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
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.
Many have long suspected TNK-BP would be next on the list, as the Kremlin appears to be systematically reasserting state control over the energy sector (BusinessWeek.com, 4/19/07). Formed in 2003, when BP invested several billion dollars in the venture, TNK-BP is 50% owned by BP and 50% owned by a group of Russian investors that includes well-known tycoons Mikhail Fridman and Viktor Vekselberg.
So it may be significant that, under the terms of the original 2003 agreement, the Russian shareholders agreed that they wouldn't sell their part of the venture before the end of 2007. Now that the waiting time has expired, no one will be surprised if the Russian partners sell their stakes to the state. Gazprom has long been rumored to be the likely buyer. If past experience is any guide, strong-arm tactics against TNK-BP could well be a way of encouraging the shareholders to sell—or lower the asking price.
Looking at Leadership Involvement
Even more alarming for BP is the idea that the British energy giant itself—and not its Russian partners—is in fact the primary target. On Mar. 20 the Russian business newspaper RBK Daily cited an anonymous source "close to TNK-BP," who claimed the actual goal of the investigation was to "drive BP from the Russian oil business." Certainly, the subsequent news that two U.S. citizens linked to the British Council have been charged with spying strongly suggests that the FSB's actual beef is with foreigners, and not their local partners. BP declined to comment on Mar. 20.
The big question, of course, is to what extent Russia's top leadership is behind the investigation. The spying scandal comes only weeks after Russia elected Medvedev, who is widely viewed as a relatively progressive and pro-Western figure. Needless to say, the crackdown on TNK-BP, one of the largest foreign investments in the country, isn't exactly the kind of signal investors are hoping to see from the new President, who formally assumes office in early May.
The spying charges also came the day before the Russian Duma was due to pass its new law regulating foreign investments in "strategic sectors" of the Russian economy, especially the sensitive oil and gas sector. Under the new rules, the FSB must be consulted about large-scale foreign investments to ensure that state secrets aren't threatened. The spying allegations at TNK-BP send a chilling message to would-be investors pondering the significance of these new measures.
The behavior of Russia's security agencies often seems to border on paranoia. The FSB's head, Nikolai Patrushev, has frequently warned that foreigners, buried insidiously in innocent-looking nongovernmental organizations, are in fact out to undermine Russia and steal its secrets.
Ongoing Diplomatic Dispute
This also isn't the first time TNK-BP has found itself subject to the FSB's attentions. In 2005, the work of several TNK-BP Siberian subsidiaries was suspended on the orders of the FSB, and in 2006 the FSB opened a criminal investigation into allegations that government officials had leaked "state secrets" to TNK-BP. Under Russian laws, exact data about Russia's oil and gas reserves are deemed state secrets, creating a major headache for managers of TNK-BP, the third-largest oil company in Russia.
But the timing of the new claims, so soon after the presidential election, is certainly suspicious. Perhaps Russia's rulers want to demonstrate decisively to the outside world that Vladimir Putin's replacement by Medvedev doesn't signal any softening in Russia's position on thorny issues. The ongoing diplomatic dispute with Britain began with the assassination of Russian émigré Alexander Litvenenko in 2006 and Russia's refusal to extradite the chief suspect wanted by the British police.
It could well be that Medvedev has nothing to do with what's going on. Many have long suspected he would be little more than a figurehead President—with the real power residing among the hard-line elements linked to Russia's security services. It surely won't be long before the conspiracy theorists (and in Russia, that usually means everybody) speculate that the crackdown against TNK-BP is in fact part of a wider power struggle between rival factions in the Kremlin.
Certainly, if hard-line factions linked to the FSB want to provoke an embarrassing international scandal at the outset of Medvedev's presidency, they are going about it the right way.