WHITE NIGHTS AND POLAR LIGHTS

1. How important is the acquisition of Russian Oil to a Western oil firm? How would you value the worth of this acquisition for different companies?

Let’s first take a look at the natural advantage of investment in oil industry in Russia. Russia is the world’s largest single producer of crude petroleum. Its reserves of petroleum were the seventh largest in the world and its reserves of natural gas the largest. Moreover, Russia is located directly next to the lucrative European and Japanese markets and boasted an existing network of pipelines and refineries capable of serving Western Europe. Investment in Russian oil seemed relatively free of the currency constraints that dogged other potential investments since oil exports could presumably be priced and sold in hard currency.

But in the middle of 1990s, the political risk increased. The government had passed measures taxing foreign owned ventures nearly to the point of bankruptcy. With the unravelling of Soviet Union, the oil market was reopened to the outside world and permitted to woo foreign investment again. To facilitate investment, the law that allowed for foreign participation in the

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This is a strategy between the first-mover strategy and the wait-and-see strategy. However it is not unreasonable to assume that for instance the price of government bonds are correlated with the political risk.

High risks: Under the conditions that existed in Russia, any investment was vulnerable to heavy taxation and possibly expropriation, soaring inflation and fluctuated exchange rate risk, and unclear legal system. All strategies have their positive and negative aspects. The Conoco company is somewhere in between as well as their strategy. Of course, the company did not exclude the Russian market for ever. The Mobile Company can afford to wait with its entrance in Russia since they are stabile and recognized Oil Company in the world market. If the Russian government expropriates it is likely that this will be looked upon favourably by international investors and there will be less demand for buying roubles in order to invest which implies that the rouble will depreciate against the dollar which means that the costs are decreasing for the company as the Cost for increasing risk of expropriation.

The best strategy

It is hard to evaluate which of these strategies is the wisest to use in the ex-ante perspective. Another way to hedge is to have better relations with the local authorities maybe include people with political influence in the board of the company. Another way to hedge their investment is to make the Russians dependent on their technology i. Which one is the wisest? Why?

Phibro strategy

Phibro applied first mover strategy in the Russian oil market. there are no guarantees that the final investment will behave as the smaller ones undertaken in the beginning. The strategy gives the company opportunity to experiment on the market and find the “optimal” investment.

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