Lukoil as a privatized exporter and International Trade

Lukoil as a privatized exporter and International Trade
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Table of Contents
 TOC \o "1-3" \h \z \u  HYPERLINK \l "_Toc388290213"
Introduction  PAGEREF _Toc388290213 \h
4
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Theories of trade  PAGEREF _Toc388290214 \h
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Impact of political and economic conditions on global oil markets and prices  PAGEREF _Toc388290215 \h
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International trade and competitive advantages  PAGEREF _Toc388290216 \h
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Factor mobility and exports  PAGEREF _Toc388290217 \h
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Foreign direct investments  PAGEREF _Toc388290218 \h
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Factor mobility  PAGEREF _Toc388290219 \h
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Factor movement and international trade  PAGEREF _Toc388290220 \h
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Abstract
Lukoil is the largest privately owned gas and oil company, and is critical to the Russian economy, which relies heavily on natural resources to improve growth prospects. Russia has large proven reserves and this will improve the country’s competitiveness and terms of trade as demand for oil grows. Nonetheless, there are political risks on the Russian economy from severed relations with Ukraine and the West following the Crimean annexation. Lukoil needs to export and improve their operational efficiency to compete with Western oil companies, which have better technology. Furthermore, international trade is critical to growth of the Russian economy and competiveness in the Russian oil and gas sector. Overall, Russia needs to improve the business environment and ease factor mobility to increase foreign investors’ confidence.
PART A
Introduction
The Russian real GDP was 3.4 % in 2012, but in 2013 it slowed down to 1.3% (World Bank, 2013). The biggest challenge for the economy was lack of structural reforms, and this has negatively impacted on investor confidence and business outlook. Furthermore the Crimean crisis has complicated Russian’s role in Eastern Europe and Central Asia. Lukoil has the biggest reserves of oil among privately owned oil and gas corporations globally, and the Russian Federation is heavily dependent on natural resources for growth. Though the company was originally a state owned corporation in 1991, the company recently been privatized, but the government is still a key stakeholder in the company. This paper focuses on various aspects of Lukoil as a major player in the Russian oil industry, Russia as a major oil producing country, it will then highlight on production factors, their relationship with international trade and offer recommendations.
Theories of trade
In the case of Lukoil, absolute and comparative advantage explains the company’s position. Market forces affect the prices of oil, and since the company controls 2.1 % of global oil production increase in oil prices has a positive impact on the Russian economy and vice versa. Russia has absolute advantage because of oil reserves and vertical integration of the industry. Furthermore, Russia has acquired more clout in the global economy; the factor proportions theory also supports the country’s position as a leading oil supporter. Showing that there are more discovered oil reserves in comparison to Saudi Arabia, the biggest oil producer and this has improved advantage in the global oil market. The country’s policy focused on former Soviet republics shows that the similarity theory applies. Equally, the company has a competitive advantage as there has been increased global demand for oil over times, and the country has also improved supporting industries as well as factor conditions.
Impact of political and economic conditions on global oil markets and prices
Both political and economic factors influence oil markets and prices as OPEC make oil supply uncertain. Besides demand and supply having a huge impact on oil prices, perceptions on future trends affect the oil markets (Global envision, 2007). For instance, following the Crimean crisis, there were fears that oil sales to Europe would slow down and such uncertainties increase oil prices. Though, oil prices have on an upward trend, the prices fluctuates in response to the global economy and geo political factors affecting the major oil producing countries. Furthermore, supply quotas also affect the oil market and as the demand increases the prices rise if the quotas are maintained (Global envision, 2007). Additionally, the war in Iraq and unrest in Libya have led to increased oil prices as oil production fell.
International trade and competitive advantages
Productive factors influence the international trade, whereby companies and countries focus on efficiency to gain a competitive edge in the international market. Through having competitive advantage a company is able to outperform rivals through strategic advantages. The proven oil reserves provide an opportunity for Russia and Lukoil to gain both domestic and international competiveness. In any case, globalization has related to increased linkages in the world economy and having competitive advantage at the international scene improves the company’s profitability. Similarly, competitors with competitive advantages may outshine Lukoil, and hence the local Russian companies need competitive advantages to operate on a global scale. It would also be easier to invest outside Russia if there are competitive advantages, and this can be enhanced through increased efficiency, better technology and marketing skills.
Factor mobility and exports
Factor mobility entail...