International Business-LUKOIL case study
International Business-LUKOIL case study
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.
- The use of the comparative advantage theory can support the oil exporting advantages of Russia. Justify your answer.
- 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.
International trade theories argue that nations should open their doors to trade Conventional free trade wisdom says that by trading with others, a country can offer its citizens a greater volume and selection of goods at cheaper prices than it could in the absence of it. Nevertheless, truly free trade still does not exist because national governments intervene. Despite the efforts of WTO (World Trade Organization) and smaller groups of nations, government seems to be crying foul in the trade game now more than ever before.
We see efforts at protectionism in the rising trends in governments charging foreign producers for “dumping” their goods on the world market. Worldwide, the number of anti-dumping cases that were initiated stood at about 150 in 2014, 225 in 2015, 230 in 2016, and 300 in 2017.
There is no shortage of similar examples. The US charges Brazil, Japan, and Russia with dumping their products in the US market as a way out of tough economic times. The US steel industry wants the government to slap a 200 percent tariff on certain types of steel. But car makers in US are not complaining, and General Motors even spoke out against the anti-dumping charges — as it is enjoying the benefits of low cost steel for the use in its auto production. Canadian steel makers followed the lead of the US and are pushing for anti-dumping actions against four nations.
Emerging markets too, are jumping into the fray. Mexico recently expanded coverage of its Automatic Import Advice System. The system requires importers (from a selected list of countries) to notify Mexican officials of the amount and price of the shipment 10 days prior to its expected arrivals in Mexico. The ten day notice gives domestic producers advance warning of incoming low priced products so they can complain of dumping before the product clear customs and enter the market place. India is also getting onboard by setting up a new government agency to handle anti-dumping cases.
Why dumping is on the rise for the first place? The WTO has made major inroads on the use of tariffs, slashing them across every product category in recent years. But the WTO does not have the authority to punish companies, but only governments. Thus the WTO cannot pass judgments against individual companies that are dumping their products in other markets. It can only pass the rulings against the governments of the country that imposes anti-dumping duty. But the WTO allows countries to retaliate against nations whose producers are suspected of dumping when it can be shown that:
- i) The alleged offenders are significantly hurting the domestic producers.
- ii) The export price is lower than the cost of production or lower than the home market price.
Supporters of anti-dumping tariff claim that they prevent dumpers from undercutting the price charged by the producers in a target market and driving them about of business. Another claim in support of anti-dumping is that it is an excellent way of retaining some protection against the potential dangers of totally free trade. Detractors of anti-dumping tariffs charge that once the tariffs are imposed they are rarely removed. They also claim that they cost companies and governments a great deal of time and money to file and argue their cases. It is argued that the fear of being charged with dumping causes international competitors to keep their price higher in the target market than would have otherwise be the case. This would allow domestic companies to charge higher prices and not loose market shares forcing consumers to pay more for their goods.
- Based on the above case study, evaluate the effects of dumping on domestic business and also on the consumers
- As we have seen WTO cannot currently get involved in punishing individual companies for dumping. Its action can be only directed towards governments of countries. Do you think this is a wise policy? Justify your answer.