Mitigating Regulatory Risks for U.S. and EU Investments in Russian Oil and Gas Industry

By Irina Avdeeva

Russia’s abundance of natural resources makes the Russian oil and gas sectors highly attractive to foreign investors. According to some estimates, the share of foreign capital in the Russian extractive industry was 13.07 percent in 2014, 26.03 percent in the manufacturing industry, and 3.07 percent in the industries supporting the production and distribution of electricity, water, and gas. However, high levels of administrative bureaucracy, complex and often contradicting regulations, corruption, and the lack of an independent judiciary are still damaging for the investment climate in Russia. In addition, Western sanctions against Russia introduced in response to Russia’s annexation of Crimea in 2014 as well as Moscow’s current policy in Ukraine have led to a tremendous outflow of investments, with foreign direct investments dropping from over $53 billion in 2013 to just under $10 billion in 2015.

Industry regulations shape investment conditions, creating a framework for a foreign company’s operation in a host country. Therefore, changes of rules can have a significant impact on businesses, leaving the foreign company vulnerable to uncertainties. Regulatory risk refers to possible detrimental effects of changes in regulations and laws on the business environment: the potential for regulations to constrain or hinder a company’s operation in a certain industry decreases the attractiveness of that industry for future investments.

The following research paper analyzes the regulatory risks that EU and U.S. companies face when investing in Russian oil and gas projects. The analysis provides an overview of potential sources for regulatory risks, taking into account important attributes of the oil and gas sectors as well as Russian domestic politics. Finally, the paper aims to suggest important risk mitigation strategies for companies considering investing in the Russian oil and gas sectors, outlining potential opportunities for cooperation and providing examples of successful and failed projects.

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