The collapse of BP’s share swap deal with Rosneft is not only good for the company, but “a victory for the rule of law”, Mattias Westman, the founder of Prosperity Capital Management and one of TNK-BP’s largest shareholders told CNBC.
BNP’s joint venture partners Alfa Access Renova (AAR) — a consortium of local billionaires comprising of Mikhail Fridman, Viktor Vekselberg, German Khan and Len Blavatnik — had objected to the deal between BP and Rosneft, the state oil company, for development of Russia’s arctic oil fields.
Rosneft has said that it may continue talks with BP despite the deal passing a midnight deadline on Monday.
BP announced the deal in January with great fanfare, proposing that Rosneft would take five percent of its ordinary voting shares in exchange for 9.5 percent of shares in the Russian company, with the two agreeing to cooperate to explore and exploit three license blocks on Russia’s Arctic shelf.
AAR took issue, saying that the deal violated the terms of the agreement between the consortium and BP that created TNK-BP. The influential businesspeople behind AAR said that their contract stipulated that BP should direct all of its future Russian deals through the joint venture.
A Russian arbitration panel ruled that the share swap could not go ahead without AAR’s agreement, which was not forthcoming.
Over the years the TNK-BP saga has been one replete with tales of brinkmanship, intrigue and rumors of political interference – BP executives were reportedly denied visas during a 2008 dispute between the joint venture partners.
Press reports allude to the hands of powerful oligarchs who, in the public perception at least, run Russia’s business interests and have a hand in its government.
This encapsulates the problem with the perception of how business in Russia works, Westman, whose fund runs $5 billion in Russia and the CIS, said.
“People have to decide which of the myths they are going to believe,” Westman said. “Either the country is run completely by the government, or it’s run completely by the oligarchs.”
Of course, he adds, it is just possible that like other countries, both sides exert influence, but neither has total control and, most importantly, neither is able to tear up a contract.
Westman said that the collapse of the deal on largely contractual grounds was a positive sign, not just because he believes that it would have “reduced the upside” for TNK-BP.
“In many ways, this is a victory for the rule of law in Russia, rather than the opposite,” he said.
Mistaking political backing for a smooth ride through contract disputes may have been BP’s error, according to Westman.
“BP made the same mistake that they’ve made all along, thinking that this is a political state, so they went over [AAR’s] heads. They went to Putin and said ‘we want to make this deal’,” he said.
BP did not immediately respond to a request for comment.
Rule of Law
“When this deal [with Rosneft] was announced – which was against the… shareholders agreement that they had, these entrepreneurs [AAR] went to court and won very easily, because it was very clear that Rosneft was not allowed under their contract," he explained.
"And then the Russian government tried to convince them to agree, but when they couldn’t convince them, the rule of law prevailed and this deal fell through," Westman said.
“It clearly wasn’t the Russian government that scuppered this deal. The Russian government was for this deal. But it was against the contract that was prevailing, and therefore it fell.”
Other local analysts agree. Alexey Moiseev, head of macroeconomy at VTB Capital in Moscow told CNBC.com: "I think that from a macro standpoint, this deal was very good for the Russian economy in general,” Moiseev said.
"What in fact is going on is that Rosneft is a Russian company, TNK-BP is an entirely private company and it is surprising that the government has not applied its might to put pressure on TNK-BP in favor of its own company, Rosneft.”
“Russia is not very well known for transparent corporate management or comfortable political risk, but this is the first major case where the key government officials acted in quite a respectable manner,” Teymur Huseynov, head of energy consulting at risk consultancy Exclusive Analysis, told CNBC.com.
“BP’s miscalculation, in our opinion, was thinking that the Russian government officials, specifically deputy prime minister Igor Sechin, as well as the prime minister [Vladimir Putin] himself would tell AAR to shut up and not get involved in the deal,” Huseynov added.
Igor Sechin was both deputy prime minister and chairman of Rosneft, but stepped down from the oil company in April. Some analysts believe that the move was largely symbolic, and that Sechin still pulls the strings at Rosneft.
Regardless, neither he nor Putin intervened strongly on behalf of BP. This miscalculation has caused BP to lose face at a time when its reputation is still being repaired after the Gulf of Mexico oil spill last year.
“It’s very clear that this deal was very important to BP after what happened in Maconda in the US. BP desperately needs to replenish its reserves, Russia provides this opportunity, especially the frontier regions of Russia, where the government is really keen for some greenfield projects to kick-start,” Huseynov said. “That doesn’t mean that this is the way to do business in Russia.”