::: RUSENERGYLAW Journal ::: #4'2005

RusEnergyLaw JOURNAL • Archive/4'2005

EDITORIAL

Professor Thomas W. Wälde
Jean-Monnet Chair, Centre for Energy, Petroleum and Mineral Law and Policy University of Dundee

Dear Colleagues,

This issue raises very interesting questions – not only for or in Russia.

First, the question of how to manage the political, fiscal and legal situation post-privatisation. Privatisation in relatively chaotic circumstances can never be something perfect and correspond 100% to ex-post wisdom expressed in international agency studies and economic theory books. Sometimes it is better to leave defects of privatisation as they are as trying to remedy them ex-post can cause more upset and undermine the effective rule of law that is a precondition for any long-term prosperity. There are, as experience teaches us, however some reasonably successful ways to manage serious post-privatisation resentment and political dissatisfaction. One needs here to bear in mind that such resentment only arises if privatisation was for the purchaser successful. If privatisation buyers lose money, they never get compensated and sink into mere oblivion. For those who are seen as successful, one needs not only to ask: Was it, with hindsight, too cheap for them to purchase assets that later turned out to be very valuable, but also: What was the risk, the confusion, the uncertainty as the time they bought? In my view, the UK solution to this post-privatisation frustration is instructive: In 1997, the incoming Labour government under Tony Blair levied a non-discriminatory “windfall” tax on privatised utilities. The tax was not prohibitively high; though substantial enough to create political support among the beneficiaries. It was levied in a non-discriminatory way; and all the privatised utilities continued to prosper. Clearly an approach that worked.

Secondly, this issue discusses the evolution of the legally little protected administrative subsoil license towards a contractual format, with greater legal security and protection. I had advised, in 1995, that the production-sharing contract reform – so complex and controversial – would not be necessary if the subsoil license would be converted to a license contract, with legal protection, including access to a neutral system of dispute settlement for foreign investors. The steps now taken are therefore in my view clearly into the right direction.

In 1992, I had experienced the enthusiasm of the “Houston project”, heavily subsidised and controlled by US oil companies, to carry out a reform of the Russian oil legislation. Under the critical impression of what was then done (little) and intended (much – and largely unrealistic illusions of Texan control over Russian oil and gas), I came to the conclusion that the future for international oil companies in Russia was in the main limited to be minority partners for the emerging large Russian companies. I was vehemently opposed at oil industry conferences. My view was in the end published by OPEC (Bulletin, 1994) and observing the developments reported in this issue with respect to production-sharing law, subsoil law and Gazprom, I feel vindicated.

The issue raises also the importance of taxation of oil and gas. There is a tendency now – not only in Russia, but also in other post-privatisation energy situations – to use the lever of tax law to undermine earlier investment made in confidence in the legal predictability of the fiscal regime applicable. I refer here in particular the quite dangerous instrument of disregarding legally valid transactions on the basis that their underlying intention was to minimise taxes). Such anti-avoidance rules have there place in outright fraud, but an incautious and excessive reliance on them risks to undermine confidence by business in the rule of law. It is legitimate for companies to try to minimise taxes; tax avoidance is legitimate, while tax evasion is not. It is often not easy to draw a “bright line” border. But is it essential, for a rule of law regime, to be extremely careful in not using general legal principles with an abuse potential to destroy the credibility of the legal system.

The issue raises the significant legal reform that has taken place in Russia over the last 15 years – arguably the most extensive legal reform in Russian history. Legal reform is fine; but one needs to “fill” the formal legal reform (i.e. new laws on the book) with a legal, commercial and institutional spirit to make them function. Otherwise they remain just a veil. I have discussed this in an article on Legislative Reform in Transition Countries (International and Comparative Law Quarterly 1994) when reform had started, but it seems as important now as it appeared to me then. Legal reform – this is the experience of the European Union – is always subject to domestic political tensions. It is therefore necessary to stabilize any legal reform, to “anchor” it in international disciplines, mainly those provided by treaties, the WTO and the Energy Charter Treaty. European Integration, the most visible economic and political success of the last 50 years, would not have worked if countries had been left to respect the treaties on their own, without the existence and effective enforcement by the European institutions, mainly the EU Commission and the European Court of Justice. I wish to congratulate the authors and contributors to this most illuminating, timely and relevant issue of the prestigious Russian Energy Law Journal.

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