Jeremy Warner's Outlook: BP's Browne must rely on Putin's word that Russia is not a taxing issue

If the TNK deal were to turn sour it would not spell disaster for BP. But the verdict on Lord Browne and the share price would be much harsher
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The Independent Online

BP's Lord Browne flies out to Moscow on Thursday for an audience with President Vladimir Putin. The visit was fixed months ago, yet it is sensitively timed because the Russian authorities have just slapped a $1bn demand for back tax on BP's 50:50 joint venture with the local oil producer TNK.

While this is probably more of a negotiating ploy than the beginning of another Yukos-style assault on the oligarchs, BP's chief executive will nevertheless be keen for reassurance that the Kremlin remains fully supportive of Western inward investment, particularly into its vast oil resources.

Lord Browne took a calculated risk when he paid $7bn for the stake in TNK-BP 18 months ago. So far the gamble has paid off. The door has in effect been closed on other Western oil majors buying into Russia and BP has recouped nearly a third of its original outlay in dividends.

Even if the deal were to turn sour, it would not spell disaster for BP - the investment represents just 3 per cent of its market capitalisation. The verdict on Lord Browne and the share price, on the other hand, would be much harsher. There are three important oil-producing regions of the world - the Middle East and West Africa are two and the third is Russia. In the Middle East, Iran and Iraq remain out of bounds to BP whilst most other Gulf states only welcome Western oilmen wearing Stetsons and talking in a Texan accent. As for West Africa, BP has reasonably decided that Nigeria is a bigger gamble than Russia.

BP needs Russia in order to grow. Lord Browne's task is to demonstrate to President Putin that Russia needs BP just as much, in terms of the technology, management and investment it can bring. Seven short years after defaulting on its sovereign debt, Russia is back in the international fold. The Yukos affair has sorely tested that judgement. TNK-BP will be a litmus test of who has their hands on the levers of control - Mr Putin or the bureaucrats of old Russia. Lord Browne can only hope that the president still calls the shots.

What? No pensions policy? You bet

Full marks to Michael Howard for committing more than a third of his planned tax cuts to pensions. Labour has yet to say anything remotely meaningful about pensions, preferring instead to await the outcome of Adair Turner's Pension Commission before deciding what to do.

Yet even on that count, ministers rather pre-empted the Commission's recommendations by assuring employers there is no question of imposing compulsory pension contributions in the next parliament. Or have they? Alan Johnson, the Secretary of State for Work and Pensions, yesterday said compulsion had not been ruled out as party policy, even though the Prime Minister does seem to have ruled it out personally.

Labour is all over the place on an area of policy which ought to be home turf - how to provide a decent level of social security. Not to set out the Government's intentions on this key area of debate going into an election is an omission of some cowardice. On pensions at least, we don't know what we are voting for.

At least the Tories have committed to something. The only trouble is that it's hard to see the point of it, either as a measure in itself or as a vote winner. As things stand, the tax incentive for pension saving is heavily skewed towards top-rate taxpayers. Basic rate taxpayers gain proportionately less. By committing to pay £10 for every £100 saved on top of the usual tax reliefs, the Tories go some way to levelling the incentives.

But actually, they would do much better to put the money towards abolishing tax for the low paid altogether. For nearly all the low paid and many basic rate taxpayers too, it's simply not worth saving for a pension even if they can afford to. The amounts involved are too small to buy a decent annuity and would only count against means-tested benefit in later life.

The Tories address this latter issue by promising to phase out the primary form of means-tested benefit for the over 65s, the minimum income guarantee (MIG). This would be achieved by indexing the basic state pension to earnings, but leaving the MIG indexed to just price inflation, which tends to lag earnings by some distance.

In this way, the basic state pension would over time overtake the MIG, which would become redundant. Government policy, such as it is, is the other way round. The basic state pension is linked to inflation, but the MIG tracks earnings. The only way to counter the disincentive to saving at the heart of the present system would be to introduce compulsion, but to announce such a policy in the run up to an election would be tantamount to declaring a rise in taxes.

The other obvious solution would be to raise the pension age. This would allow for the payment of a bigger state pension without it costing the earth. Yet the Government has ruled that one out too. The thinking behind Labour's fence sitting seems to be that there are more votes to be lost than to win in pension reform. Thus does Labour illustrate one of the great paradoxes of democracy. Few governments dare risk the short term pain of tackling these long term issues for fear of upsetting the voters on whom they rely.

Stock market gloom looks overdone

If a week is a long time in politics, it seems to be an absolute age in the minds of stock market investors, whose swings of sentiment become ever more bewildering. One minute it's tearaway growth and inflation that is top of everyone's list of concerns, the next it is slowing growth and deflation.

Over the last couple of trading days it has been the latter, with shares falling sharply across all major markets. In the past month and a bit, the FTSE 100 has given up nearly all this year's gains. For US indices, the situation is even worse, with both the Dow and the S&P 500 now quite a bit lower than they started, so plainly this is nothing to do with pre-election nerves.

The immediate trigger for the latest downturn in prices was disappointment with IBM's trading update in combination with some weak US economic data. The result has been a generalised flight from risk, with corporate and emerging market bonds weakening alongside equities. Is this just another blip, of the type we've seen before in the long, slow march back from the abyss markets seemed to be falling into immediately prior to the Iraq war, or is it something more serious?

The former view still seems the more likely. I say this even though it flies in the face of what business leaders have to say. Nearly everyone complains of a marked slowdown, and this is not just in retail where the present soft patch is well chronicled. Across all sectors there is said to be a sogginess in demand. Conditions are tough.

Usually, the view from the coal face is the most reliable, yet I wonder whether things are as bad as complained of. After the best year in world economic growth in decades, things were bound to slow a bit. If conditions are just not quite as good as they were, that's plainly a rather different story from being absolutely dire. In point of fact, wages are still rising strongly, and so is labour participation. Oil prices, though weaker than they were on fears of a slowdown, are still high.

Many of the same things could be said about the US, where again fears of a slowdown seem to be overdone. To the contrary, the inflationary risk continues to look the most potent.

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