13:44 GMT +3 hours26 May 2016

Russian Press - Behind the Headlines, April 13

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Private Oil Companies Demand Access to Offshore Projects / World Bank: Russia Fails to Live Up to Trade Potential

Vedomosti                                                                                                                                                                                    Private Oil Companies Demand Access to Offshore Projects

The heads of the four largest private Russian oil companies have complained to Putin about the preferential treatment given to Rosneft and Gazprom. The prime minister agrees that not only state-owned but also other “purely Russian companies” should be given access to offshore projects.

Vagit Alekperov (LUKoil), Vladimir Bogdanov (Surgutneftegas), Alexander Korsik (Bashneft) and German Khan (TNK-BP) have sent a letter to Putin in anticipation of a meeting on the development of Russia’s continental shelf.

Under the 2008 law on mineral resources, only state-controlled companies with at least five years’ offshore experience can bid for offshore licenses. This limits the list to Rosneft and Gazprom. Alekperov, until recently the only one to complain, said in a March interview with The Financial Times, “State companies take the licenses and do nothing with them.” In their letter, the four chief executives write that limited access to offshore resources “is a key issue that can have a negative impact on the fulfillment of the state offshore exploration program based predominantly on extra-budgetary funding.” Offshore fields yield 16.7 million tons of oil per year, or 3% of all oil produced in Russia, and 41.6 billion cubic meters of natural gas (about 6%), said Troika Dialog analyst Valery Nesterov. The program stipulates increasing oil production by 40-80 million tons and gas production by 190 bcm by 2030. According to the Natural Resources Ministry, Russia’s offshore reserves are estimated at 100 billion tons of oil equivalent, or 20%-25% of the world’s total.

The law “discourages most Russian companies’ exploration efforts,” the chief executives write in their letter, asking Putin to consider expanding the list by including private Russian companies.

Putin’s press secretary Dmitry Peskov told Vedomosti that Putin, who only knows about the letter from media reports, proposed that conditions should be considered for allowing “purely Russian companies” to participate in offshore projects. He added that such companies should also attract the funding for these projects. The meeting participants also approved benefits for companies that are implementing offshore projects.

“We hope that corresponding amendments will be made to the legislation,” LUKoil spokesman Dmitry Dolgov said. Peskov explained that private companies can take part in offshore projects as partners of state companies and that additional conditions will be drafted for private companies’ participation in offshore projects. “Purely Russian companies” is not a legal term, Peskov said. The phrase concerns companies that are registered in Russia, have operations here and are predominantly Russian-owned. There are no 100% Russian-owned companies among the large oil producers because their shares are traded on the stock market and there are foreign investors among the shareholders.

It is up to the government to decide on expanding access to offshore projects, but the companies that plan to participate in them should be aware of the environmental hazards, have the necessary technological competence and be ready to take risks, said a Rosneft representative. The representatives of Gazprom, TNK-BP, Bashneft and Surgutneftegas declined to comment.


Moskovskiye Novosti                                                                                                                                                                       World Bank: Russia Fails to Live Up to Trade Potential

Russia’s efforts to diversify its exports by shifting the emphasis from commodity sectors have so far yielded little results, and slightly over half of all Russian companies entering foreign markets survive the first two years.

Foreign customers are only interested in Russia’s mineral resources, a World Bank report on diversification of Russian exports suggests. While the proportion of commodity exports continues to grow (65% in 2009), the export of engineering products, electronics and chemicals grew by only 10% over the past decade.

The experience gained by natural gas exporters is hardly applicable to other industries; therefore, whatever growth we have, it comes from the expansion of exports of existing products in existing markets, WB’s Alvaro Gonzalez said.

Although Russian companies are making forays into foreign markets, only 57% of Russian export events (defined as one foreign sale in a given year) survive after the initial two years. In China this rate is higher than 70%. The low export survival rates – in fact the lowest of the BRICS – are a symptom of a lack of competitiveness in the non-oil and gas sectors.

Russia actually seems to be underperforming even compared with its existing trade potential, according to the World Bank. Russia “undertrades” with China and India as well as with several G8 countries. Moreover, the number of countries with which Russia seems to be “undertrading” grows when the oil and gas industries are excluded from the mix. Despite the increase of China’s share in global trade, its share in Russia’s total exports remained stagnant at around 4–5% in 1998–2008.

The problem is even more serious; World Bank economists are being politically correct, said Boris Kuznetsov from the Higher School of Economics. “Many Russian exports that are not technically commodities, are still linked to mineral extraction. We sell metals and mineral fertilizers. We sell arms that were developed in Soviet times, which invested 40% of its GDP in the defense industry,” he said.

In fact, many Russian companies’ export potential is constrained by the fact that their profits are much higher than those of their counterparts in comparable economies. As long as a company feels comfortable it has no motivation to innovate or explore new markets. At the same time this leads to higher domestic prices.

Another constraint is excessive government regulation in the economy. The percent of state ownership in Russian business is twice that of the European Union. State companies control 17% of all jobs. “Government support is mostly granted to obsolete and inefficient producers and exporters,” said Yury Simachyov from the government's interagency analytical center.

The planned WTO accession will increase the challenge of diversifying exports. Export diversification is crucial to improving economic sustainability, Gonzalez said. The World Bank’s advice is to develop competition and privatize state companies. Reducing bureaucracy will also help increase Russian companies’ export prospects. Most importantly, extensive support needs to be given to companies that venture onto foreign markets.

RIA Novosti is not responsible for the content of outside sources.


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