Micro and Macro Determinants of Capital Structure and Economic Growth in Russia: The Case of Oil and Gas Companies

This thesis consists of two parts. The first part examines the micro and macro capital structure determinants of oil and gas companies in Russia, and the second part investigates the importance of energy sector to the Russian economic growth. In the first part, we examine the financing decisions of companies by taking into account the effects of two subsequent major tax reforms in 2001 and 2002. Within the framework of dynamic trade-off theory of capital structure, we find a low speed of adjustment indicating that attaining the target debt ratio is not the primary concern of Russian oil and gas companies. Our estimation results also support the importance of bankruptcy and agency costs as determinants of capital structure. We find that during the pre-tax reform period (1992-2000), the taxation settings encourage the use of debt financing. Our estimation results support the positive effect of the taxation settings (i.e., effective company tax rate and effective Miller tax rate) on the level of debt financing at company level. During the post-tax reform period (2002-2016), the tax incentives for debt financing decreased significantly due to the drastic decrease in company tax rate and the adaptation of flat tax system at the personal level. Our estimation results show that there is a negative effect on the level of debt financing at company level. However, the average debt ratios of Russian companies increased consistently during the post-tax reform period even though there is a lower tax advantage of debt financing during this period. Our estimations show that the macro financial setting of greater access to debt (i.e., volume of domestic credit provided by banks to private sector) is found to be the driving force behind this increase during this period. In the second part, we investigate the causal relationship between fossil energy sources, the production cost of oil and financial development on economic growth in Russia. The results show that Russian companies‟ oil production cost and oil prices cause economic growth and the one-way causality is negative. We also find that there is one-way positive causality from natural gas price, financial development, and education investments to economic growth. The negative oil price effect supports the resource curse hypothesis, whereas the positive natural gas price effect does not. Russian policies should focus on lowering companies‟ production cost of oil, improving financial development and investing in education.