PRESIDENTIAL ASSISTANT TAKES TOUGH LINE ON TNK-BP

C O N F I D E N T I A L MOSCOW 001776 SIPDIS STATE FOR EUR/RUS; NSC FOR MWARLICK E.O. 12958: DECL: 06/19/2018 TAGS: ECON EPET PGOV PREL RS EINV SUBJECT: PRESIDENTIAL ASSISTANT TAKES TOUGH LINE ON TNK-BP Classified By: CDA Daniel A. Russell for Reasons 1.5 (b) and (d). -------------- Summary -------------- ¶1. (C) In a June 18 meeting Presidential Assistant and G8 Sherpa Arkady Dvorkovich told NSC Senior Russia Director Warlick, EUR/DAS Merkel and EUR/RUS Director Kelly that both sides in the TNK-BP dispute were at fault and that the GOR would not intervene. He agreed that a negotiated outcome that preserved BP's investment -- and Russia's reputation -- was preferable, but that BP would inevitably have to agree to changes in the status quo, including the departure of current CEO Robert Dudley. Dvorkovich also reaffirmed the GOR's commitment to modernize the economy and to play a larger international economic role. He promised the GOR would respond soon with its suggestions for how to structure the government roles in the proposed U.S.-Russia business-to-business dialogue. End Summary -------------- TNK-BP -------------- ¶2. (C) NSC Senior Director Warlick told Dvorkovich that the USG was following the TNK-BP situation closely and was increasingly concerned over the dispute. DAS Merkel said the USG perception was that GOR administrative resources were being used by the Russian partners to exert pressure on BP. Warlick said this perception was hurting Russia's reputation with foreign investors. She suggested that it was in the GOR's interest to be more assertive about supporting a resolution. If the dispute ended up in the Russian courts, and BP was ultimately driven out of this joint venture, it would be a disastrous outcome for all concerned. ¶3. (C) Dvorkovich responded that the government had no intention of intervening. It was a commercial dispute that the shareholders needed to resolve among themselves. He expressed confidence that if the dispute reached the courts, it would be adjudicated fairly and argued that the problem was with false international perceptions of the Russian legal system. He added that both sides in the dispute had violated the "spirit" of the partnership, but he rejected the idea that the Russian partners were guilty of anything illegal, such as the inappropriate use of state resources. ¶4. (C) Dvorkovich claimed the source of the dispute was BP's policy of treating TNK-BP as a subsidiary, a policy he alleged was being pursued by TNK-BP CEO Dudley. By contrast, the Russian partners (with whom he had clearly spoken) viewed it as a Russian company that wanted to expand overseas and play a larger role in international energy markets. At BP's behest, he claimed, Dudley had frustrated the Russian partners' overseas expansion plans, which would have competed with BP. Dudley had also assigned too many BP employees to the company. ¶5. (C) Dvorkovich acknowledged that the GOR was concerned over potential damage to the country's investment reputation, would prefer a negotiated resolution, and was talking informally to both sides. However, he said BP was making "no positive suggestions." The bottom line was that things could not stay as they were and Dudley would eventually have to go. He had suggested informally a possible replacement, Denis Morozov, the CEO of Norilsk Nickel, who he said was known to be an independent Russian businessman. In addition, the Board of Directors would have to be changed to include "independent members." (Comment: While Dudley's departure may be possible, there is little chance that BP would accept a Russian substitute. See Septel for Dudley's views on the state of play.) ¶6. (C) Warlick noted that the claim of an excessive number of Westerners working in TNK-BP was exaggerated. They were at most hundreds in a company of tens of thousands. Merkel added that the alleged dispute over expansion plans was also exaggerated, as it centered on a limited number of countries that were problematic because of sanctions issues, not BP's commercial interests. That said, both Warlick and Merkel stressed that the key was not to argue over details but to find a way to resolve the dispute that would prevent the forced withdrawal of BP, which would not be good for either the company or Russia. -------------- Economic Reform -------------- ¶7. (C) In response to a question about the GOR's economic priorities, Dvorkovich said that they had been articulated numerous times, such as in President Medvedev's February speech at the Krasnoyarsk economic forum and most recently by Medvedev and First Deputy Prime Minister Shuvalov at the St. Petersburg Forum. Internally, the GOR was committed to modernizing the Russian economy and externally it was determined to play a larger international economic role. ¶8. (C) Dvorkovich said the main thrust of reform domestically was to fight corruption and improve the rule of law. Comprehensive plans for meeting both these objectives would be adopted by Medvedev by September. In addition, the GOR planned to increase spending on infrastructure and social programs to improve the country's competitiveness. He acknowledged that this could spur further inflation but argued that the way to cool the economy was to increase its capacity rather than artificially restricting demand. He added that the GOR hoped to involve private partners in all of these initiatives, which should also slow inflation. ¶9. (C) Externally, Dvorkovich stressed that Russia wanted to play a constructive role in the international financial system. The GOR planned to host a meeting for financial sector professionals later in the year that would be designed to elicit private sector suggestions for how governments could reform the international financial system in the wake of the sub-prime crisis. He said Russia also wanted to play a constructive role in international energy markets. The tax incentives it was adopting to spur upstream oil production were a recognition on Russia's part that it needed to do more to boost world supplies. -------------- B2B Dialogue, WTO -------------- ¶10. (C) Warlick said that our understanding following Commerce Secretary Gutierrez's meetings at the St. Petersburg Forum was that the GOR would get back to us on the government's role in the business-to-business dialogue proposed in the Sochi Strategic Framework Agreement. Specifically, we understood that First Deputy Prime Minister Shuvalov had agreed to consult with Economic Minister Nabiullina. Dvorkovich acknowledged that was the GOR's understanding as well and said they were planning to meet soon internally to discuss how to respond. Merkel stressed the positive results from the government-to-government dialogue and our hope that the business dialogue would be similarly successful. Dvorkovich stated that the GOR agreed on the importance of establishing the B2B dialogue soon; the only outstanding issue was to clarify the role of government participation. ¶11. (C) On WTO, Dvorkovich said the recent visit of World Bank (and former USTR) Zoellick had been very positive. Zoellick and President Medvedev had discussed the handful of remaining issues, including agricultural subsidies, state-owned enterprises, and export tariffs for lumber and had agreed that all were easily solvable. Dvorkovich said the bilateral agreement with Georgia was likely to be the final sticking point. He added that negotiations with Ukraine on a bilateral agreement had begun, but that Russian negotiators did not anticipate similar political difficulties. RUSSELL