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. Last Updated: 07/27/2016

Export Rule For Oil Is Troubling

The Russian Government last week introduced new regulations which are likely to cause annoyance and financial loss to foreign investors working in Russia's critical energy sector.

These companies are used to unpleasant surprises from the government. They have long said they are hesitant to invest in Russia because crucial tax and export laws are subject to constant change.

Foreign companies say that the government encourages them to invest and then without warning introduces new limitations and taxes on exports that virtually guarantee their venture will suffer losses.

What is surprising about the latest set of restrictions, which was announced to foreign joint-venture oil companies last week, is that they affect the Russian Foreign Investment Law, supposedly passed to protect the rights of foreign investors.

The law guaranteed that foreign joint ventures with over 30 percent foreign ownership had the right to export "whatever they actually produce". In the case of the oil industry, this right is crucial because the world price for oil is much higher than the Russian domestic price.

Last week the Fuel and Energy Ministry ruled that all foreign joint ventures must receive permission from a special commission before receiving licenses to export their oil. The apparent justification is that some foreign firms have been abusing their rights under the foreign investment law and illegally breaking Russia's system of export licenses.

Fuel and Energy Ministry spokesmen have suggested that some joint ventures are buying oil from existing Russian sources and then using their status as joint ventures to obtain an export license for the oil.

If this is what the ministry has in mind, the new commission with its new layer of potentially corrupt bureaucrats seems a strange answer to a problem apparently confined to a few small operators. The main effect of these new rules will be a serious reduction in the rights that all joint ventures were given under the Foreign Investment Law. It places the issue of export rights into the fickle domain of Russian government policy.

The ministry appears set on a definition that excludes about a dozen joint ventures which do not actually mine oil but instead increase oil output in other ways, either by repairing old wells or increasing efficiency from existing wells or recovering waste.

This makes little economic sense. Russian oil output is likely to fall 15 percent this year and Russia desperately needs foreign investment to stop this trend.

It seems absurd that Russia should draw some artificial distinction between joint ventures that increase production and those that only increase efficiency. Russia needs every extra barrel it can get.