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Twenty-two years ago, Mikhail Fridman could be found wandering the streets of
Moscow offering to wash windows.
Now, after rising to become one of the world’s richest men with a fortune
estimated at between $12 billion and $17 billion (£6-8.5 billion), Fridman
is leading a group of four oligarchs who are using strong-arm tactics with
oil giant BP over its lucrative Russian business.
The joint venture TNK-BP accounts for about a quarter of BP’s global oil
reserves. BP owns half of the company; the four businessmen, through their
Alfa Access Renova (AAR) consortium, own the other half.
The feud between the two sides has become increasingly acrimonious. Two weeks
ago, BP chairman Peter Sutherland accused Fridman and his partners of
resorting “to the corporate raiding activities that were prevalent in Russia
in the 1990s” in a bid to take control of the business. “This is bad for us,
bad for the company and, of course, very bad for Russia,” Sutherland said.
Fridman retorted by comparing Sutherland to Hitler’s propagandist Joseph
Goebbels, and renewed calls for Robert Dudley, the BP-appointed chief
executive of TNK-BP, to be sacked.
Fridman shares a 25% stake in TNK-BP with his right-hand man German Khan. The
other 25% is split evenly between Viktor Vekselberg, the chairman of Rusal,
the world’s biggest aluminium producer, and Len Blavatnik, a long-term
business partner, whose American-based investment firm Access Industries
moved into Russia shortly after the fall of communism.
Connections between the four run deep. Blavatnik and Vekselberg went to school
together. Fridman and Khan, also Ukrainian, first met as students at the
Moscow Institute for Steels and Alloys in the 1980s. Vekselberg is another
graduate of the institute.
Their business dealings – and vast wealth – stretch back to Russia’s
controversial privatisations of the 1990s. Collectively, they have operated
as AAR or TNK since the mid1990s.
Relations between BP and the four oligarchs deteriorated sharply in an
explosive meeting of the TNK-BP board last November, The Sunday Times has
learnt.
Since then, BP has come to believe its Russian partners are behind an
increasingly bitter campaign to force it to the negotiating table.
New evidence has emerged to suggest that the Russian side may have been linked
to an investigation by Russian immigration authorities this year that led to
the suspension of work permits held by 148 foreign engineers working for
TNK-BP.
The company has been subjected to raids by the Russian intelligence agencies
and Dudley has been hauled in for questioning by Russian police. Allegations
have also emerged suggesting that Vekselberg and Khan – who both serve as
TNK-BP executives – have been actively undermining Dudley from inside the
company.
Behind the dispute lies the wider question of whether the Kremlin has its eyes
on TNK-BP’s assets and would like to see BP forced to sell up to Gazprom,
the state-owned gas monopoly.
If BP wants to preserve the value of its 50% stake, it appears it will have to
cut a deal with the four men. “BP is still talking daily to all four of the
Russian partners,” said one oil analyst. “From what I can gather, that would
be better described as shouting at one another.”
When BP struck the deal with Fridman, Khan, Vekselberg and Blavatnik in 2003
to create TNK-BP, it did so with its eyes open. BP had been crossing swords
with Fridman and Khan for years.
In 1997 BP bought 10% of a Russian oil firm, Sidanko, for $571m. Little more
than a year later it was forced to write down the value of the holding by
$200m, after Fridman, through TNK, took control of Sidanko’s largest
subsidiary.
BP was not the only western investor stung by TNK. More than 40% of Sidanko
was held by a consortium that included billionaire financier George Soros
and Bahamas-based currency trader Joe Lewis.
At the time, Fridman was still building his fortune – and a reputation as a
fearsome negotiator. Khan was usually by his side. He was widely reputed to
carry a gun into Russian board meetings. Today, his office at TNK-BP’s
Moscow headquarters is decorated with his personal gun collection.
BP eventually won back its share of the Sidanko assets in 2001, but it was
clear that a longer-term solution was needed to keep the company in Russia.
Creating TNK-BP saw BP stump up $7.5 billion to the four men, comprising
$2.6 billion in cash, $3.7 billion in BP shares plus BP’s Russian assets.
Crucially, the new deal also led to the creation of a new governance structure
for the company. Everything would be split 50:50 between BP and AAR. Under
the terms of the deal, BP would get to appoint the chief executive, Dudley,
and AAR would get to appoint the chairman – namely Fridman.
Almost before the ink on the agreement was dry, minor rows over strategy
began. It was inevitable the pair would fall out, and hostilities erupted
when Dudley stood before the TNK-BP board last November to present the
business plan for this year.
Opportunities for the group were springing up across Russia, the chief
executive said. Bringing new production on stream was also going to demand
further investment. Dudley proposed a 75% cut in TNK-BP’s annual dividend to
fund it.
Fridman sat at the head of the table, flanked by Blavatnik to his right and
Vekselberg to his left. All three were angry. They demanded that if further
investment were required it should be funded by some form of capital-raising
exercise.
The Russian camp suggested floating off TNK-BP’s oilfield services business.
Alternatively, they said, some of the company’s assets should be sold. It
subsequently emerged that the Russian directors had appointed UBS, the
investment bank, to review these options.
TNK-BP had been a huge success for its joint owners. In its five years it had
generated about $18 billion in dividends for BP and its four partners.
The BP-appointed directors, who include Lord Robertson of Port Ellen, the
former Nato secretary-general, were taken aback. They reasoned that, under
the terms of the original business plan, 2008 had always been envisaged as a
year when growth would slow to fund investment. Not so, argued the Russian
camp.
The deadlock continued until February when the board was due to meet again at
BP’s London headquarters in St James’s Square. Shortly before it was due to
start, word came through that none of the AAR directors would be attending.
The reasons were unclear.
Within weeks, a BP employee was arrested in Moscow on suspicion of industrial
espionage. BP’s Moscow offices were raided by state officials.
Allegations of a £21m tax evasion by BP then surfaced, related to previous
deals involving Sidanko. Suggestions of environmental violations at TNK-BP’s
biggest field also appeared.
BP repeatedly asked Fridman directly whether he was behind any of the
investigations, according to industry sources, knowing that he had been
alleged to have used similar tactics against business partners in the past.
Fridman, who has repeatedly denied any connection to any investigation, is
said to have responded mostly by shrugging his shoulders and saying: “This
is Russia.”
In early April, 148 of BP’s expatriate employees had their work visas
suspended, forcing them to down tools immediately. The hurdles being placed
before BP and TNK-BP seemed to be getting higher.
At the end of May, a rescheduled TNK-BP board meeting was due to take place at
a neutral venue in Cyprus. The AAR directors, however, said they would not
meet unless both sides agreed to sack Dudley, claiming that he was biased
towards BP.
From then on, a row that had been simmering behind closed doors erupted into
the open, amid threats of legal action and name-calling.
With Fridman and Dudley locked in apparently insoluble stalemate, the task of
finding a solution has fallen to Alex Knaster, one of the AAR directors, and
Lamar McKay, a senior vice-president at BP, who has been sent over to Russia
to handle talks between the two sides.
On June 3, the AAR directors put a proposal to BP, suggesting the oil giant
could buy out their half in the business by paying them with BP shares. BP
has said it will consider the offer, but only on condition that the Kremlin
approves, and that either Gazprom or Rosneft takes on the stake.
Ultimately, BP’s Russian empire is expected to end up as a minority interest
in a larger business run by one of those two Russian energy giants.
A quick resolution to the dispute, however, is not being forecast by many
Russia-watchers.
“You can never predict the future in Russia,” said one western businessman who
sits on the boards of Russian companies. “Often, you have enough difficulty
predicting the final version of the past.”
THE RUSSIAN GANG OF FOUR
MIKHAIL FRIDMAN: worth £6-8 billion Born to a Jewish family in
western Ukraine in 1964, Fridman was shunned by classmates when he started
university in Moscow. His window-washing business was one of the first
private enterprises in Russia and soon he turned to international trade,
telecoms and then oil.
GERMAN KHAN: worth £3 billion The public face of TNK-BP in Russia,
Khan is Fridman’s right-hand man. Born in the Ukranian capital Kiev, the 46-
year-old met Fridman at the Moscow Institute of Steel and Alloys. He spent a
few years trading textiles, shoes and jewellery, then joined forces with
Fridman in 1989.
VIKTOR VEKSELBERG: worth £5 billion While he is best known as the
chairman of the metals giant Rusal, Vekselberg also controls a string of
business interests through his Renova investment vehicle. At 51 he is seven
years older than Fridman but went to the same university as both Fridman and
Khan.
LEN BLAVATNIK: worth £4 billion He was born in Russia but
emigrated to America in 1978, aged 21. A long-term business partner of
Vekselberg, he sits on the boards of both Rusal and Warner Music and is now
based in London and New York. Blavatnik is said to be a marginal figure in
the dispute with BP.
