems likelier to buy than be bought.
Beyond the oil industry, there are a few obvious targets for foreign multinationals, if they can summon up the courage. There are some big formerly state-owned car and telecoms firms, still struggling to modernise, plus breweries and food factories. There has long been talk that a foreign firm will buy into Norilsk Nickel, which extracts one-fifth of the world's nickel and platinum from northern Siberia.
Yet although some Russian firms now see proper management control and corporate governance as essential, they remain heavily concentrated in telecoms and the oil industry. Even if foreigners snap these up, many Russian firms will remain a mystery to potential buyers--at least until Russia has done more to reduce bureaucracy and simplify tax and business law. Here, progress, though genuine, is slow. In truth, it will only be clear that Russia has truly changed when you do not have to be BP to invest there.