When BP executives Sam Bennett and Lamar McKay filed into the offices of Pamplona Capital on Park Lane in London last month, they were feeling reasonably confident despite the firestorm swirling round them.

For months, the oil giant and the four Russian billionaires with whom it owns TNK-BP, Russia’s third-largest oil company, had been embroiled in one of the most public and bitter disputes in recent corporate history. Just a few weeks earlier Robert Dudley, the BP-appointed chief executive of the company, was forced to flee Russia to a secret location in central Europe after what BP called an “orchestrated campaign of harassment” by authorities at the behest, they claimed, of its deep-pocketed Russian partners.

But behind the scenes halting progress was being made. McKay, an American BP executive and TNK-BP board member who had been parachuted in from Houston to negotiate with the Russians, and Bennett, one of BP’s chief negotiators who played a central role in setting up the original joint venture in 2003, knew their adversaries well. Across the table were a pair of billionaires: Alex Knaster, the investor who runs Pamplona and is a TNK-BP board member, and Mikhail Fridman, one of the world’s richest men and the combative head of AAR, the Russian investment group that owns the other half of TNK-BP.

The talks were prickly, but cordial. There was none of the public vitriol that had been spewed in recent weeks. (At one point, Fridman had accused Peter Sutherland, the BP chairman, of using Nazi “Goebbels propaganda” after Sutherland labelled Fridman and his partners corporate raiders.)

What was hammered out over the five hours of hard-nosed talks in Knaster’s office overlooking Hyde Park had in fact been broadly agreed a few weeks before at the Palais Hotel in Prague. That was where BP chief executive Tony Hayward met Fridman and agreed the terms of a truce. The following talks between their lieutenants led to the memorandum of understanding that was finally signed and unveiled last week.

After months of public mudslinging BP had finally buckled. It gave in to every one of AAR’s demands. By December 1, Dudley will be jettisoned, replaced by a Russian-speaking executive of BP’s choosing with extensive “Russian business experience”.

New independent directors will be named, the board will be slimmed, a listing of up to 20% of its shares is expected in London or Moscow but not before 2010. TNK-BP will also be free, in theory, to expand into international markets where BP is less inclined to tread, such as Iraq, where AAR already has interests, or Cuba.

It could have been worse. Analysts feared that the onslaught of investigations in Moscow would make life so uncomfortable for BP that it would cut its losses and sell out of the company that accounts for a quarter of its production. The crisis was also seen as a big test of Hayward’s new reign. A BP insider said: “When you see how canny Hayward can be, it could signal the beginning of quite big changes.”

Yet some industry sources see the accord as little more than a problem deferred. One executive said there is a history in Russia of signing memorandums of understanding and nothing happening.

Indeed, the BP memorandum must still be converted into a binding legal contract, which is expected to happen over the next two months. The uncertainty surrounding the deal was reflected in the market’s reaction to the deal. Relieved investors sent BP’s shares up by 4% last Thursday when the accord was announced. By the end of the day and into Friday, however, they gave up that ground and more. The shares ended the week down 5.6%.

Citigroup expects the quasi-resolution will nonetheless give a fillip to BP’s share price, which has underperformed rival Royal Dutch Shell by about 50p per share since the controversy erupted. The bank values the TNK-BP stake as worth 48p per BP share, or about 10% of its market value.

“The compromise answers immediate concerns about BP’s near-term future in Russia, removes a key overhang on valuation, and should allay market fears over the need for a resource-led acquisition from BP,” said Mark Bloomfield at Citi.

A great unknown is whether relations between the two sides can truly be mended. Both sides were making all the right noises last week. Stan Polovets, chief executive of AAR, said he was “absolutely confident” that both sides can patch things up.

“Everybody has a decent working relationship,” he assured, adding: “We are pleased that common sense prevailed. The changes that are being made are going to make this company stronger.”

The choice of chief executive will be crucial. Hayward said last week he had a shortlist of six possible replacements for Dudley, who will be given a senior position at BP. Industry sources said the candidate could come from Yukos or Sibneft, the former Russian energy giants that have been dismantled and sold in recent years.

However, there is a danger the position could be seen as a poison chalice. “Who is going to want that job, navigating between two warring parties?” asked one source.

Polovets is confident there will be no lasting damage, either for Russia or TNK-BP: “This whole situation has been sensationalised quite a bit,” he said. “We’re happy with the outcome. “

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