#17 - JRL 7068
New York Times
February 19, 2003
A Rocky Road Led to Big Russian Oil Deal
By SABRINA TAVERNISE
MOSCOW, Feb. 18 -- Russia's deal of the decade got off to a rough start.
For months, teams of investment bankers, lawyers and accountants had been jetting between London and Moscow trying to nail down an agreement that promised to be the single largest investment in Russia since the fall of Communism. A giant new Russian oil company would be created from Tyumen Oil, Sidanco and Onaco, with BP, a minority owner of Sidanco, investing billions to buy half the new company. But BP would not specify just how many billions it had in mind.
At long last, a delegation of BP executives led by Rodney Chase, the No. 2 executive after Lord Browne, came to Russia last fall with a figure. It was not to the Russians' liking, and a hush fell on their side of the table.
Mikhail M. Fridman, the leading figure among the investors negotiating with BP, recalled in an interview this week that he tried to be noncommittal but was also holding out for a better offer. "I didn't want to agree in a way that felt like I had resolved the issue," Mr. Fridman said.
It took more months of wrangling to close the gap on price, including a period when the parties seemed to be stuck at just $300 million apart, less than 3 percent of the venture's ultimate value. Finally last week, they struck agreement: BP would pay $6.8 billion in cash and stock and would choose the new company's top executives, with Mr. Fridman's Alfa Group and his partners — Leonard Blavatnik, the Russian-born American head of Access Industries and Victor Vekselberg of the Renova Group — holding a half-interest but ceding senior management positions.
The deal puts a foreign company in control of a major producer in Russia's energy heartland for the first time, and it gives BP a big lead in opening up Russia as a "province" for Western energy companies to seek reserves and growth.
"It's a pretty surprising deal," said one Western banker. "It shows that foreigners figured out a way to collaborate with Russians. It's almost inconceivable now that you could ever go back and reconsider privatization." But though it was not apparent to outside observers at the time, a sizable portion of the foothold BP had already won in Russia was also on the line in the talks. Mr. Fridman and his partners held an option to buy out most of BP's holdings in Sidanco, which was due to expire in the middle of 2004, and they intended to use it.
BP spent six hard years building that presence, and was caught in the middle of a dispute between its first partner, Vladimir Potanin, and Tyumen Oil, which Mr. Fridman controlled. Eventually, BP made peace with Mr. Fridman; now they are partners.
"Mr. Fridman has been very successful in a tumultuous market," said Robert Dudley, the BP vice president who negotiated much of the deal. "He's got a long-term outlook. I won't say that's rare in Russia, but it was very important to us."
The deal thrilled other leading Russian oil executives. Mr. Fridman got congratulatory calls from some of the most powerful, including Roman Abramovich of Sibneft and Mikhail Khodorkovsky of Yukos Oil. The high value for Russian oil assets built into BP's deal lifted the market prices of others in the industry.
"The deal gives a benchmark to the Russian market," Mr. Fridman said.
But some of the country's political elite remain wary. Raised in Soviet times, they are uncomfortable with any loss of control over an important piece of Russia's economy.
The main production unit of the new venture, Tyumen Oil, was the last of Russia's state-owned oil companies to be privatized, and the first to be priced a bit closer to actual value than previous sales, where the value was set by official decree.
Mr. Fridman and his partners paid $810 million for 40 percent of Tyumen, part of a total of $5 billion the state received for all the oil assets now being assigned to the new venture, according to Mr. Fridman. BP is now paying a price that implies a total value for those assets of about $16 billion, including contributions brought to the table by BP, but not including proceeds from recent bond sales.
Takeover followed by makeover has been Mr. Fridman's signature strategy in Alfa Group's various investments. He refurbished and sold a Russian candy maker to Danone Group, the maker of Dannon yogurt; a glass maker to Asahi Glass of Japan, and a cement producer to Holcim of Switzerland.
A member of Boris Yeltsin's inner circle in the mid-1990's, Mr. Fridman shares the unsentimental view of his investment properties that is common among Russia's young tycoons, but a sharp departure from the Soviet managers who came before them. He also does not hesitate to apply bare knuckles to the country's ramshackle legal system, pioneering the use of the bankruptcy courts as a corporate takeover tool.
Analysts here say it is still unclear if other deals will follow. But the deal does start a trail toward a new phase of economic development in Russia, with today's industrial oligarchies giving way to more diverse ownership, including publicly held foreign companies like BP.
"Any business should be sold if you're offered the right price," Mr. Fridman said. "If you don't, the market will punish you. Or God. Or maybe they are the same thing."