IN THE AUTUMN of 1999, BP’s chief executive, Lord Browne, was sitting in his
office overlooking the City of London, smoking a Cuban cigar and trying to
decide whether to ring a Russian billionaire named Mikhail Fridman, who
controlled a big Russian oil company called TNK.
Browne was furious that Fridman’s TNK was in the process of stripping assets
from a rival oil company called Sidanco, in which BP held a 10% stake. The
chief executive of Britain’s largest company was hellbent on stopping what
he saw as a clear case of corrupt Russian business practice. Browne decided
against calling Fridman. “I was going to, but then I didn’t,” he said.
Instead, Browne stepped up a covert campaign to stop Fridman. Browne wields
considerable clout and his campaign eventually galvanised George Soros, the
then US vice-president Al Gore, the CIA and Tony Blair.
Four years on from his war of nerves with Fridman, Browne’s enemy is now his
partner.
In 11 days from now, at London’s Intercontinental Hotel, investors will be
treated to the extraordinary sight of BP’s chief executive standing side by
side with Fridman, the man he used to see as a bandit.
Together they will unveil the details of BP’s £4.8 billion investment in a
50-50 joint venture with Fridman.
In principle, City of London investors like the deal. They have good reason
to: TNK-BP, the name of the joint venture, becomes Russia’s third-largest
oil company. It will make at least $1.6 billion in after-tax profit this
year, says Browne. It will also add about 13% to BP’s petroleum reserves —
for the time being, nudging BP ahead of its arch rival, Shell, to become the
No 2 oil supermajor, in terms of reserves, behind Exxon Mobil. Browne claims
to have learnt a lot since his initiation into Russian business in the
1990s.
“Our due diligence on this went way beyond what is normal,” he says. For his
part, Fridman says he and Browne are now bound by mutual interest. “BP’s
investment gives our company credibility in the eyes of western investors,”
he says, speaking in his heavily guarded office in the block-long,
Soviet-style Moscow headquarters of his Alfa Group.
“It increases the value of our company.” But a lot rides on the smiles of the
enemies-turned-partners. BP’s investment in Russia, the largest in history,
legitimises Russia as a destination for western capital. Exxon Mobil and
Chevron Texaco are this weekend competing to take at least a 25% stake in
Russia’s largest oil company, Yukos, for about $11 billion, a move that has
been made possible through Browne’s link with Fridman. Still, Russia and its
oil industry remain at least as wild as the US during the robber baron days
of Rockefeller. In July the government arrested Planton Lebedev, an
associate of Mikhail Khodorkovsky, the majority owner of Yukos for alleged
theft. It also launched an investigation into Yukos on a number of charges,
including murder. While they recognise the opportunity BP has created for
itself, investors gathering for BP’s October 16 presentation are keen to get
assurances that the partnership on which BP’s Russia bet stands is solid
enough to withstand a fall in oil prices and other, even more unpredictable,
shocks. “The market will digest the numbers,” says State Street Research
analyst Denis Walsh. “What’s more important are the relationships.” Browne
and Fridman have little in common, except a tempestuous past. Browne, 55,
went to Oxford and has worked his entire career at the publicly owned BP,
rising through the company ranks to become chief executive in 1995. He
transformed BP from the weakest of the major oil companies, known in the
1980s as the seven sisters, into one of five so-called supermajors by
orchestrating two US deals — the $48 billion purchase of Chicago-based Amoco
in 1998, and the $27 billion purchase of San Francisco’s Arco in 2000.
Fortune magazine reckons Browne is the most powerful businessman in the
world outside the US, but like most western corporate bosses, his personal
fortune is unlikely to exceed tens of millions of pounds.
Fridman, 39, grew up in Lvov, a city that over the past century has belonged
to the Austro-Hungarian empire, to Poland, the Soviet Union and now Ukraine.
He studied at the Moscow Institute of Steel and Alloys and, when Gorbachev
ushered in perestroika in the 1980s, he set up a photography collective. He
is also a founding member of the circle of businessmen that the Russian
newspaper Izvestia in 1996 termed “the oligarchs”. TODAY, with interests
ranging from banking and mobile phones to oil, Fridman has amassed a fortune
— one that Forbes magazine estimates at $4.3 billion.
Reviewing the battle between himself and Browne during an interview in his
cavernous office, Fridman acknowledges that the pressure BP brought to bear
via intermediaries such as Blair and Gore played a role in his decision to
agree a truce. But he is at pains to make clear that self-interest is the
key factor. “We did what we did because we wanted to,” he says. Fridman,
meanwhile, has two partners of his own in the TNK half of the TNK-BP joint
venture. He controls 50% of TNK and his two partners each control 25%. The
first is Viktor Vekselberg, a bearded businessman whose Renova Group
controls a sizeable chunk of Russia’s aluminium industry. He is a friend
from his Soviet student days of TNK’s third shareholder, Leonard Blavatnik.
Blavatnik emigrated to America in the 1970s and worked for Macy’s department
stores and Arthur Andersen, the now defunct auditor of Enron, before
founding Access Industries, a company headquartered at 760 Fifth Avenue in
Manhattan.
“Len and I stayed in touch after he went to the US,” says Vekselberg. “When
the situation here changed, I said, ‘Len, come back, there are opportunities
here’. Len said ‘never!’ But eventually he did, and we went into business
together.” Typical of the tangled relationships that mark the Russian
business scene, it was yet another oligarch who indirectly brought Browne
and Fridman together. This one is Vladimir Potanin, one of the architects of
the privatisation of Russia’s oil industry. In 1995, using Boris Yeltsin’s
loans-for-shares scheme, through which olig-archs lent money to the Russian
government and took shares in state-owned companies as collateral, Potanin
took a controlling stake in the Sidanco oil company. He had several
partners. One was a Cyprus-based holding company, Kantupan, whose backers
included George Soros, the British billionaire Joe Lewis, and Harvard
University Endowment Fund. Another partner was Fridman.
“Under our agreement, he had a two-thirds interest” in the controlling stake
in Sidanco, Fridman says. “I had a one-third interest. I sat on Sidanco’s
board.” But before long, Potanin and Fridman fell out — badly. “I was paid
some money. I was not too happy with the amount. It created a certain
negative feeling. I decided to act rather aggressively,” Fridman said. In
1997, in one of the final oil-company privatisations, the Russian government
sold TNK to Fridman, Vekselberg and Blavatnik. The terms remain a subject of
dispute. The three men acquired 40% of the company in 1997 for the announced
price of $800m. They picked up a further 49.8% in 1999 “for much less,
because oil prices had fallen”, Fridman explains. It is at this point that
Browne entered the picture. Potanin, having bought out Fridman’s interest in
Sidanco, sold 10% of the company to BP for $480m in November 1997. BP became
the manager of Sidanco’s oil assets.
Today, Browne is careful to note that BP’s board approved the investment,
while acknowledging that BP did not fully understand what it was getting
into. “It wasn’t that big an investment for us,” he says. “It was a 10%
stake. There was only so much due diligence we could afford.” Like Yorkshire
coal-mining villages in the days of Arthur Scargill, the oil towns of West
Siberia were in the 1990s laws unto themselves. Local managers of the
subsidiaries of the new oil companies remained unreconciled to their new
bosses in Moscow and London. In 1998 Russia suffered a financial crisis. The
government defaulted on about $40 billion of bonds and the rouble plummeted.
At the same time, the oil price fell from close to $30 a barrel to almost
$10 a barrel. In the face of financial hardships for employees and
contractors, Sidanco’s local managers began manoeuvring for control of some
of its prize subsidiaries.
One was a company called Chernogorneft. TNK bought up as much debt from
Chernogorneft’s creditors as fast as it could to consolidate its grip on the
company, Fridman says. Browne and other BP executives simply did not
understand the rules of the game. “We took advantage of the law,” he says,
“but we always acted within the law. Frankly speaking, we were seen as some
kind of Russian bandits.” It was at this point that BP decided to counter
Fridman’s tactics in Siberia with hardball as it is played in London and
Washington.
On September 7, 1999 Blair wrote to the then prime minister, Vladimir Putin,
to say that “BP fears that what is and could be a healthy and profitable
company will be manipulated into bankruptcy and collapse”. Blair wrote the
letter at BP’s request, according to Browne. Soros wrote to US officials,
including Madeleine Albright, Bill Clinton’s secretary of state. But the
letter-writing campaign failed. Browne’s worst fears were realised. On
November 26, 1999 TNK acquired Chernogorneft, in what BP maintained was a
rigged bankruptcy auction, for about $176m, or a tenth of what Russian
analysts estimated to be its value. Fridman, now Browne’s No 1 enemy, looked
to have won. THE DEFEAT was a serious public-relations blow for Browne,
especially since he had signed the contract acquiring BP’s 10% stake in
Sidanco from Potanin in the presence of Blair at 10 Downing Street. BP wrote
off $200m of its stake in Sidanco, and, privately, Browne mounted a campaign
to block TNK from winning approval for a $500m loan guarantee from
Washington’s Export-Import Bank, the credit arm of the US State Department.
Browne approached Al Gore in the White House, according to TNK shareholders,
and argued that if, after Chernogorneft, the Export-Import Bank approved
TNK’s application, it would be sanctioning corrupt Russian business
practices.
In December 1999, according to reports in the Russian press and the Washington
Post, the CIA got involved in the campaign to block TNK. The US intelligence
agency delivered a 29-page report about TNK and its shareholders to the
Export-Import Bank, according to the newspaper. It contained a
two-and-a-half- page section headed “criminal situation”. A CIA spokesman,
Bill Harlow, told the Post it was “a private report commissioned by an
international oil company and produced by a Russian security firm”. Browne
declined to comment on the CIA report. “I genuinely know nothing about it,”
he says. On December 21, 1999 Albright instructed the Export-Import Bank to
reject the loan- guarantee application for the time being on “national
security” grounds.
Several days after December 21, BP and TNK reached an agreement in principle
under which TNK would take a 25% interest in Sidanco while returning
Chernogorneft to Sidanco. “It was not the money,” Fridman says of the
Export-Import loan. “The Export-Import Bank is part of the US government. So
it was the US government saying we were not people fit to do business with.”
TODAY Browne and Fridman dismiss the Sidanco affair as ancient history.
Fridman praises Browne as “an entrepreneur”. He says: “BP pushed a lot in
Russia. It lost a lot of money and suffered from the negative publicity for
getting involved in such a wild country as Russia. Now it will gain.” Browne
describes Fridman, Vekselberg and Blavatnik as “remarkable”. Of his past
trials with Fridman, he says: “Partnership born out of conflict, if it goes
the right way, can be particularly strong.”
Browne is relying on more than psychology to safeguard his company’s
investment. He has chosen as BP’s Russian partners three oligarchs instead
of one. This could improve BP’s bargaining position if the four shareholders
in the 50-50 joint venture were to fall out. BP has also staggered its
payments to TNK shareholders. It made a $2.6 billion cash payment after most
of the deal closed in August. It will pay $1.35 billion more in cash when
the Russian government approves the last part of the deal. In addition, it
will pay $3.75 billion in BP stock in three annual instalments over the next
three years. Until the end of 2007, there is a lock-up.
Neither side can sell its stake in the new company. TNK-BP is registered in
the British Virgin Islands, which means that if the shareholders fall out,
disputes will be heard under British-based law. BP has a 50% interest in
TNK-BP, as opposed to the minority stake Exxon Mobil and Chevron Texaco are
talking about with Yukos. This means that BP has an equal rather than
minority say at board level. Still, there are already differences between
the two sides. TNK shareholders say that the joint venture’s 600 operating
subsidiaries, employing about 113,000 employees, will function by consensus.
BP executives say the same, but Bob Dudley, the Mississippi-born TNK-BP
chief executive, who started his career at Amoco, offers an addendum. He
says that BP identified the key subsidiaries and negotiated the right to
appoint a majority of the board members to them.
TNK shareholders say that the provision may be included in the master
contract, but they add that they do not recall it. There is also the
political factor. How Russia’s oil companies develop as a domestic political
issue might test the joint venture as much as falling oil prices. BP wants
its Russian joint venture to steer clear of Russian politics. TNK-BP will
not contribute to the campaigns of candidates running for the duma, the
lower house of Russia’s parliament, in December.
Nor will it contribute to Putin’s re-election campaign or the campaigns of his
opponents in the March presidential election. But Browne concedes: “What the
TNK shareholders do is for them to decide.” BP’s Russian political risk is
not theoretical. Andrey Vavilov, a senator in Russia’s upper house of
parliament, is already asking if Fridman is going to pay tax on his TNK
profit. “Into what account was the money paid?” Vavilov asked. “Where was
the account?
Are TNK’s shareholders going to pay Russian tax on the profit they made
selling Russian oil assets to BP? We won’t know until 2003 tax returns are
filed next year.”
