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Russia Gets Giant Boost from Rising Oil Prices

  • James Brooke

Russia Gets Giant Boost from Rising Oil Prices

Russia Gets Giant Boost from Rising Oil Prices

As much of the world reels from civil unrest and natural disasters, Russia is cashing in on high oil prices that may allow it eliminate its budget deficit in 2011.

Libya suspends oil exports. Political revolts put the Persian Gulf on edge. And Germany and Japan close one quarter of their nuclear reactors.

In today’s energy world, Russia seems to be the winner. Producing 11 percent of the world’s energy output, Russia is the world’s biggest energy exporter.

“This is a huge amount of energy - about five times more than Russia’s share of global GDP or population. This is the basic number,” said Leonid Grigoriev, who studies Russia’s energy economics at Moscow’s Higher School of Economics.

With prices expected to average over $100 a barrel this year, the oil bonanza is expected to erase Russia’s budget deficit this year.

This is timely for the Kremlin, which is handing out pay and pension raises as the nation starts an election cycle. The latest came Friday when President Dmitry Medvedev announced that salaries for soldiers will triple next January - just 10 weeks before election day.

Oil and gas pays for about 40 percent of Russia’s budget. Once prices rise over $27 a barrel, Russia’s Finance Ministry takes in 90 cents for each dollar.

”This is why the Russia depends so much on oil and on oil prices,” said Leonid Grigoriev. “And that’s why any turmoil in the world immediately brings money to the Ministry of Finance.”

Today, foreign currency reserves are growing at $100 million a week. By the end of March, Russia’s total reserves are to hit $500 billion - the world’s third largest, after China and Japan.

Now, economists are now raising Russia’s economic growth estimate for 2011 to five percent - the highest level since 2008, the year the economic crisis hit.

Higher oil earnings filter down to Russian consumers.

Last year, car sales and overseas travel jumped by one third. The equivalent of 10 percent of Russian took foreign vacations. Next year, Russia is to displace Germany as Europe’s largest car market. In February, Ford, GM and Volkwagen announced new joint ventures to produce more cars in Russia.

Russians spend now, because they are never certain about the future.

In one decade, the oil price gyrated wildly - from a low of $8 a barrel in 1998 to a peak of $147 in 2008.

Looking at the long term, analysts say Japan's nuclear crisis may benefit Russia by pushing the world energy pendulum away from nuclear toward natural gas. Germany imports almost half of its gas from Russia. Even before the crisis, Russia was investing to increase gas production by 50 percent over the next 20 years.

The downside is that high prices ease pressures to cut corruption, to diversify the economy and to lighten the hand of government on business.

Chris Weafer, chief strategist with Uralsib Capital, fears that the new flood of oil earnings is leading the Kremlin to slow its privatization program.

“We have seen it in the Gulf Arab countries. and we saw it in Russia in the last 10 years that as the oil price is rising governments talk about the need for reform and using the money wisely, but as the price goes up too high, the whole process slows down, people become complacent, they become lazy, they live the good life as it were, until the collapse comes,” he said. “And then then whole process starts again.”

In public opinion polls, corruption rivals food prices as the number one public complaint for Russians. According to Transparency International, Russia is the most corrupt of the Group of 20 major economies.

Last week in a speech in Moscow, U.S. Vice President Joe Biden clearly warned Russia that corruption scares away investors.

“No amount of government cheerleading or public relations or U.S. support or rebranding will bring wronged or nervous investors back to a market they perceive to have these shortcomings,” he said. “Only bold and genuine change.“

As Biden spoke, new economic data came in. Despite the oil price rises, despite the run up in the Russian stock markets, the country suffered a net loss in investment capital in February.

“Despite the stock market and despite the oil prices, people are still very skeptical that there is going to be material change in Russia,” said strategist Chris Weafer. “Right now, they are voting with their wire transfers."

Another cloud on Russia’s horizon is demographic. Over this decade, the Russian workforce is expected to shrink by 10 million people, or 15 percent.

Solutions are not popular: raising the retirement age, increasing immigration, and raising productivity through more foreign investment. And those measures will not be taken until after Russia’s presidential election - one year from now.

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