Interview 1 : Senior Executive of large company operating in Russia

Interviewed by Andrei Grigorian

Interviewee – senior executive of a western company operating in Russia.

Interviewee has asked his company and his name to remain anonymous.

Q: What will be some key factors that shape Russia’s development in the next 20 years?

A: The main thing to keep in mind is that politics has evolved closely to the oil price. No matter what Medvedev or anyone else says, Russia has not really begun investing in any infrastructure or industry other than oil and gas and mining. As during the Soviet era, they rely heavily on their natural resources.

Q: What is the general outlook for natural resources and how will this affect Russia?

A: Larger oil and gas field are becoming harder to find. Deposits that are being found are more expensive to extract and require more work. This suggests growth in demand over the next 20 years and Russia currently has the necessary resources to meet this demand.

Q: As a western company, how do you manage to operate in an environment where corruption seems institutionalised?

A: Corruption is largely the concern of Russian companies. As a western company we are outside the hierarchy. We do not give bribes and operate as we would in any other part of the world, with integrity and transparency. This means that at times it takes us longer to achieve our goals as there is more bureaucracy involved and some things are more difficult.

Q: What is the Russian government’s attitude to western companies operating in Russia, especially in the natural resource sector?

A: The ideal for them would be to have ‘Russian only’ companies operating. In reality, no Russian mining or oil & gas company has brought any major projects on stream in the last 30 years. They still operate on the Soviet model. If they want to bring projects on stream, they need to partner with western companies and this is beginning to happen, albeit slowly.

There is also a link to the oil prices here, when prices are high, Russian companies behave like they do not need to partner with Western companies. They tend to keep doing what they do, in a sense this means that the window of opportunity for Western companies is closing. However when oil prices fall, Russian companies realise that they need outside partners to help with projects.

Another factor is the fact that Russian companies have borrowed heavily and are now overleveraged. They have massive debt and are looking for new sources of revenue and partners to share the risk and cost of new projects. Gazprom is currently in talks with an oil major for this reason.

Q: What is the Western outlook on the continuity of business in Russia? Are we likely to see a situation where the state begins to nationalise companies including foreign companies, similar to what is happening in Venezuela?

A: Depends on 1 or 2 people within the government. Putin and Medvedev need to sort out their differences. A few different scenarios can occur in regards to the political situation. The most likely is that Putin and Medvedev will sort things out and we will see a stable government full of the old guard (the men that Putin put into positions of power). There will be a continuity of the current regime and it will be more or less business as usual. A potential problem is that with continuity, there may be inflexibility and eventually paranoia within the regime.

In this respect there is some stability due to the lack of opposition. A worst case scenario would be that the elections were opened and someone from the very far right was voted in. There is also the possibility of political instability like we see in Ukraine and Belarus.

The more likely scenario is that we will see Putin and Medvedev continue to rule in a relatively stable one part system, the downside is that this may lead to stagnation.

Q: Why hasn’t the government been able to diversify into other industries?

A: In a country with a decline in population with a natural resource advantage, it is hard to diversify by decree. There is a natural tendency to exploit what is readily available.

Q: Why haven’t the Russian companies (oil, gas, mining) been able to bring any serious projects on line?

A: The non performance is related in some way to a punitive tax regime which discourages the companies from investing in projects. In some cases it’s also a matter of different factions looking after their own interests and skimming off the top when times are good. The companies have become inefficient; they have lost ability to go from exploration, to production.

Russian oil and gas companies tend to stick to the old Soviet model. They have a large amount of resources and have not had to do as much exploration. On average Russian oil and gas fields have a much longer reserve life, therefore companies do not need to change what they are doing. The reserve to production ratio is high so they don’t feel the need to explore.

In comparison, reserve life is shorter in western companies, they need to be innovative and bring new and different projects online, this way they gain experience and continue to explore.

Signs are currently that Russian companies are realising that they will need to sign more JV deals with western companies.

A: What in your opinion will lower oil prices mean for Russia?

Q: It depends what you mean by low. It depends on what has been budgeted in. In 1998, $10 per barrel was considered high. A price below $40 will be problematic for Russia however if the price remains high, there is a risk of complacency, less reason to pursue reforms and a tendency to sit back and reap the profits.

Q: Any other thought that you have on Russia’s prospects over the next 20 years?

A: There is a shift towards modernisation, the civil society will develop closer to the west, having said this, it is difficult to predict.

Belarus and Ukraine are potential models of a future for Russia; these are more realistic if the voting process is opened up.

The Russian’s are suspicious about the Chinese and recognise that there will be a large demand from the Chinese. They are generally keeping the Chinese companies out. They are reluctant to let the Chinese access to Russian natural resources.