Economic and politicalbackground of Russia at the time

of its accession to the WTO

Andrei V Belyi, CEURUS, University of Tartu

Outlining context

• Difficult economic transition, features of the State capitalism

• Dominance of energy sectors in the economy

• Increasing overseas trade and investments, need to defend economic competitiveness of non-energy sectors

Russia’s embedded institutions of energy governance

Role of the State has always been quite important in both oil and gas sectors

Evolving State Capitalism but debate on the opening up the economy

Licensing is not an investment, problems of property rights

Predominant role of Gazprom, close relationship with diplomacy

Energy and macroeconomics in Russia

• Observing a slow down in economic growth from 5 to 3.5%

• Growing dependency of GDP on oil and gas export revenues (arnd 60%)

• Growing dependency of State budget on oil price

• Oil price driven policies are inefficient for the hydrocarbon sectors

Evolving State-Markets Relations

Slow transition (1985-1991)

Deep reforms(1992-1998)

Strong Markets vsa Weak State

“Stabilization”(1999-2009)

How to rebalance?

Strong State

vs Controlled

Markets

Puzzles of policy priorities

• Decrease the role of the State in the economic segments or reinforce the State especially in the oil sector? (Dvorkovich vs Sechin)

• Ensure export competitiveness of non-energy sectors (metals, steel, agriculture) without harming the energy sectors?

2001-2003 2003-20101992-2000

VSNK(3-5%)

Gazprom(7-8%)

Yukos(12-13%)

Rosneft(5-6%)

Onako(1-2%)

Sidanko(8-9%)

TNK(9-10%)

Sibneft(7-8%)

Tatneft(7-8%)

SurgutNG(11-12%)

Lukoil (19%)

Slavneft(5-7%)

Yukos acquires VSNK(20-21%)

SurgutNG(15%)

Rosneft(5-6%)

TNK acquires Sidanko, Onako(12%)

Slavneft(4%)

Sibneft(9-10%)

Gazprom(7%)

Tatneft(5-6%)

Lukoil(19%)

Rosneft(28%)

state-owned

TNK-British Petroleum Holding (16-17%)private

Gazpromneft (8%)State-owned

Tatneft(6%) regionally owned

SurgutNG(16-17%)private

Lukoil(22%)private

Consolidation in oil sector

Will Rosneft take over BP shares?

Reasons for concentration:

– Political:

- Concentration of the control over strategic state resources

- Easier conditions to conclude profitable concessions

– Economic/financial:

- Larger profits stimulated by the high world oil prices

- Attraction of external capital to invest into the sector

– Technical:

- Better capability to exploit difficult areas of resources

Production share in brakets

Implementation problem: vertically integrated comp limit the market

Página 8

Transition from command to market• Transition from command to market

economy in the 1990s lead to a decrease

in production. In 1998 oil production

represented 59% of its 1990 level

• After 1999: oil sector regained its

strength with the economic stabilization

and world price increase

• In 2004 Largest production subsidiary

Yuganskenftegaz was taken over by the

state owned company Rosneft from Yukos

• Stagnation after 2007 mainly due to

domestic inefficiencies

Source: Oil & Capital

Till now, Russian oil production still did not attend its peak that reached in 1988

0

100

200

300

400

500

600

1988 1990 1991 1992 1995 1998 1999 2003 2005 2007

Mln tons

1995-99: lowest production level

Oil production declineafter Break-down ofthe USSR (1991) Dueto under-Investments

1999 – onward: Production recovery(see slide 9)

1992: private and state-owned oilcompanies start operating Russianoil sector

Mln tons

Export growthwith theproduction, buthalf of oil goes forRussian internalmarket

144 164 190 230260 262 258323

348380

421

459 470 481

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007

Oil Production and export: historical trends

Production

Export

Russian gas sector

Russia is the first world gas producer

0,00

100,00

200,00

300,00

400,00

500,00

600,00

700,00

Russia is the world leading gas consumer:Up to 70% of gas production is consumed Domestically � need to reduce gas flaring

Production

Domestic consumptionBCM

Export is monopolized by GazpromOil companies and independents sell gas domestically

EU oriented export, East direction is underdeveloped

Challenges at international level

• Change in contractual relations– Stagnating demand and Countervailing power – Shortening of duration of contracts– Reassessment of risk sharing (TOPs?)

• Conflicts around oil-indexed price• Higher flexibility of the gas markets due to

an influx of LNG � Urgency in domestic price reform but

monopolistic structure constitutes a barrier

Reforms: gas

• 1989: Minneftegazstroi reformed and Gazprom created

• 1993: Gazprom becomes a a Joint stock company, treated as a natural monopoly

• 2005: Gazprom is open for 49 per cent of privatization

Transport

Production

Pipeline

Supply+

market

Central Asia

Oil companies

Gazprom

Independent producers linked to political class (Novatek, Itera)With oil companies extert a pressure on access to networksGazprom would allocate them an internal market, but price is uncompetitive for most!

Price issues

• Low gas price is considered to be a subsidy by energy importers (non-energy industries would profit)

• Russia (similar position to Saudi) defends a different view – WTO is needed

• Unilateral increase of prices by Gazprom would provoke political and social tensions

• Price reforms would stem from the domestic market fragmentation in Russia’s gas markets. Again about State enterprise restructuring?

Conclusion

• WTO represents Russia’s objectives to reinforce competitiveness of non-energy sectors (eg steel, metals, fertilizers)

• State capitalism is reinforcing in the oil sector, and there is a relative decrease of Gazprom’s power

• Balance of power between the two views is not clear