Question

Case Study-1

LUKOIL is the largest oil company in Russia. The company is also the second biggest owner of proven resources in the globe. The company was found in Moscow, Russia, the year 1991. As of 2019, LUKOIL produced 102.65 tons of oil. Currently, LUKOIL accounts for more than 19% of the total production of crude oil in Russia with its profits being USD 192 billion as of 2019. This report is aimed at discussing the trade strategies of LUKOIL as a privatized exporter of crude oil and analyzing the various risks that may be faced by Russia as a key oil exporting country.

It can be identified that the current situation of the oil exports of Russia is that the country is in a competitive advantageous position over the foreign counterparts. Due to the high quantities of crude oil reserves present in the country, the nation has a natural inherent advantage related to having sufficient accumulated oil resources. When observing the oil export system of Russia, it can be identified that a large part of the oil export in the economy is headed by the local countries like Kazakhstan and Azerbaijan. This information helps to establish that the Country Similarity theory can be used to explain the current position of the country as an oil exporter. This theory establishes that the majority of trade carried out between a home country and other countries should be with the nations which are at similar positions of economic performances as compared to the exporting country. The Porter’s diamond of national competitive advantage is another main trade theory that can be used to explain the position of Russia as an oil exporter. The demand for oil has increased across the world and continues to increase on an accelerated basis. In this scenario, Russia remains in a competitive advantageous position due to the availability of high reserves of oil in the country.

Theories of trade that are not relevant for explaining the position of Russia as an oil exporter are the Mercantilism theory which suggest the encouragement of exporting and discouragement of importing practices and the theory of countries which suggests that large countries are self sufficient in nature which is not true in case of Russia because the economy is largely driven by exports. The PLC theory of trade is also irrelevant in this case because oil is considered as a natural resource that is more of a necessity than a desire or luxury product.

Over the last decade, the oil industry in Russia has experience major changes. The economy of Russia has experienced significant growth in its Gross Domestic Product (GDP) on a year on year basis. The majority of this exceptional economic growth in the country can be accredited to the most valuable natural resource of the country which is crude oil. The oil industry of Russia accounts for 25% of the total GDP of the nation and 40% of the export values in the country. Political factors that have affected the growth of the oil industry include government regulations, quotas and embargos imposed by OPEC countries, trade sanctions, like the sanctions imposed on countries like Iran etc. The economic factors that largely affect the global oil markets include the economic uncertainties caused by low economic performances of nations, less disposable incomes and Purchasing Power parity (PPP), high levels of unemployment etc. which affect the oil industry and oil exports at both macro and micro levels.

In spite of the tremendous success of the crude oil industry in Russia, the country is now looking for new strategies to reduce the risks associated with the extreme dependence on oil export and the heavy fluctuations of oil prices in the global markets. Due to this, the major oil companies like LUKOIL are engaging in new international trade management strategies like foreign investment and expansion as the ways of reducing the impacts of political uncertainty, fluctuating oil prices, changing export values and other risks related to the oil industry. It can be said that for both LUKOIL and Russia as oil exporters, creation of competitive advantage would be the primary key for determining the level of success that Russian oil can achieve in the global oil markets. The fact that Russia has much higher resources of crude oil than the other oil producing and exporting nations is definitely a source of competitive advantage for the country but does not guarantee long term success. For succeeding in the international trade markets, the Russian oil companies like LUKOIL should display greater efficiency that would help them to create higher competitiveness. Foreseeing the profits and opportunities in importing and exporting activities would be another key strategy to ensure the success of the nation as a viable trader. The use of the comparative theory can uphold the oil exporting advantages. Since Russia produces mass amounts of crude oil, therefore, it should prevent other countries to occupy in the market with FDI (Foreign Direct Investment) strategies so as to protect the exporting economy and its natural resources.

The relationship between exports and factor mobility is strongly integrated in the case of LUKOIL. The company use large amounts of financial resources, equipment and trained human resources. Also, LUKOIL employs high amounts of investment efforts and capital in the production areas which are most capable of making profits. The company experiences high factor mobility in the export systems due to the fact that it exports oil to various geographical locations across the world.

The roles assumed by the Russian government and the Cost Rican government for using trade to achieve the national economic goals are distinct in terms of the use of strategies and regulations. The Costa Rican government has developed acquired skills and talent within the oil industry of the country. In contrast, the Russian government has adopted the strategy of exploiting the global demands of oil by controlling on the surplus natural oil reserves in the country. Also, the Costa Rican government has transformed the economy by using high technology manufactured products and underplaying the export of natural resources. On the other hand, Russia has transformed the economy by shifting the control of the industry from the state owned businesses to the more competitive and efficient private enterprises.

To conclude, it can be said that there are many limitations in the ways of performance and success in the global oil industry. As for companies like LUKEOIL, the main key to success would be competing in the industry through strategies like efficiency achievement in all parts of the supply chain including extraction, refining as well as distribution of oil. Also, the country and the oil companies should focus on protecting the natural resources from foreign countries and companies which may try to exploit these resources.

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Required Question

Question 01: The use of the comparative advantage theory can support the oil exporting advantages of Russia. Justify your answer.

Question 02: The Porter’s diamond of national competitive advantage theory can be used to explain the position of Russia as an oil exporter. Justify your answer.

Answer 1

Answer 01:

The use of the comparative advantage theory can support the oil exporting advantages of Russia. This is very true for Russia because the oil extracting and oil exporting has created a competitive advantage to the Russia nation and helped the nation to increase its GDP significantly. The Russia nation has the oil resources which are rare resources and have high demand in the global market. Most of the nations in the world are lacking for oil resources and they are importing oil from other nations for meeting their domestic needs. Thus oil is a mandatory need for any nation and if a nation is self dependent in oil and fuel management, then he can be competitive in the global market. Thus Russia is self dependent for their crude oil needs and he has extra capacity which can be used for exporting to other nations so that they can fulfill the requirements of other nations. Thus this shows that Russia has developed the competitive advantage in the global market due to the presence of the oil resource and exporting the crude oil to other nations in the world.

Answer 02:

The Porter’s diamond of national competitive advantage theory can be used to explain the position of Russia as an oil exporter. This is very true that Porter’s diamond of nation competitive advantage theory can easily explained the competitive position of the Russia in the global market below

· Chance – The chance is that Russia has the crude oil capacity and it can explore it as a great chance for developing the competitive advantage over others.

· Firm strategy, structure and rivalry – Crude oil is a mandatory requirement for any nation and the Russia can develop the firm strategy, structure, rivalry such that it can gain the competitive advantage in the world market.

· Factor conditions- Russia can understand the global factors for crude oil requirements and can make best suit for their interest. Hence can gain competitive advantage in global market.

· Demand conditions- Russia can analyze the demand conditions and can make use for developing the competitive advantage in world.    

· Government support- Russia will get the government support from other nations as well in building the competitive advantage in the world market.

Thus we can say that the crude oil resource availability for Russia is helping it to gain the competitive advantage in the global market.