Raid on BP: A Russian Spy Story

The day before the Duma enacted tough new foreign investment rules, two brothers with ties to Britain and the U.S. are arrested and accused of spying

by Jason Bush

Over the years, investors in Russia have grown accustomed to the unexpected. Often, just when things seem to have calmed down, the next bombshell is right around the corner. That's surely the only way to describe the extraordinary news that a manager from TNK-BP, British Petroleum's Russian joint venture, and his brother, who works for the British Council, have been arrested and accused of spying.

The arrests came less than three weeks after Russia's election of a new President, Dmitry Medvedev, which seemed to send a reassuring message of liberalism and stability (BusinessWeek.com, 3/3/08). Remarkably, they also occurred just one day before Russia's Parliament, the Duma, was set to enact tough new rules on foreign investment (BusinessWeek.com, 3/19/08) in strategic Russian industries such as minerals and energy.

On Mar. 19 plainclothes Russian police—presumably operatives of Russia's Federal Security Service, or FSB—raided the Moscow offices of both TNK-BP and British Petroleum (BP), seizing documents and hauling in two managers for questioning. Formal charges were issued the next day.

Speculation and Confusion

According to a statement released by the FSB, the two men arrested are brothers, Ilya and Alexander Zaslavsky, both Russians with U.S. citizenship. They are accused of obtaining classified information that would be of use to foreign oil and gas companies. Ilya works for BP.

Adding to the intrigue, brother Alexander heads the Moscow Alumni Club for the British Council, the cultural arm of the British government and the subject of a recent diplomatic spat between Russia and Britain. In January, Russia forced the closure of the British Council's offices outside Moscow after police brought in Council staff for questioning on unrelated matters.

What to make of it? Even before news of the arrests broke, Russia's media had been awash with speculation about the reasons for the police raids on TNK-BP and BP's offices. According to Russia's Interior Ministry, the raids were linked to an investigation into Sidanco, a former Russian oil company that ceased to exist when it was merged into TNK-BP in 2003. For several years the former Sidanco has been subject to tax investigations dating to the period before BP made its investment. Yet in a bizarre and confusing twist, other branches of the same Ministry flatly deny that any investigation into TNK-BP's relationship with Sidanco is under way.

What's more, the arrest of the Zaslavsky brothers has no obvious connection to the Sidanco case. That raises the disturbing, but all too credible, possibility that Russia's Interior Ministry, the branch of the government responsible for the tax probe, hasn't the faintest idea what the FSB is up to. The other alarming possibility is that TNK-BP is simultaneously the subject of two—or possibly even more—unrelated investigations, signaling a concerted government crackdown on one of the largest foreign investments in Russia.

Reminiscent of Yukos and Sakhalin II

As usual with such incidents, speculation is rampant that the police actions are actually motivated by business or political concerns, not law enforcement. It certainly wouldn't be the first time. The raids are reminiscent of the long-running tax investigation into the Yukos oil company, which ended with its forced breakup and re-nationalization.

Law enforcement concerns also were the backdrop for re-nationalizing a large chunk of the Sakhalin II energy field, which is operated by a consortium headed by Shell (RDSA), as well as of Kovykta, a large Siberian gas field that BP agreed to sell to Gazprom (GAZP.RTS)—Russia's state gas company—last year.