An Oil Romance On the Rocks

Five Years After BP Partnered With Russian Tycoons, This Lucrative Marriage of Opportunity Is in Collapse

The marriage of British oil giant BP and a group of Russian-bred tycoons in a joint venture in 2003 was strained from the start.

"The first risk . . . is mutual distrust," the joint venture's executive director German Khan warned his colleagues in the company newsletter when the deal was signed.

Mistrust has curdled into open hostility, despite the fact that the 50-50 joint venture, called TNK-BP, has doubled or tripled in value -- and paid out a staggering $18 billion in dividends to its shareholders in just five years. Both sides are tapping into rich reservoirs of grievance and accusation.

The Russian oligarchs accuse BP of pursuing its own interests, overloading the venture with costly expatriates and refusing to let it pursue exploration opportunities in other countries, such as Cuba. Meanwhile, BP suspects that its Russia-based partners want to siphon off prized assets and seize management control. BP also thinks the partners have prompted Moscow authorities to escalate tax investigations, conduct a raid on the company's offices and turn down the visas of 148 expatriate workers who have been forced to leave the country. Separately one expatriate staff member was arrested on suspicion of espionage.

Yesterday the firm's besieged president, Robert Dudley, facing the expiration of his Russian work visa this weekend and calls for his ouster from the tycoon partners, said he would leave Moscow and run the company from abroad. George Robertson, the former NATO secretary general who is TNK-BP's vice chairman, in Washington yesterday blamed the venture's four Russia-based partners for Dudley's inability to obtain a visa, calling it "an outrage."

The strife at TNK-BP has disturbed foreign analysts and investors who see it as an ominous sign about the difficulty of doing business in today's Russia. British Prime Minister Gordon Brown, German Chancellor Angela Merkel and President Bush discussed the case with Russia's President Dmitry Medvedev at the recent Group of Eight summit.

When TNK-BP was formed, it was widely seen as a sign that President Vladimir Putin's Russia was open for business, with even its prized oil and gas industry ready for foreign investment and cooperation. BP's high-profile chief executive John Browne and Russian financier Mikhail Fridman signed agreements in the presence of Putin and British Prime Minister Tony Blair. A gala reception was held at the Kremlin Armory for 300 guests from the worlds of business and politics.

Five years later, the feud at the joint venture has become a test, in the eyes of many foreign investors, of whether it is safe to invest in Russia and whether the apparatus of the state can be marshaled against foreign investors in commercial disputes.

"The sooner it's resolved through means that are transparent and fair, the better, not only for the parties concerned but for everyone considering investment in Russia," said Ed Verona, president of the U.S.-Russia Business Council.

Earlier this month, Viktor Vekselberg, one of the Russia-based partners, hosted a lunch at a tony midtown Manhattan French restaurant, Le Bernardin, to make his case against Dudley and BP's management of the firm. The day before he had been at Harvard University because he had financed the replacement and return of large bells from Lowell House to their original location in the Danilov Monastery in Moscow.

The venture has been rewarding for him. Vekselberg's personal company, Renova, has received $4.5 billion in dividends plus its share of what BP paid to buy in since the deal was forged; he said the partners had bought 40 percent of the firm for just $810 million when the post-Soviet government privatized the operation.

Dressed in a white suit and open shirt, Vekselberg said there was no way he, a wealthy oligarch of Ukrainian, Jewish descent, could orchestrate official inquiries in Moscow. Instead, he said, the dispute with BP and the investigations into Dudley's management were a coincidence. He said that he too had been questioned about tax matters.