Russia - introduction
Local content in Russia is, like much of the country's regulatory terrain,
murky. Foreign investors have to contend with the intensely politicised nature
Russian energy industry and the Kremlin's use of oil and (particularly) gas an
instrument of foreign policy. At the domestic level, a combination of intense
'resource nationalism' and elite acquisitiveness makes outside investment into
sector fraught with a number of risks. The TNK-BP affair, in which Russian
corporate raiders seized control of the country's third-largest oil company
apparent acquiescence of the Russian government, is an object lesson in the
dangers of doing business there. It follows the Sakhalin affair in which Shell
forced to cede control of its operations to the state-owned giant Gazprom,
is often seen as an arm of the Russian state.
Dimitri Medvedev, president since May 2008, raised hopes that he would be a more
liberal ruler than his predecessor Vladimir Putin. However aside from a few
cosmetic changes, very little has changed. With Mr. Putin now prime minister,
is unsurprising. The Kremlin continues to view foreign investors as potential
threats to national sovereignty.
This aggressive approach has raised the question of whether local content is
even an issue in Russia. If Russian firms control most operations, will there
need for legislation regulating the conduct of outsiders? Might it even seem an
affront to Russia's technical capabilities?
Closer analysis reveals that this is not entirely true. Local content provisions
do exist in Russian law, but the terminology is so vague that actual local
content clauses are negotiated in each contract.
In existing PSAs, local content requirements are, if anything, becoming more
stringent. International operators are expected to employ a diverse range of
strategies to ensure their projects bring stable and sustainable growth to
communities. This includes "unbundling" of contracts and price
preferencing for local contractors but focuses most strongly on micro-changes
procurement policy – ensuring indigenous firms are as informed and capable of
competing for contracts as the international suppliers.
This practice is viewed by many independent observers as something of a
"seal-of-good-housekeeping", in the sphere of local content. For
procurement policy changes are more expensive and do not yield results as
as price preferencing, they do not encourage inefficient firms to rely on
Russian content laws as a form of subsidy. In terms of creating sustainable
development in which native players compete on a level playing field with
this is crucial.
Such free-market pragmatism may seem at odds with Russia's energy nationalism.
But in reality the Kremlin quietly acknowledges the massive defects in Russia's
indigenous industry. The Soviet-era infrastructure is decaying and in need of
enormous investment – around $1 trillion. The dire shortage of skilled
meanwhile, creates bottlenecks in the labour market. This becomes an especially
pressing issue when one considers that much of Russia's untapped energy
are in places – such as remote parts of Siberia and the frozen Arctic – which
can only be accessed through sophisticated technical capabilities. Local
will help to build Russia's homegrown ability to tap these supplies.
The future course of local content in Russia will depend largely on the
direction which the Kremlin takes. Aggressive nationalism will undoubtedly
barriers for entry to the energy market, whilst a failure to impose the rule of
will exacerbate existing uncertainty about the country's commitment to
its contracts. The TNK-BP and Sakhalin affairs show that Russian companies,
the backing of the Russian state, are willing to rewrite contracts if they
appear to be a threat – to Russia's national interests or to oligarchic