Russia shocks BP with demand for $1bn in back tax from oil venture

BP's flagship investment project in Russia suffered a major and unexpected setback yesterday after its joint venture TNK-BP disclosed it had received a back tax bill for almost one billion dollars.

BP's flagship investment project in Russia suffered a major and unexpected setback yesterday after its joint venture TNK-BP disclosed it had received a back tax bill for almost one billion dollars.

The claim, which refers to 2001, is likely to cast a pall over Russia's precarious investment climate and came out of the blue.

The firm, which is 50 per cent owned by BP and 50 per cent by a group of billionaire Russian investors, had initially been asked to pay just $145m. TNK-BP immediately said it would contest the new bill but sought to play its significance down insisting that it had arisen from a routine procedure.

It said it hoped to settle the matter through informal negotiations but would sue if that failed. A court is due to hear TNK-BP's arguments against the claim later this month.

The announcement caused the benchmark Russian stock market index to fall by 2.5 per cent, its largest drop in almost a month, while stocks in Tyumen Oil Co, one of the firm's main units, fell by eight percent. Other Russian oil firms also saw losses.

The timing of the announcement, from Russia's point of view, could not have been worse. It came on the first day of the annual Russian Economic Forum in London, a showcase event supposed to promote inward investment.

Ironically President Vladimir Putin was also doing his best to plug investment opportunities in Russia yesterday -- at a trade fair in Germany.

Russia is anxious to put the fallout from the Yukos case behind it and persuade investors that the de facto renationalisation of the firm's biggest production unit last year was a one-off.

Snowballing back tax claims are, however, familiar to anyone who followed the Kremlin's standoff with Yukos.It was back tax claims against what used to be Russia's biggest oil exporter that drove the firm to the brink of bankruptcy.

The claims were initially small but eventually added up to a staggering $27.5bn.

Indeed the shadow of Yukos appeared to haunt nervous investors yesterday as the trial of Mikhail Khodorkovsky, the firm's imprisoned former chief executive, wound up. Judges retired to consider whether he is guilty of a series of fraud and embezzlement charges (which some believe are politically motivated) and are expected to pronounce a verdict on 27 April.

Viktor Vekselberg, a co-owner of TNK-BP, was ukeen to play down any similarities between his company and Yukos.

Received wisdom has had it that TNK-BP would never run into Yukos-like trouble. The firm's creation in 2003 had Mr Putin's personal blessing and the eight billion dollars BP pumped into the merger was heralded as the largest foreign investment in the Russian economy. The move appeared risky at the time but has seen BP's coffers swell as world oil prices have soared. Lord Browne, BP's Chief Executive, has been bullish about TNK-BP's prospects. He is on record as doubting whether his firm would ever receive any Yukos-style back tax claims, a risk he described as "minimal."

However, the firm's fortunes have appeared less certain recently.Earlier this year members of Russia's Upper House of Parliament asked the tax authorities to investigate allegations that TNK had minimised its taxes by using tax havens between 2000 and 2003 before its merger with BP.

More recently TNK-BP has seen its expansion plans curbed. Three auctions to develop Siberian oil fields were abruptly cancelled, reportedly to stop the firm winning the tenders.

And though purportedly keen to woo foreign investors, the Russian government said last month it wanted strategic reserves of oil, gas and metals to remain in Russian hands.

TNK-BP, Russia's third biggest oil producer, argues that it is not evading any taxes. It says it is planning to pay $10bn in Russian taxes this year, up from $6.5bn in 2004.