TNK-BP Russia (2008) Harvard Case Solution & Analysis

Lessons from BP Experience in the TNK-BP joint venture

The investment in Russia was never the first decision that BP would have taken, as it already had a dissatisfying experience in the past in Sidanco case.However,due to the lack of opportunities elsewhere and BP’s matured oil fields and being unable to achieve the growth targets, it had to take the decision to invest in Russia.

The key lessons learned through the BP scenario are that there is more to business than the economic and political factors, even though the financial results are very favorable and revenue and net income have increased multiple times during the period.Moreover, the dividend payments have been made according to the deal, the debt level has been maintained but problems still exist.Trust is an important factor when deciding to start a joint venture and this case shows the lack of trust is the reason for most of the issues.

Trust is not built through the economic coordination however,it is built or eroded by at interpersonal level through interactions, and the erosion of trust leads to the unhealthy relationship between both investors. Energy is treated as security issue by most states, and Russian concerns over European countries will take over the oil markets is one of the issue due to which trust issues arise and one example of it is when Victor Vekselberg commented about expatriates.However,the labor cost when the expert professionals are hired from other countries are always high, and it has become a major issue for BP when the questions were raised that BP was taking extra dividend by paying these employees bonuses and entitlements.

Due to the prior investment in Russia, BP knew the political and legal issues in the Russian market, but it had no experience of dealing with the authorities like tax, custom and the monopolies and relationship with the regions, which can be fatal in running the Joint venture.Them is take that BP made was not to research about the previous ventures of Alfa, Access/ Renovo to have an idea on how have they performed and managed them and what to expect from them in future.

Changes in the policies of the Government:After the venture has also raised problems, tax authorities have imposed more tax on TNK-BP due to which the management has reduced the payout ratio, which has raised concerns for Partners who demanded 40% payout ratio.More taxation might pose problems with those objectives; another issue here is the change in policy of participation in the auction of oil fields for companies, which are 50% foreign-owned that will affect the growth of the TNK-BP.

Another lesson that can be learned by TNK-BP case is that involving political channels in business issues often end up in worse situations than the business was before the involvement and it often results in souring the relations between the countries.

Problems of Visa and employing the necessary employment of native workers in international ventures can also become a big problem as we can see in the TNK-BP case, where the pressure comes from the top authorities of the Government. Rejection of visas by the authorities, and blaming BP for paying high wages can affect the productivity of the Business, which can ultimately deteriorate the financial position of the company creating further problems.

The killing of an employee raises the security issues, which in the future can affect the company if specialists are needed in order to run the business, and that they may decline to work in Russia.

BP made efforts to sort out a deal with Gazprom, who first contacted them to form an alliance collapsed, however BP was confident that the alliance could go ahead.In addition, it discussed it with higher officials of the Government who were un supportive of the possible alliance, which might have influenced Gazprom from not committing, which put off the deal.TNK-BP Russia (2008) Case Solution

Relationships between Partners worsen with the demand from AAR for letting TNK-BP to expand outside Russia, which was against the agreement signed at the start of venture, and that the CEO of TNK-BP should be replaced.This was because he was not acting independently and pursuing the interest of BP over Russian shareholders and focusing too much on increasing the reserves, which was declined by Chairman of BP. This shows how hard it is to operate with such disagreements and distrust, even though BP up till now was respecting the agreements.............................

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