Why Is This Man Smirking?

Putin's environmental complaints against multinational oil companies were widely dismissed as red herrings; but now?

3 min read

During the last five years or so, the Putin-Medvedev regime has repeatedly forced the big oil companies to renegotiate major development contracts on terms more favorable to Russia. The government's modus operandi, whether the situation pertained to the Sakhalin 2 field in East Siberia or the even more challenging Shtokman fields in Russia's northern waters, has been to bring environmental complaints against the partner companies, saying in effect that the multinationals have to pay Russia more to compensate for unforeseen damages. Though such complaints have not been wholly dismissed by industry experts and the world press, it's generally been taken for granted that Putin's environmental complaints--like his punitive use of tax law to eliminate rival power centers--have been a mere cover for his true political and economic objectives.

As Spectrum editor Sandra Upson put it in a news analysis several years ago, "The government’s environmental concerns may be genuine: Greenpeace and the World Wildlife Fund have raised strong objections to the damage inflicted on [Sakhalin]  island as a result of the energy companies’ operations. However, if the Russian government is challenging the companies’ environmental permits. . .solely to rework contracts to include Gazprom (as most analysts believe), the government is threatening the sanctity of all business relationships that bring in outside companies and capital."

As Upson explained, oil contracts with multinationals generally had been made on the basis that Russia would cover initial development costs but only start collecting revenues when oil production started. That meant, as the Putin-Medvedev government saw it, that the multinationals had little incentive to constrain development costs. Then too, there was Putin's basic determination, articulated in a kind of doctoral dissertation he wrote before becoming the country's leader, to take full national control of the country's mineral resources and use them to power its economic recovery and the reconstruction of a mighty Russian state.

Russia is overwhelmingly the dominant supplier of natural gas to Europe, and a major supplier of oil as well. It aspires to build out pipelines to Northeast Asia, and even become of significant supplier of liquefied natural gas to the Americas.

The decisive turning point in relations between the Russian state and the big oil companies was the arrest in late 2003 of Mikhail Khodorkovsky, the country's top oil tycoon, who had started to act as if he were operating in a liberal democracy with competitive party politics and a prevailing rule of law. Khodorkovsky was funding opposition parties, threatening to challenge Putin for the presidency, negotiating international pipeline contracts without consulting Putin's people, and even thinking of selling a big stake in Yukos to Exxon or Shell. In the past decade, as some outside experts saw it, Khodorkovsky had made Yukos Russia's best-run company, and so he saw not reason why he should not be allowed to collect his just rewards.

 All those factors evidently contributed to Putin's decision to have Khodorkovsky locked up and to throw away the key. The arrest sent an unmistakable message to the general public that nobody in Russia was safe, not even the country's richest and most successful person. And it told the multinational oil companies that they had better watch their steps. Relations with the companies soon deteriorated to the point where, some years later, the British CEO of BP's joint venture in Russia--TNK-BP--announced he was moving out of Russia to an undisclosed location, citing a long campaign of legal harrassment by Russian authorities. From the end of July to the beginning of December 2008, Robert Dudley continued to run TNK-BP from a secret location, until the venture's Russian shareholders and BP agreed to replace him.

What an outrageous way to treat a fine upstanding company like BP, right? Well, actually, the arrest of Khodorkovsky and Putin's hard line on multinational oil development always went down well with Russians: with reason, men like the Yukos CEO were seen as robber barons, who had acquired their industrial empires for a fraction of their real worth; with some reason, the multinationals were seen as arrogant, accustomed to getting their way in relations with weak developing countries.

Outside Russia all that looked rather differently, of course, But now, in the wake of BP's Gulf of Mexico catastrophe, does one really need to ask why Putin is smirking?



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