Thursday, June 21, 2012

Oil Dependency and the Russian Economy

Some say Russia's government requires oil prices of $120 a barrel to balance the budget, while others say the real figure is as high as $150 a barrel or more. Either way, Russia's economy is already feeling the pain of the recent global decline in oil prices. And there is no guarantee that the oil slump will end any time soon.
Oil dependency is seen as Russia’s biggest weakness.

This year’s budget needs an oil price of more than $120 a barrel to balance, lifting the non-oil deficit, the shortfall excluding oil and gas revenues, to 12.5 per cent of GDP. It was below 5 per cent before 2008.

...Oil prices would need to grow by $10 to $15 a year, he adds, otherwise the “budget will not be affordable”, forcing Russia to increase borrowing or reduce spending.

Economists have also warned that, with budgetary spending becoming a bigger contributor to growth, and that, in its turn, increasingly funded by oil and gas revenues, Russia is drawing too heavily on its energy wealth.

That drives up prices and costs, crowds out private sector investment and makes manufacturing uncompetitive, all classic symptoms of the so-called Dutch disease.

This hinders what should be its main policy aim: diversifying the economy away from reliance on extractive industries. _FT

Opinions are mixed over whether Russia's president Putin is serious about facing Russia's many structural problems. But opinions are like rectums: every athol has one.

What matters is whether wise and knowledgeable people are willing to place bets on Russia's future, under Mr. Putin, and whether the smart money inside Russia is staying inside Russia -- or is fleeing the country.

In fact, capital flight from Russia has recently been described as "torrential," and the brain drain of Russia's best and brightest to Europe, North America, and Israel continues.

Russia is desperate for foreign investment in order to maintain its role as an energy superpower. As noted in the chart above, China is a very big investor in Russia, but China lacks the state of the art energy technology which Russia needs. Which means that Russa -- under Putin -- will need to learn to "play nice" with some of the same large western energy companies which it has traditionally ripped off in the past by nationalising profitable energy assets, once developed.

There is a reason why large global insurers are reluctant to insure outside ventures and partnerships in Russia.

Putin is very ambitious, has made many promises, and aims to spend a lot of oil & gas money. Time will tell whether that money materialises in the quantities planned. If energy prices remain depressed for long, it will not take long for Russia to run through its cash reserves.

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