autonomously from the state. Eventually the Russian Federation would have five large energy companies, each of whose oil reserves were comparable to the size of the largest western majors.
The development of these companies was more than just a wholesale reconstruction of the Russian oil industry. It also brought visible changes in the larger cities. In Soviet times, those few lucky enough to own automobiles had to search out the rare and hard-to-find dingy service stations on the outskirts of the city. But now new, modern service stations were springing up at intersections and alongside the highways, bedecked with shiny corporate logos—Lukoil, Yukos, Surgut, TNK, and a number of others. The stations came equipped not only with high octane gasoline of dependable quality, but also in many cases things that people never expected to see, like convenience stores and, even more remarkable, automatic car washes. All of that would also have been unimaginable in Soviet times.
OPENING UP
How did this new Russian oil industry look to the rest of the world? In 1992 the head of one of the world’s largest state-owned oil companies was asked what he thought about Russia and all the changes that were happening there. His answer was very simple. “When I think of Russia,” he said without a pause, “I think of it as a competitor.”
Others saw opportunity. For many decades after the 1917 Bolshevik Revolution, the Soviet Union had been closed off, an almost forbidden place, another world. The Soviet oil industry operated largely in isolation, with little of the flow of technology and equipment that was common in the rest of the world.
In the late Gorbachev years, at the end of the 1980s, the Soviet Union started to open the doors to joint ventures with Western companies. The objective was to bring in the technology it needed to improve the performance of the Soviet industry. Then came the collapse of the Soviet Union. This provided a vast new prospect to Western companies: the potential to participate in a region rich with hydrocarbons, perhaps comparable to the Middle East in the scale of resources, and world-class opportunities. They dispatched teams to research these opportunities.
Some concluded that, whatever the “Russian risk,” they simply could not afford not to be in Russia. “When you looked at the opportunity, you became enthusiastic,” recalled Archie Dunham, then CEO of the U.S. major Conoco. “It was just a huge opportunity.” But, as time went on, the Western companies learned how difficult it was to work in the Russian Federation. As Dunham added, “You had a rule of law problem, you had a tax problem, and you had a logistical problem.”
The uncertain political environment, the shifting cast of characters, the corruption, the security risks, the opaque and constantly changing rules, the uncertainty as to “who was who” and “who was behind who”—all of these made others more reluctant. “We had opportunities all over the world,” said Lucio Noto, CEO of Mobil. “Once you sink a couple of billion dollars into the ground, you can’t move it.”13
When the Western companies looked across the panorama—at the operating conditions, the equipment, and the fields—they saw an industry that was suffering from decades of isolation and that lacked the most up-to-date equipment, advanced skills, and sufficient computing power. They recognized that Russian geoscientists were at the forefront of their disciplines, but that, in Russia, “theory” was quite separated from “practice.” They also saw the dire situation in the Russian oil fields and the desperate need for investment. The Westerners were convinced that they would be welcome because they brought technology, capital, expertise, and management skills. That is not how Russian oil people looked at it, however. They took great pride in what the Soviet industry had accomplished, they were confident in their own skills, and they enormously resented the implication that they were not up to world standards. The Russian industry, in their view, did not need outsiders telling them what to do. Nor did it need substantial direct foreign participation in order to transfer technology. If the Russians needed technology, they could buy it on the world market from service companies.
Neither the government nor the emerging Russian business and political classes saw any reason to give up control over any substantial resources to Western companies. They may not have agreed among themselves as to who would ultimately own those resources and control the wealth so generated, but the one thing on which they could all agree was that it should not be the foreigners.
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