Emerging Markets: BP, AAR, And TNK-BP (see Emerging Mar)

Emerging Markets: BP, AAR, and TNK-BP (also see Emerging Markets 7.1)

TNK-BP is a joint venture (JV) company that is 50% owned by BP and 50% owned by the AAR consortium, representing three major Russian business groups: Alfa, Access, and Renova. Founded in 2003, TNK-BP has become a major oil company in Russia, ranking as the third-largest oil producer in the country and among the ten largest private oil companies globally. It produces approximately 1.9 million barrels of oil per day, accounting for about 25% of BP’s oil production and roughly 40% of its reserves. The company provides around $2 billion in dividends annually to BP.

Despite its lucrative profile, TNK-BP has become a focal point of complex conflicts and intrigue between BP and its Russian partners. This interaction has unfolded over issues related to control, strategic direction, and legal disputes, revealing the multifaceted nature of joint ventures involving Western multinationals and Russian oligarchs.

Background and Context

TNK-BP’s establishment in 2003 was part of BP’s strategy to penetrate the Russian oil market, leveraging joint ownership with local oligarchs. The alliance was designed to combine BP's global expertise with Russia’s vast oil reserves. However, the partnership faced immediate challenges rooted in cultural differences, divergent strategic interests, and local power dynamics. The Russian oligarchs aimed to utilize TNK-BP to expand beyond Russia, whereas BP sought to limit its Russian operations to mitigate geopolitical risks. This tension was exemplified by disagreements over how aggressively TNK-BP should pursue international expansion versus domestic growth.

Key Episodes and Conflicts

Episode I: 2008 Crisis and Internal Disputes

The first major conflict erupted in 2008, characterized by public disputes and legal battles. The Russian partners expressed grievances over extensive costs associated with expatriate consultants, which they considered excessive and indicative of mismanagement. Moreover, a central issue was the restriction on TNK-BP’s expansion outside Russia and Ukraine. BP’s corporate policy, influenced by U.S. sanctions and strategic considerations, limited their operations in countries like Iran, Cuba, and Syria, contrasting with the Russian partners’ desire for broader opportunities in these regions.

During this period, the dispute escalated, culminating in the confiscation of BP’s expat visas and police raids on offices in Moscow. Additionally, there were allegations of espionage involving TNK-BP employees. The clash over visas was symbolic of broader control issues; the Russian shareholders, represented by Viktor Vekselberg, argued for a reduced foreign workforce, effectively limiting BP’s influence within TNK-BP.

The internal power struggle highlighted differing visions for TNK-BP’s future. Russian oligarchs advocated for a more independent and globally ambitious company, while BP sought to maintain strategic control aligned with Western practices. The dispute reached a critical point when BP’s expatriate CEO, Bob Dudley, was compelled to leave Russia, signaling a shift toward Russian dominance in the company’s management. Subsequently, Fridman assumed interim CEO responsibilities, symbolizing the oligarchs’ strengthened grip over TNK-BP.

Oil Spill and Strategic Realignments

In 2010, TNK-BP faced environmental challenges with an oil spill in Siberia, which further complicated BP’s operations in Russia. Despite the turmoil, BP’s leadership remained committed to maintaining its stake and influence in Russia. Dudley’s return as BP CEO in July 2010 marked a pivot toward collaboration with the Russian partners. BP sold assets in Venezuela and Vietnam to TNK-BP for $1.8 billion, signaling an attempt to diversify and expand TNK-BP’s international footprint while generating cash to address Gulf of Mexico spill costs.

Episode II: 2011 - The Rosneft Deal and Legal Tensions

The second major episode commenced in early 2011 with BP’s announcement of a strategic alliance with Russia’s state-controlled oil company, Rosneft. The deal involved BP acquiring a 9.5% stake in Rosneft, with both companies collaborating on offshore exploration in the Arctic. This alliance was backed by the Russian government, which saw it as a means to modernize and develop their Arctic reserves.

However, the partnership sparked fierce opposition from TNK-BP’s oligarchs, particularly through allegations that BP’s dealings with Rosneft violated the JV agreement that restricted BP from pursuing third-party energy projects without TNK-BP’s consent. The oligarchs, led by Mikhail Fridman, regarded this move as a betrayal and initiated arbitration proceedings. The Swedish tribunal supported their claims in 2011, effectively blocking BP’s Rosneft deal and earning the moniker “Ros-nyet” (meaning “Russia said no”).

The fallout from this legal defeat strained BP’s relationships with Russian authorities and business partners. Moreover, Rosneft entered into a new strategic alliance with Exxon Mobil, further marginalizing BP in Russian energy politics. The legal battles underscored the fragility of BP’s position in Russia and highlighted the risks multinational firms face when engaging with entrenched local power structures.

Impacts and Strategic Implications

The conflicts between BP and the Russian oligarchs underscore several key themes in international business, especially involving emerging markets. Firstly, cultural and political differences significantly affect joint ventures, especially when Western companies operate within systems characterized by oligarchic control and state influence. The disputes exemplify the importance of aligning incentives, managing power asymmetries, and understanding local legal and political landscapes.

Secondly, the case reveals how legal and political risks can rapidly undermine foreign direct investments. The Russian oligarchs’ maneuvers, backed by government support, demonstrate how local actors can leverage legal processes and political connections to curtail foreign influence, challenging traditional corporate governance norms.

Thirdly, the strategic miscalculations by BP—such as underestimating the importance of local political dynamics and overestimating the stability of joint ventures—highlight the necessity for multinational firms to develop nuanced market entry and partnership strategies. Adaptation to local contexts, risk management, and diplomatic engagement are critical for long-term success in such environments.

Conclusion

The BP-TNK-BP case provides a compelling example of the complex interplay between multinational corporations and emerging market stakeholders. It illustrates that despite technological and financial strengths, Western firms must navigate geopolitical and local power politics carefully. Building mutual trust, respecting local legal frameworks, and establishing clear governance structures are essential to prevent disputes that can jeopardize strategic objectives.

Furthermore, the evolving relationship among BP, the Russian oligarchs, and the Russian government demonstrates that success in emerging markets requires flexibility, cultural sensitivity, and a keen understanding of the political landscape. As BP's ongoing saga in Russia shows, establishing sustainable and mutually beneficial partnerships in emerging markets remains a challenging but vital component of global strategy.

References

• Peng, M. (2014). Global Strategy (3rd ed.). Mason, OH: Cengage Learning.
• Bloomburg Businessweek. (2010). How BP learned to dance with the Russian bear. September 27.
• BusinessWeek. (2008). BP: Roughed up in Russia. June 16.
• BP. (2010). BP to sell Venezuela and Vietnam businesses to TNK-BP. October 18.
• BP. (2011). BP and AAR agree on new management structure for TNK-BP. October 21.
• BP. (2011). BP and AAR reaffirm commitment to growth and success of TNK-BP. May 17.
• BP. (2011). BP remains committed to partner with Russia. March 24.
• Economist. (2008). At war with itself. July 5.
• Economist. (2008). Crude tactics. June 7.
• Economist. (2011). Dudley do-wrong. April 2.