Russian and British leaders fail to thaw relations

TOYAKO, Japan (Reuters) - The first meeting between Russian President Dmitry Medvedev and British Prime Minister Gordon Brown failed on Monday to thaw bilateral relations that are at their lowest point since the Cold War.

The meeting on the sidelines of the Group of Eight rich nations summit in Japan had fuelled hopes it could ease a row over a $38 billion oil joint venture, TNK-BP, or problems for Britain's cultural outpost in Russia, the British Council.

Medvedev and Brown smiled and shook hands praising great potential for Russian-British ties, but made no substantial headway in the thorny issues souring relations.

"The president proposed to focus on elevating relations to a normal level," Medvedev's chief foreign policy adviser Sergei Prikhodko told reporters.

"Brown outlined his own ideas about problems in bilateral ties, including the British Council, some major oil companies," he said. "Medvedev gave explanations and drew Brown's attention to the need to work out a long-term approach to cooperation."

Moscow and London established cordial ties after Medvedev's predecessor, Vladimir Putin, came to power in 2000. But they soured as Russia accused Britain of hosting the Kremlin's political foes, including self-exiled tycoon Boris Berezovsky.

Ties plummeted to their lowest point since the Cold War after Russia refused to extradite to Britain ex-security guard Andrei Lugovoy accused of poisoning outspoken Kremlin critic Alexander Litvinenko in London in 2006.

The strains in political ties soon translated into tax problems for the British Council, blamed by the Russian officials for illegal operations, and a row over TNK-BP, and tit-for-tat expulsions of diplomats.

"Of course the Prime Minister raised the three main outstanding issues that we have with Russia. That is the Litvinenko case, the issue relating to BP and the issues relating to the British Council," Brown's official spokesman said.

"It's clear that we are not going to solve all these problems in one meeting, but it is important that we have a constructive relationship with Russia that allows us to raise and discuss some of these difficult issues," he told reporters.

TNK-BP HURDLE

TNK-BP, owned 50-50 by BP and four Russian-connected billionaires, began in 2003 as a model joint venture blessed by the Kremlin. It produces a quarter of BP's global oil output and posted a net profit of $5.7 billion last year.

But earlier this year, the Russian co-owners rebelled against the BP, accusing the joint venture's chief executive officer of playing mainly the hand of the British side.

Their protest was accompanied by tax police raids, security sweeps and court cases which many assumed showed the Kremlin was pressuring the firm to accept a state partner.

A similar barrage of official harassment was unleashed in 2006 against Shell to force it to sell a controlling stake in its giant Sakhalin gas venture to Russia's state-dominated energy champion Gazprom.

The row over TNK-BP is seen in the West as a test for Medvedev, who came to power in May promising to promote the rule of law in Russia. The Kremlin denies any involvement in the row over TNK-BP and said it would not interfere into what it described as a "purely commercial dispute".

Last year, then British Prime Minister Tony Blair warned Putin ahead of the previous G8 summit in Germany that foreign investors could pull out of Russia if they felt mistreated.

Brown specifically raised the most contentious issue in the TNK-BP row -- problems with issuing work permits and visas for the British managers of the joint venture.

"President Medvedev said that everyone has to obey the regulations, which are similar to those existing in the EU states," Prikhodko said in separate comments to Russian news agencies, in a clear sign of no concessions.

Brown's spokesman also stressed the dispute was primarily a commercial one, but he said Medvedev had assured Brown that visa applications from BP staff would be treated normally.

Despite the hurdles, Brown said there were reasons for engagement with Moscow: "There was common ground also about what we do in the Middle East, about what we do for Iran and how we can get Iran persuaded that it's not in their interests to develop nuclear weapons."

Prikhodko and Brown's spokesman both said more than half of the talks was devoted to major global issues.

"More than half of the conversation, its major part was devoted to economic issues, mainly to international economic issues including energy security, food crisis, steps needed to overcome the financial crisis," he said.

"The conversation was open and in my opinion there is a chance to achieve progress in bilateral relations, although it will not be easy to achieve this," Prikhodko said.

(Writing by David Clarke and Oleg Shchedrov, Editing by Rodney Joyce)