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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

Wednesday, Oct. 1


The St. Petersburg International Innovation Forum 2014 kicks off today at Lenexpo, where it will be presenting the latest and greatest ideas until Oct. 3. Focusing on economic development and the decisions and measures necessary to encourage development in Russias most important industries, the event is a possibility to discuss the innovations currently available in a variety of fields.


Representatives of the Russian and international media industries arrive in St. Petersburg for the first ever International Media Forum being hosted by the city until Oct. 10. With a variety of events on tap, including workshops, lectures and film screenings, the event plans to reemphasize the citys reputation as the countrys culture capital and as an emerging market and location for the visual arts.



Thursday, Oct. 2


The celebration of the bicentennial of the birth of Mikhail Lermontov continues with todays free exhibition in the citys Lermontov Library at 19 Liteiny Prospekt. Titled Under the Rustling Wings, the temporary exhibition will feature the costumes and scenery used in the 1917 production of Lermontovs play The Masquerade, which he wrote in 1835 when he was only 21 years old.



Friday, Oct. 3


Learn more about how to manage and evaluate employee performance during SPIBAs Human Resources Committee meeting this morning on Employee Assessment: Global and Local Trends. Starting at 9:30 a.m., the discussion will touch on such topics as the partnership between HR and business, reliable assessment strategies and more, with Tatiana Andrianova, the head of the SHL Russia and CIS branch in St. Petersburg, as the featured guest. Confirm your participation by Oct. 2 by emailing office@spiba.ru or calling 325 9091.


AmChams Procurement Committee Meeting is at 9 a.m. this morning in their office in the New St. Isaac Office Center on Ulitsa Yakubovicha.



Saturday, Oct. 4


Wine and cheese lovers will get their chance to revel during Scandinavia Country Club and Spas Wine Market Weekend. Going on today and tomorrow, wining diners can listen to live music, take part in culinary classes and, of course, sample a variety of fine wines from around the world. The cost of admission is 400 rubles ($10.30) for adults and 200 rubles ($5.15) for children.



Sunday, Oct. 5


Look for the latest fall fashions at the Autumn Market today in Freedom Anticafe at 7 Kazanskaya Ulitsa. The minimarket plans to offer clothes more flattering than the puffy jackets that are a staple of the citys cold-weather fashion, while offering the same amount of protection from the biting winds blowing off of the Baltic.



Monday, Oct. 6


SKA St. Petersburg, the citys KHL affiliate, welcomes Slovakian club HC Slovan in a match-up tonight at the Ice Palace near the Prospekt Bolshevikov metro station. The puck drops at 7:30 p.m. and tickets can be purchased on the clubs website or in person at either the arenas box office or the clubs merchandise store on Nevsky Prospekt.



Tuesday, Oct. 7


Learn more about Russias energy industry at the St. Petersburg Energy Forum that begins today and runs through Oct. 10. Attracting industry experts and political and business representatives, the forum plans to welcome more than 350 plus companies and their representatives to discuss the future of Russias largest economic sector.



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