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Monday, October 22, 2012

Putin Embraces BP


The Russian state-owned company, Rosneft, reached separate agreements in October 2012 to buy TNK-BP from BP and a group of Russian billionaires. According to the Wall Street Journal, the deal represents “an acquisition that promises to reshape the Russian oil industry in favor of the state-owned company.” The Russian federal government was set to own or control nearly 50% of the Russian oil industry. Lest it be supposed that the legacy of inefficient state enterprise might compromise that industry in Russia, the state would have the benefit of literally sitting on the same board with representatives of the experienced oil producer from the private sector. By implication, the traditional dichotomy between public and private could be further blurred, such that the easy labels of “socialism” and “capitalism” may become less and less relevant or useful (except in the rhetoric of American presidential contests). Rosneft itself is a case in point of privateness and publicness coming together with a shared vocabulary or at least financial aim. Before addressing this point, I present the basics of the deal itself.

                                                     Robert Dudley, CEO of BP, talking with Vladimir Putin at the Kremlin.   Source: Telegraph

According to the Wall Street Journal, “(u)nder the terms of the transaction, BP will receive $17.1 billion in cash for its 50% stake plus shares representing 12.84% of Rosneft, worth $9.7 billion on the bid date. It will then use $4.8 billion of that cash to purchase an additional 5.66% of shares Rosneft from the Russian government, taking its total holding up to 19.75%, BP said in a statement. . . . BP will get two seats on Rosneft's nine-person board as part of the deal and expects to be able to account for its share of Rosneft's earnings, production and reserves on an equity basis.” Rosneft would acquire the other half of TNK-BP for $28 billion from the AAR consortium of Russian oligarchs. “Rosneft will finance the transactions, which have a total cash value of $45.1 billion, from a combination of existing cash resources and new borrowings.”  In short, we’re talking about a lot of money—a lot at stake. In other words, the implications of the deal deserve a lot of attention and analysis.
 
Expanding on the traditional notion of interlocking directorates, BP would be sitting on the board alongside officials or representatives of the Russian government. The latter would be able to nurture and develop contacts in the corporate world and BP would have access in Russia far beyond Arctic exploration rights.  That is to say, collusion could become worse, and this could undercut the public interest in the interest of private gain—private here applying both to corporate retained earnings and government coffers. That is to say, government itself could become more “private” and less “public,” leaving the public interest without a proper guardian or advocate.
 
The deal gives the Russian state an interest in the well-being of a foreign private company. This in turn would give the company some leverage in terms of Russian regulations. In other words, BP could use its alliance with the state to essentially “capture” Russian regulatory agencies. "This is a good, big deal, not only for the Russian energy sector, but also for the Russian economy," said Russian President Vladimir Putin, after a meeting at which he approved Rosneft's acquisition of TNK-BP in a meeting with the company's Chief Executive, Igor Sechin. The Russian president would thus have an interest in protecting BP as well as the joint venture. That is to say, from the standpoint of the bipolar dichotomy of “socialism vs. capitalism,” the cosy relationship proposed in Russia puts government and private ownership literally in the same room and having the same financial purpose. Mutual back-scratching would be almost inevitable, not only concerning the interests of the Russian state and BP, but also particular government officials and company executives.
 
Lest it be thought that privatizing the nearly 50% of the Russian Oil industry that would be controlled by the Russian state would be preferable—this option being more in line with the traditional “public vs. private” paradigm—it can be asked whether Russian oligarchs are preferable to Putin’s state. The tradeoff might come down to one of whether the state is really distinct from organized crime in Russia. There might not be much of a difference, with the exception that state-corruption is slightly more transparent. Even if the distinction is meaningless practically speaking, it can also be asked whether the oligarchs deserve their wealth and profits, especially if they came out of cheap post-Soviet sell-offs based on connections. For that matter, the anti-democratic response of Putin can cause one to ask whether his government deserves the added revenue. The Wall Street Journal reports, “A Rosneft takeover of TNK-BP would bring the Russian state's control over oil production to nearly 50% and mark a major milestone in Mr. Putin's reassertion of Kremlin control over the strategic oil sector, much of which was sold off in the privatizations of the 1990s to well-connected tycoons like AAR's owners. Since Mr. Putin came to power in 2000, the tide has turned the other way in an industry the Kremlin depends on both as a source of international influence and more than half of all tax revenues.” One might ask whether Putin deserves this even as he represses political opposition—even arresting a major figure following a “documentary” on television produced by the state. Faced with the abuses that more wealth and BP-connections might give the Russian president,  a reasonable person might be left with the conclusion that neither Putin’s pals nor his government is worthy of owning vast wealth; the world envisioned by Adam Smith as against the concentration of great wealth might come out the winner, even if only in the world of thought.
 
In addition to the downside, which may admittedly be so abstract and contrary to the status quo to be of any practical effect,  it is also worth pointing out that putting government officials and business managers in the same room could enhance both the efficacy of government regulation and corporate public affairs departments.  That is to say, knowing the otherness of the other could improve how one relates to the other “above board.”
 
Being on the same board, government officials or their representatives in Russia would no doubt see up close how private business executives “think” (i.e., the logic of business), while executives in the private sector (at BP) would gain a better understanding of the political calculus of government officials. That is to say, business and government would take one step closer together from that of “arm’s length” transactions and the regulatee-regulator relationship. Understanding how the other thinks is indeed a good thing where two parties must interact (e.g., regulation). At the very least, the efficacy of government regulation could in principle be enhanced as it could be put in sync with how managers think.
 
Understanding how business managers use regulation strategically—even preferring more regulation because it is easier for one’s own company than one’s competitors to comply—can enhance a regulator’s ability to craft regulations that achieve the desired public-policy outcome.  In other words, being able to anticipate the policies that business managers would enact in reaction to a proposed regulation can give the regulator a sense of the outcome up front. The regulation can thus be tailored with the anticipated reaction in mind such that the outcome sought would stand a better chance of resulting. A regulator could anticipate, for example, how managers would attempt to circumvent the proposed regulation, and the latter could be adjusted to close off that possibility.  A Russian official who has seen BP executives in action on Rosneft’s board could say to a regulator of another industry, “No, that won’t work; they would only do X to get around it. I know how they think.”
 
In terms of corporate public affairs departments (and corporate lobbyists in general), feedback from a company executive who knows how government officials think could advise on how to appeal to them on their own terms. A BP executive with experience with Russian government officials on Rosneft’s board could say to the director of BP’s government affair’s department in Russia and even another country, “If you really want the legislator to pay attention, bring up X because X is likely to be on his or her mind.” That is to say, fit the company’s strategic objective within the political calculus. Knowing the otherness of the other is necessary both to regulators in crafting more effective regulations that are not undercut by the other and to corporate public affairs directors who want to influence legislators and regulators.  As discussed above, however, there is also a downside, and it should not be disregarded either.
 
In summary, the modern world of extensive territorial empires and great concentrations of private wealth in the form of corporations can leave the individual business practitioner and the small investor in the dust along with the public at large. There is indeed value to public policy and government regulation in government officials deepening their understanding of how business executives think. Similarly, corporate public affairs departments could use more insight on how government officials tick. At the same time, the financial stakes and related cosy relationships as evinced in the proposed deal in Russia increase the risk of collusion at even personal financial benefit at the expense of the common wealth and general welfare of the people and even society at large. Putin might conclude, for example, that what is good for BP is good for Russia. This represents a very dangerous step (similar to “What is good for GM is good for the U.S.”) away from democracy in the direction of plutocracy. The question is perhaps less on whether the old “public vs. private” world is antiquated than whether government is really still government—governing the whole in the interests of the whole rather than certain parts—and whether large corporations are still private. On the latter point, it is worth remembering that Clive of the East India Company had a private army in Bengal at his disposal and the title of governor from the state. Indeed, the notion that the CEO of a private company would also be the governor of a territory might give us pause in reflecting on the governmental power that a large public-private partnership might have in Russia.
 
Source:

Selina Williams and James Marson, “Rosneft to Buy Entirety of TNK-BP,” The Wall Street Journal, October 22, 2012.