BP has said it will sell its 50% stake in its joint venture TNK-BP to Rosneft as part of a £16.7bn deal.
Russia's state owned oil company will pay the British energy firm $17.1bn (£10.6bn) in cash and $9.7bn (£6bn) in shares for the stake.
The deal, which is subject to state and regulatory approvals, will take BP's stake in the Rosneft to 19.75%, and see it gain two seats on its board.
As a result, the company - which is already Russia's biggest oil producer - will control almost half of the country's oil output, making it the world's largest listed energy company.
The deal comes after weeks of talks - as revealed by Sky News' City Editor - and is tipped to become one of the most significant alliances ever struck in the energy industry.
Russia's President Vladimir Putin described the agreement as a "good deal at a good price".
While BP's chairman Carl-Henric Svanberg said it was "an important day for BP".
"Russia has also been an important country for us over the past 20 years. Our involvement has moved with the times," he said.
"TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia."
"Things are changing in Russia... BP was also looking to change horses - it was in bed with some oligarch and is looking now to be closer to the Russian government which owns a majority stake in Rosneft," he told Sky News.
"When you look at this cash - some it will go to the balance sheet, some of it will go into investment but the rest of it could come back in the form of a special dividend."
Despite a fraught relationship with AAR, BP's is believed to have earned around $20bn (£12.4bn) in dividends from the "enormously successful" venture, Mr Joyner added.
Rosneft and BP now have an exclusivity period of 90 days to negotiate fully-termed sale and purchase agreements.
BP shares rose 1.1% to 455p following the announcement, while Rosneft shares were up 3%.
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