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'sfirst 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 exploration of natural resources, granting a legal right for joint ventures with 30% or greater foreign participation to export 100% of their oil, stipulating only that exploration and extraction licenses be granted on the basis of public bid or auction had been passed. Despite rapid attempts to create a Western-style legal frame work, Russia's legal system remained underdeveloped, lacking any serious foundation of contract, property, or corporate law. No Western investor could be confident of how the laws would be interpreted, or on what grounds legal decisions would be made. Tax was also a big problem bothered foreign investors. The Russian Subcommittee on Taxation acknowledged that taxes absorbed roughly 52% of the gross revenues of petroleum projects or even as high as 75% …

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