by Tom Bower
Peter Aven approached Sechin, the point man. Through takeovers during the previous four years, Sechin had increased Rosneft’s oil production from 200,000 barrels a day to over two million. He could interpret the president’s opinion. “Sechin,” it was afterward reported, “has approved harassment going ahead without breaking relations.” Nothing however would happen until after the presidential elections on March 2, 2008. Following the smooth transfer of presidential office to Dmitri Medvedev, Sechin’s authority was confirmed. Appointed a deputy prime minister, he moved with Putin from the Kremlin to the White House, the prime minister’s offices. Sechin was now acknowledged as all-powerful, and extended his rule over Gazprom. To confirm his new authority, he visited Gazprom’s 34-floor headquarters in Cheryomushki, south of Moscow, and was escorted by Alexei Miller to view one of Russia’s holiest secrets: the giant switchboard controlling the whole of the country’s gas supplies, from the oilfields into the pipelines to the towns and cities. Sechin did not stay for tea.
The mood at TNK-BP’s office in Moscow noticeably changed. From their conversations with Sechin and Igor Shuvalov, the partners understood how they were to put pressure on BP. The fulcrum was Dudley’s contract with TNK-BP, which Khan had allowed to expire. Without a contract there would be no work visa, and without a work visa Dudley’s residence visa would not be renewed. In London, Hayward admitted that “Understanding the soup in Moscow is hard.” He was not helped by Browne’s decision to downgrade BP’s office in Moscow, appointing a non-Russian-speaking representative isolated from Moscow’s power brokers. Fridman’s message about survival was misunderstood. “Fridman doesn’t know what he wants,” a senior BP director sniffed. Isolated from Russia and relying on Hayward and Dudley, BP’s board of directors assumed that Fridman and his fellow oligarchs were wholly unreliable. “Negotiating with these people is impossible,” said one director, unaware that Fridman’s demands were crystal-clear: TNK-BP was to be Russified, and the oligarchs wanted more money from the business. Hayward had not anticipated how much pressure the partners would put on BP. The next move was unexpected.
The enforcement of Russia’s laws and regulations, as BP’s executives knew, was random. Everything was prohibited, and every accused could effortlessly be found guilty if prosecuted by the country’s regulators, police and government departments. In that jungle, the tax authorities, the ministry of the interior, the FSB or security police (the successor to the KGB), and the agencies responsible for granting visas to alien nationals could, depending on the circumstances, take the initiative against foreigners working in Russia. Since 2003, Khan had shielded BP’s staff and had managed the bureaucrats. By establishing “an accommodation” with the government’s officials to “overlook” any transgressions and obtain protection from pressure, Khan had protected BP’s staff from valid accusations of lawbreaking. Contrary to Russian law, many BP staff were receiving their salaries offshore, and inevitably all of them had failed to comply with the complicated employment regulations. Khan, quite legally, now “withdrew” the shield, and the government officials ceased to turn a blind eye to the transgressions. Overnight it became open season for badly paid officials who regarded businessmen as “low life” to snap hungrily. Aware that the rigorous enforcement of punitive laws would now be praised, the tax collectors and senior officers of the FSB considered themselves at liberty to harass TNK-BP’s expatriate employees. Without any explicit order from the Kremlin or even the oligarchs, senior FSB officers proceeded to do their job: to enforce Russia’s laws. Both the oligarchs and the Kremlin would later deny having any role in what happened next.
On March 19, 2008, none of TNK-BP’s Russian employees reported for work. Soon after Dudley arrived, about 50 officers from the FSB and the interior ministry barged in, demanding to see TNK-BP’s employment contracts. Safes were drilled open and beds installed for the security officers to rest in. In the raw battle for power, the pressure point had been identified. Khan failed to seek the renewal of visas. Simultaneously, Vekselberg refused repeated requests to sign the renewal of Dudley’s contract. Both could stand back and allow the law to take its course. In April, 146 work permits were suspended. BP’s operation would inevitably be paralyzed by the expulsion of Dudley and the 146 expatriate specialists and their families. Dudley was on a timetable for departure.
On May 20, there was another security raid on TNK-BP’s offices. “Let them suffer,” said an oligarch. Other state organizations, smelling action approved by the Kremlin, took the opportunity to join the campaign against a corporation plainly guilty of “mistreating” Russia’s oil production. Incandescent, Dudley asked Fridman, “Are you responsible?” “No,” replied Fridman. “What’s the real agenda?” asked Dudley. “We want TNK to be independent of BP,” said Fridman. “Is this your work?” Dudley asked Khan. Khan denied it. The Russian culture, Dudley believed, was to deny responsibility. Fridman and the other partners later admitted to trying to remove Dudley because, on their account, he was biased toward BP and was causing the company to underperform, but they denied accusations of harassment. Dudley, in turn, denied allegations of underperformance, adding that on his watch TNK-BP’s performance had been “stellar.” He was unaware that Sechin, receiving regular reports, had agreed not to interfere. “Fridman just wants to cause chaos,” a BP director told Hayward. Hayward’s conviction about the existence of a coordinated plan amused Fridman. “When I wake up and I think I know what will happen tomorrow in Russia,” he smiled, “I lie down and wait for the feeling to pass.”
BP’s troubles were reported across the globe. Most observers forecast that the company would lose its entire investment. No less than 20 percent of its reserves, 25 percent of its production and 8 percent of its profits would disappear, along with its annual gross earnings in Russia of $5.7 billion. The chance of returning to normality, BP’s spokesmen admitted, was slim. The company’s plight seemed consistent with so much of the world’s reserves becoming closed to the oil majors or becoming subject to the state-to-state deals perfected by China with African and Latin American governments, which distrusted the majors.
“There’s always an element of risk,” Hayward was told by an adviser. “There’s something going on, but I don’t understand all the moving parts.” Hayward had still not given up on Alexei Miller. On April 26 he met the Gazprom chairman at Stamford Bridge to watch Abramovich’s Chelsea play Manchester United. Hayward hoped that Miller would finally agree to buy the partners’ 50 percent stake. Instead, he was told that Gazprom would need another month to consider the options. In frustration, Hayward decided to stage a media blitz. He hoped to embarrass the Kremlin into putting the oligarchs under pressure. On May 26, Dudley described in a newspaper interview what he regarded as the “sabotage” perpetrated by German Khan. BP, he said emotionally, had reached a “watershed.” “The road ahead is risky and will likely test the strength of Russian institutions.” The outburst surprised the oligarchs. Dudley, they agreed, had been “misjudged.” “His screaming is not good for us,” said a Russian. In London, Hayward was upset by the interview and the repercussions.
Things only became heavier for TNK-BP. Two Russian brothers, educated at Oxford and employed by TNK-BP, were arrested and charged with industrial espionage for stealing documents from Gazprom. Soon after, Tetlis, an obscure broker with a nonexistent address, won a temporary injunction in a Siberian court against TNK-BP for illegally employing specialist contractors for inflated salaries. “Fridman seems able to find friendly judges in the remotest places,” complained a BP director. Astutely, the partners had gotten around a term in their original agreement with BP prohibiting the use of Russian courts to resolve disputes. The British courts, they knew, would be unsympathetic. “Of course we’re using the Russian legal system,” Sechin was told. “It’s the only system we have.” The Kremlin was content to ignore the treatment being meted out to BP because the Alfa partners appeared transparent and, unlike Khodorkovsky, never sought to squeeze any advantage from t
he president. “They’ve got a back road into the Kremlin,” one of Hayward’s advisers lamented. “We can’t see what’s happening. All we can do is go through the front door.”
To discover the truth and embarrass the oligarchs by securing Putin’s support, Hayward arranged a meeting with Sechin. The opportunity arose during Rosneft’s annual meeting. “I’ll hear both sides of the argument,” Sechin told Hayward when they met in a Moscow palace. Like a Godfather, Sechin listened to Hayward’s complaint about the oligarchs. Hayward appealed to him in English and, if he did not understand an expression, in Spanish, “We just want a level playing field to limit the risks.” Recalling how Yukos had been dismembered and Khodorkovsky imprisoned on contrived charges, Hayward urged, “Please don’t allow any fabrications to help those guys.” To illustrate his complaint, he added, “What they’re playing isn’t rugby but Australian rules football.” Sechin looked puzzled until Hayward explained the style of the “dirtiest contact game in the world,” then laughed and opened the trap by asking in English, “Whose interests do you represent?” “I’m BP’s chief executive,” replied Hayward. “TNK-BP is a subsidiary and my responsibility.” Sechin smiled. Hayward had exposed exactly the conflict of interest that the Alfa partners criticized. The judgment was merciful. “I must tell you, this is a corporate conflict and the government does not want to be involved. I urge you to find a solution.” Hayward left without the comfort of Sechin’s support against Alfa, but content that Putin wanted BP to stay for the long term. “They could do a lot worse to us,” he reported in London. Sechin, he believed, would control the dogs.
Irritated by Miller’s procrastination, and unaware that Putin had excluded any purchase by Gazprom, Hayward felt he could at least rely on Sechin’s assurances when he arrived in Larnaca, Cyprus, on May 29 for a board meeting. In Moscow, the deadline for the departure of BP’s employees was approaching. At the outset of the meeting, Hayward was challenged. “You should withdraw Bob,” said Fridman. “He’s not independent. The interview he gave was unacceptable.” “We’re not prepared to give you Bob Dudley’s head,” Hayward replied. The Russians regarded Hayward with a mixture of fondness and disdain. Compared to the preening John Browne, Hayward was balanced, but unlike Browne he was tactically weak. In Hayward’s place, Browne would have been realistic, struck a deal and carried his board; but Hayward, they believed, did not listen, and feared returning to London to announce a fair surrender. The partners stormed out of the meeting. A new frenzy of speculation had been triggered about BP’s fate.
Six days later, Hayward arrived in Moscow with an armory of threats. At Rosneft’s annual general meeting, he spoke from the floor to warn Russia to obey the rule of law. From Moscow, he flew to the World Economic Forum in Saint Petersburg. BP’s employees in the capital were packing to leave, while Dudley, questioned for five hours by officials about his taxes, accepted his powerlessness. Beset by “intolerable” working conditions, an “orchestrated campaign of harassment” and telephone tapping, he knew fighting against Fridman, Khan and Vekselberg was pointless. “They understand the wiring diagrams inside the Kremlin,” he told Hayward. “They have thrived because of their intimate relations with individuals in the Kremlin.” Unpersuaded, Hayward sought out Sechin in Saint Petersburg for reassurance that BP’s investment would not be confiscated. Sechin enigmatically advised him not to worry. Hayward appeared relieved, but did not fully understand. Sechin had indicated during lengthy conversations with the oligarchs that the Kremlin would not interfere with the campaign to remove the foreigners. Western newspapers quoted government officials hinting that Mikhail Fridman and his group “are only starting the offensive. In the near future, it will be worse.”
Flying on to Kuala Lumpur, Hayward became outraged by news of intense pressure on BP’s staff. Sechin’s assurances, he realized, could not be taken at face value. Those encountering Hayward in Malaysia noted, “He’s spitting blood.” In London, Peter Sutherland heard from BP’s advisers that the Kremlin was taking note of ExxonMobil’s lawsuits against Hugo Chávez for nationalizing the oil majors’ assets. Threatening to cast the Russian government into the wilderness as an international pariah, Sutherland thought, would halt Putin in his tracks. Priding himself on “never moving away from a fight,” Sutherland was attracted to the idea of shaming Putin by spreading the message, “Russia is not yet ready for prime time — Russia does not have the Good Housekeeping Seal of approval for investment.” Hayward preferred not to engage in a public brawl, but after a few days’ reflection Sutherland decided to “open a new front.” Unlike Shell’s capitulation over Sakhalin, he would not roll over. “I won’t stomach it,” he told his fellow directors. On June 12 at a conference in Stockholm, Sutherland publicly accused Fridman of resorting to “corporate raiding activities that were prevalent in Russia in the 1990s,” which was “very bad for Russia”; and he ridiculed the supposed attempt by Dmitri Medvedev, the new president, to reform Russia’s culture of “legal nihilism.”
Sutherland was pleased by the worldwide publicity. The oligarchs, he believed, were thugs. Their traditions were different, but now they knew his style, and his determination to win. “Damn his grandiose view of the world,” commented one of the oligarchs traveling outside Russia. “He thinks he’s a master of the universe.” The partners in Moscow felt the heat. Telephone calls from Sechin reflected Putin’s unease. Sutherland had organized telephone calls from Gordon Brown, the head of the European Union and Washington. Most important, Angela Merkel, the German chancellor, had agreed to contact Putin personally. In that testing moment, Fridman and Aven could count on Sechin’s ideology. Convinced that the West was engaged in a conspiracy against Russia, the purist bureaucrat believed he was the bulwark to protect Russia’s interests. Russia, Sechin decided, would not be publicly embarrassed by threats, especially from Sutherland, whose sole interest was BP’s profits. Nevertheless, a balance would be struck. Although Sechin preferred state to private ownership, he liked Hayward, and accepted the partners’ assurances that once the foreigners had left, normality would be restored. Sutherland had raised the stakes, but had failed to tip the balance.
In one of many telephone calls between Fridman and Hayward, the Russian was blunt: “You’re playing a dangerous game of fighting and not listening. We are not angels, we are businessmen. We play a hard game.” To prove that the battle would be fought with no hostages, Fridman called a press conference and commissioned his staff to write an article for the Financial Times. Denouncing TNK-BP’s performance as “dismal,” he described BP as “arrogant” and “wild barbarians,” and ridiculed Sutherland for acting “in the best traditions of Goebbels’ propaganda” and “insulting the leadership of Russia.” BP, he claimed, thought oligarchs were only interested in “having fun on yachts, private Boeings and football clubs.” But the Alfa group was only focused on earning money. There would, he concluded, be no compromise about Dudley’s departure, and he added that the Kremlin was not involved in the dispute. Oligarchs expressing themselves in fluent journalese in the capitalists’ journal surprised Sutherland and Hayward. Neither could grasp the relationship between the oligarchs and the Kremlin, but they hoped that Gordon Brown’s meeting with Dmitri Medvedev at the G8 summit in Japan on July 7 would resolve their plight. To Hayward’s dismay the president confirmed his detachment to Brown: “Their argument is commercial. It has nothing to do with the Kremlin. The Russian state is not involved.” Inside Putin’s White House, however, there was apprehension. “The dispute is destroying the image of Russia,” commented Kirill Androsov, responsible in Putin’s office for Russia’s economic development. The free-market technocrat with a master’s degree from the University of Chicago’s business school disdained the corruption of low-level officials to use against BP but, despite President Medvedev’s public condemnation of those officials, the process was unstoppable.
Two weeks later, BP’s staff left Moscow “in a hurry.” Newspapers reported, “BP’s control of TNK-BP is slipping.
” Hayward was invited to discussions by Alex Knaster, an associate of the oligarchs, at his London offices in Park Lane. “We can’t carry on with Dudley,” said Knaster. “Nor Dupree.” Hayward accepted the advice to withdraw Dupree and recall Lamar McKay, the trusted American who had originally forged the deal. In Moscow on July 24 Dudley received an unambiguous message. The next day, he was told, he would be arrested. Instantly, he drove straight to the airport, and flew to Paris. At BP, he was universally hailed as a hero. Over the following weeks he would work from hotels in France, Belgium and Holland. In London, Hayward was flattened. Until the last moment, he had believed that Dudley would not be forced to flee. In that moment of “greatest” uncertainty, his aide admitted, “The Russians didn’t blink.” BP’s fate in Russia appeared to be terminal, and the corporation’s very survival as an independent oil major was in doubt. “It’s a hairball,” smiled an oil trader in New York, likening BP to a cat swallowing its own fur.
Two days later, Lamar McKay phoned Fridman to suggest a meeting. Fridman chose to meet in Prague, his favorite city, which reminded him of Lvov, his birthplace. “We’re on the way to buttoning this up,” he was told by an associate in London. Hayward arrived on July 30 in a good mood. BP’s board had agreed to end the war. Fighting in Russia had proved to be too dangerous. The unemotional meeting was notable only for Hayward’s denial that TNK-BP was ever run as a subsidiary. “Tony, we must remove the conflicts of interests,” smiled Fridman, satisfied by his victory. In a five-page “memorandum of understanding” the two men agreed to appoint an independent Russian chief executive, to be found by BP, and to float 20 percent of the company after 2010. BP’s staff would not return to Moscow.
