Russia’s oil woes

Moscow's attachment to statist economic policy is undermining its bid for global energy dominance, says Leon Aron, resident scholar at the American Enterprise Institute.

By re-nationalising its energy sector, Russia is slaying its largest golden goose, says Aron:

Between 1999 and 2004, young tycoons invested over $36 billion, or 88 per cent of their net profits, in "greenfield" exploration, drilling, and modern technology.

Helped along by the cheaper ruble and an overhaul in the companies' corporate management (which became leaner, more transparent, and responsive to the markets), the private sector's oil production grew by 47 per cent.

Trillions of rubles were paid in taxes to the Treasury and, for the first time in post-Soviet history, dividends went to the shareholders.

By contrast:

During the same five years, extraction by state-owned companies was up by a mere 14 per cent.

But ever since "acquiring" most of YUKOS (a private company), Rosneft (a once obscure state-owned company) has aggressively continued to buy oil assets.

Gazprom, also state-owned has been on a shopping spree of its own: in just the last three years it has spent $18 billion on acquiring "non-core" businesses outside the gas field more than it has invested in exploration and production since 1996.

Thus, some of the most productive assets of the Russian oil industry have been transferred from the most transparent and efficient companies to the least transparent and efficient. As a result, after an average growth of 8.5 per cent between 2001 and 2004, in the last two years, the growth in oil production has dropped to 2 per cent.

These moves are bound to make foreign direct investors think twice before going into Russia and if last July's float of Rosneft's shares on the London Stock Exchange is an indicator it was much less enthusiastic than Moscow had hoped for harvesting stock markets might not work either.

Source: Leon Aron, Russia's Oil Woes, The American, January/February 2007.

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FMF Policy Bulletin/ 13 March 2007

Publish date: 22 March 2007
Views: 998

Energy, Oil, Energy

The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation. This article may be republished without prior consent but with acknowledgement to the author.

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