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From Russia With Contempt

Times Online
The Times
July 3, 2008

From Russia With Contempt

The new man in the Kremlin cannot afford to stand aloof while oligarchs and officials ruin Russia’s reputation with investors

In Moscow yesterday, the Russian migration service approved work permits for 48 foreign employees of an oil company half-owned by BP. Seldom can such a trivial piece of bureaucracy have meant so much: at stake in this argument over the status of a few dozen oil workers is nothing less than Russia’s reputation as a place to do business, and the long-term health of its economy.

The approval of the permits means that, for the time being, senior foreign staff of TNK-BP, a British-Russian joint venture, can go on working in Russia. BP’s $8 billion stake in this venture is the single largest foreign investment in Russia. TNK-BP itself is the third-biggest oil producer in the country, where the oil and gas industries still overwhelmingly dominate the economy.

Russia needs specialised foreign investment and knowhow more than it is prepared to admit. Its net oil output fell in the first half of this year for the first time in a decade, and its state-owned energy giants, for all their size, lack the resources to open up the new fields in eastern Siberia on which strong future output depends.

Yet TNK-BP, and its expatriate staff in particular, have been hounded by the authorities more as intruders than valued investors. The situation is complicated by a furious power struggle within the company, but the essentials are clear – and they are depressingly reminiscent of past assaults on property rights that the Kremlin should be defending.

Last year TNK-BP was forced to sell its share in a giant Siberian gas field to Gazprom for a fraction of its real value. BP put a positive gloss on the deal, but this spring its relations with officialdom turned sour. TNK-BP’s Moscow offices have been raided twice by police. A court in Siberia has barred dozens of its foreign employees from working in Russia on technical grounds. Other staff, until yesterday, have been denied extensions to their work permits, and the company’s British chief executive, Robert Dudley, has been questioned by the Interior Ministry about alleged tax evasion.

Dmitri Medvedev, the new Russian President, has echoed his predecessor in demanding respect for the rule of law. He has also said that it would be illegal for state institutions to involve themselves in corporate conflicts such as this one. If so, at least five state institutions have broken the law in their dealings with TNK-BP.

The truth is that the rule of law in Russia was mocked, not strengthened, under Vladimir Putin, and it remains a sham. It offered no more protection for Shell (squeezed out of the Sakhalin-2 gas project after being threatened with a $30 billion environmental lawsuit) or Yukos (dismantled by the Tax Ministry and sold off to Kremlin allies) than it does now for BP or 140 million ordinary Russians.

The world’s oil majors are not angels. They hire the best legal advice wherever they operate and usually benefit from it. Even when, in Russia, they have not, the scale of the country’s reserves has persuaded Shell and BP to accept losing control of their investments as the price of doing business with the Kremlin’s proxies.

In this case TNK-BP’s billionaire Russian shareholders may fear losing control more than BP itself. The stakes for both are high – TNK-BP made $5.7 billion last year. But they are highest for Russia herself. With oil at $140 a barrel, its economy looks invulnerable. Yet it urgently needs to diversify by engaging more fully with the global economy, and that will not be possible as long as even its biggest investor is hamstrung by unenforceable contracts, corrupt police and venal courtrooms.

When Gordon Brown meets Mr Medvedev in Japan next week, he should challenge him to stand firm and make a reality of the rule of law.

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