Russian oil companies are investing primarily in the regions where they operate

1 april 2016 | Rossiyskaya Gazeta

“Russian oil and gas companies are spending roughly the same amounts on social investments and charity as their western counterparts. However, in Russia those investments primarily go to a rather small number of regions,” the Analytical Center's expert Alexander Amiragyan told Rossiyskaya Gazeta, explaining that Russian oil companies primarily invest in the regions where they operate, i.e. where they extract oil and natural gas (Western Siberia) or where they process them (Western Siberia and the regions along the Volga river).

Alexander Amiragyan
Alexander Amiragyan
Department for Fuel and Energy Sector

Mr. Amiragyan believes such geographical concentration allows regions rich in oil and natural gas to capitalize on their advantageous position twice: first as a result of tax revenue from the production of oil and natural gas and then from the social investments of the companies. This state of affairs increases, in its turn, the inequality in living conditions between oil and NG producing regions and the rest of the country. However, there are exceptions: some NG companies implement projects in European Russia and the Far East where no raw materials get extracted or processed. Such projects are rather limited in scale, though.

Normally, a company enters into a socio-economic cooperation agreement with a region, and then projects are selected for that region. It has to be borne in mind, however, that oil and NG companies normally try to invest in cities where they have production sites, derricks or people, thereby, ultimately, looking after their own interests. In other words, the companies both improve the living standards for their personnel and ‘feed’ the region in the process. Engagement with local social projects across Russia also gets taken into account by the stock markets that trade in the securities of such companies.

Mr. Amiragyan believes there is a very significant difference between the social projects of western companies and those of Russian companies. Western companies direct the majority of their social investments to developing countries, Africa and Asia in the first place, to supply local communities with energy, water, basic education and basic healthcare services. In addition, the west has a much more advanced culture of doing business transparently: all social spending is funneled through special funds and direct subsidies or is incurred as measures implemented by companies at their own expense. Last year the largest social co-investment by a private foreign company was USD 585 million (or RUR 35.55 billion). In terms of percentage of sales, it is comparable to what all Russian oil and NG companies spend on social projects but in absolute terms it is almost 7 times greater, the expert pointed out.

But it has to be remembered that the main redistribution of the oil and NG rent into the social sphere happens not through social investments by the companies but through taxes and budget spending, Victoria Gimadi, the Head of the Department for Fuel and Energy Sector of the Analytical Center, added, expanding on Alexander Amiragyan’s comment. “Practically all the companies publish annual sustainable development reports in which they provide detailed information about the projects they have been working on; including information about how much money was spent on what purposes. On average, each company invests between 1 and 6 billion rubles a year in social projects,” the expert pointed out.

In November 2015, the Analytical Center prepared an energy bulletin in which the topic of social responsibility of oil and NG companies was given a thorough treatment and which notes, in particular, that large-scale social responsibility of business is a relatively new thing in the world and especially in Russia. The experts believe that oil and NG companies are leading the pack in corporate social responsibilities for several reasons: oil and NG is the wealthiest sector of the economy, and local government authorities and social movements are keeping a close eye on these companies and, last but not least, Russian oil and NG companies often have western (or ‘local enlightened’) minority shareholders and managers. Another reason for the lead can be a plan to float on western stock exchanges.