Russian Energy Czar Warns BP, Partners

Moscow—Russia’s powerful energy czar, Igor Sechin, warned BP PLC and its billionaire Russian partners not to let their differences get in the way of what he called a “historic” deal between the British company and OAO Rosneft.

“We consider this project a priority, a strategic one, and we want to realize it,” Mr. Sechin, who is both deputy prime minister and chairman of Rosneft, the state oil company, said during an interview with The Wall Street Journal. He threatened legal action against BP and its partners if they sabotaged the $16 billion deal.

Mr. Sechin, who was personally involved in the talks with BP, cited the agreement—now held up by court order because of the conflict between BP and its partners—as evidence that Russia’s efforts to woo major international companies are paying off. Since the global financial crisis hammered Russia’s oil-dependent economy, the Kremlin has dropped talk of becoming an “energy superpower.” Instead, officials have tried to put on a more welcoming face to attract the foreign capital and technology they now say the country needs.

A longtime aide to Prime Minister Vladimir Putin, Mr. Sechin, 50 years old, is viewed as one of Russia’s most powerful men and most prominent hardliners. Long a shadowy figure who rarely speaks publicly, Mr. Sechin has begun to raise his profile during the past year or so, attending the World Economic Forum in Davos, Switzerland, and courting top foreign energy executives.

In a 90-minute interview, Mr. Sechin portrayed Russia’s investment environment as more welcoming to foreigners than the reception Russian companies get when they expand overseas. He said cases commonly cited as a evidence of Russia’s difficulties for business—the Kremlin’s breakup of oil giant OAO Yukos and the legal and other problems of Hermitage Capital, a big Western investment fund—are actually signs of the promise and protections that Russia offers.

“Among the offerings that are on the market, we satisfy investors fully,” he said.

Rosneft’s deal with BP is a model, he said. Under the planned agreement, BP will bring its broad offshore experience to fields with potentially huge reserves of oil and gas off Russia’s Arctic coast, an area that had been closed to all but Russian state companies. As a condition of the deal, Rosneft insisted on a share swap, giving the Kremlin-controlled company a 5% stake in BP in exchange for 9.4% of Rosneft.

Mr. Sechin said he would like to cement the deal by putting a representative on BP’s board of directors in exchange for giving BP a slot on Rosneft’s, though the issue hasn’t been decided. It could be a sensitive one. The deal with Rosneft has raised concerns in Washington that it could give the Kremlin undue influence over BP.

Currently, however, the deal with BP is on hold because of a British court order won by BP’s other partners in Russia, a group of Soviet-born billionaires who own half of TNK-BP, the British company’s Russian venture. Known as AAR, the Russian shareholders charge that BP’s deal with Rosneft violates its exclusive agreement with them. The issue is to come before an arbitration panel next month.

Despite close ties to AAR shareholders, Mr. Sechin said the conflict was “definitely unexpected” for him, adding that he had asked a major AAR shareholder to support the deal on the eve of the announcement. While he said BP should have resolved any issues with its partners before signing the deal, he also warned AAR not to let its commercial interests get in the way of a strategic project.

Rosneft might allow TNK-BP to participate in the Arctic deal as a “portfolio investor,” he said, but Russian law prevents the company from working on offshore projects.

He said there have been no talks about the possibility that AAR might sell its stake in TNK-BP to either Rosneft or BP. Though AAR says it doesn’t want to sell, Mr. Sechin said he doesn’t rule out such a deal. “We’re ready to consider any serious proposals,” he said. He also said that TNK-BP’s 50-50 ownership is “a very difficult structure to work in” because of the complexity of resolving internal conflicts.

Foreign direct investment in Russia remains modest compared with other big emerging markets, though several multibillion-dollar deals have been unveiled in recent months. Preliminary official data show investment fell to $12 billion-$14 billion last year from $15.9 billion in 2009.

Mr. Sechin complained of a “disparity” in that Western countries are less open to Russian energy investment than Russia is to outsiders, adding that foreign investors control about 25% of Russian energy assets. Other than BP’s stake in TNK-BP, however, most of those holdings are minority portfolio stakes. Russia’s biggest energy companies—Rosneft and OAO Gazprom—remain tightly state-controlled.

He said investors should take a long view and be attracted by how much the country has changed in the past 25 years—a period going back to the Soviet era.

He brought up the case of William Browder, whose Hermitage Capital fund had been one of Russia’s largest and most successful foreign portfolio investors until he was stripped of his Russian visa in 2005. Hermitage’s travails came to symbolize the difficulties of doing business in Russia, particularly after a lawyer working for Mr. Browder died in a Russian jail in 2009. The lawyer, Sergei Magnitsky, had refused to recant allegations that the Russian police investigating charges of tax evasion against Hermitage had perpetrated a $230 million fraud against the government.

Mr. Browder’s experience should “attract investors,” Mr. Sechin said, because of the “fantastic” returns Hermitage made before the problems arose.

“What matters to an investor? That there be an economic result,” Mr. Sechin said, adding that he didn’t know the details of the visa problems and that Mr. Magnitsky’s case is being investigated.

Mr. Sechin also gave a spirited defense of the breakup of Yukos, once a favorite among foreign investors until its main shareholder, Mikhail Khodorkovsky, was jailed and the company’s main assets sold to Rosneft. The back-tax claims and bankruptcy of Yukos were conducted by Russian courts, he said, while Mr. Khodorkovsky and his colleagues were implicated in a string of murders and other violent crimes.

Mr. Sechin has denied allegations that he masterminded the Kremlin’s attack on Yukos.

Western judges have found that several of the Russian court rulings in the Yukos case were politically motivated. Mr. Khodorkovsky’s representatives deny the allegations of violent crimes, adding that he has never been charged with them.