Oil and the economy of russia from the late tsarist to the post soviet period

Oil and the Economy of Russia

This book examines the development of the Russian economy from tsarist times
to the present through the lens of the oil industry. It considers the role of the
state, business-state relations, foreign participation, enterprise performance and
technology. Besides providing much rich detail on the changing nature of the oil
industry, the book also puts forward important conclusions, including the fact
that in the late nineteenth century private enterprise rather than the state was the
principal driver of economic development, and that after the collapse of the Soviet
Union incumbent managers were more effective in running their companies than
financier entrants, whose main concern was short-term gain.
Nat Moser has over 20 years’ experience analysing the Russian oil sector from an
academic and investment perspective. He completed his doctorate at the University
of Manchester, and post-doctoral research at University College London and has
advised some of the largest foreign equity investors into the sector. He is currently
a director of two companies working in the field of oil and gas exploration and
production.


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118. Russia’s Economy in an Epoch of Turbulence
Crises and Lessons
Vladimir Mau
119. Oil and the Economy of Russia
From the Late-Tsarist to the Post-Soviet Period
Nat Moser
120. The South Caucasus
Security, Energy and Europeanization
Edited by Meliha B. Altunisik and Oktay F. Tanrisever

Oil and the Economy of Russia
From the Late-Tsarist to the Post-Soviet
Period
Nat Moser


First published 2018
by Routledge
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and by Routledge
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Routledge is an imprint of the Taylor & Francis Group, an
informa business
© 2018 Nat Moser
The right of Nat Moser to be identified as author of this work has
been asserted by him in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
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British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British

Library
Library of Congress Cataloging in Publication Data
Names: Moser, Nat, author.
Title: Oil and the economy of Russia: from the late-Tsarist to the
post-Soviet period / Nat Moser.
Description: 1 Edition. | New York: Routledge, 2018. |
Series: BASEES/Routledge series on Russian and East European
studies; 119 | Includes bibliographical references and index.
Identifiers: LCCN 2017032257| ISBN 9781138242876 (hardback) |
ISBN 9781315277509 (ebook)
Subjects: LCSH: Petroleum industry and trade–Russia–History. |
Petroleum industry and trade–Soviet Union–History. | Petroleum
industry and trade–Russia (Federation)–History. | Industrial
policy–Russia (Federation)–History. | Petroleum industry and
trade–Russia (Federation)–Management.
Classification: LCC HD9575.R82 M667 2018 |
DDC 338.2/7280947–dc23
LC record available at />ISBN: 978-1-138-24287-6 (hbk)
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For my mother and father


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Contents

List of figures
List of tables
Abbreviations and acronyms
Note on measurement
Preface

ix
xi
xii
xiii
xiv

1

Introduction
The oil industry: main features and characteristics  1
Conceptual terminology  5
Structure, methodology and sources  7

1

2

The late-tsarist oil industry, 1861–1917
Late-tsarist economy overview  11
Late-tsarist oil industry overview  13
Role of the state   16
Foreign participation  29
Monopolies, cartels and business-state relations  33

Technology 40

11

3

The Soviet oil industry, 1917–1991
Soviet economy overview  51
Soviet oil industry overview  55
Enterprise management  60
Inefficiency of resource use  66
Technology 70

51

4

The post-Soviet oil industry, 1991–2017
Post-Soviet economy overview  87
Post-Soviet oil industry overview  94

87


viii  Contents
The state and the oil industry  99
Business-state relations  102
Foreign participation  108
Enterprise performance  114
5

Conclusion

130

Appendix
Literature review
Bibliography
Interviews conducted

135
149
155
166

Index

168


Figures

2.1   Russian oil production 1863–1917
2.2   US and Russian oil production 1870–1916 
2.3   Russian oil production 1863–1880
2.4   Russian oil production 1877–1916
2.5   US oil production 1877–1916 
2.6   Russian oil output in 1890 by producer
2.7   Russian oil output in 1913 by producer
3.1   Soviet GNP 1945–1991 

3.2   Soviet oil production 1917–1945
3.3   Soviet oil production 1917–1940 
3.4   Geographical distribution of Soviet oil production in 1938
3.5   Soviet oil production 1945–1991
3.6   Soviet oil production 1945–1991 
3.7   Geographical distribution of Soviet oil production in 1950
3.8   Geographical distribution of Soviet oil production in 1980
4.1   Russian GDP 1992–2015
4.2   Russian budget balance 1992–2015 
4.3   Oil price 1992–2015
4.4   Russian current account 1992–2015
4.5   Russian international reserves 1992–2016
4.6   Foreign direct investment into Russia 1992–2015
4.7   Russian oil production 1990–2015
4.8   Russian oil production 1990–2015 
4.9   Russian oil production by company 1992–1999
4.10 Change in production between 1992 and 1999
by ownership type
4.11  Russian oil production by company 1999–2004
4.12 Change in production between 1999 and 2004
by ownership type 

14
15
23
24
25
36
37
54

56
57
57
58
58
59
59
90
91
91
92
93
93
96
97
115
116
117
118


x  Figures
4.13  Russian oil production by company 1992–2004
4.14 Change in production between 1992 and 2004
by ownership type
4.15  Russian oil production by company 2005–2012
4.16 Change in production between 2005 and 2012
by ownership type
4.17  Russian oil production by company 2013–2015
4.18 Change in production between 2013 and 2015

by ownership type 

120
121
121
122
123
123


Tables

2.1   Key industrial and economic indicators for five largest
economies, 1861 and 1913
2.2    Oil-field licence auction lot details and results, 1872
3.1    Soviet and Western oil field reserve classification 
4.1   Oil and gas businessmen with government
positions in the 1990s 
4.2   Oil and gas industry leaders with connections
to Putin from before he became President
A.1   Russian oil production 1863–1917
A.2  Russian state treasury income from the oil
and salt businesses 1813–1873
A.3   Major oil producers in 1890 
A.4   Major oil producers in 1913
A.5   Soviet oil production 1917–1992
A.6   Geographical distribution of Soviet oil production in 1938
A.7   Geographical distribution of Soviet oil production in 1950
A.8   Geographical distribution of Soviet oil production in 1980
A.9   Post-Soviet Russian oil industry chronology 1991–2016

A.10  Russian oil industry ownership structure in 1999
A.11 Russian oil industry and the loans-for-shares
scheme 1995–1997 
A.12  Russian oil production 1987–2015
A.13 Russian crude oil and condensate production
by company 1992–2004
A.14 Russian crude oil and condensate production
by company 2005–2015

12
20
67
106
108
135
136
137
137
138
140
140
141
141
144
145
146
147
148

Abbreviations and acronyms

AARAlfa-Access-Renova
bblbarrel
boe
barrel of oil equivalent
capex
capital expenditure
CEO
Chief Executive Officer
COO
Chief Operating Officer
d.
file (delo)
f.
collection (fond)
GARF
State Archive of the Russian Federation
GKI
State Committee for the Management of State Property
GKZ
State Commission on Mineral Reserves
Gosplan
State Planning Committee
IOCs
International oil companies
JV
Joint venture
MET
Mineral Extraction Tax

Minfin
Ministry of Finance
Mingeo
Ministry of Geology
MoNR
Ministry of Natural Resources
OFS
Oil-field service
OGPU/KGB/FSB State security service
op.
catalogue (opis)
PSA
Production-sharing agreement
RF
Russian Federation
Rosnedra
Federal Agency for Subsoil Use
Rosprirodnazor
Federal Service for the Supervision of Natural Resources
RSFSR
Russian Soviet Federative Socialist Republic
T-VOPartnership
TNK
Tyumen Oil Company
TsGIAL
Central State Historical Archive, Leningrad
UK
United Kingdom of Great Britain and Northern Ireland
US
United States of America

USSR
Union of Soviet Socialist Republics or Soviet Union


Note on measurement

Figures measuring oil production and refined products in this book are in metric
tons. I use the English spelling “tons,” rather than the French “tonnes.” In latetsarist Russia, oil was measured in puds (1 metric ton = 61 puds), and I have
converted these figures into metric tons. In the Soviet Union, oil was measured
in metric tons, and this practice has continued in post-Soviet Russia. In the West,
oil is measured in barrels (1 metric ton = 7.3 barrels), and some of the figures in
this study comparing Russian and international oil companies are in barrels. The
figures in metric tons in this book should not to be confused with British long tons
and US short tons which are based on imperial weights, and are somewhat more
and less, respectively, than metric tons.


Preface

This book examines the development of the Russian economy from the late-tsarist
to the post-Soviet period through the lens of the oil industry. As well as explaining
Russia’s past, the findings are important for understanding the country’s future
path of economic development.
The book is based upon my engagement with the Russian oil industry over
the last 20 years through both academic and business work. Underpinning it is
the academic work I did for my MPhil thesis at Oxford University in 1995–1996,
my PhD at Manchester University in 2005–2009, and my post-doc at University
College London in 2012–2013. My business work – which relates to investment
in the oil and gas sector – gave me the opportunity to live in Moscow in 1997–
2004, and be a frequent visitor up until 2014, where I met many senior oil company managers and executives. It also enabled me to travel extensively in the oil

regions of the Former Soviet Union including the major oil-field towns in West
Siberia and the Volga-Urals, and some of the smaller ones in central Ukraine, and
to talk there with drillers, geologists, geophysicists and engineers.
At the heart of this book are two dozen or so of interviews with oil industry
participants conducted since 1995, and extensive oil industry data that I collected
throughout the period. The book also benefits from a rich secondary literature – in
both Russian and English, and relevant archival research I undertook in Moscow.
In hindsight, I was fortunate to be researching the sector, interviewing industry participants, collecting data, and travelling across Russia at a time when the
country was open to the West, and attracting substantial investment from it. The
deterioration in relations between Russia and the West since 2014 has underlined
to me that embarking on this project today, rather than 20 years ago, would be
more difficult. The wave of Western investment into the Russian oil industry that
occurred from the early 1990s opened doors for me to see at first-hand, and even
be a participant in, certain important events.
Over the years, a lot of people have assisted me with the work that went into
this book. My greatest thanks go to my mother Caroline, my father Brian, my wife
Olya, my brother Titus, my father-in-law Alexander Ivlev, my step-father Peter
Sollis, my PhD supervisor Peter Gatrell, my MPhil supervisor Chris Davis, and
my colleague at UCL Pete Duncan. I am also very grateful to: Rudiger Ahrend,
Dmitri Avdeev, Theo Balderston, Thomas Blake, Olga Boltenko, Mark Bond,


Preface xv
Constantine Brancovan, Alexander Burgansky, Euan Craik, William Flemming,
Nellie Galiauv, Till Geiger, Chris Gerry, Thane Gustafson, Nigel Gould -Davies,
Liam Halligan, Nick Halliwell, Peter Halloran, Mike Haywood, Russell Harvey,
Jim Henderson, David Hoffman, Elena Krasnitskaya, Nick Latta, Oleg Maximov,
Ivan Mazalov, Tav Morgan, Vadim Murzak, Roland Nash, Patrick Newman,
Alexander Nazarov, Peter Oppenheimer, Slavo Radosevic, Elisabeth Schimpfossl,
Robert Skidelsky, Peter Sowden, Rab Speirs, Marat Terterov, Sergei Tischenko,

Gardner Thompson, Vakhtang Vardanyan and Mike Winn. Finally, I’d like to
thank all my interviewees, and the UK Economic and Social Research Council for
funding both my PhD and post-doc. Any mistakes in this book are the responsibility of myself alone.


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1Introduction

Russia1 has been a major force in the global oil industry since the 1870s – just a
decade after the industry first developed in the US – and it has been the largest
oil producer in the world at various points since, including the 1900s and 1980s,
rivalled only by the US, and more recently Saudi Arabia.2
Within Russia, the oil industry became an important economic sector in the late
nineteenth century, and has retained that position ever since. It provides a direct
support to the domestic economy through cheap fuel, and is a vital source of government revenue and export earnings. The industry played a significant part in the
development of large-scale modern enterprise in the country, and is central to relations between business and the state, with oil magnates ranking amongst the country’s most powerful businessmen in both the late-tsarist and post-Soviet periods.
This book looks at the development of the Russian economy since the 1860s,
and the main debates about this, through the perspective of the oil sector. These
debates relate to several overlapping themes: the role of the state; business-state
relations; foreign participation; enterprise performance; and technology. The
book also identifies some of the major continuities and discontinuities within
these themes in different periods of Russian history, and provides an international
context through a comparison with developments in the oil industry in the US –
another geographically large and resource-rich country. In addition – though with
some gaps – the book provides a study of the development of the oil industry in
Russia right from its inception through to the present day.
In this introduction, I consider the features and characteristics of the oil industry, and assess how relevant the sector is for making general conclusions about
industrial development in Russia or elsewhere. I then explain the main conceptual

terminology that I use in the book – important for understanding long-run economic development in Russia. Lastly, I outline the structure of the book and the
individual chapters, and briefly discuss the methodology and sources.

The oil industry: main features and characteristics
An introduction to the oil industry
Oil consists of hydrocarbon molecules. It is generally accepted that most oil
deposits were formed from decomposed plankton and algae. The deeper and


2  Introduction
longer the burial of this organic material, the lighter and less viscous (thick) the
oil. Oil reservoirs are mostly found in sedimentary rock such as sandstone with the
hydrocarbons occupying the tiny pores and fractures within the rock. Oil is found
in several different geological layers beneath the surface of the earth, with the
deepest reserves located at a depth of, in some cases, more than 5km.3 The main
geological layers in Russia where oil has been found are the Permian, Jurassic and
Devonian which range from a few hundred metres to around 3km in depth.
Oil-based products have been present in history for many centuries with uses
ranging from healing ointments to combustible weapons of war. There are many
reported instances of oil seeps around the world where black, tar-like oil oozed
from sedimentary rocks exposed at the surface, and this was gathered by local
people. However, it was not until the second-half of the nineteenth century that
something more closely resembling a modern “industry” began to develop. This
occurred simultaneously in the US and Russia, and in Galicia and Romania – and
was based upon the collection of crude oil and its “cooking” or basic refining to
extract kerosene, which was then used in cheaply manufactured lamps. Initially,
production was from bailing the seepage from shallow wells dug in the ground.
After the introduction of drilling – first in the US in 1859 – larger underground
reservoirs began to be exploited.4
Advances in oil-burning boilers in the 1860s and 1870s resulted in increased

demand for fuel oil, until then a low-grade by-product (residual) of refining, for
use in locomotives, steamboats and metallurgical furnaces.5 At the start of the
twentieth century, the growing popularity of the automobile powered by an internal combustion engine resulted in increasing demand for gasoline (petrol), a midgrade product of refining. The advent of automobiles proved fortuitous for the
industry because it came at just the time that the spread of electricity reduced
the demand for kerosene for lighting, thus giving the industry an important new
source of demand.6 Although, today we are looking at the possibility of electric
battery-powered cars replacing those powered by gasoline and diesel.
The importance of technology is a recurring theme for the oil industry.
Throughout its history, technological advances have played a crucial role in
changing the nature of the industry through opening up new opportunities, and
changing the economics of existing practices. In exploration and production, the
introduction of drilling in the late nineteenth century allowed the exploitation of
underground reservoirs, while in the twentieth century, advances in geophysical
analysis and reservoir management techniques enabled more accurate drilling, and
a greater proportion of oil to be extracted from a reservoir. Since the beginning
of this century, the combination of hydraulic fracturing and horizontal drilling
has allowed oil to be extracted from shale, and this has completely reinvigorated
the US oil industry.7 Developments in refining were crucial in creating products
with mass markets which range from “light” products such as jet fuel, through
mid-grade products such as gasoline, to “heavy” fuel oil, and in maximising the
yield of such products from a given barrel of crude oil. Transportation innovations including rail tankcars, pipelines and marine tankers allowed the profitable
exploitation of oil reserves hundreds or even thousands of miles from their point


Introduction 3
of consumption. Finally, technical developments in other industries played an
important role, with, for instance, improvements in the strength of drill pipe supplied by the steel industry vital for deep drilling.
Economic characteristics of the oil industry
Oil exploration and production is an extraction industry with similarities to mining industries such as coal or gold mining. Geology is the starting point for the
success or failure of an enterprise. It determines whether reserves are present,

the appropriate scale of production of those reserves, and the rate of depletion.
The challenge for oil producers is to apply the most appropriate methods and
technology to extract the resources in the most efficient manner. This includes
correct interpretation of the geology – which since the twentieth century has relied
heavily on the use of seismics (tracking and analysing sound waves which are
“shot” through the ground) – and effective reservoir management, through the
depth, spacing and angle (from vertical to horizontal) of drilling. Upstream capital
requirements vary considerably. The cost today ranges from a few million pounds
for conducting seismics and drilling one or two onshore wells, in West Siberia or
Texas for instance, to billions of pounds for the construction of offshore extraction infrastructure in regions such as the North Sea or the Gulf of Mexico. Due
to this range, the degree of concentration of upstream ownership is often not that
great, with small independent producers developing lesser deposits and larger
multinationals producing from more substantial fields.
Another characteristic of the upstream oil industry relates to the natural depletion over time of an oil field. Thus, as the economist Harold Hotelling observed in
the 1930s, orthodox economic theory of the firm is not appropriate given that “the
indefinite maintenance of a steady rate of production is a physical impossibility.”8
The transportation of oil from the point of extraction to the point of refining
is accomplished by pipeline, marine vessel or rail. All three involve large capital
expenses and long lead times, and provide opportunities for operators to benefit from economies of scale. Pipeline and rail transportation networks also often
exhibit the characteristics of “natural monopoly” industries. Such an industry is
one where it is cheaper for one undertaking to supply services than two or more,
since the latter would involve replication of plant and networks – fixed costs
which are largely insensitive to variations in output. Thus, when competition is
present in a natural monopoly industry, the result is welfare losses to consumers
that are manifested in higher prices and lower quality. Alternatively, however,
when a single unregulated firm dominates, there is a danger of monopoly profits
and prices, and limited coverage.9
Oil refining is a heavy processing industry with similar characteristics to
industries such as steel or aluminium which turn inputs (crude oil, iron, alloy,
etc.) into semi-finished or finished commodities. Oil refineries must adapt both to

the type of crude oil available (known as “feedstock”) which may, for instance,
have a high or low sulphur content and to the type of market (e.g. automobiles or
industry). Sophisticated refineries which have a high yield of the more valuable


4  Introduction
light products are very expensive to construct, costing billions of pounds. Thus,
barriers to entry are higher in refining, and the ownership structure more concentrated, than in exploration and production. As with transportation, oil refining has
significant opportunities for exploiting economies of scale.
In addition to refining, another important aspect of the downstream segment
of the oil industry is the distribution and sale of refined oil products. This part
of the industry can vary from centralised state distribution to sale through small
decentralised private outlets. In the West, the large vertically integrated oil majors
have tended to own a large proportion of distribution outlets. The gasoline retail
business sometimes also exhibits monopoly characteristics – with a single seller
controlling prices within a certain area – or oligopoly characteristics – when several sellers collude to keep prices high.
The integrated business model of the majors such as ExxonMobil and Royal
Dutch Shell – from production through refining to distribution – allows them to
benefit from better and more stable margins than dedicated producers, refiners
or distributors. Retail prices of refined products are less prone to fluctuation than
crude prices, allowing the majors to reduce the impact of falling crude prices on
their revenue.10 Essentially the downstream provides a helpful “cushion” in a low
oil price environment, while in a high oil price environment profit margins on
the upstream business are lucrative. The overall point is that the oil industry is a
cyclical business, and an integrated company with upstream and downstream is
financially much more robust in the cycle.
Along with other energy industries such as nuclear, gas and coal, an important characteristic of the oil industry is a tendency for greater state intervention
than elsewhere in the economy. This has been noted by several economists. In
the 1980s, Dieter Helm, John Kay and David Thompson identified three main
reasons why government played a greater role in energy than in other sectors

of the ­economy: first, that energy is a particularly important commodity whose
production affects all other sectors of the economy to a greater degree than
most other commodities; second, that the time-scales associated with decisions
about energy are exceptionally long, and governments are better able to cope
with the resulting uncertainty over future returns than the private sector; and
third, that many areas of energy supply are natural monopolies which necessitates government regulation or even outright ownership.11 More recently,
Paul Stevens, reinforcing this work, observed that the energy sector has certain characteristics which “emphasize market failures,” and therefore requires
“greater government intervention.” He identified that the production and consumption of energy generates very significant externalities, most obviously in
the field of environmental concerns, but also with respect to energy’s strategic
importance.12
Overall, the oil industry can be seen to be useful for generalising about industrial development in Russia and elsewhere, though with two qualifications. First,
the industry has much more relevance for other heavy industries – which also
have characteristics such as high capital expenses, long lead times and economies
of scale – than light industries. The relevance of the oil industry to other heavy


Introduction 5
industries is borne out by the fact that it was itself, according to A. D. Chandler,
at the vanguard of the creation of “modern large-scale industrial enterprises” in
the second-half of the nineteenth century with “salaried managers, a vertically
integrated structure, and companies exploiting economies of scale and scope in
production and distribution.”13 Second, due to its strategic importance and certain
natural monopoly characteristics, even when generalising about heavy industry,
the tendency for greater state intervention in the oil sector than elsewhere needs
to be taken account of, especially when examining the issue of the role of the state
in the economy.

Conceptual terminology
Economic systems
In any given society, the productive resources of land (which include oil resources),

labour and capital are limited. Due to this scarcity, societies have to decide in an
orderly way what is produced, how to produce it, and for whom it is produced. An
economic system is “the set of institutional arrangements used to allocate scarce
resources.”14 Such a system is defined by its attributes or characteristics.
Paul Gregory and Robert Stuart focus on four general attributes which they
identify as key in differentiating economic systems: ownership (private or nonprivate); information and coordination mechanisms (market or plan); levels of
decision-making authority and responsibility (centralised or decentralised); and,
finally, incentive arrangements (moral or material). Other criteria to distinguish
between economic systems include the scale of production and the level of integration into the international economy. Using their four criteria, Gregory and
Stuart generate a three-fold classification of economic systems, namely capitalism, market socialism, and planned socialism. Two related concepts are “reform,”
which is the process of changing (improving) an existing system, and “transition,”
which is the movement from one economic system to another, for instance, from
planned socialism to capitalism.15
Institutions and transaction costs
The concept of transaction costs is important for understanding the way in which
the “institutional arrangements” of economic systems function. Analysis based
upon this concept is part of the new institutional economics school, of which the
leading figure is Douglass C. North.
North views “institutions” as “the rules of the game in a society,” and “organisations” as “players in the game,” and the interaction between institutions and
organisations “shaping the direction of institutional change.” Under capitalism,
according to North, property rights, the law and share ownership are examples of
“formal” institutions, while conventions, attitudes to the law, and codes of conduct are examples of “informal” institutions. Meanwhile, governments, firms, law
courts, banks and trade unions are organisations.16


6  Introduction
North finds that institutions affect the performance of an economy by their
effect on the costs of production and exchange. Together with the technology
employed, institutions determine the transformation and transaction costs that
make up total costs. Transformation costs are those associated with bringing

together land, labour and capital in the production process, while transaction
costs consist of “the costs of measuring the valuable attributes of what is being
exchanged, and the costs of protecting rights and policing and enforcing agreements.” North identifies the costliness of information as the key to the costs of
transacting. An unreliable judicial system, government red-tape and corruption
are all examples of things that would create an unfair “playing-field” for business and, thus, increase transaction costs.17 The higher transaction costs are, the
slower will be the rate of economic development. North emphasises that “impersonal exchange with third-party enforcement has been a critical underpinning of
successful modern economies.” By this he means that in advanced economies,
business is conducted through official contracts which firms can rely on the government to, when necessary, enforce.18
Applying this institutional terminology to the oil industry, formal institutions
can be seen to be the licensing regime, the procedures for issuing licences, laws
on company ownership, and contracts between production and service companies, while informal institutions are conventions, attitudes and codes of conduct
amongst government officials, and company executives and employees.
Principal-agent relations
The concept of principal-agent relations, which is part of organisational economics, is important for understanding the “institutional arrangements” in an economy.
According to organisational economics, individuals participate in organised
behaviour, pursuing self-interest, subject to bounded rationality. Self-interest is
defined as “the pursuit of personal objectives, including material gain, satisfaction
from a job well done, enjoyment of leisure and of challenges, and the exercise of
responsibility.” Subject to bounded rationality means that individuals “act under
the constraints imposed by their intellectual capacities.”19 These characteristics
lead to two major classes of organisational problems. The first, technical-administrative problems, derive from individuals who are limited in their ability to make
decisions because of, for example, incomplete information. The second, agencymanagerial problems, derive from individuals who, while pursuing self-interest,
may pursue objectives differing from those established for the organisation.20
To cope with agency-managerial problems, an organisation must establish
rules concerned with setting up subgroups within the organisation, assigning
tasks, coordinating activities, monitoring activities, and describing the nature of
incentive arrangements. These rules, along with such external factors as cultural
and historical influences, largely determine the nature of the organisation and lead
to basic and important distinctions among economic systems.21
Except in the case of very simple organisations (such as an owner-operated

company with no employees), a hierarchy is present. Superiors (principals)


Introduction 7
establish objectives and issue orders to subordinates (agents) who are supposed
to carry out assigned tasks to achieve organisational objectives. When both the
principal and the agent are motivated towards the same goal, or when the performance of the agent can be easily monitored, conflicts between the principal and
the agent are unlikely to arise. However, when parties have different goals and
when monitoring is difficult, conflicts between principal and agent – referred
to as an agency problem – are likely, and these have implications for economic
development.22
Growth
Gregory and Stuart identify two types of economic growth: extensive – which is
derived from the expansion of inputs of land, labour and capital – and intensive
– which occurs as a result of productivity improvements generated from sources
such as organisational and technological change, and qualitative improvements in
inputs. The Western experience shows that the process of economic development
involves a transition from extensive growth to intensive growth, and long-run
growth must come from efficiency improvements because inputs cannot continue
to expand indefinitely at a rapid pace. Meanwhile, “dynamic efficiency” is the
ability of an economic system to enhance its capacity to produce goods and services over time without an increase in capital and labour inputs.23
Technology
Ronald Amann defines “technology” as the ranges of equipment, mechanisms and
processes which transform raw materials into products or services. The extent to
which technology is effective is determined by the quality, output, novelty and
profitability of the final product. In a broader sense he also states that technology also includes the skills of the workforce.24 Robert Millward’s study of the
development of private and public enterprise in Western Europe is notable for
highlighting the role of technology as opposed to ideology in driving changes in
economic organisation since the early nineteenth century.25 As noted above, this
is also the case in the oil industry.

Structure, methodology and sources
Structure
This book is structured chronologically. Chapters 2, 3 and 4 consider the oil
industry during successive periods in Russian history between 1861 and 2017:­
Chapter 2 looks at the late-tsarist economy, 1861–1917; Chapter 3 at the Soviet
economy, 1917–1991; and Chapter 4 at the post-Soviet economy, 1992–2017.
Chapter 2 begins with an overview of developments in the Russian economy,
and in the oil industry in the late-tsarist period. Separate sections then consider
the role of the state in industrial leadership, business-state relations including the


8  Introduction
presence of monopolies and/or cartels, the role played by foreign participation,
and the level of technology in industry.
Chapter 3 begins with overviews of the Soviet planned economic system – both
in theory and how it functioned in practice – and of the main developments in the
oil industry during the period. The issues of enterprise management, efficiency
of resource use, and technological development are then examined in detail in
separate sections.
Chapter 4 begins with an overview of developments both in the Russian economy and in the oil industry in the post-Soviet period. The roles of big business, the
state and foreign participation in the oil industry are then considered separately.
A further section examines enterprise performance in post-Soviet Russia through
the perspective of the oil industry.
Chapter 5, the conclusion, reviews the book’s findings, highlights some of the
similarities and differences between the different periods, makes several comparisons with the oil industry in the US, and presents some broader conclusions about
long-run economic development in Russia and what we can expect going forward.
Methodology and sources
The research methodology used in this book consisted of both qualitative and
quantitative approaches. Qualitative approaches included analysis of primary and

secondary sources, and interviews. Quantitative approaches involved the analysis
of data on the production, ownership, financial indicators and geographical distribution of the Russian oil industry.
In terms of primary sources, I examined documents in the State Archive of
the Russian Federation (GARF), in Moscow, about the Soviet oil industry. From
Russian libraries – including Russian State (formerly Lenin), State Polytechnic
and Moscow State University – as well as the inter-library loan service at the John
Ryland’s Library at Manchester University, I was able to locate important texts in
Russian about the late-tsarist and Soviet oil industry written by direct participants
(these are discussed in the literature review and listed in the bibliography, along
with the secondary sources). Academic research that I undertook in Moscow in
1995 for my MPhil thesis, followed by my business work there in 1997–2004,
enabled me to collect a considerable number of relevant primary documents on
the post-Soviet oil industry including laws, government reports on the restructuring of the sector, company and brokerage reports and company financial accounts.
Some of the research I undertook as part of my work during that time was also
directly relevant for this study (listed in the bibliography under primary sources).
In terms of interviews, I conducted a total of 26, 5 in 1995 in Moscow – when
I was researching first phase privatisation of the sector for my MPhil – and 21
in 2006–2009 for my PhD. These were mostly in Moscow, though several were
also in West Siberia, the Urals and London (all are listed). The interviewees were
mostly a mix of Russian and foreign expatriate oilmen working for integrated
oil companies, exploration and production companies, and oil-field service companies. Many of the interviewees had decades of experience working in the oil