Russia is a terrible place in which to do business.
This does not mean that the country doesn't merit the intense interest that it has received in recent years from international oil and gas companies. It most certainly does. Nor does the statement mean that there have not been commercially successful ventures in that vast, resource-rich land. There certainly have been a few.
And the sentiment is not one that companies active in Russia express in public with much emphasis. They are trying to build business and political relationships, after all.
But the statement needs to be made: Russia is indeed a terrible place in which to do business. And only Russians can fix it.
The problems
There are two overarching problems in Russia, each a dimension of lawlessness.
One problem is the ephemeral nature of business deals in Russia, which partly results from an absence of law. The other problem is that the country's stagnant wealth is rapidly falling under the control of criminal organizations prone to bloodshed--a failure of law enforcement.
Business agreements in Russia must somehow create their own certainties. Regulations change. Taxes come and go. Authorities shift. Since there are no laws on which to base oil and gas ventures, companies usually seek specific legislative support for the agreements they manage to complete. Indecision is endemic at all levels.
Apparently, it was institutional indecision that set back much-needed production sharing legislation in the upper house of parliament last month (see story, p. 12). Duma, the lower house of parliament, passed draft production sharing legislation in June. Why the Federation Council rejected the measure, passage of which is crucial to several major development projects, is unclear.
A new vote on the legislation is possible before general elections Dec. 17--but very unlikely. A Russian production sharing law, therefore, now seems at least a year away.
This is how things get done in Russia. A surprise export tax that could have wiped out foreign oil and gas investment has been rendered endurable by compromises and exemptions. But it remains in effect. In the absence of a full slate of supporting legislation, joint ventures exist at the pleasure of special terms from the government.
On balance, the government has been moving in the right direction. However slowly, Russia has been opening up to foreign capital, although some foreigners have lost patience and withdrawn.
But the rapid emergence of organized crime threatens progress and adds uncertainty to arrangements not firmly rooted in law. Reports of the murder of business people in Russia have become alarmingly frequent. The political influence of criminal groups is said to be strong.
To some extent, resort to lawlessness by desperate people can be expected in a capital-starved country changing economic systems. That's an excellent reason to complete the change as quickly as possible. Yet Russia is dragging its feet, prolonging the turmoil on which the ruthless thrive.
Enticing the corrupt
A bright spot for the Russian economy is a slowdown in the country's long oil production slide. But much remains to be done. In addition to passing reasonable production sharing legislation, Russia needs to make more improvements in domestic pricing, taxation, and especially the oil and gas transportation system. Unfortunately, all these areas are enticing opportunities for the corrupt. The government must not just pass laws to encourage investment, therefore, but also vigorously enforce domestic laws already in effect.
Russia desperately needs to create wealth. It can do so best by developing its natural resources, which requires capital and technology available only from abroad. That means Russia must become a better place than it is now in which to conduct business. If it does not, the economy will continue to consume capital, and only outlaws will prosper. Copyright 1995 Oil & Gas Journal. All Rights Reserved.