Privatization in the Russian Oil and Gas Sector?

A seminar last week at the Institute of World Economy and International Relations (IMEMO) in Moscow was devoted to history and prospects of privatization on the Russian oil and gas industry. The conclusions of the debate were hardly encouraging for proponents of private business. The phrase ‘the vector is toward de-privatization,’ was a euphemism for the nationalization strategy of policymakers in the Kremlin.

This exchange of opinions coincided with a statement of Prime Minister Dmitry Medvedev. Speaking in Hanoi, he assured journalists that ‘the privatization course will be continued.’ The so-called liberal camp in the Russian government keeps repeating the privatization mantras laboriously, and occasionally even ideologues of a strong role of the state use the same rhetoric. The truth is exactly the opposite.

In 1998-1999, right before Boris Yeltsin appointed Vladimir Putin his successor, about 10 percent of Russian oil was produced by the state through government controlled stakes in energy companies. Today this share is between 40 and 45 percent. It does not look very much like privatization, does it?

Rosneft, which used to be the weakling of the petroleum industry, has taken over quite a big number of assets from private owners: Udmurtneft, Yukos, Itera, and is planning to absorb TNK-BP and become the world’s largest public oil company. Gazprom has established control over Sibneft and Sakhalin II.

Actually, there have been quite a lot of privatization efforts in the industry, but the general scheme is rather conspicuous. The government sold assets to private owners—usually referred to as ‘oligarchs’—and allowed them to run the businesses for a while and collect substantial income before a state-controlled company buys the same assets back for a price that exceeds the initial value.

In some cases, a state company is ordered to sell a lucrative asset to a private corporation with good connections in the right places at a fraction of the market price (as it happened, for example, with Gazprom’s distribution network in Chelyabinsk, suddenly sold to Novatek). The general trend, however, is to make Rosneft and Gazprom larger and stronger.

The incentive could be political and even ideological, as some top officials of the old Soviet school seem to be convinced that the state can manage the vital industry and make the country stronger. Essentially, the state control translates into inefficiency and corruption. Unlike managers of private entities, bureaucrats in the government have nothing to lose when the companies they control launch wasteful and redundant projects. The losses will be covered from the national budget. And the expensive projects become a priority because they can make some ‘friendly’ contractors and kickback receivers much richer.

While corruption remains a systematic feature of the Russian economy, no motivation exists for the government officials to become efficient managers who care about interests of shareholders.

Mikhail Krutikhin

Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.