Last week, when we last visited Mikhail Fridman and Viktor Vekselberg, the controlling shareholders of Tyumen Oil Co. (TNK), we found them in the shrubbery desperately trying to sell off their loot.
For more than a year, they had been offering minority-sized stakes in the oil company. But, after doing their due diligence, Chevron-Texaco and other international majors had said no.
What a difference a week makes! And that reminds me of the tale called “Loose Packaging,” written by Soviet satirist Mikhail Zoshchenko in 1932.
“These days, there’s no bribery,” Zoshchenko’s narrator proclaims as he arrives at the railway station to dispatch some parcels. “People’s morality has changed significantly for the better,” he adds hopefully. Trouble is, he soon discovers, the queue for parcel dispatch is a long one, and, at the end of the wait, the weight-checker arbitrarily rejects every second or third shipment, claiming the packaging is loose and must be refixed.
According to Zoshchenko’s eyewitness, a man loaded down with six hefty boxes from a state optics factory gets angry when his shipment is rejected, so he offers a bribe to the weight-checker. The clerk is affronted. He tells the shipper he should be ashamed of himself and count himself lucky he doesn’t call the police. “People shouldn’t be allowed to think that we’ve got our fingers in the till, like in the old days,” he confides to a colleague.
While they are talking, the narrator sees his own package needs fixing and asks one of the weight-checker’s colleagues to secure it. When he argues over the price, he is told the fee must be shared with the weight-checker. He pays, and the weight-checker accepts his parcel. The same thing happens to the man with the six boxes. Both are given invoices for the extra fee. It says “loose packaging.”
If you look carefully at the announcement of the Fridman-Vekselberg sale of their TNK stake to British Petroleum (BP), you will find a line on the invoice that says “loose packaging.” What is remarkable about the deal is not the confidence BP is presumed to be showing in Russian business conditions – the small print of the terms of sale demonstrate there is little of that. Rather, the deal looks to be the first time two Russian oligarchs have opted to hand over control of a property they acquired unlawfully and make their getaway for clean cash.
Actually, this is the second deal of its kind to be arranged by Vekselberg in the past month. In the first, he announced with Roddie Fleming, heir to the Fleming’s Bank fortune, that he is selling a controlling stake in his aluminum company, Siberian Ural Aluminum (SUAL) for an undisclosed but large sum that would give Fleming management control of the new company and its cash flow.
This week’s announcement suggests Fridman and Vekselberg will sell many of TNK’s oilfield assets – including those whose acquisition is the target of international litigation alleging fraud, theft and extortion – and all of TNK’s debts. Now, TNK is Russia’s most heavily leveraged oil company, and passing $2.5 billion in liabilities to BP, just before an oil price crash and the elections, is a sensible move. Even more sensible from Fridman’s and Vekselberg’s point of view is that some of the assets they are selling to BP – the Sakhalin Four and Five oilfield projects, plus a half-share of the Rospan gasfield – will require enormous and lengthy investment before they start to earn money.
The Russian proprietors like to pocket their earnings through a network of corporate fronts from here to Liechtenstein, Luxembourg, the Bahamas, the Isle of Man, Gibraltar and Panama. They show no interest in spending these earnings on the future of TNK, and the company has reached its borrowing limit. The new deal allows BP to do the investing, the borrowing and the repayment for them.
The deal is good for Russia only inasmuch as BP says it will take control of the cash flow of the oil company. With output of 1.2 million barrels per day, at current prices, that is worth about $13 billion in annual sales, all of which TNK has been passing through a chain of trading companies, brokers and other intermediaries at pricing that avoids domestic taxation and enriches shareholders offshore. Whether or not BP intends to operate the same kind of trading schemes, there is enough cash in the new company to pay more tax to the Russian treasury and cover the $3 billion cash payment BP is making to Fridman and Vekselberg. The three-year deferred payments of $1.25 billion worth of BP shares, which are also part of Fridman’s and Vekselberg’s take, are an insurance policy for BP that it can in fact get control of TNK’s cash flow, and a cheap way of paying Fridman and Vekselberg with value they would have taken from TNK sooner or later themselves – and that BP will earn from the Russian properties.
The loose packaging in this deal is as telling as Zoshchenko’s weight-checker. It’s not “mind-boggling,” as Moscow investment bankers are desperately trying to claim. Nor will it sustain the brief jump in Russian share values. TNK’s acquisition tactics have made the company unsellable in the form of an international share flotation. The threat that, in a post-Iraq war collapse of oil prices, it would be unable to service its debt has proven great. TNK cannot obtain unsecured financing, and it is at the limit of what its current oil flow can collateralize. It also won’t spend its own cash to boost that output.
So Fridman is jumping back to banking and Vekselberg to living off Western rents and dividends. BP thinks it has tied up the package so that the Russian risk is contained.
As President Vladimir Putin advised foreign investors in Russia this week, deals like this require courage – and good lawyers.