BP's Faustian Pact with Russia goes horribly wrong with Yukos verdict – Telegraph Blogs

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The Permanent Court of Arbitration in The Hague has thrown the book at the Russian state, or more specifically at Vladimir Putin and his Siloviki circle from the security services.

The $51.5bn ruling against on the Kremlin unveiled this morning has no precedent in international law. The damages are 20 times larger than any previous verdict.

Lawyers for the Yukos-MGL-Khodorkovsky team tell me that they cannot pursue the foreign bond holdings of the Russian central bank if the Kremlin refuses to pay up when the deadline expires on January 15, as seems likely. Moscow has already dismissed the case as “politically motivated”.

Nor can they go after embassies and other sovereign assets that enjoy diplomatic immunity, though they are eyeing a list of Russian state targets that slipped through the net.

What they can certainly do – and have every intention of doing – is attacking the assets of state-owned companies that act as instruments of the Russian government. Above all, they intend to pursue Rosneft, the venture built from the expropriated assets of Yukos.

That means they also intend to pursue BP (indirectly), since BP owns a fifth of Rosneft shares as a legacy from the TNK-BP debacle.

Rosneft is the world’s biggest traded oil company with production of 4m barrels a day. It is run by Mr Putin’s close friend Igor Sechin, a former KGB operative in Africa, a loyalist in Mr Putin’s political machine in St Petersburg, and the architect of Russia’s energy strategy for the last decade.

The Court’s ruling made it clear that Rosneft is not a commercial company with a (passive) state shareholder. It said the Rosneft was “the vehicle” used to expropriate Yukos and has acted as an instrument of the state.

Mr Putin himself said at the time that the purpose was to reverse the giveaway privatisation of Russia’s natural resources and sovereign heirlooms in the bandit era of the 1990s. “The State, resorting to absolutely legal market mechanisms, is looking after its own interest,” he said.

The lawyers will have to file asset seizure claims in each national jurisdiction under the New York Convention, arguing the case one country at a time. These national courts are likely to give a high-weight to findings of the tribunal. The ruling was unanimous, and its language was blistering.

"Yukos was the object of a series of politically motivated attacks by the Russian authorities that eventually led to its destruction. The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets," it said.

All three judges – a Canadian, a Swiss, and an America citizen picked by the Russians themselves – seemed deeply irritated that Russia had failed to furnish any fact witnesses or send anybody from the finance ministry to testify on concrete issues.

The Kremlin sent theorists to debate hypothetical points. This cuts no ice in a court. It treated the procedure with barely concealed contempt, and received a hot retort. Russia’s external debt (state, banks, and companies) rises to $770bn at a stroke. The foreign currency debt will rise to $610b. Refusal to pay will at some point become a sovereign default.

The noose is tightening on Rosneft. Its shares are down 16pc since early July. It can still export oil but it cannot raise debt with a maturity beyond 90 days from any US body, and is effectively shut out of the global financial system.

It has $44bn of debt, largely in US dollars. It must roll over $26bn by the end of next year. It has large cash reserves but it is also trying to fund $21bn of capex investment this year to keep output up.

Alex Fak from Sberbank said Rosneft can no longer roll over debts under US sanctions. Nor is it receiving any new “prepayment” funds under deals with western Companies (like BP, which forked over $1.5bn earlier this year and is now a major creditor, effectively letting Rosneft borrow on its credit rating).

Rosneft is not in immediate trouble. But it may need help from the Russian state at some stage, and is highly dependent on the price of oil.

If oil were to fall to $80 for a sustained period – and Saudi Arabia and the US could theoretically together bring this about, the latter by releasing supplies from the strategic petroleum – it would face a squeeze. Some analysts say this may happen anyway if Libya and Iran come back on stream.

The question for BP is why it joined the wolf pack tearing apart the Yukos carcass a decade ago, and took part in bids for Yukos assets in very close association with Rosneft, despite warnings that was acquiring “stolen assets” and might one day find it had no legal protection.

A cursory reading of the ruling by tribunal makes it crystal clear that no responsible company should have had anything to do with this episode. Nor has it stopped. BP has sunk deeper into the morass, becoming a creditor, and pledging to go ahead with a joint venture with Rosneft to extract shale in the Volga Urals even after the US placed Mr Sechin on its sanctions list.

BP’s Robert Dudley was more or less obliged to pay homage to the Kremlin at the St Petersburg Economic Forum in May, knowing that failure to attend or to make the right noises would leave the company vulnerable to an attack – and there have been many before, both against BP itself and Shell, among others.

When asked if BP was still committed to Russia, he said: "We work in a world today where politicians all too often only can look eighteen months out before the next election, and there are countries like Russia in agreements with China that are looking out 25, 40, or even 50 years. That's what we have to do as companies. These kinds of relationships that we have with Russia and Rosneft are not transactional, they are strategic partnerships based on mutual benefit and trust," he said.

"Those were very correct words from Mr Dudley," said Igor Sechin, glowering down at him across the hall.

Let us not be pious. BP has been dealing with difficult and fractious regimes for much of its history. Like other oil majors, it has to drill in such places because that is where the last oil reserves are.

Even so, it is far from clear that there has ever been a proper accounting of the serial political misjudgements that led BP to bet so much of its corporate future on the Putin regime. The management misread Russia. They misread the fundamental nature of Putinism.

They have been in denial ever since, but events unfolding now on so many fronts at once risks washing over them like a tidal wave. There is “non-insignificant” risk – to borrow from lawyers – that BP may lose its Rosneft stake as the sanctions war escalates.

For Russia, the Yukos verdict brings its travails to a header sooner. The country needs massive investment and technology from the West just replace depleting reserves and to cut fracking costs to a viable level. The chances of that are vanishing by the day.

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