Cablegate: What's Behind the Raids On Tnk-Bp and Bp
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0864/01 0881459
ZNY CCCCC ZZH
P 281459Z MAR 08
FM AMEMBASSY MOSCOW
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INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 04 MOSCOW 000864
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DOC FOR 4231/IEP/EUR/JBROUGHER
E.O. 12958 DECL: 03/25/2018
TAGS: EPET ENRG ECON PREL PGOV RS
SUBJECT: WHAT'S BEHIND THE RAIDS ON TNK-BP AND BP REF: A. MOSCOW 816 B. MOSCOW 768 C. 07 MOSCOW 3054 Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d)
------- SUMMARY -------
1.(C) The backdrop to last week's raid on TNK-BP is a tale of intrigues inside intrigues with speculation running rampant over who is behind the attacks and why. We may never know but our best guess is that it is ultimately a commercial struggle for control and ownership of a highly productive asset. That struggle has been on-going for some time and has two main threads. The first is the desire on the part of some of the Russian partners, billionaires all, to exercise greater control, and derive more of the profits, than BP. The second is the GOR's desire that Gazprom purchase the Russian half of the company -- Gazprom, naturally, wants a lower price, the Russian billionaires, if they have to sell, want a high price. Others see political motives and the chance to take a slap at the British as well. However, ultimately this is a story about billions and billions of dollars. End Summary
------------------- BILLIONAIRES VS. BP -------------------
2.(C) Various theories have been circulating among the oil and gas community as well as in the local press as to the motives behind the recent attacks (refs A and B) on TNK-BP, one of the world's ten largest oil companies. Prominent among these theories is in-fighting among the shareholders, especially between BP and its Russian billionaire partners. The TNK half of TNK-BP is shared between billionaires Viktor Vekselberg (Renova company - 12.5 percent), Mikhail Fridman, German Khan and Peter Aven (Alfa Group -- 12.5, 11, and 1.5 percent) and (Amcit) Lev Blavatnik (Access Industries -- 12.5 percent). The Russian billionaires, especially those from Alfa, are feuding with BP in a spat that goes back years. As one BP official told us when the company was forming, "We have a love-hate relationship. They love us (our money), and we hate them (their corporate governance and management styles)."
3.(C) According to a western TNK-BP official, the raids should be seen as the latest in this multi-year attempt to drive out or scare away the foreign managers of the company, which made nearly $9 billion in profits last year. Khan has traditionally led the charge to get rid of the western managers who have brought to the company western business practices such as accountable corporate governance, transparency, and fiscal discipline. In particular, senior western TNK-BP executives have pointed to the company's procurement as a sore point for Khan and to a lesser extent the other billionaires. TNK-BP spends several billion dollars a year on equipment and supplies. The BP half of TNK-BP has been able to limit directed purchases and kick-backs, much to the chagrin of some of their business partners. The former BP officials in the company also point to a contentious board meeting last fall at Fridman's Chateau in the south of France. When their prediction that declining investment would lead to falling production and profits proved prescient, the Alfa partners in particular used this to argue for a change in senior management.
4.(C) Threatening the visa status of the western employees in the company has been a favorite tactic xxxxxxxxxxxx These efforts appear to have culminated in a March 25 announcement that 148 of the BP employees seconded to TNK-BP would have to temporarily be removed from the company while their visa status is clarified. xxxxxxxxxxxx
5.(C) Adding another wrinkle to the in-fighting between the billionaires and BP is that the billionaires quarrel among themselves as well. The BP managers have a much better relationship with Vekselberg and Blavatnik. They regard Vekselberg as a serious businessman and one whom they hoped would be able to buy out the other Russian partners. Blavatnik has a limited operational role in the company, reducing scope for friction. The BP managers tell us that talk of one partner or another buying out the others has been going on for some time.
------------------------------------- GAZPROM TRYING TO SAVE A FEW BILLION? -------------------------------------
6.(C) The other widely circulated theory behind the FSB raid on TNK-BP is that it is an attempt by Gazprom to knock down the billionaires' price. Gazprom and the TNK half of TNK-BP have reportedly been negotiating for months over a price for the Russian half of the company. When TNK-BP was formed in 2003, the agreement stipulated that the Russian partners would not sell their shares until January 1, 2007, a date which was subsequently pushed back a year. Over the past six months, the western managers at TNK-BP have told us that the GOR would prefer to buy out the billionaires and bring the company more fully under state control. Moreover, they have told us that although Rosneft was mentioned early on as a potential partner, the GOR apparently decided that only Gazprom would be allowed to purchase the Russian half of the company.
7.(C) On the whole, BP is sanguine about this prospect. In their view, Gazprom would likely make a more reliable and predictable partner. The negotiations over the Kovykta gas field (ref C) led to Gazprom-BP negotiations over a global strategic tie-up that in turn puts the potential partnership in TNK-BP in a positive light. The most likely model would be the Sakhalin Energy Investment Corporation (SEIC). Although Shell was pressured into selling a majority share to Gazprom, it has been left to operate the company more or less as it sees fit. That said, Vladimir Konavalov, the head of the Petroleum Advisory Forum, told us it is possible that Gazprom may nonetheless want to reduce BP to a minority share in the company. A western TNK-BP official told us BP can live with this and that there is already a side deal in place once the purchase happens that would give Gazprom 50 percent plus one of the shares.
8.(C) The Russian billionaires on the other hand are not at all happy at the prospect of being forced to sell their shares and if push comes to shove they are determined to get the best price they can. Vladimir Milov, a former Deputy Energy Minister, told us that the GOR would prefer to avoid any hint of the Yukos affair in resolving TNK-BP's ownership. If the billionaires are forced to sell, they will get "market value." The question is who determines that market value? It will not be the market. However, it will not be Gazprom either. The billionaires have connections, influence, and above all cash with which to fight. One of the senior western TNK-BP executives told us recently that he was surprised the fight had gone on as long as it had and that it was apparent they had underestimated the billionaires. In particular, this official noted, the Alfa Group's Peter Aven appears to have considerable influence in the Kremlin. This official also noted that Gazprom is only interested in the whole of the Russian half, giving any of the billionaires an effective veto over the sale by, for instance, fomenting continuing uncertainty, as the Alfa Group may have done with these latest attacks.
9.(C) Vekselberg threw down the price gauntlet by publicly valuing the company at $60 billion late last year. This is not an arbitrary sum. The western executives at TNK-BP have told us that extrapolating from the small amount of shares currently traded publicly undervalues the company and that based on its reserves, production, and profits, Vekselberg's figure is close to the mark. The difference is considerable. However, based on those publicly traded shares (less than 3 MOSCOW 00000864 003 OF 004 percent of the total) the current market capitalization of the company is $27 billion, having dropped 10 percent following the raid. Depending on which valuation is used, Gazprom would have to pay either $3.5 or 7.5 billion dollars for each 12.5 percent stake, reason enough to fight.
10.(C) Adding grist to the theory that Gazprom is behind the investigation is the fact that under Russian law, it is the target of industrial espionage that must initiate the investigation by filing a complaint. Gazprom was almost certainly aware of TNK-BP's "Gazprom project" assessing it as a potential partner and may have chosen to use this to put pressure on the billionaires. Seen in this light, actions such as Mitvol's environmental review (ref A) are seen by many as part of a coordinated attack on the company to reduce its value and induce the sale of its Russian half.
-------------------- KREMLIN IN-FIGHTING? --------------------
11.(C) No conspiracy theory in today's Russia would be complete without some reference to the power struggle within the Kremlin, particularly in light of the impending change at the top. In a March 25 meeting, Ekho Moskvy Editor Aleksey Venediktov called the action by the FSB a warning shot to Medvedev. He speculated that very involvement of the FSB as evidence that the actions were tied to FSB Chief Patrushev and through him to Presidential Administration Deputy Sechin,s maneuvering during this political transition. Many Embassy contacts have in fact predicted a loss of influence for Sechin following the transition. Creating a scandal over TNK-BP could be a means for Sechin and his supporters to remind the President-elect of their ability to wreak political havoc. If such a scandal disrupts business dealings between Gazprom -- the rival to the siloviki-dominated Rosneft state oil company (which Sechin chairs) -- and Western partners, so much the better.
12.(C) There are, however, reasons to discount this theory. As we noted above, BP has told us that Rosneft is no longer a serious potential purchaser of the Russian half of TNK-BP. A senior western executive at Rosneft told us the same thing. In addition, many of the contacts with whom we discussed TNK-BP developments pointed out that FSB involvement isn't conclusive one way or the other. Any of the players in this game could have access to the FSB, including Gazprom and the Alfa Group.
------------------- A JAB AT THE BRITS? -------------------
13.(C) Given abysmal Russian-British bilateral relations, the press and some of our British counterparts, were quick to see an FSB raid on the highest profile British investment here as a politically motivated attack against the Brits. Ilya and Alexander Zaslavsky, the two brothers who were arrested in connection with the FSB's charges of "commercial espionage" were, respectively, heads of the Oxford-Cambridge and the British Council alumni associations. These linkages were widely publicized and embraced by many media outlets as being related to the raid on TNK-BP and BP offices.
14.(C) However, despite the prominent attention given in the press to the British angle of the story, it seems to us more likely that this is coincidental. Regardless of the state of the two countries political relations, the commercial relationship is very strong and has been largely fenced off by both governments. Some of our contacts said it was entirely possible that the connection to the British Council was simply a PR "bonus" for the FSB.
---------------------------- CONCLUSION: FOLLOW THE MONEY ----------------------------
15.(C) Fridman/Khan vs. Vekselberg, TNK vs. BP, TNK-BP vs. Gazprom, BP vs. Gazprom, FSB vs. Brits, and siloviki vs. siloviki. A BP official told us last week that this situation will probably be "messy for a while". That seems a safe bet. Our sense is that this is ultimately a MOSCOW 00000864 004 OF 004 multi-faceted fight for control and ownership of a multi-billion dollar company, which BP and its executives at TNK-BP are caught in the middle of. We'll probably never knew who ordered the raid and why or who ordered the Zaslavsky brothers' arrest and why. What we will eventually know, to paraphrase Churchill, is which bulldog emerges from under the carpet with the prize. We think it will be Gazprom, but it may take longer than they would like. BURNS