BP's dispute with its Russian partners has erupted into open hostilities with the stage set for a long battle in the international courts. Report by Danny Fortson

Bob Dudley was at the end of his tether. The embattled chief executive of TNK BP, BP's Russian joint venture, could no longer do his job effectively. Suspicious that his office had been bugged and his landline tapped, the Mississippi-born oil man resorted to stepping out on the balcony to make phone calls. He began to have his office regularly swept for bugs.

Relations at the top of Russia's third-largest oil-and-gas group had disintegrated into all-out civil war. The breakdown between its owners, BP and four Russian billionaires, was so severe that managing the day-to-day operations had become virtually impossible. So Dudley rang BP's headquarters in London last Thursday to tell Tony Hayward, BP's chief executive, that he was leaving Russia. Dudley said he could retain operational control of TNK-BP, but others are doubtful.

His departure was not a total surprise. Dudley had just five days before a temporary visa expired, but there had been hope that he would be able to get a new one. Instead, he booked a flight for that evening, destined for a location that BP has kept under wraps. Putting in motion an operation that had been weeks in planning, executives at TNK-BP immediately began pulling together a team that would be flown out to support Dudley. He will now attempt to run TNK-BP, a company with a workforce of more than 66,000, almost all Russians, from a secret location.

BP chairman Peter Sutherland told The Sunday Times: "He is not in a BP office or in our headquarters in London as has been suggested. I'm not going to say where he is but I don't think he is under any physical threat."

Dudley's sudden departure, which BP waited to announce until he was airborne, was designed to shock its disgruntled partners at AAR, the consortium owned by Mikhail Fridman, Leonard Blavatnik, German Khan and Viktor Vekselberg that controls the other half of TNK-BP. BP was drawing a line in the sand. "Up to now we have played by the Queensberry rules and as a consequence we have been outfoxed," said a BP insider. "That will no longer be the case."

Since March, BP and TNK-BP have been subjected to a series of inquires, investigations, and raids at the hands of Russian authorities. BP's offices have been raided twice by the FSB, the state security body formerly known as the KGB. TNK-BP's offices have been inspected four times by the labour ministry. A former employee was arrested on charges of industrial espionage. Dudley was interrogated for six hours at the Ministry of Internal Affairs on tax-avoidance schemes engineered at TNK two years before he arrived.

Last week TNK-BP was forced to send the last of the BP secondees home amid a row over their visas. Khan, who is also responsible for government relations at TNK-BP, had ignored a request from Dudley for 150 visa renewals for foreign staff. Instead, he requested just 63 from immigration authorities, in effect ending the employment of nearly half the company's crucial technical specialists. At one point, TNK-BP security men denied BP staff entry to TNK-BP headquarters.

The company's travails have coincided with AAR's increasingly public dissatisfaction with how TNK-BP was being run by Dudley, who was appointed by BP. Sutherland said: "The treatment of us by our partners has been disgraceful. We have hundreds of joint ventures in the world and in my 12 years as chairman we have never had any disputes or been subjected to the harassment tactics that have been indulged here." He has appealed to the highest level of government, including Vladimir Putin and Gordon Brown, for help.

For Russia, the spat has been a public-relations disaster. News of Dudley's dramatic exit sent the country's benchmark Micex index down by as much as 6% on Friday, the sharpest single-day drop since January and a new low since Dmitry Medvedev became president three months ago. Katynka Barysch, Russia analyst at the Centre for European Reform, said: "It's bad for Russia because of the credibility issue. This is a new government, and rule of law is one of Medvedev's big things. But the impression is that the rules are being bent and stretched and applied unevenly."

For its part, AAR says BP has only itself to blame. Its demands, said Stan Polovets, the chief executive, are simple. They want Dudley fired, replaced by a new chief executive that BP can appoint - as long as he is not from within the organisation. They have lobbied for higher dividends and a new independent board that will allow the company to grow into a formidable international oil giant, rather than being treated like a "BP subsidiary". AAR has tried to debate these proposals in a "fair and amicable way", Polovets said, but has been repeatedly rejected by BP. The rejection of an AAR plan, tabled last summer, to list the company on the London Stock Exchange, set the current chain of events in motion.

"Everything we've proposed in the past couple of months has been ignored or shut down by BP. They've pushed us into a corner and given us no choice but to be more proactive and aggressive," Polovets said.

AAR denies "categorically" allegations that it is using the Russian authorities to apply pressure on BP.

How did it come to this when it all started so beautifully? When the deal to bring TNK together with BP's assets in Russia was signed in June 2003, it was done in the presence of Tony Blair and Vladimir Putin and held up as the dawning of a new age in British-Russian relations.

It was, at best, a marriage of convenience. Not long before the landmark deal was done, Lord Browne of Madingley, BP's chief executive at the time, and Mikhail Fridman, a director of TNK, were sworn enemies. Browne had been infuriated by Fridman, who took advantage of the chaos in Russia during the late 1990s to try to take assets cheaply out of Sidanco, a Russian oil group in which BP owned a 10% stake. Using his connections in America and Downing Street, Browne orchestrated a campaign to block banks from financing the deal on corruption grounds. Days after Fridman's attempt on Sidanco fell through, the two rivals struck an asset-swap deal that was a prelude to the full merger unveiled in 2003. It's not surprising that the deal, which gave AAR and BP each 50% but neither side operational control, has now unravelled.

The stakes are high. TNK-BP accounts for a quarter of BP's production and a fifth of its reserves. Colin Smith, an analyst at Dresdner Kleinwort, has estimated that BP's stake is worth about $25 billion. If it were not mired in controversy, it could be worth much more. TNK-BP trades at two-thirds the multiple of rival Lukoil, and half that of Gazprom. "A stable TNK-BP is worth a lot more than $50 billion," said an analyst.

It has been a fantastic deal for all involved. In the past five years, AAR's billionaires have received $18 billion through dividend payments and asset sales. That largesse has helped push Blavatnik and Vekselberg up the Forbes list of 100 richest billionaires. The cash has also funded their forays into industries around the world. Blavatnik holds a 4% stake in Warner Music and until recently sat on its board. His Access Industries conglomerate has key relationships with some of the biggest names in international finance. It raised $21 billion from Goldman Sachs to fund a takeover of chemical group Lyondell last year. He also owns 19% of Air Berlin.

Fridman is an adviser to the Council on Foreign Relations, the influential New York think tank. Douglas Hurd, the former Tory MP, sits on the board of Altimo, a company owned by Fridman's Alfa group. Lord Powell, Margaret Thatcher's foreign-affairs minister, sits on the advisory board of his Alfa Capital.

BP plans to use that dependence on international financial and political institutions against them. A BP insider said: "This company is full of people with degrees in geology who play golf at the weekend. It is not used to this kind of behaviour. But we are well respected in capital markets and the City and those relationships are going to be very useful."

Both sides are digging in for a battle that could mean many months, or years, in court. AAR has hired seven law firms, led by Lovells. BP has marshalled its lawyers as well, led by Linklaters. Sutherland said: "We are going to use every aspect of influence that we can bring to bear to bring about a satisfactory resolution. That includes legal proceedings explaining our case and speaking to those intermediaries that can intercede."

The endgame is unclear, but few fancy BP's chances of coming out ahead. "AAR are extremely clever. They know what's required to be effective and have the co-operation of the authorities. This is not a fair fight," said a source close to TNK-BP. "The government is staying out of it for now. They certainly aren't going to step in to save BP. It would be naive to assume that AAR are conducting this campaign solely to deliver international growth."

Nick Day, chief executive of Diligence, a business intelligence firm that deals in Russia, said this was all just positioning ahead of an ultimate sale to Gazprom or Rosneft, the state-owned groups. TNK-BP is the only big oil group in which the Kremlin does not own a stake. "This is a war of attrition and AAR holds all the cards because it has local authorities who are complicit in efforts to put BP under pressure," said Day. "Russia is clearly renationalising three industries: oil and gas, minerals and metals, and the defence sector. AAR and BP realise they are in a competition to sell out to Gazprom, and AAR is trying to buy BP's stake cheaply and then sell it on for a profit to Gazprom." Gazprom declined to comment.

The odds are certainly stacked against BP. Mark Pritchard, chairman of the British-Russian Parliamentary Group, said: "This is yet another example of the Kremlin interfering through the back door with foreign investment in Russia."

Countdown to the rupture

June 26, 2003: Tony Blair and Vladimir Putin witness signing of deal to create TNK-BP.

Nov 2007: A disagreement over a dividend payout and strategy arises, setting off the boardroom clash.

March 19-25, 2008: BP and TNK-BP offices in Moscow raided by FSB. BP employee arrested for industrial espionage; BP pulls 148 specialists from TNK-BP after visa difficulties.

April 28: TNK-BP security prevent BP specialists entering building in defiance of an order from Dudley.

May 26: Dudley gives interview in Russian press, admitting big differences with Russian partners.

May 29: AAR shareholders boycott a shareholder meeting in Cyprus. Independent director Jean-Luc Vermeulen resigns as crisis worsens.

June 10: Dudley is interviewed for six hours by Ministry of Internal Affairs on tax-avoidance schemes set up by managers, including Khan and Vekselberg, between 2001 and 2003 - before Dudley arrived at the company.

June 12: BP chairman Peter Sutherland calls AAR tactics "corporate raiding".

June 16: Fridman calls for Dudley's removal for first time at press conference in Moscow.

July 7: BP launches $352m (Pounds 177m) suit in High Court in London against TNK-BP over tax liabilities.

July 11: TNK-BP board meets in Cyprus; $1.8 billion dividend request is rejected, and AAR's calls for Dudley's removal are rejected.

July 16: First foreign TNK-BP employees begin leaving Russia as visas expire.

July 22: BP withdraws 60 remaining specialists.

July 24: Dudley leaves Russia.