HOWZAT

How did it come to this when it all started so beautifully? When the deal to bring TNK together with BP’s assets in Russia was signed in June 2003, it was done in the presence of Tony Blair and Vladimir Putin and held up as the dawning of a new age in British-Russian relations.

It was, at best, a marriage of convenience. Not long before the landmark deal was done, Lord Browne of Madingley, BP’s chief executive at the time, and Mikhail Fridman, a director of TNK, were sworn enemies. Browne had been infuriated by Fridman, who took advantage of the chaos in Russia during the late 1990s to try to take assets cheaply out of Sidanco, a Russian oil group in which BP owned a 10% stake. Using his connections in America and Downing Street, Browne orchestrated a campaign to block banks from financing the deal on corruption grounds. Days after Fridman’s attempt on Sidanco fell through, the two rivals struck an asset-swap deal that was a prelude to the full merger unveiled in 2003. It’s not surprising that the deal, which gave AAR and BP each 50% but neither side operational control, has now unravelled.

The stakes are high. TNK-BP accounts for a quarter of BP’s production and a fifth of its reserves. Colin Smith, an analyst at Dresdner Kleinwort, has estimated that BP’s stake is worth about $25 billion. If it were not mired in controversy, it could be worth much more. TNK-BP trades at two-thirds the multiple of rival Lukoil, and half that of Gazprom. “A stable TNK-BP is worth a lot more than $50 billion,” said an analyst.

It has been a fantastic deal for all involved. In the past five years, AAR’s billionaires have received $18 billion through dividend payments and asset sales. That largesse has helped push Blavatnik and Vekselberg up the Forbes list of 100 richest billionaires. The cash has also funded their forays into industries around the world. Blavatnik holds a 4% stake in Warner Music and until recently sat on its board. His Access Industries conglomerate has key relationships with some of the biggest names in international finance. It raised $21 billion from Goldman Sachs to fund a takeover of chemical group Lyondell last year. He also owns 19% of Air Berlin.

Fridman is an adviser to the Council on Foreign Relations, the influential New York think tank. Douglas Hurd, the former Tory MP, sits on the board of Altimo, a company owned by Fridman’s Alfa group. Lord Powell, Margaret Thatcher’s foreign-affairs minister, sits on the advisory board of his Alfa Capital.

BP plans to use that dependence on international financial and political institutions against them. A BP insider said: “This company is full of people with degrees in geology who play golf at the weekend. It is not used to this kind of behaviour. But we are well respected in capital markets and the City and those relationships are going to be very useful.”

Both sides are digging in for a battle that could mean many months, or years, in court. AAR has hired seven law firms, led by Lovells. BP has marshalled its lawyers as well, led by Linklaters. Sutherland said: “We are going to use every aspect of influence that we can bring to bear to bring about a satisfactory resolution. That includes legal proceedings explaining our case and speaking to those intermediaries that can intercede.”

The endgame is unclear, but few fancy BP’s chances of coming out ahead. “AAR are extremely clever. They know what’s required to be effective and have the co-operation of the authorities. This is not a fair fight,” said a source close to TNK-BP. “The government is staying out of it for now. They certainly aren’t going to step in to save BP. It would be naïve to assume that AAR are conducting this campaign solely to deliver international growth.”

Nick Day, chief executive of Diligence, a business intelligence firm that deals in Russia, said this was all just positioning ahead of an ultimate sale to Gazprom or Rosneft, the state-owned groups. TNK-BP is the only big oil group in which the Kremlin does not own a stake. “This is a war of attrition and AAR holds all the cards because it has local authorities who are complicit in efforts to put BP under pressure,” said Day. “Russia is clearly renationalising three industries: oil and gas, minerals and metals, and the defence sector. AAR and BP realise they are in a competition to sell out to Gazprom, and AAR is trying to buy BP’s stake cheaply and then sell it on for a profit to Gazprom.” Gazprom declined to comment.

The odds are certainly stacked against BP. Mark Pritchard, chairman of the British-Russian Parliamentary Group, said: “This is yet another example of the Kremlin interfering through the back door with foreign investment in Russia.”

Countdown to the rupture

June 26, 2003: Tony Blair and Vladimir Putin witness signing of deal to create TNK-BP.

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