Studies Eastern European Markets
Eastern European Markets
the 22nd of May 2003

Peeter Vahtra
RUSSIAN OIL SECTOR TODAY AND TOMORROW
– THE IMPLICATIONS OF THE CASE OAO YUKOS
Turku School of Economics and Business Administration
Electronic Publications of Pan-European Institute, 2/2004
The whole study as a pdf-dokument.

Summary

The question of the future of Russian oil sector has been a hot topic ever since the Yukos crisis broke down. A wide range of opinions have been presented and even the worst case – pictures been painted on full re-nationalization of oil assets according to governmental will.

In following, some recent facts and relevant considerations will be presented, on the future rule and structure of Russian oil sector as well as its role in the country’s economy.

Under continuously favorable world market conditions, Russian oil sector is experiencing unchallenged growth in production and export terms. Along with unstable situation in Middle-East, Russia has become the most attractive oil supplier worldwide, providing the world’s biggest oil resources available for foreign participants. Fuelling the growth, Russian oil majors led by Yukos, Lukoil and TNK-BP are presenting impressing numbers of growth along with implementation of increasingly Westernized management practices and patterns of organizational development.

In light of the recent events, one can thus only attempt to draw further conclusions on the development patterns of Russian oil sector. At the moment, the most probable outcome seems to be the survival and strengthened position of few oil majors in the sector, playing according to the rules of government. As of the contradictory Yukos case, the company has very few realistic changes to fight back the authorities, being efficiently stripped from its weapons and even its assets. The tax evasion charges, as such, won’t bring down the company, with increasingly solid financial base, however, the continuing probe over its assets and license deprival will serve as effective measures to harm the core activities of the company. At current state of license economy in Russian oil sector, very few means are left for the individual companies to fight the authoritarian decision-making, be it justified or not. It is however realistic to assume more sophisticated practices of governmental control to be implemented in the sector.

The revisited tax legislation will most probably bring some enhanced transparency to the oil sector policies. Although cutting the windfall profits of oil companies, use of tax loopholes currently causing troubles for many companies, will be prohibited by law thus decreasing the scale of arbitrary use of power in the matter. The nationalization of private property, and review of privatization of 1990s, would undoubtedly be one of the shortest ways to yield the destruction of current Russian economy. However tight the control of state over the oil sector, the Kremlin is well aware of the fact the sector being the very basis of Russian economy at present.

The means however are there for government to gain unchallenged control over the oil economy and further amendments are being carried out for this purpose. In accordance with the governmental affirmations of respecting the outcomes of the privatization of last decade, statements have constantly put forward about increasing the role and control of government in the oil sector. Under the present circumstances, no realistic alternative for the government tightening its grip over the industry can be presented, whether one likes it or not.

The industry and its actors are growing more powerful than ever and for curbing their ambitions, measures are taken, of which the Yukos show trial serves as the most visible example. Since the message is now delivered for time being, no reasons for repeating such actions are at sight, nor can they be afforded. The means more sophisticated are available for increasing the control over the industry and its individual actors. Whereas the growing oil sector is boosting the overall economic growth of the country, concerns have increasingly been expressed on the future of the other sectors of economy.

Along with the growth in oil sector, very few economic branches have witnessed remarkable growth during the past years. Only the heavy machinery industry can be said to hold the potential for international competitiveness, with the vulnerable SME sector still heavily on the path of formulation. No recent analysis have presented the evidence of decreasing importance of the oil sector for the country’s economy (e.g. Sutela 2004, Kaitila 2003, Rautava 2002). With Russia remaining heavily dependent of the volatile world prices of oil and other raw materials, the federal revenues are understandably affected by these fluctuations, offering an unstable basis for economic development.

As the oil and commodity sector being the main source of revenues, the investment activities are largely targeted on this sector. With growing investments into raw material extraction and the refining activities, the importance of other economic sectors inevitably decreases and causes a distortion in the country’s economic structure.(Kaitila 2003). Despite the differing underlying conditions, some commonalities can be recognized between Russia and the oil states of Asia and Latin America with the alarming troubles arising from the dual economy structure and so-called Dutch Disease.

A country equipped with such huge strategic resources in one sector controlled by few elite groups, inevitably experiences the growing inflow of money into that sector. This results in huge wealth accumulation connected with high inflation and rising costs, a situation where high domestic costs virtually kill the competitiveness of practically all non-oil exports. (Sutela 2004) Although the economic structure and resource base of Russia (fortunately) differs from that of traditional oil states, the implementation of policies enhancing the use of Russia’s other resources and well-educated labor, are of vital importance for the healthier development of the country in the long run.

Further concerns are connected with the actual condition and development of Russian oil assets. Whereas possessing huge resources, a significant part of Russian oil industry assets are inherited from the Soviet era and of urgent need for restructuring. Although accounting for the lion’s share in the country, the oil sector investments have widely been targeted to the exploration and production enhancement activities with increasing claims from the authorities of neglecting the sustainable long-term development of the assets. In several cases, the wells are used to their exhaustion seeking for high short-term profits. The issue of sustainability in production is firmly connected to the ownership economies and licensing procedures of governmental agencies.

One has once again to recall the very nature of the oil business in Russia, based on the license economy with the actual productive assets belonging not to producers but to the state. Under the regime of this nature, the aims of individual actors can often be questioned; under what conditions one is targeting for the long-term sustainable production or practicing an opportunistic strategy of profit making? Additionally, the recent course of events has definitely not increased the confidence in government’s sustainable licensing policy. Since it is more than unrealistic to present the thoughts of free oil license and reserves market in Russia even in the long-term, several questions of the future efficiency of the industry are left open.

Russian oil today and tomorrow - the implications of the case "OAO Yukos"

The whole study as a pdf-dokument


More information
Turku School of Economics and Business Administration
Pan-European Institute
Turku, Finland
Tel. + 358 2 481 481
Telefax + 358 2 4814 268
http://www.tukkk.fi/pei

 TERMS & CONDITIONS / KÄYTTÖOIKEUDET. © Oy Compiler Ab. All rights reserved.