Foreign investment in Russia: The case of the oil industry

Abstract

THE RUSSIAN OIL INDUSTRY is in desperate need of investment. Output has fallen by over 45% since the peak year of 1987, and could fall still further if major financial commitments are not forthcoming. Domestic firms, starved of cash, and often lacking the appropriate technology and expertise, are unlikely, however, to be able to turn the industry around by themselves. Instead they will need to enter into partnerships with Western oil companies, which, attracted by Russia's skilled labour force, its relatively low production costs, and, above all, its huge reserves of oil, are ready to make major investments. It is widely accepted that such co-operation could benefit both sides. Projects could generate enough revenue to compensate both the foreign oil companies and their local partners, in the form of profits, and the Russian government, through tax revenues. Increased exports would improve Russia's trade balance and make it more able to service its foreign debt; the additional tax receipts would help to balance the state budget, and facilitate macroeconomic stabilisation. Furthermore, Russian equipment suppliers would receive additional orders, employment would be created for Russian workers, and the local economies of the oil-producing regions would benefit generally from large inflows of foreign money. Western energy consumers and governments would gain too, from added insurance against any future tightening of world oil markets and higher world prices. Yet, despite all these benefits, very little investment has actually taken place. By the summer of 1995 no more than $1-2