roughly comparable to the $65 billion invested globally by the Big Five oil majors in 2004.
Investment in extraction accounted for 30% of total investment in the Russian economy in 2006
and refining another 27%.
Meanwhile cash-rich energy companies have attractive price-earnings
ratios and suck in foreign portfolio investors. Over the past decade each spike in world oil prices
has led to a surge in new drilling, with a 3-6 month time lag, as companies drill in the marginal,
high cost corners of existing fields. So output has been rising in response to the higher price level,
at 8-11% a year 1999-2004 and 6-7% thereafter.
A viable development model?
State-owned firms may well be less efficient than privately owned firms, but whatever the
hypothetical long-term benefits of oligarchic capitalism, the historical record of the 1990s was
that the system proved politically unsustainable in Russia. Also, it is not preordained that state-
owned firms will always be hopelessly inefficient. Putin is not closing off the Russian economy
from the outside world, quite the contrary. Russia’s state conglomerates are cooperating more
closely with Western partners, upgrading their managerial and accounting procedures in order to
make themselves more attractive to foreign direct and portfolio investors.
In the wake of the break-up of Yukos the share of oil output produced by majority state-owned
companies rose from 16% in 2003 to 43% in 2006. The overall state share in the economy rose
The main Yukos production unit, Yuganskneftegaz, was sold to state-owned
Rosneft for $9.35 billion in December 2004. A plan for Gazprom to absorb Rosneft was derailed
after months of backroom maneuvering, but the government went ahead with a complex plan to
buy 10.7% of Gazprom shares in order to raise the state holding to 51%, using a loan that will be
paid off with a public offering of $7.5 billion of Rosneft stock. Gazprom was compensated for its
failure to take over Rosneft by being allowed to buy independent gas producer Nortgaz and
Roman Abramovich’s Sibneft, the fifth largest oil company, in November 2005. Gazprom paid
$13 billion for 73% of Sibneft shares, close to a market price.
At the same time as Putin has built this new model, he is still committed to integration with
May 2006. It has 27% of the world’s natural gas reserves. Estimates range from 40 to 140 billion barrels,
due to uncertainties over ownership rights and cost conditions and the fact that such data are considered
state secrets.
46 World Bank, op. cit., 2006.
47 Oil share from Tomson, op. cit; total share according to the European Bank for Reconstruction and
Development quoted in Neil Buckley and Arkady Ostrovsky, “Back in business - how Putin’s allies are
turning Russia into a corporate state,” Financial Times, 19 June 2006.
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Convention