EDITORIAL RUSSIAN CHANGES POINT TO PROGRESS

Suddenly, most changes occurring in everchanging Russia point in the right direction. They raise hopes for the country's political stability, climate for foreign investment, and relations with centers of power elsewhere in the world.
July 4, 1994
3 min read

Suddenly, most changes occurring in everchanging Russia point in the right direction. They raise hopes for the country's political stability, climate for foreign investment, and relations with centers of power elsewhere in the world.

The main sign of progress is the long-awaited signing of a production sharing contract for development of oil fields off Sakhalin Island. Negotiations for the $10 billion project, called Sakhalin II, were not easy. Partners in Sakhalin Energy Investment Co.-Marathon Oil Co., McDermott International Inc., Mitsui & Co. Ltd., Royal Dutch/Shell, and Mitsubishi Corp.-deserve credit for their patience and tenacity. The Russian government deserves credit for accommodating the needs of foreign investors-needs that, by most accounts, many officials do not yet fully comprehend.

MORE AGREEMENTS SEEN

Signing of the Sakhalin II agreement at a meeting of the U.S.-Russian joint Commission on Economic and Technological Cooperation indicates that Russia still wants to do business with outsiders, even if it hasn't fully learned how to do it. The commission, chaired by U.S. Vice Pres. Al Gore and Russian Prime Minister Victor Chernomyrdin, predicted that other big oil and gas deals will be signed soon.

It's a message international investors needed to hear. Russia had been backsliding, with economic reformers falling from grace and surprise taxes souring existing projects and plans. Russia seemed for a while to want money and technology from outside but not partners. Sakhalin II affirms that Russia can complete a major deal.

Other recent developments will help. Chernomyrdin says he'll propose to the Russian parliament a package of tax breaks and incentives for foreign investors. The tax measures include a 5 year holiday and a guarantee that tax laws will remain stable. Russian officials seem to be learning that capital at risk hates surprises.

A huge remaining question is whether Chernomyrdin will get what he wants from the parliament-especially Duma, the lower house. Duma and the executive branch have diverged on important issues, and last year's political gains by opponents to reform seemed to widen the split. Cooperation is essential not only to the tax package but also to legislation on production sharing agreements (PSAs), without which deals such as Sakhalin II have no legal basis.

According to reports from Moscow, Duma and the administration of President Boris Yeltsin are no longer totally at odds. Duma officials openly welcomed six late-May decrees by Yeltsin dealing with investments by non-Russians. The next step is to turn that sentiment into action by passing the related laws and the PSA legislation. The sooner it happens, the better.

INTERNATIONAL MOVES

Other encouragement comes from Russia's agreements late in June to join the North Atlantic Treaty Organization's "Partnership for Peace" program and enter a partnership with the European Union. The moves ease fears about Russian expansionism. And they add credibility to Moscow's expressed but as yet largely unrealized ambitions to participate in the world economy.

Russia's progress so far is mostly symbolic. But so is most foreign interest in Russian ventures. Russia welcomes foreign capital but has signed few world-class deals and still hasn't passed laws essential to them. Foreign oil companies welcome the chance to explore and develop Russia's huge hydrocarbon resources but have yet to invest much money. Symbolic or no, progress is progress. Russia is closer to economic viability now, than it has been in a long time.

Copyright 1994 Oil & Gas Journal. All Rights Reserved.

Copyright 1994 Oil & Gas Journal. All Rights Reserved.

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