• Summary
• Competitive effectiveness of TEC branches (macroeconomic analysis) 
• The competitive analysis of TEC companies'market shares
• The monopoly on natiral gas. ÎÀÎ "Gasprom"
• Electric energy monopolist "EES Russia"
• A competitive environment. The oil industry.

Summary

A study of management effectiveness among major corporations of TEC branches was conducted in January-April 2001. The main study objective was to confirm the hypothesis that presumes that the management of private oil companies with no governmental control that operate in a competitive environment is more effective than that of the government controlled oil corporations (“Gasprom”, RAO “EES Russia”) that operate in monopolistic settings when all other conditions are the same. The study has confirmed the theory.
The study has embraced three TEC branches: the natural gas, electric energy and oil industries. The coal industry was not included due to its high specificity in regard to financing. Based on the study the general conclusion was drawn: the more vigorously the companies underwent privatization process and stepped out of the government control the faster those companies finished the process of assets parsing and started the process of building an effective management structure. An example of companies with highly effective management is the companies of the fuel and energy industry (“Lukoil”, “Sibneft”, “Surgutneftegas”, TNK, UKOS) that operate in a highly competitive environment.
The natural gas monopolist OAO “Gasprom” is quite successful on the World market where the company competes with transnational corporations. However, operations on the controlled domestic market and politically influenced operations with the countries of former proved inefficient. Energy monopolist “EES Russia” has never even created a management structure. The company is still at the stage where it’s overcoming the conglomerate privatization phenomenon – building its management structure, systematizing its assets and starting to control its finance. The concept of restructuring has not yet been formed.
While oil companies have been able to come up with investment resources and actively invest in modernization of their enterprises, the government monopolists are suffering a shortage of investments. The oil companies manage their financial resources more effectively than the government monopolists. Private oil companies’ production and finance indicators, as well as positions of the market shares are much better than those of companies controlled by the government. Government monopolists implement ineffective investment strategies, feel the impact of irrational government prices and tariffs regulation policy, taxation system and political intervention. A separate problem is presented by absence of law and regulation system of TEC, for instance – obscure sharing of decision making responsibilities among Ministry of Energy, RAO “EES Russia”, the regional governments and energy companies. Finally, despite the fact that from the beginning of privatization there has been much talk of restructuring the natural monopolies, the government has not done anything in that direction.

Competitive effectiveness of TEC branches (macroeconomic analysis)

TEC branches operate in different economic and legal settings. Companies of the oil industry operate in a competitive environment, while giant monopolists “EES Russia” and “Gasprom” as well as the government control the market of the natural gas and electric energy industries.

The analysis of dynamics of economic effectiveness indicators leads to a conclusion that the oil companies better than all the others have overcome the consequences of the economic crisis and regained the effective production level due to their highly effective financial management and market orientation, as opposed to the production figures. Comparing the investment dynamics reveals that only the oil companies have sufficient investment resources and made efforts to increase it.

The analysis of dynamics of principal energy resources production for the past 10 years has shown that major drops in production of energy resources fall on 1990-1995. It primarily had effected the oil industry, and, to a lesser degree, the natural gas industry. Therefore, there had been a decrease in oil consumption on both the domestic market and oil export. But for the past 2 years, following the livening-up of the economy, and due to the amiable international energy resources market, there has been a noticeable increase in the production of energy, oil and oil products, and coal. In the meantime, the natural gas production remained stable in 1999, and dropped by1.5% in 2000. This tendency is quite undesirable in the current market, because the decrease of natural gas extraction may lead to a lower consumption of natural gas on the domestic market and reduced export. In the foreseeable future this condition may negatively impact the national economic growth and the living standard, since switching the energy industry to oil and mazut as fuel resources would require substantial investments.

For the period from 1990 until 1999 the energy resources production had decreased by 25%, and consumption – by 29%. Furthermore, during that period the very model of energy resources production and consumption had changed – the natural gas segment had increased. To a certain degree, this is the consequence of the 10-year period discrepancy in the prices on energy resources. Lately, and especially in 1999 and 2000, cheap natural gas has been a vehicle of industrial branches and other areas of production and non-production development. As a consequence, lowering the natural gas extraction in this energy consumption model threatens to halt the national economic development. This situation may be a result of flaws in the government’s natural gas industry regulations and inefficient management of a company.

The analysis of financial indicators in TEC branches has revealed that the most stable efficiency has been achieved by RAO “EES Russia”. The cost-effectiveness leader “Gasprom” has shown 36.3% and 42.2% in 1998 and 1999 respectively versus 13.7% and 32.2% of that by the entire oil industry. By the criteria of profitability as the indicator of effectiveness of companies’ operations, the oil companies are the unconditional leader, demonstrating the superiority of their management system.

The greatest realization profit (including export) is harvested by the oil industry. The gap became noticeably wide in 1999 due to the increase of export prices, as well as the domestic market oil prices rate hike over the inflation rate. The natural gas industry was also profitable in 1999 due to the increase in export prices, but the controlled prices of the domestic market were lagging behind the inflation rate. The same applied to the electric and thermal energy industries.

The analysis of capital cost-effectiveness has shown that Russian electric energy industry has provided small, but stable in comparison to other TEC branches profit – 4% and 5% in 1998 and 1999 respectively, a trend that also applies to the electric energy industries of developed industrial countries. But the leader in cost-effectiveness of net (40%) and gross (20%) assets in 1999 was the oil industry, furthermore those figures commeasure with the cost-effectiveness of sales in 1999. Meanwhile, there was a substantial gap for those figures for RAO “EES” and “Gasprom”. A conclusion could be drawn that the oil industry has the best financial management among TEC branches, including bringing in investments strategy, and effective use of own capital.

The analysis of financial figures. Net assets (fixed capital) in balance currency constitutes 69% in ROA “EES Russia”, 57% in “Gasprom”, and 51% in the oil industry, which is according to the financial standards of countries with developed market economy is quite acceptable (norm is above 50% threshold). However, in solvency and debt management categories the oil industry looks much better than the others, which also testifies to the oil companies’ superior financial management. The oil companies’ turnover of capital is 97 days versus 300 and 319 days respectively for “Gasprom” and “EES Russia”. Only oil companies’ solvency and liquidity are in accordance with the international financial standards. The liquidity coefficient, a ratio between working capital and current liabilities, comprised 218% (threshold is 200%), “Gasprom” figure was 145%, and RAO “EES Russia” – 126%. The total liquidity coefficient, which indicates a company’s ability to pay off its debts in time (a ratio between monetary funds and their equivalents and current liabilities) comprised 18%, 12% and 11% respectively (threshold is 20%). However, the low figures of these coefficients for “Gasprom” and ROA “EES” in 1999 are due to the fact that a substantial part of their products were paid by the clients with various monetary equivalents. The proportions of the products paid in money constituted 31% and 34% respectively (worth noticing that this situation was improved in 2000). Dissatisfactory level of “EES Russia” and “Gasprom” financial management to a certain degree could be attributed to the government influence: under the governmental pressure the decision making priorities are heavily tilted towards political and social rationales, as opposed to the economic expedience.

Fixed capital and capital investment. The most investment activities are noticeable in the oil industry, the condition that leads to a conclusion that companies of the oil industry have a vested interest in long-term profits. The investments in the natural gas and electric energy industries are not sufficient enough. Perpetuation of the current tendencies has already led to a decrease in natural gas extraction as well as unstable dynamics of the electric energy generation.

The fixed capital of the natural gas and electric energy industries are significantly worn-out. In three study groups of TEC the average attrition constituted 60%, which is higher than that of the entire industry. Nearly one fifth is completely worn-out. Necessity to restructure the production module and maintain the production capacities on a satisfactory level for domestic and export needs requires substantial investments in the energy companies. Russian oil companies have fully realized the necessity for investments, and have financial and structural means for its realization. The level of investments in principal capital is far from desirable in the electric energy industry. For the past two years there has been a decrease in production investments in “Gasprom”. The reasons for that are as follows:

1) Substantial expenses in the area of domestic and foreign credits, which had been mainly received before the crisis.

2) Changing the investment focus on unrelated for “Gasprom” activity areas: purchasing of more shares in unrelated to the industry companies, increasing money pumping into media projects.

Investment strategies are nowhere to be found in RAO “EES Russia” and “Gasprom”.

The competitive analysis of TEC companies’ market shares.

There are seven TEC companies with market shares that are being actively traded on the domestic and foreign exchange markets: RAO “EES Russia”, OAO “Gasprom” and five oil companies – “Lukoil”, “Sibneft”, “Surgutneftegas”, “Tatneft” and “UKOS”. In the period of economic crisis of 1998 the most stable were “Surgutneftegas” (13-fold decrease and then 24-fold increase) and “Lukoil” (14-fold decrease and then 8-fold increase) shares. “Gasprom” saw the worst situation – the shares dropped 40-fold and then increased by only 8. The analysis of market characteristics shows that investors view the oil companies’ potential as the most prolific: in the P/E ratio (the current price of a stock divided by the actual earnings per share of the issuing firm) category “UKOS” is the leader (14.4), “Surgutneftegas” – 9, and “Lukoil” – 8.2; in the P/S ratio (financial ratio that compares stock price with sales per share (or market value with total revenue))category the leaders are “Surgutneftegas”, “UKOS”, “Likoil” and “Tatneft”.

In the liquidity category the leader is RAO “EES Russia”. In regard to the liquidity dynamics the leader is “UKOS”, which in a year-period has set up a liquidity market. The most profitable in a long- run have been RAO “EES Russia” and “Surgutneftegas”, but lately – “UKOS”.

The monopoly on natural gas. OAO “Gasprom”.

“Gasprom” Trust was established as a derivative of the natural gas ministry in 1991 and became incorporated in 1992. But the management system proved inefficient and in 1997 the process of reorganizing the vertical structure of operational and financial management started. Centralization of assets, realization avenues and finance, as well as liquidation of unrelated to the industry’s objectives processes, and reorganization of administrational infrastructure took place. This restructuring allowed the company to consolidate financial resources, attract new investments and efficiently manage the gas resources according to the demand. As the result of restructuring, the amount of “Gaprom” facilities was reduced from 870 by 258, and staff reduced from 396.8 thousand to 278 thousand (of January 1^st, 1999), furthermore, the maintenance costs were also reduced. In 1997-1998 there was a decrease in expenditure by 7% and in salaries by 1%.

The management success was mainly achieved through establishing the independence from ministerial structures and eliminating the unrelated to industry ventures, also differentiation of subsidiaries according to their specialization in extraction, processing and products transit, as well as creation of domestic market sales facility  “Mezgregiongas” with regional branches and missions. The effectiveness of “Gasprom” management allowed the company to expend its foreign market in Western Europe, and to reach the final consumers, and to become the co-owner of the natural gas pipeline and underground storage in Germany, also to implement the construction of pipeline from the Western consumers to the Russian natural gas transit systems (project “Yamal-Europe”).

The expansion of “Gasprom” market in the countries of former USSR proved less efficient due to the increasing cases of defaults and the absence of market settings. Mainly it had to do with the agreement between Russia, Ukraine, Belorussia and Moldova in regard to the restructuring and debt payments. Because of that, “Gasprom” is positioned far behind “Itera” on those markets, which works with domestic to those countries companies and trades in accordance to the negotiated fixed prices. What’s important to mention is that “Gasprom” hasn’t been able to accumulate enough investments to maintain the extraction of natural gas. Maintenance of old, and development of new deposits require an influx of investments; the company is counting on the forecasted increases in the natural gas prices and transit tariffs. In the meantime, the opportunity of increasing the profit as a result of lowering the expenses is not even taken into consideration.

“Gasprom” has acquired, using financial credits in some cases, enterprises that are not related to the industry such as banks and mass media. However, the investments haven’t brought in yet the expected profit, but have averted the attention from the principal area. The project “Sibur” on oil development looks ambiguous. The project requires a substantial investment capital, which is being relocated from the natural gas extraction and transit expansion resources, as well as from the resources for building the management potential, which is currently conspicuously missing in “Gasprom”.

The pivotal role in negative processes in the company is being played by the established working relationship between “Gosprom” and the government. The government hasn’t used its leverage efficiently in the areas of governmental prerogatives: monopoly regulations, taxation, forming prices and politics. The domestic competitive natural gas market has never been established. The independent natural gas producers cannot compete against “Gasprom” even on the regional level. The reason for that is the extreme weakness of those companies, and the incompatibility of those companies’ production scale to that of “Gasprom”. Another reason is conditions under which those companies access the natural gas pipelines. “Gasprom” monopoly on the natural gas pipelines subjugates the other natural gas producers.

Currently there are federal and regional institutions for the natural gas prices regulations. However, approved by FEC natural gas prices are not implemented for months in the regions due to the political reasons of local administrations, especially in the pre-election periods, and as a result lowering the profit of the delivered natural gas.

The prices regulation policy, implemented by the government, allows for free market price formation on mazut and coal, and artificially lowers the natural gas prices - the situation that creates a discrepancy between fuel prices. Juxtaposition of the coal, natural gas and mazut prices in 1999 showed 1, 0.5 and 2.8 respectively. In the meantime, the interrelation of the aforementioned figures produces 1, 1.6 and 1.7 respectively in the developed industrial countries of the Western Europe.

Such price formation policy hasn’t created competitive environment for the energy resources; consumers have been interested in the maximization of natural gas consumption, which in its turn, led to poor natural gas conservation. The situation was worsened by lack of financial discipline on the consumers’ part – unlike the coal and mazut industries, the natural gas industry does not have the prepayment policy, and there is no law that supports the “turning-off” measure in case of delinquency on payments. Among the delinquents were the metallurgy and chemical industries, the energy industry, as well as economically sound regions such as Tatariya, Bashkiriya, Nizhegorodskaya and Sverdlovskaya regions, Moscow and Saint Petersburg. Among major debtors were Belorussia, Ukraine and Moldaviya. The Ukrainian natural gas debt, including fines and penalties, constituted nearly 2.1 billion dollars, Belorussia and Moldova – 900 million dollars.

The government usage of the “natural gas” leverage in its political interactions with the former USSR countries does not consider the losses of “Gasprom”. The low natural gas prices on the domestic market, delinquency on payments, and the monetary equivalents as a form of payments - all led to the situation when the domestic market and the markets of former USSR countries became unprofitable for “Gasprom”.

Under these circumstances “Gasprom” gives up the problematic markets to the private corporation “Itera” (established in 1999). Each year the company entrenches deeper and deeper into the territory of “Gasprom” in regard to the natural gas supply to the countries of the former USSR. Furthermore, in search of possible partnerships with its opponents in the countries of the former USSR, “Intera”, unlike semi-federal “Gasprom”, is not restricted by unnecessary formalities, and, therefore, is more successful in the supply business. In 1999 “Itera” reached 1 billion dollars in natural gas sales, and received 80% of payments. There is a reason to believe that the very existence of “Itera” and its successful development are beneficial to “Gasprom” and it is accomplished with “Gasprom” knowledge and participation. Firstly, the presence of this company on the domestic market creates an illusion of a competition on the natural gas market. This is the answer to MVF’s request for restructuring Russia’s natural monopolies, and its goal is creation of a competitive market. Besides that, the substantial gap between the domestic and export natural gas prices, approximately 5-fold in magnitude, apparently does not satisfy “Gasprom”, but while “Gasprom” remains the sole natural gas domestic market monopolist, eliminating the gap seems hard, since attempts of monopolistic price establishment historically have been combated with governmental price regulations. “Intera” activities represent the case in point for the “Gasprom” ongoing argument with the government on fairness of the domestic natural gas prices.

Electric energy monopolist “UES of Russia”.

Before 1992 Russia had had a singular electric energy system (EES) represented by the federal electric supply monopolist corporation. In 1992 Russian Energy and Electrification RAO “EES” Incorporated was founded, the principal energy generators and the central operation unit were transferred to the company’s possession. Based on the regional resources, joint-stock corporations (RAO “EES” subsidiaries and dependent companies) were established under the umbrella of “AO-Energo”(with the exception of “Tatenergo” and “Irkutskenergo” – the companies that managed to retain independence from RAO “EES”). Although RAO “EES Russia” became incorporated and privatized, along with the establishment of the company’s legal structure in 1992, for many years the vertical management structure has remained idle. The primary focus of the company has been set on the technical aspects, while economic matters have been either ignored or viewed as secondary in importance. As a result of this policy RAO “EES Russia” did not have a system for products realization, neither did it have a control system for money influx no did it ever manage to formulate a coherent investment policy, etc. Even those companies that were RAO “EES Russia” subsidiaries on paper, factually were managed by the local governments.

In 1999-2000 the company established products realization, control and energy realization audit systems, which allowed the management to negotiate productively with the outside shareholders; the company finally solved the issue of control over minority shareholders. Over the realization system establishment period the question of monetary payments was raised. By 2001 the barter trade was mostly eradicated, as a means of payments it residually remained in the local budgets (trading natural gas for local electric energy generators). In 2000 89% of payments were received in currency. Elimination of barter trade has led to a logical need for a comprehensive budgeting on all levels – from “EES Russia” subsidiaries to the headquarters. Implementation of the budgeting plan significantly upgraded the company in respect to the operations’ transparency and effectiveness of management.

Among the management achievements it is worth mentioning the company’s positioning as a holding company structure that operates in a market environment; payments received in currencies; restructuring of financial liabilities; establishment of the products realization facilities in the regions that report to the central holding company office.

On the other hand, regardless of the exponential increase in payments received in currencies, the cost-effectiveness has not soared, but actually has slightly dropped (from 13% to 12%). Furthermore, the company has not been able to attract investors, and, as a consequence, the deterioration process of the primary company’s assets continues. The privatization induced the disintegration processes that have led to the industry decentralization (RAO “EES” is a sole shareholder of only 9 enterprises of “AO-energo”, has more than 50% of shares in 33 enterprises, and less than 50% of shares in 32). In the meantime the positive stimuli like market regulations have never been realized. Finally, the company is heavily underrated and the company shares have highly volatile characteristics.

The major problem of RAO “EES” is the absence of investment resources for renovation of the company’s primary assets (the attrition volume is estimated at 50%-60%). In the current condition the company barely provides sufficient energy supply for the domestic needs, the energy supply for the national industrial development is jeopardized. There are two probable investment sources – own savings and private investments from outside. In order to attract the investments the regulated electric energy tariff has to be increased. The situation could be drastically changed if, for instance, the company underwent the process of restructuring. Therefore, the tariff plays a pivotal role in the proposed plans for the company restructuring.

The RAO “EES” management has prepared a restructuring concept, the main mottos of which are the words “deregulation” and “demonopolization”. The process of restructuring is primarily aimed at the global change of the energy market prices, as well as making the industry more transparent and comprehensive to investors. However, the proposed concept has a number of flaws, the major one is being poor justification of the competitive environment advantages over the monopolistic one from the perspective of social obligations such as ecology, continuation of energy supply to the regions with depressed economy, electrification of the rural areas, etc.), as well as from the point of operations’ effectiveness and further development of the energy supply resources. Additionally, implementation of the proposed methods for price formation may skyrocket the electric energy tariffs (estimated 3 times and possibly more).

The RAO “UES of Russia” management analysis leads to the following conclusions. First of all, the energy industry operates inefficiently, notwithstanding the low expenses of energy production (less than that of the West) due to the artificially capped fuel prices (mainly natural gas). Second of all, presently the highly cost-effective electric energy export is considered the industry’s priority. However, from the mid-range perspective the effectiveness of this policy is highly controversial. Adjusting the natural gas prices (approximately 3-fold) to the market level may lead to a drop of export cost-effectiveness to zero, and, possibly, losses. Finally, RAO “EES Russia” cannot provide the necessary fuel reserve for electric energy non-stop generation, thus jeopardizing the continuous supply of energy and presenting potential financial losses.

The company’s major shareholder and regulator - the government, which has brought a number of negative factors into the company’s spheres of operation, heavily influences the management’s course of action:

In the post-crisis period the energy industry has been able to subsidize the national economy because of the lowered (in comparison to the industry prices) tariffs;

The existing price formation system does not provide for the decrease in losses;

The law and regulation system of the energy industry has never been created – the condition that leads to perpetuation of unsettled arguments with the consumers, local administrations, etc. As a result – the obscure sharing of responsibilities for management decisions.

There is no governmental development strategy for the electric energy industry. Furthermore, there is no consensus in regard to this matter among the executive branches.

A competitive environment. The oil industry.

The privatization of the oil industry started in 1992, and led to the reorganization processes and formation of 4 types of vertically integrated oil companies (VIOC):

1) VIOC under the direct control of the federal government (“Rosneft”, “Slavneft”).

2) VIOC under the direct control of the local governments (“Tatneft”, “Bashneft”).

3) VIOC that were acquired by the existing prior to the privatization process management (“Lukoil”, “Surguitneftegas”).

4) VIOC controlled by financial-industrial groups and new managements (“UKOS”, “Sidanko”, TNK, “Sibneft”).

The VIOC that have been established for the past 5-6 years, had uneven starting conditions and have gone through divergent evolutions due the differences in the management effectiveness. The most objective indicator of the management efficiency is the industrial index.

The management efficiency could also be judged by dynamics of extraction. There are two ways to boost the production capacity. In the first scenario the increase is achieved through the extraction of own deposits. And in the second scenario it is fulfilled through takeovers, seizures and purchases of new licenses. All oil companies are following more or less the first path. For the past 5 years only “Lukoil” (merged with “Komiteck”), “UKOS”(merged with VNK), and TNK (partially merged with “SIDANKO”(“Chernogorneft” and “Kondpetroleum”)) could follow the second path. Acquisition (takeover) of the existing oil companies could be viewed as a success of the “Lukoil”, “UKOS” and TNK managements. Moreover, those companies have significantly increased the extraction capacities of their own deposits.

“Surgutneftegas” has had a graduate increase in the extraction capacity, which could be considered an indicator of management effectiveness. The extraction figures of “Bashneft” at the first glance could testify to its management ineffectiveness. However, for the past two years the extraction decrease rate has been slowed down significantly. What is important to consider is that “Bashneft” deposits are the most depleted and flooded. Taking this into consideration, it is safe to say that the company’s management is competent enough; the company is using progressive methods for the oil extraction. The worst extraction dynamics as well as other production figures are shown by “SIDANKO”. As a result of the ineffectual management system the company has lost a number of its oil facilities.

The second most important indicator of the management efficiency is the export dynamics. There is a correlation between oil export and extraction, but this ratio is unstable. The correlation dynamics between oil export and extraction indicate (to a certain extent) the closeness of the company to the government. There is no competition over the foreign market customers - so far all the VIOC are tied to the European clients, but there is a fight for the export rights. Success in this area could be considered one of the most reliable indicators of the management efficiency due to the high specificity of Russian production environment.

“Rosneft” has achieved the highest extraction-export ratio. Naturally, the federal company has the closest relationship with the government, but this partnership has had its ups and downs. The most stable and increasingly effective is the relationship developed lately by “UKOS” with the government.

In the area of primary crude oil refinery capacities “UKOS” has been a leader for the past 4 years. However, one of the important indicators of the management’s efficiency is the dynamics of primary crude oil refinery. For the past 5 years (to be exact – for the past 2 years) “Lukoil” has increased its primary refinery capacity after purchasing Uhtinsky NPZ (oil refinery facility). “UKOS” has realized a number of major projects at Samarskaya group oil refinery facility. Moreover, the capacity increase has been also achieved because of the inclusion of Anchinsky oil refinery facility (along with VNK) in the company’s assets and use of Angarsky facility, lost by “SIDANKO”. In the meantime, TNK has reconstructed Ryazansky oil refinery facility. All of the above could be considered successful management strategies.

The forth management efficiency indicator is the depth of the primary refining, which could reveal the companies’ intentions in regard to the domestic market, since the main export products are mazut and diesel fuels. The gasoline export is significantly lower. Cost-effectiveness of the oil products on the domestic market is directly correlated with the depth of primary refining.

Absolute progress in the depth of oil refining has been achieved by “Surgutneftegas”. Although, the only oil refinery facility is export oriented, the depth of refining testifies to the company’s attention to the domestic market. Although, being the only company’s facility simplified the process of modernization. “UKOS”, the owner of 5 facilities, faced a more complicated task. TNK succeeded in the deepening of the refining process because of the reconstruction of Ryazan facility, not to forget – TNK has received a whopping financial credit from Eksimbank, USA. The stable dynamics of the refining depth by “Lukoil” could be considered a success, since along with “Komiteck” the company inherited one of the oldest oil refinery facilities - Uhtinsky NPZ.

“Surgutneftegas” is the leader in the area of investments in production resources. The company is mainly focused on optimizing profits from its own functioning facilities. Overall, “Lukoil”, TNK and “UKOS” have similar investment strategies that are focused not only on the current production, but also investments in the new enterprises and securities, as well as acquisition of licenses. The conclusion for almost all oil companies is that the 1997-1998 period was short of investments. The companies mostly tried to “break even” for money spent during the privatization. The situation has changed dramatically after the crisis and especially in 2000. The oil business changed from mid-range profitable to highly profitable. The management realized that in order to secure long-term profits substantial investments in fixed capital are the absolute necessity, considering the shortage of investments infuse in the preceding period. Part of 1999 had been spent for realization of this fact, and 2000 saw the explosion of investments in the oil industry. Furthermore, the “takeover” companies as well as the companies that seek new development licenses (“Lukoil”, “UKOS”, and TNK) invested large sums of money into the fixed capitals.

Review of the privatization period leads to a conclusion that the faster oil companies underwent the privatization process, the faster they transferred to the private competitive market the sooner they completed the struggle for the property and financial influx, and started building a civilized efficient management structure.

Success of the oil industry is especially significant, since the industry has experienced the drawbacks of the governmental regulations in the areas of taxation policy, export control and monitoring of crude oil and associated gas streams.

In 1999-2000 the oil industry had a moderate taxation burden, allowing for the industry development. However, the analysis has revealed that this condition arose not from the merits of the taxation system, but from the sudden increase in the oil prices and the ruble devaluation in 1998.

Presently, the major unpredictability factor in the system of oil industry taxation is the custom fees, which were reimposed in 1999, three years after they were “terminally” aborted. Currently, the custom fees are at the moderate level, but they are constantly reviewed and may be increased in any moment. The excise on oil is also government regulated.

Since 1994 the government has never directly exercised the non-tariff oil and oil products regulations in the export control area. However, in 1999 the export supply became dependent on the domestic market supply, which in economic terms is equivalent to the export quota. The government can change the export rules by either reinforcing the obligatory supply to the domestic market or regulating accessibility to the export capacities of the arterial pipelines. Additionally, should the practice of quotas on the oil export reappear (which was actively discussed on the government level at the end of 2000), it is highly probable that the quotas would be auctioned, which, in its turn, could lead to substantial losses by the oil companies, as well as would create a new instability factor.