RUSSIAN OIL COMPANIES: The Struggle for Economic Succession

by Valery Kryukov

This article covers the role of oil companies in the regional economy of Siberia as well as the main approaches to the privatization of one of the most significant sectors for the regional economy. The old Russian oil refining and distribution ministries have been broken up and some twenty vertically integrated companies have been created out of their constituent enterprises. Ten of these are directly founded on Siberian J-S companies. What distinguishes these holdings, organized in the Russian oil and gas sector, was that they were formed through consolidating state share holdings (51% of all voting shares). The biggest winners were a score of oil barons, mostly from major upstream production enterprises. By the end of the fourth quarter of 1995, only a small fraction of the budgeted sum had been obtained and powerful Russian bankers offered to help cover budget shortfalls by offering loans to the government in exchange for controlling shares in major industries. During the last two months of 1995 and the first half of 1996 auctions were held to transfer the state share holdings to financial institutions in exchange for granting loans for the Federal government. The privatization process is creating a diverse group of new shareholders. Several privatization trends are becoming apparent. The first is a management buyout. In addition, new and powerful Russian banks are emerging as today’s owners. Results of mortgage auctions show real proprietors of oil companies at the moment to be financial institutions (banks, investment companies and pension funds) and institutional investors accountable to holding companies and high administrative personnel.
For the short term, foreign investors seeking to gain significant stakes in Russia's new oil companies, will probably have their greatest success in working with those pursuing the controlled placement strategy. In the long run, however, shares acquired by oil company management or powerful banks may also be made available to foreign investors. Given the relative shortage of domestic investment capital, the new owners may have to look to international capital markets.
The Russian privatization process has a long way to go. Doubtless, many, both Russians and others, are watching closely the early offerings in hopes of learning which strategy to pursue.