11

Corporate Management Corporate Management in the CISin the CIS

Week 10Week 10

Russian enterprise in the 21st Russian enterprise in the 21st centurycentury

22

Purging YukosPurging Yukos

• The Russian government has set a date and price for the sale of Russian oil giant Yukos' main unit Yugansk, seized to pay the firm's huge back tax bills.

• The sale opens on 19 December - a day before a shareholder meeting which could decide the firm's fate.

• The starting price is $8.65bn well short of the $20bn which Yukos has insisted that Yugansk is worth.

• The Russian government said there would be no limit on foreign bidders taking part in the auction.

• Yukos, however, has frequently said its unit could go to a state-owned firm, effectively renationalising it, or to a supporter of President Vladimir Putin.

• 19 November (Russia London.com)

33

Purging Yukos – the Empire Purging Yukos – the Empire Strikes BackStrikes Back

• Yukos' main shareholder has filed a legal complaint to prevent the Russian government selling off the oil giant's main production unit, reports say.

• Group Menatep, which owns 60% of Yukos' shares, used the Energy Charter treaty to bring the proceedings, Russia's Interfax news agency said.

• The Energy Charter is an international treaty that establishes a legal framework to protect investments in the energy sector in the countries of the former communist bloc.

• Under the terms of the treaty, shareholders may initiate international arbitration to reclaim damages if an amicable agreement is not reached within three months.

• 02 December (Russia London.com)

44

The attraction of private The attraction of private enterpriseenterprise

• Foreign Affairs Journal March/April 2002• The authors saw increases in Russian oil

production and new reserve finds in the Caspian Basin as evidence of substantial future export capacity.

• In addition, they depicted the Russian energy industry as an independent actor, emancipated from State control (unlike the State-held oil companies of OPEC members), which was eager to help the U.S. and the West break free from OPEC dependency by becoming a reliable, long-term energy partner.

• Quoted in Hill & Fee (2002)

55

Gas risesGas rises

66

Going West?Going West?

• Europe• OAO «Gazprom» remains the major gas supplier to the

European market, accounting for 25% of gas consumption and up to 40% of gas imports into Europe. .

• Western Europe• According to experts’ estimates, gas consumption in Western

European countries may keep growing during the period from 2001 through 2025 by an annual 2.4%, increasing from 420 bcm to 730 bcm.

• This is primarily due to the expected conversion of heat power stations to gas as their fuel.

• The consumption growth coupled with the decrease in its own gas production as a result of depleting reserves in the region is likely to increase the dependence of Western Europe on import (up to an estimated 60% by 2020).

• GAZprom annual report 2003

77

Yukos’ potentialYukos’ potential

• Reserves – Proven oil reserves (SPE basis) of 14.709 billion

barrels (DeGolyer and MacNaughton, 31 December 2003)

– Proven gas reserves (SPE basis) of 7.936 trillion cubic feet (DeGolyer and MacNaughton, 31 December 2003)

– Most reserves located in Western Siberia, including the Northern Territory of the Priobskoye Oil Field, one of Russia's largest

• Yukos annual report 2002

88

Yukos’ distributionYukos’ distribution

• YUKOS exports approximately 61 percent of its crude oil, mostly to Eastern and Western Europe, primarily through ports on the Baltic and Black Seas and the Druzhba pipeline system.

• In 2003 YUKOS' exports of crude oil to the non-CIS countries reached 46.6 million metric tons, an increase of 34% on 2002, while exports to the CIS rose 17% to 2.6 million metric tons. Domestic sales of crude oil fell to 0.5 million metric tons, a drop of 72%.

• In 2003, YUKOS exported crude oil to refineries in virtually all European countries, with the largest volumes going to Lithuania, Italy, the Netherlands, Hungary, Poland, Slovakia, Greece and Sweden.

• Yukos marketing activities site

99

Portfolio Data from FinAm – Portfolio Data from FinAm – 07/12/200407/12/2004

• 2 wks 1 wk change• Lukoil 32.350 32.390 0.12• Surgutneftegaz 0.8240 0.7800 -5.34• Sibneft 3.650 3.350 -8.22• Yukos 3.000 3.120 4.00• Gazprom 2.834 2.752 -2.91• Tatneft 1.720 1.705 -0.87• TNK 3.080 3.070 -0.32

1010

In the last yearIn the last year

• Lukoil divestment of state shareholdings• 80% export via Ukraine• Field tax audits this week of vertically integrated oil

companies– Sibneft– Slavneft – Rosneft and – Tatneft.

• Sibneft is well known for practicing tax optimization schemes.

• Several times its effective corporate profit tax stood at a record low level of 5%.

• Yukos’ 34.5% stake in Sibneft frozen.

1111

Grand Designs?Grand Designs?

• Re-nationalisation of key industries

• Strategic alliance with Gazprom = unified energy sector with exceptional export capacity?

• Start of “State Capitalism” (Economist 5/8/04)

• Need to supply home market at subsidised prices allied to state revenue requirements via taxation

• Consolidation of energy market against western competition (Hill & Fee)

1212

Internationalization of Lukoil & Internationalization of Lukoil & GazpromGazprom

• Summary of reasons:• Sales outside the domestic market offer a

better price and more solvent customers• Internationalization aids in securing the

supply of natural resources in the future• Operations abroad aim at guaranteeing

reliable and economically feasible distribution of goods to foreign customers

• Liuhto (2001)

1313

Potential summaryPotential summary

• In terms of energy sector• Unification under state control because of its vital

importance.• Exclusion of foreign investors• Putin may beget a regime with a dominant KGB

gene in its genetic code. The danger lies in some of Putin's advisors. If his former KGB associates form a critical mass around him, their worldview, shaped by the shadowy universe of the intelligence and security apparatus, can fatefully colour Putin's take on the world

• LA Times Putin's Dilemma: Can Bureaucrats Be Trusted? (6/8/2000)

1414

An effective policy?An effective policy?

• After expanding by 11% in 2003 and 9% in 2004, growth in Russian oil production slowed to just 3.6% in the first half of 2005.

• Some deceleration was expected, but the scale of the recent slowdown has been more severe than predicted

• There is still huge uncertainty about whether the state's renationalization drive will end with Yukos.

• On July 8, President Putin confirmed that Gazprom, the giant state-owned gas concern, is in talks to acquire No. 5 oil producer Sibneft.

• Not coincidentally, analysts say, Sibneft has curtailed capital investment

• Business Week – July 2005

1515

Outside of energyOutside of energy

• Alliances in other industries exist with western companies

• International alliances are reflective of ..

• Critical attempt by firms to • Expand globally and• Enhance technical capabilities

1616

Evidence of Opitz & Sauer Evidence of Opitz & Sauer (1999)(1999)

1717

Evidence of Opitz & Sauer Evidence of Opitz & Sauer (1999)(1999)

1818

Critical industries?Critical industries?

• Alliances found primarily in manufacturing and research intensive industries

• Manufacturing usually joint venture• Research (R&D) usually contractual• Where technology transfer is unilateral

usually joint venture• Where technology transfer is bilateral usually

contractual• (Hagedoorn & Sedaitis – 1999)

1919

Challenges for Russian global Challenges for Russian global leaders (De Vries et al 2004)leaders (De Vries et al 2004)

• Identify and develop successors• Build trust• Protect assets and manage government relations• Build 21st-Century organizations (3Is – innovation,

information & involvement)• Key objectives

– Design for long term value-creation– Develop organization competencies of competitors– Practice empowerment and delegation– Create information systems that support sharing

data and communication

2020

Company practicesCompany practices

• Corporate Governance – uniquely Russian/convergent/US-UK based

• Role of hierarchical FIGs in more productive resource allocation)

• (Perotti & Gelfer – 2001) • Business ethics• What is it?• Can it be “universal”?• Beekun et al (2003) – national culture factors need

to be considered in the study of global ethics & unlikely that ethical principles are invariable across cultures and different contexts.

2121

Russia & WTORussia & WTO

• Does Russia need to join WTO?• What are the potential benefits?• Usual argument – need to enter the global

community and will assist trade liberalization• Afontsev (2004) argues• Trade liberalization could be done without

WTO and joining may have affect of slowing rate down

2222

Russia’s long-term plans?Russia’s long-term plans?

• Time parameters of WTO accession• Short term – focus in on the chance of

obtaining favourable accession conditions• Medium term – prospects for defending the

interests of national economic actors using WTO’s existing political-legal mechanisms

• Long term – key issue is possibility of influencing the further evolution of these mechanisms

2323

Yukos affair is not an Yukos affair is not an impediment in WTO talksimpediment in WTO talks

• 29-10-04 • The Yukos problem does not hinder the Russia-US

talks on the WTO• Accoring to President of the US Chamber of

Commerce Thomas Donohue "It would be a mistake to consider the case of one company as serious impediment for the talks. We have many other issues to discuss, such as intellectual property, customs issues, banking sector and joint contracts. Russia stands closer to the WTO accession now then ever before".

• Source: Itar-Tass