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Rosneft Should Extract Russias Oil, Not Its Cash

Published: August 27, 2014 (Issue # 1826)


By Konstantin Sonin

One of the biggest economic sensations earlier this month was the news that Rosneft, one of the largest oil companies in the world, had appealed to the Russian government for help. One of their requests, for example, was a soft loan of 1.5 trillion rubles ($40 billion).

Both the scale and the nature of this request are a bit surprising. First of all, the amount is greater than the federal budget for public health and education combined. And secondly, to an outside observer, the very idea of a nationalized oil company looking for help from the government seems odd.

After all, what was the point of nationalizing Yukos and handing its immense resources to Rosneft (if we dont get into a discussion about personal financial or political gain)?

History shows that the governments of developing countries get more money from nationalized companies than through taxation of private corporations. Governments of developed countries face this problem to a lesser degree; they are more successful at collecting taxes.

But what is the point of nationalization a difficult and costly process if as a result the government doesnt have the opportunity to access additional funds from the company in times of need (by lowering the salaries of managers and reducing investment programs, for example) and instead finds itself in the role of a lending institution?

Aside from this specific problem, there is a more general problem with a government lending money to state companies.

Imagine that BP or Exxon borrowed money from the Russian government and then was to repay the loan. The lender would be able to get something in return for its money: collateral (if there was any) or part of the companys assets (shares, perhaps).The fact that the lender will get part of the borrowers assets if the latter doesnt repay the loan is good motivation to do so.

But what will happen if Rosneft doesnt repay its loan to the government? What can the state take if this happens? Nothing, because it already owns the company almost completely. So there is no motivating factor in this case to repay the loan.

But even this general difficulty isnt the last or even biggest problem with Rosnefts call for help from the state. The request itself is a sign of the companys effectiveness and stability, and a bad one.

The sanctions causing Rosneft difficulties in managing its own debts are simply part of the world that a large oil company must operate in. For Exxon and BP, dealing with political risks, both within the countries where they work and geopolitically as well, has long been a main, if not the primary, management task.

If Rosneft cant handle its debt in the changing political situation, it means that the company is not optimally structured or appropriately prepared for operating in the market. Its not inconceivable that its size (the biggest oil company in the world) is excessive.

If so, we should expect proposals from Rosneft as to which assets will be sold off and which expenses will be reduced so that the company can continue to be what it should: an effective and stable cash cow for our country.

Konstantin Sonin is a professor and vice rector at the Higher School of Economics. The views expressed in this article are his own.





 


ALL ABOUT TOWN

Saturday, Dec. 20


The citys Babushkina Park on Prospekt Obukhovskoy Oborony will be invaded by dozens of rocking-and-rolling Santa Clauses during todays Santa Claus Parade. Not only will they parade through the park but there will also be competitions amongst the festively-clad participants and a musical master class. There will also be a prize for the best-dressed Santa Claus.


Add to your record collection during the Vinyl Christmas Sale at the KL10TCH bar on Konyushennaya Ploshchad today. Spend the afternoon perusing the records for sale while listening the classic, clean sound of records spinning out hits from a variety of musical genres and time periods.



Sunday, Dec. 21


The Zenit St. Petersburg basketball team returns to the northern capital this evening for a matchup with Krasny Oktyabr, a Volgograd-based basketball club. Tickets for the game, which tips off at 6 p.m. this evening, can be purchased on the clubs website or at their arena, Sibur Arena, on Krestovsky island.


Satisfy your sugar cravings during Sweet New Year, an ongoing seasonal festival at the Raduga shopping center. Each weekend of December will welcome hungry visitors to taste hundreds of different kinds of desserts made from a plethora of sweet treats. Workshops are open to visitors and seasonal gifts can also be purchased for those rushing to finish their New Year shopping.



Monday, Dec. 22


Pick out the latest fashions as holiday gifts for loved ones or as early presents for yourself during the Christmas Design Sale at Kraft on Obvodny Kanal, starting on Dec. 20 and continuing through Dec. 27. Designer clothes will be on sale every day of the week or you can buy something more festive to decorate the home while sipping on hot coffee and perusing the various master classes.



Tuesday, Dec. 23


Meet Arctic explorers Fedor Konukhov and Viktor Simonov during SPIBAs and Capital Legal Services event Arctic Expedition this morning in the Mertens House business center at 21 Nevsky Prospekt. The meeting will discuss the explorers ongoing eco-social project and how companies can use the project as a unique marketing opportunity. Email office@spiba.ru by Dec. 22 if you wish to attend.



Wednesday, Dec. 24


The Anglican Church of St. Petersburg we will be holding a Christmas Eve service at 7 p.m. led by Rev Wm. Shepley Curtis of the Episcopal Church. The service will be held at the Swedish Church at 1/3 Malaya Konyushennaya Ulitsa.



To have your event included in All About Town, email tot@sptimes.ru



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