Cablegate: Insider Views of Tnk-Bp Dispute
DE RUEHMO #1775/01 1721534
ZNY CCCCC ZZH
O 201534Z JUN 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8719
INFO RHEHNSC/NSC WASHDC IMMEDIATE
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L MOSCOW 001775
STATE FOR EUR/RUS; NSC FOR MWARLICK
E.O. 12958: DECL: 06/20/2018
TAGS: ECON EINV ETRD PREL PGOV RS
SUBJECT: INSIDER VIEWS OF TNK-BP DISPUTE
REF: MOSCOW 1713
Classified By: CDA Daniel A. Russell for Reasons 1.5 (b) and (d).
------- Summary -------
1.(C) In meetings on June 18 and 19 with TNK-BP CEO Robert Dudley and Renaissance Capital's Deputy Chairman Robert Foresman (both Amcits), visiting NSC Senior Director for Russia Mary Warlick and EUR/RUS Director Kelly heard first hand accounts of the complicated, opaque and increasingly acrimonious dispute over control of the world's seventh largest oil company. Dudley said negotiations had largely broken down with BP's Russian partners in TNK-BP and with Gazprom on a global partnership. He said the Russian partners were resorting to ever more extreme tactics to gain control of the company, including the continued use of state administrative resources, and that Russian government intervention was needed to broker a settlement. He expressed appreciation for U.S. efforts to encourage GOR intervention. Separately, Foresman, whose company advises BP, attributed the freeze in negotiations over the Gazprom-BP global alliance to the influence of Deputy Prime Minister Sechin and suggested that Sechin's company, Rosneft (where he serves as Chairman of the Board), may ultimately emerge as BP's partner in TNK-BP. End Summary.
------------------- A Worsening Dispute -------------------
2.(C) Dudley told Warlick and Kelly that negotiations had largely broken down and that BP's partners, AlfaAccessRenova (AAR), were using increasingly extreme tactics in their efforts to take control of the company. He likened their tactics to the dark days of the 1990s, when Russian businesses used "corporate raiding" methods to take control of assets at prices well below market. Although the GOR claimed to be taking a "hands-off" approach to what it was describing as a "shareholder's dispute." In fact, according to Dudley, the AAR partners were using their influence and wealth to enlist the administrative resources of state entities on their behalf.
3.(C) Warlick responded that the USG was tracking the dispute closely and was concerned not only about BP's investment and the effect of the dispute on Russia's investment climate but also about Dudley's personal safety. Dudley responded that because of the structure of the company, he was the focal point of the attacks. As the CEO, he had authority over all decision-making. He said that if he were taken out of the equation, the AAR partners would achieve their objective of gaining control and would be able to do whatever they wanted with the company's assets to the detriment of other shareholders, including BP. He expected the attacks on him to continue in the form of law suits and the like but said that while the situation was wearing on him, he believed his profile was too great for there to be any physical threat against him.
-------------------------- AAR PR Campaign Succeeding --------------------------
4.(C) Dudley acknowledged that the AAR public relations campaign was resonating within Russia and especially within the GOR. In particular, claims that BP was holding Russia back by inhibiting one of its largest companies from expanding abroad and competing directly with BP appealed to Russian nationalism and the country's sense of itself as victims of the West. Likewise, the claims that BP had foisted large numbers of expatriate employees on TNK-BP, in jobs that could be performed by Russians, also appealed to Russian nationalism. The success of this public relations campaign was likely to make the AAR partners even less inclined to seek a compromise solution with BP.
5.(C) Dudley explained, however, that in fact there was little substance to AAR's claims. The number of expatriates in TNK-BP was less than 250 out of a total of 66,000 employees. Of those, only 110 were permanent TNK-BP employees and of those only 40 had ties to BP. As to international expansion, it was true that BP's preference was to invest in Russia and the FSU, where TNK-BP had competitive advantages. Dudley said the AAR partners, by contrast, were interested in expanding to places like Myanmar, Cuba, and Sudan, which posed problems for BP given U.S. and other Western sanctions.
6.(C) In addition, Dudley said AAR and, in particular, German Khan, had been systematically using TNK-BP resources to vet these projects xxxxxxxxxxxx. This particular dispute arose when Dudley said he had refused to allow Khan to continue to have these projects vetted by TNK-BP.
--------- Deadlines ---------
7.(C) Dudley said there were two important approaching deadlines: June 26, when a shareholders meeting was to be held for TNK-BP holding, which included minority shareholders, and which was to approve the accounts for TNK-BPs regional subsidiaries and renew the mandates of their Board of Directors; and, late July, when his work permit and those of the senior Western managers in TNK-BP were due to expire. He suspected that the AAR partners might attempt to prevent the Board meeting. If it were not held, the result would be two-fold: lawsuits from minority shareholders for failure to receive dividends and anarchy in the operations of the subsidiaries, which would allow their AAR-allied heads to begin stripping assets in the absence of any effective oversight.
8.(C) As to the visas, Dudley said he had submitted a new list to the Federal Migration Service (FMS), which included the senior Western management and also restored the names of the BP secondees that Khan had removed earlier. Dudley said he planned to meet soon with the FMS and hoped to have the issue resolved at that time.
----------------------- GOR Intervention Needed -----------------------
9.(C) Dudley said Russian Government intervention was needed to convince the AAR partners to negotiate in good faith. However, in that regard, he said he had heard rumors that to curry favor with the Kremlin the AAR partners had agreed to export TNK-BP's crude oil through a trading company close to the Kremlin. (Comment: He most likely meant Gunvor, whose head is reportedly a close personal friend of Prime Minister Putin.) In addition, Dudley indicated that BP's talks with Gazprom about a global partnership had been put on hold because of a power struggle within the governing elite, with officials connected with Rosneft objecting to the partnership. He said he had also heard that the GOR was considering letting the two sides fight each other to exhaustion, like "Siberian tigers," and then capture the survivor to create a third Russian major oil company (in addition to Rosneft and Lukoil).
10.(C) Dudley added that whatever the GOR's motivation, it seemed oblivious to the effect the dispute was having on the country's reputation among foreign investors. He noted that at the recent St. Petersburg Economic Forum the government had made all the right noises about creating a good investment climate, including by fighting corruption and improving the rule of law. However, the GOR's failure to address the dispute was undermining that message. Dudley said he was being constantly approached by current and prospective investors who were deeply disturbed by the government's official inaction in the face of individual Russian businessmen using state resources against a foreign partner.
--------- U.S. Role ---------
11.(C) Warlick noted that the reputational issue had been raised by Commerce Secretary Gutierrez in St. Petersburg and that the U.S. would look for other opportunities to raise our concerns, including meetings with GOR officials this week. Dudley responded that Secretary Gutierrez's efforts on BP's behalf had been deeply appreciated. He hoped that the G-8 meetings in Japan and Treasury Secretary Paulson's visit to Moscow later in the month would provide additional senior-level opportunities to drive home USG concerns. Warlick responded that it would be important for all G8 leaders to reinforce the message with Medvedev. Dudley agreed and said BP was approaching other Western countries to weigh in as well.
----------------------------- RenCap: Rosneft the Solution? -----------------------------
12.(C) In a separate meeting with Robert Foresman, RenCap's Amcit Deputy Chairman said that his firm had been advising BP for some time on its business activities in Russia. Foresman said the Gazprom-BP partnership would have been extremely profitable for both companies and had been blessed at the highest levels of the Russian Government, by Putin himself. What BP and Gazprom had envisioned was an ambitious global partnership in which they would share equity stakes in specific Gazprom and BP assets, as well as a joint venture partnership in TNK-BP. Gazprom would buy out AAR's 50 percent share of TNK-BP and receive one additional share from BP for a majority stake, but BP would continue as the operating partner. Foresman's view was that Gazprom CEO Miller had been given responsibility for making this deal happen and that Miller had fumbled the ball by taking too long and failing to engage successfully with the AAR partners about their stake.
13.(C) Foresman said Gazprom's failure to move quickly had opened the door to the AAR partners, who had seized control of the process of reconfiguring the company in an effort to extract maximum value if forced to sell. He said it was clear the AAR partners were not negotiating in good faith. For instance, it had been Alfa's Mikhail Fridman who had initiated the discussion of AAR trading its stake in TNK-BP for shares in BP. Fridman had then publicly attributed this idea to BP in an effort to further discredit the company in Russia.
14.(C) Foresman said Gazprom's delay had also opened the door to Igor Sechin who, from his new perch as the Deputy Prime Minister in charge of the energy sector, saw a chance to promote the fortunes of his company, Rosneft, at the expense of its rival, Gazprom. Sechin, according to Foresman, had seen Gazprom's expansion into the oil business via ownership of the Russian half of TNK-BP as a challenge to Rosneft's position as Russia's national champion for oil, and had moved to block the takeover and the broader Gazprom-BP partnership. xxxxxxxxxxxx
15.(C) Foresman said RenCap had also run the numbers on a BP partnership with Rosneft. It was not as mutually profitable as the Gazprom tie-in, nor as significant globally, but was looking increasingly attractive to BP under the current circumstances. Moreover, BP had bought a substantial stake in Rosneft during its IPO two years ago, a stake that had already risen by 60 percent in the interval. Foresman predicted that a Rosneft buy-out of the AAR partners was now the most likely outcome of the dispute and the one most beneficial to BP. Foresman added under that scenario Dudley would likely be out, replaced by someone acceptable to both sides such as Rosneft's current CEO, Amcit Peter O'Brien. RUSSELL