With its enormous energy resources, Russia should be a major center of foreign investment - but it is not. A cumbersome bureaucracy, an immature market and, in many regions, a deteriorating infrastructure create obstacles to doing business. In addition, political and financial turmoil have kept oil producers and investors away from Russia for the past 5 years, resulting in investment levels in the country's oil industry that are well below world standards. Consequently, Russia produces less oil today than 10 years ago, despite having the world's eighth largest known reserves, surplus production and a growing retail market.
However, many positive developments taking place should give investors and business executives cause to reconsider their investment strategy in the Russian oil industry:
• Russia's economy has surged since rebounding from the August 1998 financial crisis. Growth topped 8% in 2000 and should exceed 4% in 2001.
• Key governmental reforms are under way. New regimes for personal income tax and value-added tax took effect in January 2001, and other changes on the agenda include corporate profit tax reform, pension reform, judicial reform and clarification of the roles and responsibilities of the central and regional governments.
• Fewer business transactions are being conducted through barter - less than 20%, down from almost 50%. The increased monetization of the economy has improved tax collection and allowed greater financial transparency and more open business competition.
• Russian companies are increasingly implementing US generally accepted accounting principles, hiring foreign auditors and conducting their business practices more transparently.
These positive trends have prompted Russian companies to pour money into the domestic oil industry. During 2001, Russian oil companies will invest some US $6 billion in oilfield modernization. That capital infusion will allow Russia to produce a surplus of between 366.5 million and 733 million bbl of oil and as much as 586.4 million bbl of refined oil products per year by 2005. The sale of this surplus on world markets is likely to generate substantial profits.
International investors and companies can capitalize on these trends in a variety of ways, but most profitably through strategic alliances with Russian energy companies, equity and portfolio investments, and foreign direct investments in projects. The Tyumen Oil Co. (TNK) encourages foreign companies to seriously consider partnerships with established Russian companies as a favored method off participating in the Russian market. Partnerships enable foreign investors to gain a firm foothold in the growing Russian market and achieve substantial long-term return on investment. Russian companies, in turn, benefit from the technical and marketing expertise of global oil companies, as well as much-needed capital resources.
TNK has pursued the partnership model successfully, establishing long-term relationships with Halliburton and ABB Lummus Global, among others. TNK's partnership with Texaco, through which it will co-brand and sell its oil products at Texaco StarMarts - Texaco-branded automotive service centers, the first of which opened in Moscow in September - is a good example of how this model can work.
Clearly, more opportunities to participate in production, refining and retailing will become available for international investors and companies as the Russian oil industry expands. But without the levels of investment that only foreign partners can provide, the Russian industry will not realize its full potential, and in the end, will not produce the results many experts envision.

Simon Kukes is president and chief executive officer of Tyumen Oil Co., Russia's third largest oil company. He is a director of Parker Drilling Co. and a senior visiting fellow at Princeton University in the United States.