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Foreign Investments in the Russian Oilfields Case Study

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Updated: Jun 14th, 2022

The foreign investment in a country is determined by the attractiveness of its investment environment in which the processes of attracting and implementing investments occur. This is mainly due to the existence of a reliable legal framework in the country that regulates disputes and protects investors’ interests. Active actions to attract foreign capital began in Russia in the 1990s. The initial stage of reform and capital creation had already taken place. The country needed an influx of funds, especially in the form of investments in fixed assets, not just in allocating credit resources. This paper aims to analyze the negative and positive aspects of foreign investments into the Russian oilfields for both sides, as well as determine the significant risks of such investments based on the presented case study.

For Russia, attracting foreign investment contributes to the emergence of new financing sources for major projects, as well as the introduction of innovative foreign technologies in the Russian fuel and energy sector. Attracting new foreign investors and technologies to implement large-scale, capital-intensive, and high-tech projects will ensure the country’s oil and gas industry’s sustainable and long-term development. However, the current structure of foreign investment with a clear predominance investment in production indicates, in particular, that foreign partners still consider Russia as a source of raw material and want to reserve the right to process products with their subsequent re-export. This also indicates the reluctance of foreigners to transfer their latest technologies in oil refining and petrochemicals to Russian companies to remain in leading positions in these industries. Thus, this structure in which the share of investment in production significantly prevails over investment in refining and petrochemicals is destined to fail. Russia should strive to remove restrictions on foreign participation in the Russian oil industry because they hinder its integration into the global reproduction process.

Accordingly, the investment attractiveness of Russia’s oilfield for foreign investors is ambiguous as well. On the one hand, Russia has many advantages for investment: a capacious domestic market, professional but inexpensive working staff, an affordable resource base, and a favorable ruble-dollar/Euro ratio for foreigners. Reputable financial institutions have noted signs of economic recovery. The period of prolonged crisis is coming to an end, and foreign analysts understand that the greatest profit can be obtained by investing in the early stages of economic growth. On the other hand, there are serious obstacles that worsen the investment climate. In the foreign press, topics of corruption scandals in the Russian Federation, including major officials, are widely popular. Administrative barriers repel many investors: difficulties with processing documents, obtaining the necessary permits, approvals, and paying taxes.

Therefore, when deciding whether it is reasonable to choose a particular country as a new market for investing, the potential political, foreign exchange, and competitive risks must be carefully considered. Concerning the foreign exchange risks, Russia has broad opportunities for economic and market growth. After the devaluation of the ruble and the financial crisis, Russia’s economic growth has grown steadily to remain relatively stable. The Russian stock exchange delivered consistent returns to investors, and the country’s performance is expected to continue to show signs of improvement. Lastly, competitive risk should not be overlooked. Russia’s oilfield is one of the most attractive areas for foreign investment, which is due to the significant reserves of natural fuel resources in the country and the increasing demand for this type of goods. Thus, competition among investors for the Russian oil industry is considered relatively high. This is especially evident from the strong desire of Royal Dutch Shell to cooperate with Gazprom to bid for Rosneft, as well as British Petroleum’s will to purchase ten percent of the Russian Sidanco oil company.

Speaking of the political risks, the complication of Russia’s foreign economic policy and the introduction and permanent extension of sanctions are two major negative factors. Most investors take a wait-and-see attitude, watching in which direction the political confrontation between the Russian Federation and the United States, as well as the EU countries, will unfold. Even the easing of sanctions will most likely serve as an excellent signal to start the investment process. The unstable situation attracts speculators who want to take advantage of the situation. The Russian ruble is in demand among entrepreneurs who borrow money in currencies of countries with low interest rates and buy high-yield securities. Therefore, having considered the three major risk factors, it is possible to suggest that Russia’s unstable political and governmental forces comprise the strongest risk for foreign investors. This risk factor can be reduced by implementing the corresponding legal and tax guarantees, including legal acts on foreign investment, state regulation of foreign trade activities, and laws on credit and insurance activities of foreign investors.

To conclude, the Russian economy is relatively unstable but promising in the sense of attracting foreign investments into its oil production industry. Russia must remove restrictions on foreign participation in the Russian oil industry, without which the development and modernization of both the economy in general and the oil and gas sector, in particular, will be prolonged. However, potential foreign investors must consider Russia’s unstable political situation and the high level of competition in its oilfield; thus, careful and well-thought cooperation strategies are of high importance.

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