Russian Production Division System Upsets Foreign Investors

The Russian government was forced to make concessions to foreigners

The Russian production division system has been a reason to upset foreign investors on many occasions. However, Russian authorities, both legislative and executive, kept on saying that the Russian production division law was just fine, so investors had nothing to complain of. Russian Prime Minister Mikhail Kasyanov has recently assured foreigners that there would be no extra guarantees to secure foreign investments. However, the economic situation started changing against the background of the successful military operation in Iraq. This change does not bring any good to Russia. Most likely, the Russian government will have to make considerable concessions to foreign investors.

The first step on the way to ease the situation for foreign investors, who work in Russia on the production division basis, was made by Sakhalin Governor Igor Farkhutdinov. At the end of last December, the government demanded there should be more favorable conditions created to foreign investors. He suggested his own region as a ground to test the creation of the new "tax paradise."

The initiative from the Sakhalin governor does not seem to be something unexpected. Since Mr. Farkhutdinov used to struggle with foreign investors in Sakhalin before, who developed oil and gas deposits within the scope of Sakhalin-1 and Sakhalin-2 projections. It is worth mentioning that the governor was rather tough towards foreign investors from the very beginning of the dispute. For example, the operator of the Sakhalin-2 project, the international consortium Sakhalin Energy, promised to stop working on the project until the Russian production division law was changed. In return, Igor Farkhutdinov advised Steven McVeigh, the Director of Sakhalin Energy, should "go and work." In addition to that, the governor promised that they could clarify all other points later. This incident happened in the beginning of December, although the governor agreed upon foreign investor's opinion at the end of the same month.

It seems that there is no common opinion regarding the production division system and the adequate mechanism of interaction with foreign investors in Russia. International forum "Fuel and Energy Complex of Russia: Regional Aspects" currently takes place in St.Petersburg. Aleksey Khitrov, the chief of the department for hydrocarbon raw material and uranium, stated at the forum that the production division system was not good for Russia at all, so it was supposed to be abolished. According to his opinion, such system is not good for developed countries; it is not good for the states, which possess their own oil industry either. Furthermore, the production division gives greater advantages to investors, minimizing their risks connected with exploration and extraction.

Rinat Murzin from the Russian Ministry for Nature, is certain that the Russian production division system is most convenient when it comes to sea shelf developments. The official stated that one was not supposed to turn the system down. Rinat Murzin said that the system brought 120 million dollars of profit to the country as a result of the Shtokmanovsky oil deposit development alone. On the other hand, it is not clear, where more profit is going to come from, if foreign investors refuse from the development of Russian deposits. There are certain hopes that potential investors from the Asian-Pacific region might come to run their oil businesses in Russia. However, those hopes are still just hopes. The Russian Ministry for Nature takes the same stand as Russian state natural monopolies. The department has already taken several measures, which are rather unpleasant for home oligarchs. Experts believe that Vitaly Artyukhov, the Minister for Natural Resources, is about to be dismissed from his position. The Office of the Prosecutor General questions the minister about the case of fish and crabs plundering. The minister is a witness of the case, which does not improve his status and political opportunities.

We would like to remind here that the Office of the Prosecutor General had several questions to ask Prime Minister Kasyanov about the fish case. Deputy Prosecutor General, Vladimir Kolesnikov, promised Russian media outlets that the case would be investigated, although the prime minister would have to answer several questions anyway. This is a very good fact to prove the exasperation of political competition in coming elections. Will anyone pay attention to production division laws?

It deems that foreign investors will have to adjourn their claims and investments until the year 2004, when it becomes clear who is going to get how much money.

Akhtyam Akhtyrov

Translated by Dmitry Sudakov

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