Medvedev's Window of Opportunity

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For the market, the postelection period began when Vladimir Putin used his first speech as prime minister to announce his plans to lower taxation for the oil sector. This was a powerful statement to the international investor community that a new page had been turned in the country's desire to attract investment. The 17 percent gain in the value of hydrocarbon companies in the following two weeks -- some $105 billion of value -- can be largely attributed to Putin's statement.

The changes affecting oil taxes were the most eye-catching of recent initiatives, but not the most important. President Dmitry Medvedev's first concrete steps toward backing his rhetoric on the rule of law are potentially groundbreaking. In the private sector too, there seems to be a new flurry of activity. The metals magnates are hammering out a deal on Norilsk, LUKoil has unveiled new reserves and Unified Energy System is finally breaking apart.

It is as if Medvedev's inauguration opened up new possibilities to resolve the difficult, unresolved issues that had been building for much of the last two years. The early years of Putin's first term were also the most energetic period of coherent policy implementation in the country's post-Soviet history, and it could be the same for Medvedev's presidency.

Which brings us neatly around to TNK-BP. Here is a simmering issue that has come very much to a boil since March. It is high-profile enough to become for Medvedev what the Boris Berezovsky and Vladimir Gusinsky conflicts were for Putin. The problem for Medvedev is that, unlike Putin's conflicts with the Yeltsin-era oligarchs, the conflict over TNK-BP is not a straightforward tussle for power. It cuts across at least three major tenets of the political and economic system that have emerged in Russia since 2000.

First, private sector oligarchs are being accused of using the media and the legal system to influence the outcome of a dispute over the control and ownership of strategic assets. This smacks more of the anarchic wars of the oligarchs in the '90s than the controlled environment of Putin's presidency. Medvedev has yet to earn his spurs against the oligarchs. Just as the first years of the new regime are an opportunity for the Kremlin to define strategy, so they are also an opportunity for other power groups to assert influence. With Putin's support behind him, Medvedev will want to make very sure that the state remains the ultimate arbiter in conflict resolution.

Second, a foreign company is attempting to defend itself within the ownership structure of Russian hydrocarbon assets. One unwritten rule that emerged under Putin was that the country's natural resources benefit Russia above everything and everyone else. Foreign participation was welcome, but only under the supervision of the state. The one seeming exception was BP, whose joint venture was supported openly by Putin and Tony Blair, then-prime minister of Britain. Blair was the first Western leader to publicly welcome Putin in early 2000.

Since those heady days of cooperation, however, Britain has been knocked down in the rankings of Russia's favored trade partners. British Prime Minister Gordon Brown looks unlikely to strike up a cordial relationship with any political leader, let alone Medvedev. When Putin was president, he made clear that the foreign partners were welcome in developing hydrocarbons but that they had to look to the state first for guidance.

Third, the drive for investment is being challenged. It has become mantra that the continued re-emergence of Russia as a great power requires economic growth and that growth depends on the investment needed to improve productivity before inflation erodes competitiveness. The escalating feud between BP and their Russian partners is an embarrassing reminder of the unique challenges facing firms doing business in the country. If the globally intrepid BP is unable even to get their employees work permits, then less experienced organizations will question their ability to cope.

The conflict therefore involves something of a dilemma. If the interests of the three oligarchs who control half of TNK-BP -- Mikhail Fridman, Len Blavatnik and Viktor Vekselberg -- win out, then it seems to suggest that the strong-armed tactics being employed against BP have at least the tacit support of the state. If the interests of BP win out, then it could be spun as foreign oil companies determining the strategic direction of part of Russia's hydrocarbon wealth. The dilemma may explain why the state has so far been studiously silent.

It analyzing this conflict, it is useful to consider the underlying economics. The clear advantages to the Russian partners in TNK-BP are to sit in the driving seat during any sale of assets. But they are dwarfed by the potential economic benefits of some kind of strategic partnership between BP and one of the state hydrocarbon companies -- particularly Gazprom. The gains that can accrue from two of the world's top 10 biggest companies cooperating over hydrocarbon production are of a scale that can change the global energy landscape. At the risk of oversimplifying the issue, Gazprom has the reserves but not the international presence, while BP has a global franchise but not the reserves. Putting the two together creates a hydrocarbon giant that immediately attains the Russian goal of building international champions.

The Medvedev presidency has begun quite brilliantly. Tough actions have signaled that there is more to the president's commitment to the rule of law than just rhetoric. And we are witnessing a business-like efficiency in the White House never seen before. Thus, the increasingly ugly faceoff between the partners in TNK-BP stands out so awkwardly. It seems unlikely, against the backdrop of all the other initiatives, that Medvedev will want this conflict to stain the otherwise positive start to his presidency.

All the major players are together in St. Petersburg this weekend for the International Economic Forum. Perhaps this is the opportunity to define some new rules of the game.

Roland Nash is head of research at Renaissance Capital.