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Is Russia Riding to BP's Rescue?

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Although BP's problems in the Gulf of Mexico figured prominently in the July Anglo-American summit, its international problems do not end there. Russia seems ready to rescue BP. It is welcoming BP's former CEO, Tony Hayward, onto the Board of TNK-BP, allowing BP to explore the Arctic waters off Russia's coast, and refrained from criticizing BP during the whole time that its well in the Gulf of Mexico was spewing black gold into the Gulf and the US Gulf coast. While this is a far cry from the rapacious tactics Moscow has previously pursued against Mr. Hayward and BP, repeatedly squeezing BP projects and trying to seize control of them, Moscow's motives for riding to BP's rescue are easily explainable.

BP remains vulnerable to Russian pressure. As Andrew Kramer of the New York Times points out, BP's Russian assets make up 840,000 barrels per day of oil, almost one-third of BP's global output and more than the 665,000 barrels per day it pumps in the United States. TNK also netted BP $1.7 Billion in 2009 for its share of dividends and allows BP to claim vast reserves of oil on its books. BP has also been on occasion very helpful to Russia, for example it agreed in 2007 to facilitate Gazprom's efforts to make foreign acquisitions well before other majors and governments acquiesced in doing so. In return Gazprom was supposed to help BP in its Russia business, buying back a major Siberian gas field that was in danger of having its license revoked due to the usual predatory tactics of the Russian government. In return for helping Gazprom obtain a foreign asset, Gazprom would then sell back 25 percent of the field to BP.

Thus Russia's "rescue" of BP has its darker sides, in effect resembling sophisticated version of a protection racket. But that is how the game is played in Russia. What Moscow now wants is quite simple and clear. To cover its expected costs in the Gulf, approximately $32.2 Billion, BP must sell some of its assets abroad. Russia clearly wants those assets whether they be in Russia or elsewhere. For example TNK-BP is in talks with BP to buy fields in Venezuela and Vietnam, places where Russia is already deeply invested. Indeed, BP offered Russia those assets before showing them to others, no doubt to gain Moscow's favor.

But desirable as these acquisitions might be, Russia's ambitions for BP assets does not end in those countries. Moscow clearly wants BP's assets in the Caspian Basin. But BP has not offered to sell any of those to Lukoil, Russia's premier oil company. In the past, Russia's predatory government and energy giants have precipitated the bankruptcy of one major BP project and threats to its holdings in the Caspian. So while the velvet glove is currently on offer, inside it there is still an iron fist.

For years two dominant motifs of Russian energy policy have been to expel foreigners from owning Russian energy properties and replace them with state owned companies (often owned and directed by Putin's insiders), and second, to exclude foreign producers or governments from Caspian energy projects. Pursuing these goals Moscow has readily and frequently played hardball, even jailing independent owners like Mikhail Khodorkovsky on trumped up charges and driving out foreign owners like BP, Shell, Mitsui, and Mitsubishi by extortionate tactics. Thus Moscow long ago drove BP out of the very productive Kovykta gas field from which BP intended to sell natural gas to China. Instead Gazprom, determined to destroy any prospective rival, ousted BP and has now run the project and BP's Russian holding company, Rusia Petroleum into bankruptcy.

Meanwhile Moscow also continues to seek to exclude foreigners from the Caspian basin and maintain the greatest possible monopoly over those countries' energy exports. Although Central Asian gas and oil pipelines to China have broken any chance for a full Russian monopoly on Caspian energy, this has not deterred Moscow from attempting to exploit every opportunity to drive out foreign competitors. In Moscow's perspective BP's high costs and liabilities due to the oil spill in the Gulf of Mexico provide Russia with just such an opportunity.

Moscow quickly offered to buy up BP's Caspian holdings just as it has similarly offered to buy up Azerbaijan's gas exports. Its aims are simple: Russia seeks to eliminate the de facto independence of Caspian energy producers by controlling either the pipelines they must use or the prices they receive for their product. Second, it seeks to eliminate their economic independence by preventing them from turning to alternative buyers, producers, or funding sources like China or BP who can develop their energy holdings, help build alternative pipelines for them, and find other markets for their product. Thus third, Russia is waging a decisive battle with the EU to prevent it from building the Nabucco pipeline that would provide Europe with Central Asian gas through a pipeline from Central Asia to Azerbaijan, Turkey, and Eastern and Central Europe. Not only would Nabucco undermine any chance for Russian dominance over the Caspian basin's states' energy, economics, and politics, it would sustain both their and Europe's energy independence from Russia. Gaining control of BP and Azeri assets would go far towards undermining Nabucco and the Baku-Tbilisi-Ceyhan oil pipeline. Fourth, if Russia cannot dominate Central Asian and Azeri energy (especially gas) it then must reform its own domestic energy economy and overall economy because it can no longer afford to subsidize its highly wasteful and inefficient domestic energy economy. Therefore, its energy giants prefer to buy upstream and downstream assets abroad where they can then insinuate themselves and the Russian government into influential positions of economic-political decision-making abroad rather than invest in energy assets and infrastructure at home. In other words, neo-colonialism and influence-seeking abroad, often through tactics akin to those described above that were used against BP in the past sustains the predatory rule of Moscow's elites at home. This also explains in part the unrelenting Russian drive for a neo-imperial domination of the countries on its borders even during the reset policy of the Obama Administration.

Russia's main interest in attempting to buy out BP's Eurasian holidngs is not profit so much as power. Indeed, all the recent projects it has announced with Central Asia for both oil and gas are essentially "stuck in neutral" and marking time. Certainly it is a highly inefficient producer of oil and gas and has not invested the huge profits it made in 1999-2008 from energy in its energy infrastructure. Thus it now faces the prospect of declining oil and gas production. Moreover its methods of energy extraction, due to corruption, the topography of Siberia and the Russian Far East, huge labor costs, and lack of foreign technology and investment are wasteful and excessively costly. Furthermore Central Asian gas, as Mikhail Khodorkovsky told a US audience in 2002, is of better quality than Russian gas, making the latter less competitive.

Therefore Moscow's offers to BP represent its intention to claw back as much of this desired monopoly as possible and enforce economic and political dependence on Central Asia, Azerbaijan, and Europe. Were the US claims on BP to drive it into real distress, BP might then be forced, clearly against its current will, to divest itself of some of those Caspian holdings and sell them to Russia. Russia's predatory tactics in Kovykta show us what we could then expect elsewhere if it did obtain a monopoly on Caspian basin gas going to Europe. That monopoly would also compromise the political independence of Caspian basin states, and East European consumers of Caspian gas and oil. Fortunately with the well in the Gulf now being capped, BP apparently feels confident enough to go into the international money markets to raise capital and may not have to yield to Moscow's blandishments or to its threats.

Therefore driving BP into a corner is neither sound business nor sound foreign policy. Russia and the US may have reset their policies towards each other, but from Moscow's viewpoint the purpose of that reset is merely to allow it to consolidate its dominion over its neighbors. That outcome would be a moral and political defeat for the US and its allies. In this struggle energy is Moscow's chosen weapon. It makes no sense to hand Russia a cheap victory and strengthen its strongest instrument of domination no matter how satisfying it might be to short-sighted politicians who want not just to hold BP accountable but also to punish it. Moralism is not morality nor does it make for sound policy.