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. Last Updated: 07/27/2016

Experts Optimistic on Impact of Oil Sell-Off

The privatization of Russia's oil industry now under way is likely to increase cost efficiency and make foreign investment easier, despite the fact that employees and the government will keep control, consultants and officials said Thursday.

"Privatization of the oil industry will probably only bring positive things", said Byron Ratliff, director of petroleum industry services at the consultancy Price Waterhouse.

The government announced this week that 12 percent of shares in Yuganskneftegaz, a huge Russian company which produces 10 percent of Russia's oil, will be sold to the public at a voucher auction this month. At least three other major oil companies are due to be sold by the end of the year.

Russia is the world's second biggest oil producer, with predicted production of about 350 million tons this year, and is heavily dependent on exports of oil and oil products.

Igor Starostin, head of foreign investment at the Energy Ministry, said that privatization would attract investment from foreign banks, which have balked at investing until it becomes clear who owns Russia's oil reserves.

He said that unlike many Russian industries, oil companies would be able to offer foreign investors attractive collateral to loans.

One concern however is that the government and workers collectives at oil firms may still have too much control of their company.

Workers and managers in Yuganskneftegaz and other privatized oil enterprises will receive up to 25 percent of nonvoting stock free and can buy another 15 percent of voting shares. The state also keeps another 38 percent for three years.

"Unless they can control the company, multinationals aren't going to be that interested in getting shares into a company", Ratliff said.

Some foreign analysts have warned that employee control of privatized factories will block cost-cutting needed to put industries in the black.

But Ratliff said that Russian oil executives were already approaching auditing firms to find out how to make their business more profitable.

He said that if workers collectives tried to block cost-cutting measures, directors may opt to sell off loss-making divisions of the firm, such as supply industries. In many cases, it will be cheaper to find an independent supplier to take over the job, Ratliff said.

Ratliff said that privatized oil firms could also cut costs by pressing local governments to take over from oil companies the funding of schools and hospitals, using revenues obtained from oil taxes, Ratliff said. Ratliff said that privatized companies can also become more efficient by finding clients closer to home, rather than serving far-away clients assigned by the government.

According to George Reese, managing partner of the consultancy Ernst & Young, temporary government influence over privatized oil companies, in the form of a 38 percent share, can be useful in ensuring that the enterprise does not cut production.