BP-Rosneft Deal: How to Become a Kremlinologist and Lose Your Shirt

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Craig Pirrong submits:

The NYT business section ran a fairly long article on the BP-Rosneft fiasco . As a Russian noted in a comment to my earlier post on the subject, the Times piece supports my argument that BP ( BP ) was counting on Russian lawlessness to overcome the black-and-white of its agreement with its AAR Russian partners:

This time, it had appeared that Mr. Dudley and BP might have protection from higher-ups. Rosneft's chairman, Igor I. Sechin, is also a powerful deputy prime minister.

A senior BP official with knowledge of the company's work in Russia said BP lawyers had understood that the agreement with Rosneft (RNFTF.PK) was "on the edge" of violating the TNK-BP shareholder agreement. But the deal also appeared to coincide so strongly with Russia's national interest that the company assumed the Kremlin would discourage the Russian shareholders in TNK-BP from making trouble. [Translation: "discourage"="Threaten with adjoining cells in Chita."] The BP official spoke on the condition of anonymity because he was not authorized to talk on the record.

The article contains this howler:

Mr. Putin, too, now seems to be distancing himself from the BP-Rosneft deal. In March, he told Russian journalists at a news conference that Mr. Dudley had not warned him of the possible legal challenge from the Russian oligarchs.

"I was completely in the dark," he said, according to the newspaper Vedemosti. "When I met with BP's director he didn't say a word about this," Mr. Putin said, referring to Mr. Dudley.

I am sure that Mr. Dudley also didn't say a word about the sun rising in the east, the color of the sky, or Joe Biden's hair plugs: one needn't waste time by belaboring the universally known. The shareholder's agreement wasn't a secret. And even if it had been a secret from the wider world, do you think for a moment that Putin, ex-spook and head of a government lousy with current and ex-spooks wouldn't have known about an important fact in the most important industry in Russia? In the dark? As if.

I still think there is a substantial likelihood that BP was played from the beginning, that Sechin/Putin and the AAR oligarchs have been tag-teaming. But even if that's not the case, it is impossible to know what the true story is, and what its implications are.

The BP-Rosneft deal also inspired (if that's the word) the most ludicrous thing I've read in a long time (h/t rtyb):

Russia Investors Should Study Kremlinology

Kremlinology was once the speciality of spies and diplomats: These days, foreign investors and companies need a degree in it too. Oil major BP had expected Russian political influence would secure its $16 billion share swap deal with state-owned Rosneft. Instead, its oligarch-backed opponent, Alfa Access Renova, has successfully blocked the plans: Arbitrators confirmed an injunction on the deal on Friday. But could bad news for BP encourage others investing in Russia?

Kremlinology was almost always a farcical failure at its heyday. And BP's current predicament is attributable precisely to its attempts to practice Kremlinology. It was too clever by half in its belief that it could unwrap the riddle inside the mystery inside the enigma, and that it could play power politics in Russia. It completely outsmarted itself. If you believe you really know what's going on there-then you're the mark. That's all the Kremlinology you need to know.

The WSJ article argues gamely:

Both AAR's legal victory, and the move against ministers' corporate influence, fit a theme reformers want to promote: That Russia's investment climate is improving.

It is still far too early to draw any conclusions about the outcome of the AAR-BP-Rosneft affair. And the broader implications of that affair are even more uncertain. Even if this does represent a case in which the Russian state respected investor rights, even though it would have preferred to do otherwise, who is to say that this is a precedent, rather than a one-off? Perhaps the internal politics cut one way this time: Who is to say they will cut the same way next time? If Putin is backing off now because he needs the money (which the WSJ suggests), how will he behave when his needs are less pressing? The whole thing about Russia is that there are no-zero, zip, nada-ways of making and keeping credible commitments. Everything is driven by the particulars of the parties and the moment. That's what you need to know about Russia: Anyone who thinks that he can use Kremlinology to understand even approximately those particulars, and how they are likely to shift, is in for a rude surprise. As an alternative, I'd suggest reading entrails. It's far more reliable.

The "move against ministers' corporate influence" is even more difficult to interpret. Yes, on its face, it is encouraging. But relying on superficial readings is very dangerous when it comes to Russian politics. Is it a desperate gambit on Medvedev's part? What are its odds of succeeding? Is this just part of a mechanism to redistribute the goodies? To cut down to size some people who have gotten too big for their britches and pose a threat to Putin-at least from his paranoid perspective (paranoia being a highly valuable trait among autocrats)? (Firing everybody to get rid of one somebody is not unknown, even in the U.S.: cf. the Clinton DOJ's firing of all U.S. attorneys to get rid of a particularly meddlesome one in Arkansas.) The opening salvo in a power struggle? (In which case, run, don't walk, to the nearest exit.) Even if it is legit, how likely is it to succeed? Will it really transform in a fundamental way the political and business system in Russia?

Fools rush in where angels fear to tread. Rushing into Russia on the basis of a few ambiguous developments which could possibly, maybe, be interpreted as the harbingers of a new investment environment would be quite foolish indeed.

Disclosure : None

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

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