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. Last Updated: 07/27/2016

The Written Rules Have Little Bearing on Reality

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Officials from the Natural Resources Ministry, including the deputy head of the federal environmental watchdog, Oleg Mitvol, are in the United States meeting with investors. The aim of the visit is to explain the rules of the game in the energy sector to U.S. investors.

On paper, the rules of the game have been made clear. This summer, the State Duma finally passed laws governing foreign investment in strategic sectors. But even Natural Resources Minister Yury Trutnev admits that these remain pretty vague.

"There are still definitions like 'licenses are reviewed in the instance of existing violations,' where these instances can be determined by any bureaucrat. ... Business isn't protected," Trutnev told Kommersant last week.

Market regulators apply the law differently for various companies. Market players and analysts in the sector already depend more on their sense of the signals being sent by the Kremlin and government than on the rules. Analysts trying to evaluate risk or predict the prospects of a certain company face a major problem -- the rules are not just informal, they are also ephemeral.

Given the speed with which the signals in the industry change, it is practically impossible to evaluate the likely outcomes of different events. The role of formal methodology in market analysis continues to shrink, while the level of uncertainty continues to rise. In each particular case, it is necessary to account for a multitude of factors, and analysis is increasingly based on intuition.

It is occasionally possible to isolate a temporary tendency, but to use it to predict outcomes is dangerous, as the general line could change. The rules of the game in the oil and gas sector are corrected every few months. Most analysts were able to predict the outcome of the conflict over the Kovykta field based on past practice. But events in the Russneft case have been much more difficult to foresee. The state and state-controlled companies preferred to hold shares for ransom until the last minute (like Gazprom is doing with independent gas producers). The arrest warrant issued for the head of Russneft, which echoed the Yukos affair, demonstrates that there are no real trends in the oil and gas sector -- just the positions and interests of the different players.

There are, of course, some general rules that can be discerned by analyzing regulatory practices and the interests of companies close to the state. But it is better not to listen too closely to officials' speeches to get a general idea of the informal rules in play. Instead, what is required is an exceptional feel for the country. This comes easier for Russians, which is why foreigners have a hard time here.

This appeared as an editorial in Vedomosti.