But after unending extortion and interference from various federal and regional government officials, particularly Vladimir Butov, governor of the Nenets Autonomous District that encompasses the Timan Pechora fields, several Western firms including Exxon, Texaco, Amoco, and Norsk Hydro of Norway abandoned similar efforts, including a joint venture called Timan Pechora Co.28 Their run-in with Butov is a good example of the political interference that the oil companies, domestic as well as foreign, often encounter. Butov was elected governor of the energy-rich Nenets region in the northern part of European Russia in 1996. This was despite two earlier criminal convictions. His most recent difficulty in 2002 was the result of his refusal to recognize a Moscow court order that awarded an oil field to a company other than the one he favored.
While the other companies walked away from the millions of dollars they had already invested in the region, Conoco held out. But that was largely because they were stubborn, not because they were making a profit. Among other forms of harassment, Conoco had to deal with six different local taxes, almost all of which, after a time, were increased. By 1999, they found themselves having to pay twenty different taxes.29 The federal government also surprised them by instituting a heavy export tariff after the agreement to begin the joint venture was signed.30 That was not all. Permission to export their output was revoked periodically. They were denied access to the export pipeline. To top it off, one of the fields Conoco had hoped to develop in the Barents Sea was suddenly transferred to a Russian firm without warning or compensation.31 Over the decade, ConocoPhillips, as it is now called, invested $600 million in return for which it earned little and sometimes nothing.32
IF AT FIRST YOU DON’T SUCCEED
Despite these early difficulties, ConocoPhillips decided to try again. As company officials debated whether they should go back to Russia, ConocoPhillips, like other major energy producers, concluded that energy companies seeking new untapped reserves do not have many options, and those reserves they do find are likely to be located not only in difficult geographical areas but within politically problematic countries.33 So after much internal discussion and debate within ConocoPhillips, in July 2004, the CEO of ConocoPhillips, James Mulva, and the CEO of LUKoil, Vagit Alekperov, met with President Putin to ask if it would be okay for ConocoPhillips to spend more than $7 billion to buy up to 20 percent of LUKoil’s stock.34 For ConocoPhillips, despite everything that had gone wrong in the past, this was worth the risk. By investing in LUKoil, they acquired access to crude oil reserves at a cost of $1.70 a barrel. As the going price at the time was around $40 a barrel, that was quite a bargain.35
That both CEOs thought it prudent to check with Putin in advance tells us how central Putin and his government’s role have become in what elsewhere, certainly among the other non-Russian members of the G-8, would usually be a purely commercial decision. But Putin and those around him had earlier signaled considerable displeasure at what, for a time, almost seemed to be a coordinated campaign by foreign energy companies to buy up control of Russian natural resource companies. As we shall see, that was one of the reasons the Kremlin was so concerned about Mikhail Khodorkovsky and the rumors and evidence that he was trying to sell off Yukos, in whole or in part, to Exxon-Mobil and Chevron. To the nationalists in the Kremlin and to the public at large, that was a heretical if not treasonous act. It was bad enough that, also in 2003, TNK (Tyumen Oil) sold half of its interest to BP and allowed BP to become the managing partner after the merger.
The way BP became a major player in Russia makes a good case study of how hazardous such a quest in Russia can be. BP itself did not initially invest directly. Instead, in 1998, it bought up AMOCO, a U.S. company that in 1997 had bought a 10 percent share in Sidanko, a Russian oil company, for $484 million. (We discussed Sidanko’s privatization in Chapter 3.) By resort to chicanery in a bankruptcy court, TNK managed to destroy Chernogorneft, a Sidanko subsidiary, which it then seized from BP/AMOCO for itself. In response, BP/AMOCO decided to play it safe and wrote off $210 million of its investment in Sidanko, not something stockholders like to hear. This was followed by vituperation and lawsuits in U.S. courts against TNK. But as is sometimes the practice in post-Soviet Russia, the fact that businesses are violent enemies one day does not preclude them from holding their noses and forming a partnership the next. Thus, in August 2003, BP and TNK agreed to reconcile their differences and, of all things, form a 50-50 partnership. This cost BP $7 billion but it made geological as well as legal sense as BP’s and TNK’s oil fields were adjacent to each other and coordination rather than competition would be more likely to result in the maximum volume of extraction. But as both BP and ConocoPhillips have subsequently discovered, partnerships with a Russian petroleum company are not always warm and cuddly. Because of almost unbridgeable cultural differences, not to mention the premeditated attacks on one another, as often as not the partners came to feel that their union was more like a shotgun wedding than a marriage made in heaven. Viktor Vekselberg, TNK-BP’s chief operating officer and one of the main Russian owners, acknowledged as much in an interview reported in the New York Times.36
To further complicate matters, President Putin himself has criticized the BP investment. He has also referred to the Production Sharing Agreement (PSA) as “a colonial treaty” and expressed his regret that the Russian officials who authorized such arrangements had not been “put in prison.”37
Cultural differences are not the only hazard faced by Western expatriates working for the TNK-BP partnership. The company has also had problems with Russian government authorities. Although Russia is now more open to foreign business investment—even foreign investment leading to operating and manufacturing control—than in the Soviet era, not everything has changed. The sense of paranoia and xenophobia is still very much alive. Non-Russian executives in TNK-BP, for example, are prohibited by Russian law from having access to official state data about Russia’s petroleum and natural gas reserves. These reserves are regarded as a state secret; foreigners who acquire such data risk being charged with espionage. But how can anyone operate a petroleum or natural gas company without data about that company’s reserves? To avoid arrest, TNKBP buys petroleum reserve data from Western companies. John Grace reports that TNK-BP uses Degolyer-McNaughton or Miller and Lenz. Other maps are also freely available on the Internet.38 Nonetheless, in October 2006, some Russian government officials were charged with turning over state secrets to TNK-BP employees, and some TNK-BP subsidiaries have had their state secret access licenses revoked.39
In yet another reflection of Russia’s historic xenophobia, in October 2007 Putin complained that there were too many foreign managers in senior positions in Russian companies, especially those producing raw materials. As he put it, “a thin top management stratum dominated by foreign specialists” is the reason why Russia imports so many foreign made goods and hires so many foreign specialists.40
In all fairness, the way the Russian government reacts when foreign investors attempt to buy their energy resources is not that atypical of how most countries react in a similar situation. If anything, most members of OPEC, for example, are even more protective. But while Russians restrict what foreigners can do and know within Russia, they see no problem when Russian companies seek to buy energy producers in other countries. Thus, Putin helped LUKoil dedicate one of its new gasoline stations in New York City after LUKoil bought up the Getty oil filling-station network, a long established U.S. business operation. Neither the U.S. government nor the Congress did anything to hamper or limit LUKoil’s acquisition. Of course, LUKoil purchased Getty’s 1,300 filling stations, not its oil wells, which might have triggered a more protectionist reaction. While some Americans would likely react negatively to such foreign investments because of feelings of nationalism and fear, Russian investment in the U.S. energy sector—at least in petroleum production, refining, and servicing—is a good idea. The Russians are more likely to export petroleum to us and avoid any halt in deliveries if they have operations in the United States. Otherwise, some strategists argue, in the event of an embargo these facilities would have to be closed down. At the same time, of course, the properties Russians buy in the United States can serve as hostages if that should ever be necessary to offset similar pressure on U.S. companies in Russia. In any event, U.S. investment in Russian companies and Russian foreign direct investment in the United States symbolizes Russia’s emergence as an economic and a political player of consequence.