A Comparative Perspective on Russia’s Integration into Refining Industry Global Value Chains 1

Olga Klochko, Anastasia Tsareva

National Research University –Higher School of Economics, Faculty of World Economy and International Affairs, 101000 20 Moscow, Russia

Abstract

Although not all major changes in global value chains that have occurred in recent decades have been positive, economies that do participate in GVCs indisputably reap significant rewards and opportunities. Extensive study has been made of Russia’s oil-refining industry in terms of gross values, but the country’s integration into the oil refining industry from a GVC perspective has received little attention. Therefore, this paper compares Russia with the 14 other largest exporters of refined products using the TiVA database and by applying case studies to identify current trends. The result provides evidence that some indicators of Russia’s participation in oil-refining GVCs fall behind those demonstrated by non-oil producing or exporting countries.

1. Introduction

Most branches of the modern world economy operate within global value chains when interrelated stages of product creation are located in different countries. Leading researchers, scientific institutions and international organizations engage in a wide-ranging discussion concerning these value chains — whether they are global or regional, expanding or contracting or simple or complex (involving one or more border crossings). However, it is obvious that today a country’s economic development depends not on the supply of final goods and services to the global market, but on taking competitive positions within a GVC and moving up to the most profitable stages in terms of cost accumulation (Nicita et al., 2013; UN, 2007; Weil, 2013).

Improving a country's position in the complex world of GVCs requires analysis to identify the potential for GVC participation across industries. There are no universal industry formulae for inclusion into GVCs, and there are several reasons for this:

value added is distributed differently between various stages of the chain, depending on the industry;

a country can occupy different positions in GVCs across different industries - with low / medium / high value added;

in each industry or segment, a country has different comparative and competitive advantages and, as a result, different opportunities for moving through GVCs to more profitable stages;

1 Support from the Individual Research Program of the Faculty of World Economy and International Affairs at National Research University Higher School of Economics is gratefully acknowledged

industries make different contributions to the country's GDP, making it necessary to set priorities when managing GVC participation.

It is advisable in this regard to develop a policy for improving a country's position in GVCs from the bottom up. This should begin with studying the GVCs across separate sectors of the economy, then identifying the relationships between them and their groups and, finally, creating a comprehensive picture of the country's inclusion in GVCs and developing a system of measures to improve its GVC integration.

The assessment of a country’s GVC participation was discussed in Taglioni and Winkler (2016). It is first necessary to look at a country’s top 50-100 export and import products to determine its GVC potential. Gross trade flows can then be broken down in different ways (e.g. into domestic and foreign value added). Also, one should look at the determinants of GVC integration at the country, sector and firm levels. Finally, the analysis can assess the impact of GVC integration on economic and social upgrading (Taglioni & Winkler, 2016).

Despite the importance of the analysis of sectoral GVCs for economic policy and a large number of sectoral studies for different countries, primarily in the electronics (Shin et al., 2012; Sturgeon & Kawakami, 2010; Lu, 2017; Sturgeon & Kawakami, 2011), textile (Morris et al., 2011; Bair & Gereffi, 2013; OECD-WTO, 2018) and automotive industries (Biesebroeck & Sturgeon, 2010; Masiero et al., 2017; Lejarraga et al., 2016), Russia has received little attention. Russian economists study the overall picture of the country's inclusion into GVCs (Meshkova & Moiseichev, 2016; Volgina & Vozmilova, 2015; Sidorova, 2018, and others), demonstrating how the main GVC indicators reflect the raw material orientation of Russian exports. For foreign researchers, Russia is probably not a priority compared to other emerging countries such as China, Mexico, Brazil and Taiwan. This is because the raw material orientation of Russian exports has changed little in several decades and its international competitiveness in the manufacturing and high-tech industries has not improved appreciably.

However, achieving an understanding of the specifics of Russia's integration into GVCs at the level of individual industries is critical for the country’s economic development. Most researchers note that GVC participation enables developing countries to enter the production of high-tech goods at the initial stage, then move up the chain and develop innovative sectors (UNIDO, 2015, Taglioni & Winkler, 2016; UNCTAD, 2013; UNIDO, 2018; UNCTAD, 2015). However, we should not forget about traditional export-oriented industries, the analysis of which in the context of GVCs might be no less important. Economic theory has long held that rich natural resource endowments are a curse for a country. However, recent studies refute this (Lederman & Maloney, 2012; Gill et al., 2014). Therefore, a GVC-based view of the Russian oil and refining industry — that accounts for almost one-half of the country's exports — is very important and can provide not only a fundamentally new perspective of the country's long-term competitive advantages, but also a better understanding of the nature of those advantages and help to identify non-obvious threats and/or hidden opportunities.

This paper analyzes and evaluates Russia's integration into oil-refining GVCs in comparison with other major world oil-refining exporters (whether or not they have developed oil production). the authors chose this industry for two reasons. First, the main raw material of refining is oil, in which Russia has an obvious competitive advantage. How effectively Russia adds value to its oil in the next stage (refining) is of undisputed interest in terms of GVCs. Second, oil refining belongs to the secondary or manufacturing sector of the economy. Thus, the results of this analysis can help provide a more detailed understanding of Russia’s GVC

participation in other industries as well, including high-tech that is critical to the country’s future.

To this end, the study sets the following objectives: 1. To define a set of indicators to assess a country's participation in oil-refining GVCs;2. To identify the bottlenecks/problem areas of Russia's inclusion in GVCs in comparison

with other oil-refining exporters;3. To propose measures to improve Russia's position in oil-refining GVCs.The Methodology section addresses the first objective, the Analysis section discusses the

second and the Conclusion includes suggestions for improving Russia's participation in GVCs.The current uncertainty in the oil sector associated with the suspension of production and

air travel due to the coronavirus pandemic and the lack of stable agreements within OPEC+ makes it even more necessary to perform a detailed analysis of Russia's integration into oil-refining GVCs to determine the most effective operational model for Russian enterprises. This article estimates Russia’s integration into oil-refining GVCs in both qualitative and quantitative terms. The results obtained from the study reveal both positive and negative aspects of Russia's participation in oil-refining GVCs. The paper also offers recommendations for companies and the state to improve Russia's position in oil-refining GVCs.

2. Methodology

2.1. Country selection

To compare Russia's participation in oil-refining GVCs with other leading exporters, we look at the 15 largest countries by export volumes in terms of value added (gross exports in coke and refined petroleum products2 in 2015). The sample includes the United States, Russia, Korea, Singapore, India, Germany, China, Saudi Arabia, Canada, Belgium, the Netherlands, Japan, Spain, Malaysia and Thailand.

We assume the presence of developed crude oil production as a key factor determining the specifics of a country's participation in oil-refining GVCs. It is correct to compare Russia’s participation in GVCs with countries that have a similar level of oil production development. However, in cases where Russia’s GVC participation differs significantly from other Group 1 countries, it is useful to compare it to Group 2 and Group 3 countries instead.

The selected countries were divided into three groups (Table 1). The first group includes countries with large oil production volumes: the United States, Russia, China, Saudi Arabia and Canada. The second group consists of India, Malaysia and Thailand — countries with oil production volumes that are moderate, but sufficient to provide their oil refining industry with raw materials. The third group includes Korea, Singapore, the Netherlands, Germany, Belgium, Japan and Spain — countries with oil production volumes close to zero and refining industries dependent on imports of raw materials.

Table 1Three groups of countries for oil-refining GVCs analysis.

Countries Gross exports in coke and Crude oil production,

2 Despite the inclusion of coke in the indicator, the share of coal-based coke and semi-coke does not exceed 4% of the chosen countries’ total production of coke and refined petroleum products, with the exception of China with a share of 11% (based on Trade Map data for 2016)

refined petroleum products, M US dollars

M tons (2017)

Group 1USA: United States 86 120 470.36RUS: Russian Federation 56 868 525.08CHN: China 13 168 191.51SAU: Saudi Arabia 13 043 507.81CAN: Canada 12 585 174.23Group 2IND: India 23 907 36.75MYS: Malaysia 9 759 32.58THA: Thailand 9 738 12.07Group 3KOR: Korea 29 253 0.03SGP: Singapore 25 517 0.00DEU: Germany 16 100 2.23BEL: Belgium 12 252 0.00NLD: Netherlands 11 081 0.96JPN: Japan 10 923 0.18ESP: Spain 10 179 0.12Sources: OECD, 2020; International Trade Centre, 2016

2.2. Data and methodological framework

We conduct research on Russia's participation in oil-refining GVCs based on two analytical approaches — input-output-based analytical approaches and industry or product case studies. These are two of the four main approaches to GVC analysis found in the economics and business literature (Jones et al., 2019). Combining the two approaches provides a more complete, up-to-date and objective picture of the country's GVC participation.

Measurement of GVCs based on intercountry input-output tables (input-output approach) makes it possible to quantify the extent to which countries are included in global refining chains. We create a system of indicators of each country's participation in GVCs based on the gross-export accounting framework developed by Koopman, Wang, and Wei (Koopman et al., 2014) that fully breaks down gross exports into separate sources of value added. All indicators are calculated based on the TiVA database (2018 edition) for 2005 and 2015 (the first and last years of the available data).

Because the TiVA data (2018 edition) ends in 2015, we use the industry case studies approach to understand the current situation and identify trends. Leading researchers use this approach most often in their works analyzing industry GVCs. Gereffi (1994) uses the case studies approach to analyze the apparel industry, Sturgeon and Kawakami (2011) use it to examine electronics GVCs and Dedrick, Kraemer and Linden (2010) employ this method to analyze the distribution of value added in Apple product supply chains. In addition, it sometimes happens that data obtained from intercountry input-output table measures do not provide a clear picture concerning the nature of inclusion in GVCs. Case studies, including interviews with industry experts and analysis of analytical materials can solve this problem.

Using the tools mentioned above, we analyze Russia's participation in oil-refining GVCs in comparison with other countries in three areas: geographical diversification, dependence of oil refining exports on foreign value added content and complex GVC linkages in 2005 and 2015.

2.2.1. Analysis of geographical diversification of refined oil exports in the global market

We computed and compared four indicators for 2005 and 2015:

• share of home region in gross exports;• share of home region in the country's foreign final demand;• share of the two largest regions in gross exports;• share of the two largest regions in the country's foreign final demand.

We believe geographical diversification of exports is an important indicator of the level of an industry’s activity in the global market. The greater the diversification, the more diverse and stable its trade links are. In this regard, a positive characteristic of engagement in GVCs would be a relatively low and/or declining share of the home region in both gross exports and foreign final demand. It should be noted that there is currently a general contraction in global value chains (Li et al., 2019) due to the decline in economic activity, the slowdown in trade liberalization, as well as to technological advances that reduce the cost of a number of operations in the home market. In this regard, the growth of the home region’s share in exports might reflect the general trend of GVC development. However, although researchers have noted a contraction of GVCs over the last 3-4 years, TiVA statistics (ending in 2015) do not yet reflect this change.

In addition, refined petroleum products are standardized goods, deliverable to any country in the world without additional adaptations or marketing campaigns. Because the oil refining industry is located in both the European and Asian parts of Russia, we also analyze the share of the two largest regions (one of which is always the home region) in gross exports and foreign final demand.

We assume that geographical diversification of exports and foreign final demand will be comparatively higher in Group 1 countries than in Group 2 and Group 3 countries.

2.2.2. Analysis of the dependence of oil refining exports on foreign value added content

We calculated three indicators for 2005 and 2015:

• Foreign value added share of gross exports;• Trade balance in value added terms;• Trade balance by foreign value added.

In the case of effective integration into GVCs, the share of the foreign value added content in oil-refining gross exports of the Group 1 countries with developed oil production is assumed to be lower than that of Group 2 countries. This is due to their ability to ensure competitiveness by using their own raw materials, technologies and equipment. Accordingly, the foreign value added share of gross exports of Group 2 countries is lower than that of Group 3 countries, whose production is wholly dependent on imports of raw materials and, in some cases, on the technologies and equipment needed to process them. Group 1 countries would achieve a positive

dynamic by reducing their dependence on foreign value added. The goal before Group 2 and 3 countries, however, depends on the processing stages and types of products they have.

The trade balance in petroleum products in value added terms (gross trade balance = gross exports - gross imports) is assumed to be positive for Group 1 countries when they are included effectively into GVCs. In other words, domestic rather than imported products will supply the domestic market. A negative balance in these countries, as well as in Group 2 and Group 3 countries, is possible if they specialize in certain types of products (the export of some products is accompanied by the import of others), or the import of oil-refining products for further processing within the country, including for later export. Only through additional case studies does it become clear whether a country with a negative trade balance has achieved effective inclusion in GVCs. In general, we believe that a negative trade balance is more likely in Group 3 countries that, because they lack raw materials, might specialize in certain processing stages and/or types of products within GVCs.

The trade balance by foreign value added is calculated by excluding domestic value added from exports and imports. The trade balance by foreign value added for Group 1 countries is assumed to be close to zero or negative if their inclusion in oil refining GVCs is effective. A positive balance of foreign value indicates the ineffectiveness of a country’s engagement in GVCs.

2.2.3. Analysis of complex GVC linkages in 2005 and 2015

When three or more countries cooperate in a single oil-refining process, the above indicators do not allow us to understand the complex relationships within GVCs. Two well-known indicators released in 2013 by OECD (Greenville et al., 2017) are the most comprehensive for determining the degree to which countries are integrated in GVCs. They are:

backward participation, calculated as foreign value added share of gross exports; forward participation, calculated as domestic value added embodied in foreign exports as

share of gross exports.

In general, it is assumed that Group 1 countries will show the lowest level of backward participation due to developed oil production and that Group 3 countries will have the highest due to their lack of domestic oil reserves.

The opposite is true concerning forward participation. Because Group 1 countries can use their own oil to develop different stages of the refining process and a large range of products, they have the highest index. By contrast, Group 3 countries — that lack oil production and face technological limitations — must specialize in certain processing stages and products, giving them the lowest index.

Summarizing the research methodology, we believe that the optimal inclusion of an oil-producing country in GVCs implies the following conditions:

• a low share of home region in gross exports and foreign final demand in comparison with other exporters of petroleum products;

• a low share of the two largest regions in gross exports and foreign final demand in comparison with other exporters of petroleum products;

• a low dependence of exports on foreign value added in comparison with other countries if the foreign value in exports originates mainly from the upstream or service sector;

• a trade surplus in petroleum products; • a trade balance in petroleum products by foreign value added that is close to zero or

negative;• a low backward participation ratio and a high forward participation ratio.

3. GVCs analysis results

3.1. Geographical diversification of gross exports and final demand abroad in value added terms

Russia is one of the largest exporters of petroleum products in terms of value added. It was the world leader from 2005 to 2007 and placed second after the United States from 2008 to 2015. According to conventional trade statistics, Russian exports of petroleum products steadily increased in 2005-2015, indicating a stable position on the world market (Analytical Center…, 2016a).

The share of the home region in gross exports and final demand abroad in Russia corresponds to the average value for Group 1 countries (Fig. 1 and Fig. 2). However, two countries in the group show a much lower dependence on the home region in gross exports — 29.4% for the U.S. and 40% for Saudi Arabia in 2015. For Russia, that figure is 56.7% and China's indicators are comparable. In the geography of consumption, all Group 1 countries except Canada surpass Russia and have a lower share of the home region in final demand abroad — the U.S. 29.5%, China 48.2% and Saudi Arabia 37.1% in 2015 (Russia 51.1%).

The situation in Canada is atypical. First, the Canadian economy is deeply dependent on the United States, its dominant economic partner. This is also reflected in the oil sector. The United States is a major investor in the Canadian oil refining and petroleum industry and Canada also invests in the United States, primarily in oil production (Statistics Canada, in press). This cross-participation leads to a high focus of the Canadian industry on the home region.

As expected, Russia enjoys a better position in this regard than the countries of Group 2 and Group 3. Of the 10 countries, only India, Spain and Japan have a lower share of domestic supply and consumption abroad than Russia has. The volume of their oil production suggests that they are integrated into GVCs more actively. The examples of Spain and Japan (Group 3) demonstrate the possibility of profitable integration into GVCs even in the absence of oil production, thus further highlighting the complexity of Russia's participation in GVCs.

Fig. 1. Share of home region in gross exports, 2005 vs 2015.Source: calculations based on OECD-WTO. Trade in value added (Edition 2018).

Fig. 2. Share of home region in foreign final demand, 2005 vs 2015.Source: calculations based on OECD-WTO. Trade in value added (Edition 2018).

The analysis of the shares of the two largest regions in gross export and foreign final demand — conducted due to the location of Russian refineries in Europe and Asia — did not provide additional conclusions. For all Group 1 countries except Canada, the share of delivery volume to their two largest recipient regions abroad is lower than Russia’s, indicating that their products have a more global presence. Among the Group 2 countries, India again stands out as a positive example. Among the Group 3 countries, Spain surpasses Russia in terms of exports, and Spain and the Republic of Korea outstrip Russia in terms of final consumption abroad.

The geographical diversification of Russian oil refining exports has increased since 2005, a positive dynamic. However, this does not put Russia in a more favorable position compared to other countries. As expected, the main trend in the development of oil refining GVCs is an increase in geographical diversification. Of all the countries, only Japan (Group 3) increased its

share of home region (or two regions) in all four indicators. The situation is also unfavorable in Malaysia (Group 2), whose two largest recipient regions were the only ones to experience a decrease in foreign final demand, while other indicators increased. Germany and the Netherlands improved the geographical diversification of their foreign final demand, despite an increase in Europe's share in oil-refining exports.

Thus, in terms of geographical diversification, Russia's participation in GVCs in comparison with other oil-producing countries is not advantageous. The only positive aspect lies in the fact that the share of the home region in exports and foreign final demand has decreased — but this is typical for most countries and therefore is not a competitive advantage.

3.2. Dependence of export of refined petroleum products on foreign value added content3.2.1. Share and structure of foreign value in exports

Russia shows a relatively low dependence of exports on foreign value added: only Saudi Arabia has less (Fig. 3). All other Group 1 countries (USA, Canada and China) depend much more on foreign value. This is due to the peculiarities of how their oil-producing industries developed (USA, China) and the presence of a dominant economic partner (Canada).

As expected, the less developed a country's oil production is, the more dependent its oil refining industry is on foreign value added.

Fig. 3. Foreign value added share of oil refining exports, 2015 vs 2005 (%).Source: calculations based on OECD-WTO. Trade in value added (Edition 2018).

The majority of the countries (9 of 15) in the sample group increased their dependence on foreign value by 2015. However, this indicator did not change in Korea and decreased significantly in four countries (the United States, Malaysia, Thailand and Singapore).

We should note, however, that comparing only two years in the given period might not provide a complete picture of the dynamics at work, for which an analysis of the other years might also be required. In Russia, the growth of export dependence on foreign value added generally tended to increase from 2005 until 2015.

To get a complete picture of the foreign value added content of gross exports, it is necessary to analyze its sectoral and geographical structure. This study only provides such an analysis for Russia because comparisons with other countries would be difficult due to the nature of each country's foreign economic relations. A competitive industry requires a well-developed technological base. The value added in oil refining is distributed incrementally — the initial stages account for a smaller share of the value and the value increases in subsequent stages (Inkpen & Moffett, 2011; Canadian Fuels Association, 2013). Thus, in the case of effective integration into GVCs, foreign value content should come mainly from the previous (upstream) industries (oil production, oil refining at the initial stages).

The growing dependence of exports on foreign value can be interpreted in different ways. On the one hand, it is possible to benefit from inclusion in GVCs due to specialization at later stages of processing. On the other hand, there may be a negative inclusion if more technologically advanced components are acquired.

The largest suppliers of foreign value added to Russian oil refining in 2015 were Kazakhstan (11%), China (10%), the United States (8%), Germany (8%), France (4%) and the United Kingdom (4%). Oil production accounts for more than 60% of the value added coming from Kazakhstan. Other countries, on the other hand, supply Russia with value added generated by services and manufacturing. The chemical industry accounts for a significant share of these countries' supplies. Germany also supplies machinery and equipment, while China provides computer equipment and metals. It is obvious that higher value added segments (in comparison with the oil refining industry) account for a large amount of the foreign content of exports.

Thus, the growth of the share of foreign value added and its sectoral and regional structure indicate that Russia’s integration into GVCs has been unprofitable. The technological level of Russian enterprises lags behind that of developed countries significantly, which leads to a low depth of oil refining and a high percentage of production of dark oil products (Eder et al., 2016). Russia purchases its main technologies and equipment from leading Western manufacturers. For example, foreign firms supply Russia with most of the catalysts (55%-70%) it uses in oil refining (Rosnanotech group, 2010; The Ministry…, 2015). It should be noted that Russian production is highly dependent on imports of power equipment (the share of imports in 2013 was 80%) (Analytical Center…, 2014). The only positive aspect of this is the fact that foreign value added share of exports is lower than in any other country except Saudi Arabia.

3.2.2. Trade balance in petroleum products in value added terms

The trade balance in refined products in Russia has a stable positive balance (Table 2). This is a predictable result, given Russia's advanced oil production and the associated competitive advantage in refining.

Table 2Exports, imports and trade balance of refined products in value-added terms (million $US).

Countries2005 2015

Exports ImportsNet

exportsExports Imports

Net exports

Group 1

USA: United States 28 305.0 63 732.9 -35 427.9 86 119.5 55 734.3 30 385.2RUS: Russian Federation

30 506.8 1 123.1 29 383.7 56 867.8 2 728.1 54 139.7

CHN: China 5 497.2 11 993.4 -6 496.2 13 167.9 29 726.1 -16 558.2SAU: Saudi Arabia 14 484.2 289.9 14 194.3 13 042.8 1 441.1 11 601.7CAN: Canada 9 210.2 10 618.5 -1 408.3 12 585.2 15 278.3 -2 693.1Group 2IND: India 10 306.7 4 611.3 5 695.4 23 907.2 7 247.4 16 659.8MYS: Malaysia 4 752.7 3 892.0 860.7 9 759.0 10 695.1 -936.1THA: Thailand 3 787.9 1 658.5 2 129.4 9 737.6 3 435.3 6 302.3Group 3KOR: Korea 12 953.8 8 238.8 4 715.0 29 253.0 14 914.9 14 338.1SGP: Singapore 17 062.1 5 765.6 11 296.5 25 516.8 19 221.7 6 295.1DEU: Germany 12 152.8 17 553.7 -5 400.9 16 100.1 31 546.3 -15 446.2BEL: Belgium 10 890.0 5 324.0 5 566.0 12 252.0 7 616.5 4 635.5NLD: Netherlands 9 109.3 4 394.3 4 715.0 11 081.1 5 696.0 5 385.1JPN: Japan 6 185.5 16 904.4 -10 718.9 10 923.1 19 081.3 -8 158.2ESP: Spain 6 122.3 7 347.2 -1 224.9 10 179.4 7 253.0 2 926.4

Source: calculations based on OECD-WTO. Trade in value added (Edition 2018).

However, it is not possible to use the trade balance as a comparative indicator of participation in GVCs. Countries of all groups show very different balances — from consistently positive (Saudi Arabia, Belgium, India and Thailand) to consistently negative (Germany, Japan and China). Other countries, such as the United States, did not demonstrate a unidirectional dynamic, but swung from a trade deficit to a trade surplus. Apparently, the balance depends on many factors — the specialization within the product range, the stage of processing on which the country focuses and how the imported petroleum products are used (for the domestic market or for further processing).

3.2.3. Trade balance in petroleum products by foreign value added

After excluding domestic value added content from the trade balance, Russia's balance remains positive. At the same time, Russia is the only Group 1 country with a positive balance in terms of foreign value (Table 3). All countries' imports consist almost entirely of foreign value added, indicating that only a small portion of previously exported domestic value added returns to the domestic economy through imports.

Russia’s imports are insignificant, indicating that the domestic market is serviced independently and there is no specialization. However, exported foreign value added exceeds the imported, leading to a trade surplus.

All other Group 1 countries have a negative foreign value balance and high imports of oil refining, indicating that they specialize in certain types of products and/or stages of processing.

This is due to the following factors:

1. If a Group 1 country specializes in certain types of oil refining, it will need to import products for the domestic market that are not manufactured inside the country. In this

case, imports (that mainly consist of foreign value) will exceed the foreign value in exports and the trade balance by foreign value added will be negative.

2. If a Group 1 country specializes in a particular stage of the refining process, it might import numerous refined products at previous stages and/or import products at higher stages of refining for domestic consumption. If import consists mainly of foreign value, its size will exceed the volume of foreign value in exports and the trade balance by foreign value will be negative.

In Group 2 and Group 3 countries, surpluses are more common than deficits, which might be due to the lack of developed oil production and the need to import equipment and technology.

Table 3Trade balance in petroleum products by foreign value added, 2015.

CountriesForeign VA

in Gross Exports

Foreign VA in GExp,

Share

Foreign VA in Gross Imports

Foreign VA in GImp,

Share

Trade Balance in

Foreign VAGroup 1USA: United States 22 281.5 26% 53 059.4 95% -30 777.9RUS: Russian Federation

5 813.5 10% 2 576.0 94%3 237.5

CHN: China 4 605.3 35% 29 377.6 99% -24 772.3SAU: Saudi Arabia 182.7 1% 1 383.4 96% -1 200.7CAN: Canada 4 427.5 35% 13 726.5 90% -9 299.0Group 2IND: India 11 233.0 46% 7 223.4 100% 4 009.6MYS: Malaysia 2 156.4 22% 10 526.0 98% -8 369.6THA: Thailand 4 772.7 49% 3 427.3 100% 1 345.4Group 3KOR: Korea 21 524.0 74% 14 871.1 100% 6 652.9SGP: Singapore 20 074.1 79% 19 163.7 100% 910.4DEU: Germany 8 851.8 35% 31 124.5 99% -22 272.7BEL: Belgium 7 695.2 63% 7 594.1 100% 101.1NLD: Netherlands 7 366.3 66% 5 563.2 98% 1 803.1JPN: Japan 5 851.0 54% 18 976.5 99% -13 125.5ESP: Spain 6 890.9 68% 7 218.3 100% -327.4

Source: calculations based on OECD-WTO. Trade in value added (Edition 2018).

The fact that the volume of foreign value in exports exceeds the volume of foreign value in imports indicates that the share of foreign value added content of gross exports for Russia (10%) is very high. The growth of the foreign value added share of gross exports and the sources of its origin (the chemical, machinery and computer industries in developed countries) have already been mentioned above. Thus, from a different angle, this confirms Russia’s inefficient integration into GVCs and distinguishes it in a negative sense from other Group 1 countries.

3.3. Analysis of complex GVC linkages

Russia's backward and forward GVC participation is consistent with assumptions about the impact of oil production on the country's complex linkages.

The more developed the oil production, the lower the backward participation and vice versa (Fig. 4). For Russia, this indicator is 10% (only Saudi Arabia’s is lower). It corresponds to the share of foreign value in exports, as shown earlier.

CAN USA CHN RUS SAU Group 1 Group 2 Group 30.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2005 2015

Fig. 4. Backward GVC participation, %, 2005 and 2015.Source: calculations based on OECD-WTO. Trade in value added (Edition 2018).

The influence of oil production on forward participation in oil-refining GVCs is also confirmed (Fig. 5). On average, Group 1 countries have higher forward linkages than Group 2 and Group 3 countries. Within Group 1, countries are very diverse in terms of forward participation. Russia shows one of the highest levels — second only to Saudi Arabia.

CAN USA CHN RUS SAU Group 1 Group 2 Group 30.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2005 2015

Fig. 5. Forward GVC participation, %, 2005 and 2015.Source: calculations based on OECD-WTO. Trade in value added (Edition 2018).

The level of backward and forward participation in itself does not give an idea of the effectiveness of a country’s integration into GVCs. For example, high backward linkages might indicate that a country is using foreign components with low value added. In that case, engagement in GVCs will be profitable. On the other hand, foreign value might come in the form of technologies, equipment and products with higher value added that the country uses for simple assembly. In this case, its position in GVCs will be unprofitable.

What do Russia’s high forward linkages mean? On the one hand, higher forward participation might indicate that Russia has developed a wide range of products using its own oil that third countries use, in part, to produce goods for export. Given the large volumes of Russian exports in absolute terms, this is quite possible. On the other hand, this might indicate the production of basic products with a low level of processing, to which third countries add more value during the production of more advanced products that they then export.

Unfortunately, the second scenario describes Russia. The product structure of Russian oil refining continues to be dominated by dark oil products (for example, fuel oil), the production of which adds little value (Eder et al., 2016). It is also worth noting that specific factors have influenced the development of oil refining in Russia since the mid-2000s. Tax incentives (consisting of excess customs duties on the export of crude oil over duties on the export of refined products) were aimed at attracting investment in oil refining but have led to the development of only primary oil refining in the country (Kapustin & Grushevenko, 2018). Thus, Russia’s fuel oil production increased continuously from 2005 until 2014, even though the share of its domestic consumption remained low (Analytical Center…, 2016b).

3.4. Current trends

To understand how the situation developed after 2015, we consider the current activities of the largest oil refining producers in Russia. Several large vertically integrated oil companies whose activities are largely determined by state policy dominate the oil refining industry in Russia.

Oil refining received due attention from the state only in the early 2010s. In 2011, a quadripartite agreement was signed between the major Russian oil companies, the Federal Antimonopoly Service, the Ministry of Energy and Rostechnadzor (the Federal Environmental, Industrial and Nuclear Supervision Service). The agreement included plans to modernize Russian oil refineries by 2020 (Kapustin & Grushevenko, 2018). In 2015, tax reforms were implemented, according to which the export duty rates for dark oil products were raised to 100% of the oil rates, and the rates for light oil products were reduced to 30% of the oil rates. This measure was intended to stop the subsidization of low value-added refining and increase investment in deeper refining capacity (Bobylev, 2015). All this is reflected in the activities of Russian enterprises.

In 2017, the five largest vertically integrated oil production companies in Russia were Rosneft, LUKOIL, Surgutneftegaz, Gazprom Neft and Tatneft. These companies generate 70% of Russia’s budget revenues from the oil and gas sector (2017) (Analytical Center…, 2018) and account for 61.5% of the country's oil refining activity (2018) (Surgutneftegaz, 2018). More than 60% of each company’s revenue in 2017 came from exports of oil and refined products (except for Gazprom at 40%), indicating the leading role these companies play in integrating into oil-refining GVCs (Analytical Center…, 2018).

Rosneft leads among Russian companies, with 35% of oil refining volumes. It has 13 refineries in Russia and five plants abroad (three in Germany, one in Belarus and one in India). In an effort to improve the quality of its manufactured petroleum products (Rosneft, in press [a]), Rosneft is starting with its Russian plants to implement the most extensive and advanced modernization program among the country’s vertically integrated oil companies. It should be noted that, thanks to the fact that Rosneft operates in Germany, investment in its German refineries ensure oil supplies to its own plants as well as others in that country. As a result, Rosneft accounts for a quarter of German oil imports.

Rosneft is currently working to build additional refineries in other countries: a plant with a depth of oil refining of more than 95% in China (Rosneft's share is 49%) and a plant in Indonesia to produce motor fuel and petrochemicals for the Indonesian market (Rosneft's share is 45%) (Rosneft, in press [b]). In Russia, the company is working to build an oil-refining complex in the Far East that will not only be the largest in the region, but will also provide access to the sea and proximity to the Asian-Pacific market.

LUKOIL differs from other vertically integrated Russian oil companies in that it refines almost all (96%) of its own oil. It has achieved this with the help of its eight main plants, four of which are in Europe and account for more than one-third of LUKOIL's refining capacity. Thus, in 2017, the company produced 64% of its oil products in its Russian plants and 36% in its plants in Italy, Bulgaria, the Netherlands and Romania. The depth of oil refining in its European plants is consistently higher than in its Russian facilities. However, that gap narrowed from 75% vs 80% in 2010 to 85% vs 86% in 2016. At the same time, the share of fuel oil that LUKOIL produced fell from 33% to 21% over that period, while the share of light oil products it produced in its Russian plants increased by 14 percentage points (LUKOIL, in press). It is also worth noting that not all of LUKOIL’s European refineries use Russian oil as a raw material. Its Italian plant, for example, uses oil supplied from the Black Sea Region, North and West Africa and the Persian Gulf.

Surgutneftegaz processes only one-third of the oil it produces at its sole refinery, KINEF, located in northwest Russia (Surgutneftegaz, in press). The plant’s refining volumes declined while it retooled from 2013 until 2017 to modernize production. This included the construction of a complex to produce high-octane gasoline components (Surgutneftegaz, 2017). In 2018, crude processing volume remained at the 2017 level (18.2 million tons), but increased in 2019 to 18.6 million tons. The percentage of light oil products grew by 1.8% to 55.7% in 2018. In 2019, however, it decreased to 54,6% due to maintenance in the deep conversion plant (Surgutneftegaz, 2018; Surgutneftegaz, 2019). The improvements mentioned above open the possibility of increasing the production of high-quality petroleum products with higher value added in the near future.

Gazprom Neft is also a leading Russian oil company in terms of refining volumes, processing 63.5% of its produced oil at locations both in Russia and abroad. Foreign assets include the NIS complex in Serbia and the Mozyr plant in Belarus. The foreign plants, however, provide less than 10% of Gazprom’s total oil-refining volume. Gazprom sells more than 60% of its products on the domestic market, and that share has been growing in the past several years (Gazprom Neft, 2017). With regard to GVCs, Gazprom began modernizing its oil-refining capacities in 2009. It completed the first phase, aimed at improving the quality of its petroleum products, in 2015. The second, ongoing phase aims to increase the depth of oil refining and the production of light oil (Gazprom Neft, in press).

Gazprom Neft’s efforts to develop catalyst production are particularly important for Russia’s oil refining industry. The construction of a new catalyst production facility that began in 2017 in Omsk will increase the company’s production sevenfold. The quality of Gazprom's catalysts will be comparable to imported products. Gazprom will supply 20%-40% of those catalysts to its own plants and the remainder to other vertically integrated Russian oil companies (Gazprom Neft, 2017).

Tatneft's refining facilities are located in Russia and, like Surgutneftegaz, its facilities can process no more than one-third of the oil the company produces. In 2015-2017, the share of far abroad countries in the total volume of Tatneft’s crude oil sales grew to 67.2%. TANECO, Tatneft’s key oil-refining complex, produces high-quality oil products with high value added. It achieves a refining depth of 99.2% and a yield of light oil products of 87.5%. This is significantly higher than the Russian average of 82.1% and 62.1%, respectively (Tatneft, 2017).

Thus, almost all major vertically integrated Russian oil companies have been modernizing capacity in recent years, increasing processing depth and product quality. The state regulatory measures that have been adopted — primarily the quadripartite agreement on the modernization of oil refining capacities — have had a positive effect on the development of the industry and have increased the effectiveness of Russia's participation in GVCs. Moreover, the catalyst production that Gazprom is developing will enable Russia to reduce the foreign value added share of gross exports and the refinery modernization that all vertically integrated oil companies are implementing creates the potential to improve the geography of sales and the quality characteristics of Russia's forward participation in GVCs.

4. Conclusion

This paper examined Russia’s integration into the oil-refining industry from a GVC perspective. The research was based on the TiVA international database and case studies. The positive and negative aspects of Russia's participation in oil-refining GVCs can be summarized as follows:

Positive: leading position in the export of refined products in terms of value added (in absolute

terms); high domestic value added share of oil-refining exports; trade surplus in petroleum products in terms of value added; high forward linkages; effective state policy and development of the industry through modernization of

enterprises and construction of import-substituting production of catalysts in the last 4-5 years.

Negative: a high share of home region in gross exports and foreign final demand; an increase in foreign value added share of gross exports; ineffective industry structure of foreign value added; positive trade balance in petroleum products by foreign value added; high forward participation causality rests on exports of low-level processed products; insufficient efforts by Russian enterprises to radically improve the situation have only

partially overcome problems with GVC participation.

Only joint action by the government and business community can further improve Russia's oil-refining GVC position. Several final comments are worth making in this respect. The first concerns the expansion of manufacturing of higher value added petroleum products (increasing capacity). Only LUKOIL processes its own oil almost completely, while the other vertically integrated oil companies supply large volumes of crude oil to foreign markets without using the potential the next stages offer in terms of value creation. Surgutneftegaz and Tatneft have the greatest shortage of oil refining capacity. If it hopes to move up the value chain, it is obvious that Russia must expand its capacity to refine its own oil independently.

To increase capacity, it is necessary to examine exactly how oil refining (downstream) supply chains form. In contrast to oil production (upstream), the manufacture of intermediate and final products within the oil-refining supply chain tends to be located closer to the consumer. Only LUKOIL and Rosneft currently use foreign assets to refine their oil, while other companies have yet to announce such plans.

The most clearly effective government support measures are those that encourage investment in the construction of new refining capacity and that make possible the production of products with significant processing depth. Such measures also include tax incentives for companies, steps to make the sector more attractive to investors, and the development of the necessary infrastructure. It is important to conclude an agreement on the construction of new refining capacity similar to the beneficial quadripartite agreement on the modernization of refineries. The implementation of these measures will improve the effectiveness of Russia’s participation in oil refining GVCs over the long term and increase the competitiveness of the country’s oil-refining industry.

Thus, our results suggest that tackling the problems identified at the firm and country level would help Russia’s oil-refining industry to achieve its growth potential and enjoy the resulting benefits.

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