Russia's Petroleum Industry: An Overview of Its Current Status, the Need for Foreign Investment, and Recent Legislation

By Vaughan, Kevin J. | Law and Policy in International Business, Winter 1994 | Go to article overview

Russia's Petroleum Industry: An Overview of Its Current Status, the Need for Foreign Investment, and Recent Legislation


Vaughan, Kevin J., Law and Policy in International Business


I. Introduction

In August of 1991, Communist hard-liners staged a coup against Mikhail Gorbachev, then President of the Union Of soviet Socialist Republics. The people of the Soviet Union resisted this coup, and Boris Yeltsin, president of the Russian Federation, the largest of the Soviet Union's fifteen constituent republics, barricaded himself inside the Russian Parliament building and made a heroic stand against the Communist would-be leaders. Because of this resistance, the coup failed, and Mikhail Gorbachev was returned to power. His return, however, was fated to be brief, because during his absence the balance of power between the Soviet government and its constituent republics shifted dramatically in favor of the republics. On December 8, 1991 three of these republics - Russia, Ukraine, and Belarus - banded together to form the Commonwealth of Independent States, effectively ending the existence of the Soviet Union.(1) Since that time, these three nations have been joined by eight more of the former Soviet republics in a loosely-knit confederation.(2) Even before the Soviet Union ceased to exist, however, Russia took control of some of the resources that had always been administered by the Soviet government. This process had profound effects on the nation's oil and gas industry. In September 1991, President Yeltsin signed a decree usurping control of all Soviet energy resources situated within Russian territory.(3) This decree ordered the Russian Federation's Ministry of Fuel and Energy to take control of the oil and gas industry.(4) With this act, Russia inherited the problems, shortcomings, and vast potential of the Soviet Union's energy industry.

From an energy perspective, Russia is the most important of the former Soviet Union's republics. Because of its large size, it inherited the lion's share of the Soviet Union's oil resources. Russia's borders contain approximately ninety percent of the former Soviet Union's proven reserves.(5) This inheritance, however, has not been without problems; Russia's ability to make efficient use of this vital resource remains in question.

This paper will give an overview of Russia's weakening petroleum industry. Unlike the energy industries of some other nations, Russia's prospects have declined not because of shortage. but because of faulty policies that have brought the industry to its knees. This paper will study these policies and argue the need for foreign investment, Russia's only hope for reversing this decline. Finally, this paper will address current and future legislation dealing with the nation's energy industry, and will analyze whether the laws are effective tools for attracting foreign investment.

II. Russia's Petroleum Industry

Before Yeltsin's 1991 decree, all aspects of the petroleum industry, including exploration, production, refining, and marketing were controlled by the Soviet government through various agencies.(6) After the decree, responsibility shifted directly to the Russian Federation, principally to Russia's Ministry of Fuel and Energy.(7) To develop the nation's energy resources, the Ministry relies on former Soviet governmental entities that have since reformed into semi-private entities in the hopes of retaining control over the resources they formerly exploited.(8) Two of these entities, Rosneftegas and Gasprom, now have monopoly control over Russia's oil and natural gas resources. Rosneftegas is a conglomeration of former Soviet oil production associations;(9) Gasprom controls the region's natural gas resources and is owned jointly by the governments of the Russian Federation, Ukraine, and Belarus.(10)

Several years ago, the Soviet Union was the world's most prolific producer, topping even Saudi Arabia with peak production in 1987 and 1988.(11) At that time, the Soviet Union produced 12.48 million barre's of oil each day.(12) Russia alone accounted for approximately 11.4 million barrels of this total 3 Since the peak years, however, production has fallen rapidly, and each year witnessed an average fall in output of roughly thirteen percent from the year before. …

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