LONDON BP Plc's (BP.L) ambitious energy exploration deal in the Russian Arctic shows London and Moscow are determined to boost their business ties despite persistent tension over the 2006 killing of a Kremlin critic in Britain.
BP and Russia's state-controlled Rosneft (ROSN.MM) agreed to a share swap on Friday under which they plan to explore jointly a huge offshore area that BP says may contain billions of barrels of oil and gas.
The deal gives the British oil major, rocked by last year's Gulf of Mexico oil spill disaster, access to coveted areas of the Arctic previously reserved for Russian oil companies.
The partnership has the backing of both governments, showing London and Moscow are not letting diplomatic tensions interfere with business.
The 2006 murder of former Russian agent Alexander Litvinenko, killed in London by a rare radioactive isotope, and Russia's refusal to extradite a suspect in the case, have cast a long shadow over relations between the two countries.
Britain's coalition government, which took office last May, has said the door is open to better ties, while sticking to its demand for the extradition of former KGB bodyguard Andrei Lugovoy to stand trial for Litvinenko's murder. Lugovoy denies involvement.
"You are seeing a sort of recalibration of the relationship, even if some of the fundamental difficulties haven't been resolved," Richard Whitman, politics professor at Bath University, told Reuters.
Moscow and London had an "agreement to disagree" on the Litvinenko dispute, keeping it apart from other important areas of their relationship, such as business, he said.
On the downside, Britain runs the risk that BP's Russian deal could irritate its closest ally, the United States.
At least two American lawmakers have called for the deal to be examined by U.S. regulators to see if it affects U.S. national and economic security. But the U.S. administration has said nothing publicly so far.
The deal has also been attacked by environmental groups.
British companies accounted for $19.4 billion of the $262.6 billion foreign investment Russia has attracted since the 1991 fall of the Soviet Union, making Britain the fifth largest investor after Cyprus, the Netherlands, Luxembourg and Germany.
Over 1,000 British businesses have a base in Russia, the largest investor already being BP through its TNK-BP joint venture. For Russian companies, London is the traditional venue for selling billions of dollars of stocks and bonds.
Russia has had a troubled relationship with foreign oil groups in the past, including with BP.
But it needs BP's deepwater drilling expertise while Britain recognizes the importance of Russia's energy supplies at a time of scarce reserves and soaring prices.
"Russia is centrally important to global energy with nearly a fifth of the world's daily gas production and about 13 percent of today's oil production. So this initiative ... is good news for Europe, for the UK's energy security and worldwide," British Energy Secretary Chris Huhne said on Friday.
The deal, which gives Rosneft a five percent stake in BP, was the second major British energy deal involving an emerging market in a week after Chinese oil giant PetroChina (0857.HK)(PTR.N) agreed to buy a stake in two refineries in France and Scotland owned by British firm INEOS INEOSP.UL.
FOCUS ON BRICs
The Conservative-Liberal Democrat government, trying to foster Britain's recovery from a deep recession, has made increasing trade with key emerging markets, particularly the BRIC countries (Brazil, Russia, India, China), a priority.
Prime Minister David Cameron led business delegations to India and China last year and plans to visit Russia this year.
The Litvinenko row led to London and Moscow expelling diplomats in July 2007. Britain halted talks on easing visa rules and Russia stopped the British Council, the British government's cultural arm, from operating in two Russian cities.
Spy scandals continue to dog the relationship of the former Cold War adversaries. Only last month Britain said it had expelled a diplomat from Russia's embassy in London for espionage and that Russia had responded in kind.
Britain angered Moscow last month by moving to deport a Russian aide to a British member of parliament. A British press report said the aide was detained on suspicion of spying.
Russia also resents Britain granting refugee status to several high-profile Kremlin critics.
Despite the problems, Alexander Sternik, Russia's charge d'affaires in London, told reporters in December that Moscow looked optimistically to the future and was keen to develop Russian cooperation with Britain in 2011.
(Additional reporting by Michael Holden; Editing by Peter Graff)