The CAS for Russia (#24127-RU, May 14, 2002) emphasizes the importance of improving the business environment and enhancing competition, including encouraging reform in the energy sector and increasing effective financial intermediation and opportunities for entry and growth of new firms.
Investment in the natural gas sector is a key part of IFC’s oil and gas strategy. IFC’s involvement would stimulate the competition in the natural gas sector, currently dominated by Gazprom, and support a relatively small, local company (Russia’s natural resource sector is dominated by large companies). With a recent consolidation in the oil sector and formation of world-scale companies, it is even more important to support the development of smaller, local players who are willing to develop natural gas fields that large companies are not.
IFC will play a role in:
- supporting the development of a locally-owned and operated company, which provides employment in the region,
- providing long-term financing to the company, otherwise unavailable to it,
- advising Novatek on corporate governance issues, and
- helping to streamline Novatek’s social contributions to the indigenous people in the area of the project.
As this is the first private-sector natural gas financing in Russia, IFC’s involvement will have an important demonstrative effect – it will indicate that IFC supports the role of private companies in Russia’s natural gas sector, and this could encourage other local, private players to participate. Finally, IFC’s investment will increase the supply to the domestic Russian market of a clean, environmentally-friendly source of fuel.
IFC plans to monitor the developmental impact of employment, assistance levels to indigenous peoples, and payments made by Novatek to local and federal governments.
- Environmental and Social Benefits
The 2002 CAS for Russia also emphasizes the importance of mitigating environmental and social risks, particularly through addressing environmental hazards and improving environmental management; and improving the design, targeting, administrative capacity, and financing of social protection programs. IFC’s involvement in this project supports this pillar of the CAS by bolstering the Company’s efforts towards improved environmental and social management.
From an environmental perspective, IFC is supporting YNG’s efforts to manage operations to international environmental, health, and safety standards. The Novatek Group is committed to implementing a Corporate Environmental Management System in line with ISO 14001 standards. Additionally, YNG will complete a Safety and Operability Study of all its operations, workshops, support services, and transport. An Occupational Health & Safety Management System in line with OHSAS 18001 to ensure ongoing management of worker health and safety is a key element of the operations.
- Benefits to the Community
IFC has helped the company prepare an Indigenous Peoples Development Plan (“IPDP”), which places emphasis on providing assistance to nomadic Nenets, who are normally difficult to support in comparison to more settled Nenets.
As with other oil and gas companies in the Yamalo-Nenets Autonomous Region, YNG has agreements with the local (‘raion’) governments and the local branches of the regional indigenous NGO to provide benefits to the local communities and reindeer breeders. In cooperation with the Nadym and Tazov region, YNG is committing to programs for university scholarships, assistance to local hospitals and boarding schools, including helicopter time to move the children of reindeer herders to and from the boarding schools, support for the traditional economy and medical care for migrating herders. Support for the traditional economy will include purchasing fish and reindeer meat for use by staff of the company and finding new markets for traditional products. The company also assists in the delivery of foodstuffs to herders, who do not have access to shops. YNG is also providing support for educational and social safety net programs undertaken by the local branches of Yamal for Descendents, the regional non-governmental organization representing the local indigenous peoples.
Novatek has committed to publishing annually the amounts paid to local governments, NGOs, and other recipients of funds associated with indigenous peoples. This information will be distributed to communities within the region by local news outlets and the Yamal for Descendents local branches.
On its own, YNG will potentially provide, after further consultation, a service center for reindeer herders migrating through its area. Additionally, it will be supporting a development plan for Nakhodka, a community next to its license area, and further field research on the migratory herders passing through its production and license areas. In all, YNG is committing to $5.3 million in expenditures for these programs, including the programs in association with the governments and NGO, over the five years from 2005 to 2010.
- Benefits to the Government
The IFC-financed project will be a source of tax revenues to both the federal (albeit a small portion) and local governments. According to IFC base case calculations using a production scenario of 9 bcm/y, an average of approximately $40 million per year from the project will accrue to governments in the form of production taxes, excise taxes, profit taxes, export duties and other payments over the life of the project license (until 2020). About 11% of the tax revenues generated from the project will go to local governments while 89% will go to the federal government. The Novatek Group publishes taxes paid to the government, including production taxes, excise taxes, property taxes, and others, in its annual audited financial statements.
- Governance Context
The IMF and the World Bank are both involved in Russia, though to a limited extent given the country’s high foreign exchange reserves. The 2002 Russia CAS suggests strengthening public sector management by enhancing accountability mechanisms and information flows within and across different levels of government; improving fiscal management at the national and sub-national levels; and improving the efficiency and quality of public service delivery. In 2003, IMF commended Russia for sound macro-economic policies. Along with recommendations for continued structural reform, management of oil revenues and in other areas, IMF also welcomed decisions taken to proceed with new data and fiscal transparency. In 2004, IMF made a number of recommendations on the operation of the oil stabilization fund set up to manage oil revenues resulting from prices above US$20/bbl. The stabilization fund has played a role in helping Russia deal with recent windfalls from high oil prices. In its Report on the Observance of Standards and Codes (ROSC) Fiscal Transparency Module (August 2004), IMF Staff found that Russia had made considerable progress in fiscal transparency and financial management since 1999, although a number of important reforms remain to be undertaken.
The revenues contributed from this project to the federal government are relatively small with respect to the total revenues of the Russian government. In addition, 11% of the taxes from the project go to the local governments, and a portion of these are earmarked for the development of indigenous communities over and beyond what Novatek has already committed to spend. Given IFC’s role and developmental impact and benefits from the project to the community and local government, and given the overall framework of governance in which the project takes place, IFC believes this is a project in which it should invest.
