No. 3, 2012


Oil of Russia magazine talks to Nikolay Ivchikov, General Director of LUKOIL Croatia

LUKOIL IS ACTIVELY EXPANDING ITS PRESENCE IN EASTERN EUROPE, including the Balkans. This is a very interesting region from the commercial point of view, but operations there are often complicated by various economic, political and even psychological factors. It is no secret that in those countries, companies from Russia are often treated with some suspicion, as if anticipating a return of past times when the USSR was able to dictate the terms of economic cooperation to its COMECON partners. Today, however, these "stereotypes" are gradually fading away, partially owing to positive experience of Russian companies operating in that region. These companies include LUKOIL, which is broadly represented in the downstream sector of the Balkan countries. One of the Company's most dynamically developing subsidiary sales enterprises is LUKOIL Croatia, which has been present on the Croatian market since 2007.


Q: What were LUKOIL Croatia's outcomes for 2011?

A: In spite of macro-economic turbulence, our young and dynamic enterprise upped its sales of petroleum products compared to 2010 by approximately 10%. A major role in this was played by the customers' confidence in the quality of our fuel, which we produce at a refinery in Italy controlled by LUKOIL.

Positive operating income dynamics have also been demonstrated. The key targets have been achieved, this being a result of conscientious and sometimes self-sacrificing work by the company's employees.

It should be noted that, in 2011, in parallel, we were engaged in integrating the Krobents enterprise into our company, undertook a rebranding, began selling premium EKTO fuel, which improves engine performance, and started introducing a new IT system. It was a very busy year and the company staff demonstrated true strength of character.

For our good collective performance results, I would like to thank both our customers and our employees.

Q: LUKOIL is the biggest Russian investor in Croatia. Why is the amount of investment coming to this country from the Russian Federation limited?

A: I would broaden the question: why is there limited foreign investment in the Croatian economy in general? According to our information, it amounts to some 26-27 billion euros. This is a general question concerning Russian, Western, and (paradoxically) Croatian investors as well. It turns out that barriers are first being set and then efforts are made both by domestic and foreign parties to overcome them. As a result, movement becomes everything and the final result is negligible. Interest in investment, enthusiasm, if you like, is lost and investors eventually give up their ambitious plans and come to Croatia to enjoy the sea, the sun and the delicious local cuisine. About 90% of investment ideas end up this way or, at best, in immovable property that later often stands idle.

To be serious, though, there are several factors responsible for this.

First, the mental complexes at the political level left over from the past. It should be noted that a very serious shift has taken place and intensive contacts have been launched between the two countries' leaders. The Russian embassy in Croatia is conducting specific activities aimed at practical results.

Second, there is the legislative aspect. This concerns not only Russian investors, but practically all foreign ones. Everyone recognizes the need to simplify the laws and regulations in to attract investors rather than to scare them away.

Let me give a simple example. After obtaining a permit to operate a facility, an additional, seemingly insignificant document called "Minimum Technical Conditions" has to be executed. Officials I know admit openly that this was done to give them something to do and justify their own existence. There is an operating permit - which should be quite sufficient. Without Minimum Technical Conditions, the investor could save time and money and the civil servants thus released could do a worthwhile job in the private sector, which, in turn, would save state budget funds. And there are lots of similar examples. The legal framework for investment and business needs rapid "purging" and simplification.

Third, there is the information and awareness factor. As the Croatian economy is becoming increasingly open a serious, long-term information policy is required to advertise the unique opportunities for foreign investors in Croatia, clarify the laws and benefits of investing. Maybe it would be advisable to set up a special Investment Agency.

We, as the biggest Russian investor today, cannot agree with the microscopic investment from the Russian Federation, amounting to just a little over $200 million, and we believe that this figure does not reflect the desired level of investment cooperation between the two countries.

Moreover, the company is interested in economic progress and growth of the population's purchasing capacity in a country where we are investing our shareholders' money. And, in this sense, the interests of the Croatian government fully coincide with those of the LUKOIL subsidiary. LUKOIL Croatia will use the resources of the holding company in Moscow to promote the idea of Russian-Croatian economic cooperation.

Q: The interest of some Russian companies in acquiring or developing the local oil logistical infrastructure was broadly discussed in Croatia. Does LUKOIL intend to take part in these projects?

A: As I have already mentioned, we are a private oil company. We have a specific interest - to sell our own petroleum products to the end consumer through our own gasoline filling stations. LUKOIL has extensive experience of working on foreign markets and respects the interests of the state and state-owned companies while operating transparently, in compliance with international and local legislation. Participation in any local infrastructure projects requiring capital investment, in cooperation with state-owned companies, is not the subject of activity of LUKOIL Croatia.

We respect sovereign interests of the state and recognize the government's priority in such strategic spheres as infrastructure. In all countries, this is a more or less established practice and our approach is invariable, including in Croatia.

Even so, given an econo-mically justified approach and competitive, let me emphasize competitive prices, we are prepared to use the services of the public logistic structure. In Russia, for instance, we use the capacity of Transneft and Transnefte-produkt, which is part of its structure.

In Croatia, we collaborate successfully with JANAF, a company that has a great development potential, a modern technological base and experienced personnel. This could make a considerable contribution to replenishing the state budget and strengthening Croatia's positions on the European market of oil and petroleum products. Our company hopes to continue cooperating with the given enterprise on the condition that we are provided with quality services and charged a competitive price.

LUKOIL has experience of implementing logistical solutions both in Russia and in other countries (for instance, Bulgaria), and we are prepared, if such need arises, to share this experience with our Croatian colleagues.

At the same time, it should be noted that capital investment both by private national companies (such as LUKOIL) and our colleagues representing the public sector in the Russian Federation is very important for the economy of the region. It would be to the benefit of both sides if we smooth out the minor technical rough edges, put each other right and advance hand in hand.

Just a few years ago, there were serious interruptions in hydrocarbon supplies in the Balkans: oil refineries were obsolete or worn out or simply came to a halt, the equipment was taken to pieces as scrap, the gasoline filling stations were beyond all possible service or sanitary standards. And no one but Russian investors were prepared to take up this challenge and share the risks. Today the situation is changing. The Russian side has invested billions. The petroleum products supplied by our companies to the region's market meet the highest European quality criteria. Russian enterprises fulfill and sometimes over-fulfill their investment obligations. It might seem paradoxical, but Croatia will, in fact, achieve much greater progress and success if it develops surrounded by economically balanced neighboring states, with which it has been historically linked for many centuries.

In other words, Russian investors in the region, including major energy companies, cover the energy requirements, create new jobs and provide orders for local contractors. Trade between countries is becoming increasingly active, investments are growing and the macroeconomic forecast is improving. Healthy competition benefits all the economies in the region.

It must be admitted, however, that collaboration practice is needed: we must learn to listen to one another and find compromises. Relations should be balanced and based on the principle of economic efficiency. We should not expect the impossible from one another and put pressure on a partner. All that needs to be done is to work, to conclude contracts and fulfill them step by step.

Q: LUKOIL is a major international company operating throughout the world. How would you assess the Croatian business climate?

A: A good question. There is an investment climate and a business climate. Regarding the former, everything is more or less clear. Improvements need to be made and we will do this together. As for the business climate, it depends, first and foremost, on people, the motives of their activity, as well as the infrastructure, standards, availability of financing, etc.

Croatian businessmen are very enterprising. This tradition probably dates back to the days of the Venetian Republic. Croatians have always been good merchants. In addition, they are an economically motivated nation with high educational potential and a strong desire to improve the quality of living, their personal wellbeing and so on. We Russians are essentially the same.

LUKOIL is the most successful Russian investor in Croatia. We have become an integral part of the country's economy, work in abidance by its laws and realistically view the current situation. Sometimes I catch myself thinking that I always take the excessive and sometime unfound criticism of Croatia too personally, when, for example, I read reputable international publications. To attract investment, an atmosphere of trust and goodwill is necessary. The informational background - both external and internal - is part of the business climate.

Croatian business is, in general, susceptible to foreign experience, it accumulates the best practices on the basis of interaction both with Russian partners and colleagues from the European Union, which Croatia is preparing to join in 2013. Foreign banks and insurance companies are widely represented in the country; there is a developed financial and logistical infrastructure, including roads, pipelines, sea and river ports, and air links. Hard-working people, the compactness of the country and its favorable geographical position will create, in the future, unique opportunities for doing business.

It should be noted, however, that there are additional reserves when it comes to the business climate. Long-term work is needed to improve the competitiveness of the Croatian economy. This is a fundamental issue, since the current financial and economic crisis is primarily a crisis of competitiveness. Economies that are more stable in terms of manpower costs, taxes, labor and business incentives, where the level of social dependence is lower, are less sensitive to turbulence and demonstrate a higher survival potential. In this connection, I believe that competitiveness of the national economy might constitute the main goal of the public administration. As I have already mentioned, Croatia's reserves in this sphere are quite impressive.

Q: Your Company is conducting business in the neighboring countries, too. How do you assess their business climates compared to Croatia's and does it have any advantages?

A: Capital "votes with its feet": it either comes or goes. LUKOIL is operating successfully in countries of the region such as Bulgaria, Romania, Italy, Montenegro, Serbia, Macedonia, and others. We came to Croatia because we are confident in this country's future.

Q: How is the company's interaction with the Croatian public organized? Do you sense any barriers, bearing in mind the Russian origin of your company?

A: Our relations with the public are based on the principle of openness. We rely on our own knowledge, experience and our work team; we try not to bother officials unnecessarily since we know that they have a lot of work to do anyway, and we try to resolve matters on our own. We do not seek any privileges; we operate as a legal entity. As much as possible, we provide assistance to students and schools. We have developed good relations with Vukovar and we work with Zagreb and Split.

The Croatians are open-hearted and hospitable people and we are the same. Last year, on LUKOIL's 20th Anniversary, the Big Tchaikovsky Symphony Orchestra gave a concert in the Lisinski Concert Hall. Together with the administration of Zagreb, we helped arrange seaside holidays for children from Beslan, Russia. This was a special case that should be promoted as an example of human selflessness and mutual assistance: for many years, Zagreb and its Red Cross have been welcoming, at their own expense, the Russian children. If you could only see their happy and grateful faces when they arrive in Croatia! I would like to express our gratitude on behalf of all Russian people.

As for barriers, they have been gradually lifted; there is so much work to do there is not time to think about them. We operate like a regular Croatian firm and the name LUKOIL has easily slipped into the language of local drivers as something usual and practically customary. Even so, the company needs to be developed further and to move towards meeting the expectations of our customers and our shareholders.

Q: When your company entered the Croatian market an objective was declared of opening 100 retail filling stations. So far, there are 42. Do you think the target can be achieved?

A: Three years ago, no one believed that in 2012 we would have a retail network of 42 filling stations, considering the difficult investment climate in Croatia, the attitude towards Russian capital, and so on. Today this is a reality. I would like to say that LUKOIL always keeps its promises everywhere.     - Marina Simec

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