VZCZCXRO2898
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #1964/01 1911402
ZNY CCCCC ZZH
P 091402Z JUL 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 8955
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 001964 
 
SIPDIS 
 
DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT 
EUR/CARC, SCA (GALLAGHER, SUMAR) 
DOE FOR FREDRIKSEN, HEGBORG, EKIMOFF 
DOC FOR 4231/IEP/EUR/JBROUGHER 
 
E.O. 12958: DECL: 07/08/2018 TAGS: EPET ENRG ECON PREL RS

------- Summary -------

1.(C) BP Russia President Richard Spies told us July 7 that the company is pursuing a three-pronged approach of negotiations, legal action, and international pressure in its ongoing battle with Russian shareholders (AAR) over management control of TNK-BP (refs A and B) -- a battle that, despite progress on visas, he predicted would continue. TNK-BP VP for International Affairs Shawn McCormick separately told us July 7 that a negotiated resolution of the dispute would require BP engaging more directly with AAR, rather than relying on TNK-BP,s western managers to act in its interest. He added that BP had succumbed to AAR pressure tactics in the past and might do so again. End Summary.

---------------------- Three-Pronged Approach ----------------------

2.(C) Spies said BP is pursuing a three-pronged approach to defend its interests in TNK-BP: negotiate with AAR; examine and pursue legal options as necessary; and bring international pressure to bear on the GOR and AAR. Spies confirmed that BP had named Amcit Lamar McKay, the former head of BP Russia and a former TNK-BP board member, to head negotiations with AAR. Spies said McKay knew the AAR partners and was well-versed in TNK-BP,s history and structure. McKay would not be moving back to Moscow but would meet the AAR partners here and abroad in an effort to reach a resolution of the dispute. Spies added that BP was prepared to defend its interests in court if negotiations failed. However, he described the $360 million lawsuit recently brought by BP against AAR in the UK over 2003 tax deed of covenant as preemptory in nature, driven by concern that their claim would lapse if the suit had not been filed. The legal option was not BP,s preferred way to resolve the dispute.

3.(C) With respect to the third prong, Spies said BP is briefing all G7 governments and requesting that they approach the GOR seeking its intervention. He said that besides the U.S. and the UK, Canada, Germany, France and Italy had all expressed concern at the dispute, which they thought could undermine the position of their investors, and had expressed their intention to raise it with the GOR. Spies presented us with five different briefing papers (emailed to desk), which he said had also been shared with the other G7 governments. The papers refute the public attacks against BP by their AAR partners. Spies walked us through one paper in particular, which he said disproved the AAR allegation that TNK-BP had underperformed relative to its Russian competitors. The paper noted that the fall in production and dividends in 2007 that AAR had pointed to was a direct result of the 2006 sale of TNK-BP subsidiary Udmurtneft, to which AAR had agreed. The subsidiary had accounted for 10% of TNK-BP,s production and the sale proceeds had been paid out as a dividend, artificially raising 2006 dividends.

--------------------- AAR Tactics and Goals ---------------------

4.(C) Spies said that despite progress on visas (see paragraph 9) he expected the attacks by AAR to continue. He pointed to the July 7 extraordinary board meeting of TNK-BP Management that had been called to try to dismiss TNK-BP CEO Robert Dudley. Spies said TNK-BP Management was a cut-out that had been created to employ the company's senior management in a manner that complied with Russian tax law. The meeting, called at the instigation of AAR partner Viktor Vekselberg, had been a publicity ploy. Spies explained that BP controls 3 of five board seats, and that AAR knew it would lose the motion. According to Spies, AAR will use the vote MOSCOW 00001964 002 OF 003 in favor of keeping Dudley to buttress their claims that BP and TNK-BP,s western management were acting against Russia's best interests.

5.(C)Qccording to Spies, BP was willing to accommodate GOR interests but it was unclear what those interests were at this point. BP,s talks with Gazprom had been dormant since April and with Rosneft since last year. Spies speculated that AAR might be acting on behalf of a future government buyer for its share of TNK-BP in order to avoid any unseemly control battles between that buyer and BP. However, he had also heard speculation that part of AAR's motivation was to neutralize Putin, who was angry over their having stalled the long-pending sale of the Kovykta gas field to Gazprom (ref C). By "wrapping themselves up in the Russian flag" the AAR partners had prevented Putin from moving against them, which would have been seen to be siding with foreigners against Russians. Spies said that in the end, BP doesn't care who its partner in TNK-BP is, so long as agreements are respected and the company is managed professionally for long-term profit growth.

----------------------------- TNK-BP Management Perspective -----------------------------

6.(C) In a separate July 7 meeting, McCormick also pointed to the TNK-BP Management board meeting as evidence that AAR would continue to use every means at its disposal to take management control of TNK-BP. (Note: On July 8 tax authorities reportedly demanded detailed records on international secondees to TNK-BP. End note.) He said Dudley would remain the focal point because of the CEO's powers under the shareholder agreement, which could only be changed by agreement or through the arbitration clause of the original shareholder agreement forming TNK-BP, which directs disagreements to be settled by an international arbitration court in Sweden. In the end, McCormick said, the AAR partners would be fine with Dudley staying on so long as his control of the company was diluted.

7.(C) McCormick said a resolution of the dispute would require BP engaging directly with the AAR partners. In that regard, he welcomed the appointment of a new BP representative in charge of TNK-BP negotiations. However, McCormick said Lamar McKay might not have been the right choice. McKay had personal issues to deal with that hampered his ability to travel. McKay had come to Moscow three weeks ago but had not been back since. McCormick felt that BP would be better served by having someone senior on the ground in Moscow not only to resolve this dispute but to look after its interests in general. In fact, the absence of such an individual contributed to the appearance that Dudley and other Western managers were acting on its behalf.

8.(C) McCormick added that he was not sanguine that BP would be able to successfully defend its interests. AAR had successfully used pressure tactics against BP before. He noted that the original sales agreement had called for BP to pay half of its investment up front to the AAR partners with the other half paid in yearly installments. However, before the ink was dry the partners had asked for all the money up front. BP had said no and the partners had responded by effectively shutting down the company, as they were doing now. BP had ultimately caved and might do so again unless it was willing to accept as much short-term pain as were its partners.

----- VISAS -----

9.(C) As reported in the press, 49 expat staff of TNK-BP (actual TNK-BP employees, not secondees) have either received or should soon receive their new visas. There are at least another 37 employees whose visa prospects are still unclear, although 14 of these may be resolved soon. Spies and McCormick explained that the 150 expat employee figure often cited in the press is misleading because it represents the number of positions (not people) for which TNK-BP management seeks visas. Many of these positions are duplicates or even MOSCOW 00001964 003 OF 003 triplicates in some cases because the visas are granted on the basis of nationality and position. In order to have hiring flexibility, TNK-BP management sought permits for several nationalities for a given position. However, due to a court order resulting from a lawsuit brought by a minority shareholder linked to Alfa, there are currently no BP secondees working for TNK-BP, and many of these employees are now being relocated by BP.

------- COMMENT -------

10.(C) This case sends the wrong signals about Russia's long-term investment climate and its commitment to economic reforms. Convincing the Russian government of that is, however, another task altogether as foreign investment continues to flow into the rapidly growing economy, buoyed by rising energy prices. End Comment. BEYRLE