VZCZCXRO1244
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #2237/01 2141218
ZNY CCCCC ZZH
P 011218Z AUG 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 9271
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002237
SIPDIS
DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR FREDRIKSEN, HEGBORG,
EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER
E.O. 12958: DECL: 07/08/2018 TAGS: EPET ENRG ECON PREL RS
Classified By: CDA Eric S. Rubin for Reasons 1.4 (b/d)
1.(C) Summary: In a July 31 meeting with the Charge, XXXXXXXXXXXX provided insight into BP and AARs negotiations, noting
CEO Bob Dudley was unlikely to return and that the most important and difficult issue to resolve was likely to be
corporate governance, which was central to BPs efforts to protect its investment. XXXXXXXXXXXX, also provided some
colorful background on the AAR partners and in particular German Khan, who has orchestrated the attacks on BP and
TNK-BPs foreign employees. End Summary.
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BP/AAR Negotiations
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2. (C) XXXXXXXXXXXX said that BPs dispute with AAR head reached the "end of the beginning" XXXXXXXXXXXX had met in
Prague with Mikheil Fridman the day before, July 30, to negotiate a "cease-fire." (N.B. The meeting has since been
reported in the press.) XXXXXXXXXXXX, however, likened it to an Israeli-Palestinian cease-fire in which Khan would play
the role of Hamas, ready with some provocation or incident that would restart hostilities. Moreover, of all the
partners, Khan was the least leveraged and therefore had the least to lose if the dispute dragged on and the companys
performance suffered and payouts were delayed. He also had the least exposure outside Russia were BP to push the button
and start seizing the AAR assets through arbitration.
3. (C) XXXXXXXXXXXX said a longer-term resolution of the dispute would depend on reaching agreement in four areas:
picking a new CEO, agreeing on governance issues, agreeing on the level and nature of BP support to TNK-BP, and on
"liquidity." He said Dudley was unlikely to return. However, XXXXXXXXXXXX felt Fridman had overplayed his hand, and was
now getting pressure from the GOR to resolve the dispute and was therefore unlikely to play hardball on the identity of
the new CEO.
4. (C) XXXXXXXXXXXX said the second issue, corporate governance, was central to control of the company and would be the
most difficult to resolve. The structure of the Board, the presence of independent directors, the authorities of the
CEO, and structure of the subsidiary companies were the keys to BP protecting its investment in the company. He added
that the opaque nature of Russias legal system made this even more essential from BPs point of view and that any foreign
investor in Russia should have in its hands at a minimum the Chief Financial Officer (CFO) and the head of internal
auditing.
5. (C) On BPs level of support, XXXXXXXXXXXX said the questions revolved around whether BP would provide technical
skills to TNK-BP in the form of secondees and if so how many and under what terms. He noted that AAR and the Russian
Government knew full well that the company could not be run successfully without foreign employees. First, there were
simply not enough skilled Russian petroleum engineers and second the Russian engineers skills were not to world
standards. What the foreign personnel had brought to TNK-BP and other Russian oil companies were not only more
sophisticated drilling techniques but also an integrated approach to the work that maximized production. As an aside,
XXXXXXXXXXXX said he was very pessimistic that Russia would ever be able to get its production over 10 million barrels a
day and predicted instead a steady decline in production as the current fields were depleted and few if any new fields
were brought on line.
6. (C) XXXXXXXXXXXX said liquidity was really AARs issue as their ultimate goal was to take value out of the company.
Decisions would how much to pay out, including in the form of dividends, and how much to invest back into the company.
XXXXXXXXXXXX added that while the AAR partners overall goal was clear enough ) make as much money as they could ) they
had no real strategy for achieving that and instead approached everything tactically, and that the preferred tactics of
the Alfa partners in particular were to play rough. They had felt pressured from the government to sell at a discount,
disrespected by a BP that had been weakened by its transition to a new CEO, and had decided to make themselves difficult
until they were accommodated.
7. (C) If the negotiations were to fail, XXXXXXXXXXXX said BP would react decisively. He said BP had not reacted fast
enough or aggressively enough as the dispute had gathered steam but was "angry and fully awake" now and ready to go to
arbitration if necessary.
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German Khan and the Godfather
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8. (C) XXXXXXXXXXXX said he had a complicated and sometimes difficult relationship with Khan, though it was not as
difficult as Dudleys relationship had been. It was complicated because although they were technically on the same level
in the company, Khan as a part owner out-ranked him. However, at the same time, Khan knew very little about the oil
business, knew it, and therefore deferred to XXXXXXXXXXXX on running the company. With Dudley, he added, part of Khans
anger was because Dudley was the boss and had thwarted several of Khans pet projects, such as investing in "rogue"
states.
9. (C) XXXXXXXXXXXX
10. (C) XXXXXXXXXXXX said that after the trip he had gotten a copy of The Godfather and now watched it on a regular
basis himself so as to better understand Khan and anticipate his tactics. He added that Khans aggressive but relatively
simple business style was typically Russian where multi-million dollar deals are made in smoke-filled rooms in a matter
of a few hours and only later are turned over to the accountants to see if they make sense. It was not a style that
meshed well with BP and that culture clash was in part responsible for the acrimony of the dispute, as Khan had never
felt BP treated him with sufficient respect.
11. (C) XXXXXXXXXXXX added that Khan had gone along with Deputy Prime Minister Sechin on his trip to Cuba this week.
Khan had been very nervous about the trip, since he would not be the headliner but instead would be surrounded by other
powerful Russian oligarchs, including Sechin and Gazproms Alexander Medvedev. XXXXXXXXXXXX said nothing was likely to
come out of the trip. Cubas potential deposits were small and the geology was complicated. Even Khan was not really
interested and XXXXXXXXXXXX doubted any other Russian oil company would be interested either.
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Visa Update
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12. (C) XXXXXXXXXXXX updated us the morning of August 1 on the visa situation within the company. According to
McCormick, work visas have been trickling in all week for the foreign employees, including a batch of 18 that morning.
Although the company is still waiting for 23 additional visas, XXXXXXXXXXXX said that all of foreign employees in
"key/critical" positions, with the exception of Dudley, have now received visas and work permits (this includes
XXXXXXXXXXXX.
RUBIN