Pipeline crossroads

Russia watchers, in recent months, have been entangled in the cobweb of carefully concocted crackdown laws and the nervous improvisation of the ruling elite in order to contain the resilient opposition movement. Notwithstanding the importance of the said steps which I discussed in my latest entry, it is important to discuss another story that has been cooking in the recent months and which potentially has outstanding importance when it comes to the policy of opening: the saga around TNK-BP and how the second round of this fight between two important Russian financial circles might end.

By preventing BP from sealing a deal with Rosneft last year, the Alfa-Access-Renova (AAR) consortium, holding a 50% stake in TNK-BP made a bolder step than most businesspeople would have dared inRussia: they openly confrontedRussia’s energy tsar, the then-vice-PM Igor Sechin. On the top of it, they won: in May, the two companies declared the deal failed. But then again, this happened in a period when liberal political circles seemed to be winning the struggle for the management of Russia Ltd. Then, however, the tide turned pretty quickly and now Sechin is back in charge as the CEO of Rosneft, a board member of Russia’s energy holding Rosneftegaz and the secretary of the President’s energy commission. It certainly doesn’t come as a surprise that he wants a payback.

Most of all, nevertheless, Sechin is one of the greatest advocates of increasing the state’s role inRussia’s economy. He and his associates have so far successfully torpedoed the sale of lucrative state assets, not only in the energy sector but also in the financial sector. His chef-d’oeuvre, at the same time, would certainly be the reestablishment of state ownership over the energy sector. Therefore, when BP announced in May that, following the resignation of AAR’s Mikhail Fridman as TNK-BP CEO, it considers selling its stake in the company to an unnamed state-owned firm, it was pretty obvious that Sechin was behind the potential deal.

It still took Sechin more than a month to come public with the offer which was finally made by Rosneft and not Rosneftegaz that holds the state’s ownership in the oil company. This delay and the slight difference of who’s making the offer may point at differing opinions in the Russian elite on the potential buyout. Notably, government officials sent quite mixed signals about the possibility of the deal. Igor Artemyev, a strong Putin loyalist and the head of the Federal Antimonopoly Service vowed a “careful approach” from the part of the institution, and the economy minister Andrei Belousov, a technocrat who seems to have become the government’s top man on economic policy reminded that such a deal would require government approval. Quite curiously, Vice-PM Arkady Dvorkovich, the highest-ranking liberal in energy policy (who is more or less in an open conflict with Sechin) has so far remained quiet on the matter. It is however obvious that not everybody shares Sechin’s vision about a state-owned oil giant that would control over 40% of Russia’s oil output, twice as much as its closest privately owned contender Lukoil.

This makes the outcome of the Rosneft-BP deal uncertain. The Financial Times listed as many as six possible scenarios, none of which can be excluded at the moment. One of the most interesting features of this struggle is the complexity of its multiple frontlines. Most of all, there is a struggle for a valuable chunk ofRussia’s oil industry between two powerful groups of the economic elite:AAR, having close links to the liberal circles in the elite and Sechin’s business circle aiming at a state-owned energy sector.

But then, there is also the question of the gradual opening-up of Russia’s economy. By now most of the elite has acknowledged that Russia needs growing foreign investment, and, as a consequence, a more investment-friendly environment if it is to return to a stable economic growth (which would also help to keep the opposition at bay). Any scenario ending with BP leaving Russia would send a bad signal about the credibility of reform policies as a whole. Even if Rosneft somehow ends up buying out both BP and AAR (which would be a logical consequence of buying out BP, since a Rosneft-AAR partnership of diagonally opposed parties simply couldn’t work) and then partners up with a now-independent BP, the message sent to investors would be about the invincible primacy of state ownership in Russia, casting doubt on any future privatisation or joint-venture deal.

Another interesting scenario brought up by FT is be the one in which BP would act as intermediary of Rosneft, buying out AAR and in turn selling its own stake to the state-owned company. Some recent events do point at this solution, e.g. the appointment of former TNK-BP officials to Sechin’s Rosneft team, obviously with the purpose of facilitating future cooperation. However, AAR’s Viktor Vekselberg, a businessman with close ties to the liberal circles in the government, has already announced that he wouldn’t sell his stake in the company. Without owning at least 50% of TNK-BP respectively, though, I doubt the deal would be worth for either Sechin or BP.

Shortly, the way this story unfolds will carry important information on how strong exactly liberals and conservatives are in the Russian elite and also how seriously determined the government is to carry out long-overdue economic reforms – i.e. how many friends Sechin and his radical economic views still have in the higher echelons of the elite. As I mentioned above, they may be less than expected.

Quite interestingly, much of the next episode of the saga will take place in late October (given that BP has to conduct bona fide negotiations with AAR for 90 days before considering other options), right after the local elections that are supposed to deliver a sentence on the political reforms and the crackdowns. The two processes cannot be separated from one another, as they will both carry serious consequences for the elite and the balance of power. This is why the autumn will be even hotter inMoscowthan many think right now.

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