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Russia's oil habit keeps the economy from diversifying

Russia's oil habit keeps the economy from diversifying

Oil prices have been falling and western European customers, rattled by disruptions of Russian supplies, are looking for other sources of oil and natural gas.
That might be a wakeup call for Russia to stop relying almost exclusively on hydrocarbon exports as the backbone of its economy. Yet Russia is doing little to diversify _ and analysts say its dependence on energy resources is only getting stronger.
The collapse of the Soviet Union in 1991 left Russia with enormous natural resources wealth and largely moribund industries _ factories that had made low-quality goods sold to other Communist countries and weren't able to compete in a free market.
Since then, politicians and economists have insisted Russia needs to modernize its economy. But the immense wealth brought about by oil and gas revenues have drowned out these warnings.
"There has been a clear increase in dependence on oil and gas," said Peter Westin, chief economist with the MDM investment bank in Moscow.
Although world oil prices have dropped some 30 percent since last summer to hover around US$55 per barrel, that's still a comfortable price for Russia. Spending for the government budget is covered at a price of US$40 _ anything above that just adds to its surplus.
Russia moved this year to bring even more oil money into its coffers by sharply hiking its price to sell to neighboring Belarus, which in turn tried to raise transit costs for Russian oil that's shipped to Europe in a pipeline that crosses its territory.
The dispute brought a three-day shutdown of deliveries, prompting European governments to declare they will look for oil sources in less-contentious regions.
But despite the threats, European countries apparently can do little to wean themselves from the pipelines. Meanwhile, the customers for Russian oil and gas only look set to grow: Oil and gas pipelines to China are under way or planned; new gas routes aimed at the EU will help meet growing demand as North Sea supplies dwindle.
Those include the joint Russian-German Nord Stream link under the Baltic sea to Germany, which should contribute an extra 30 billion cubic meters by the end of the decade, and the possible expansion of the Blue Stream pipeline under the Black Sea to Turkey.
Under state gas monopoly OAO Gazprom's plan, Blue Stream would be expanded and extended to Hungary, which would serve as a hub for delivering gas to neighboring western and southern countries including Croatia and Slovakia.
And with one of the largest untapped natural gas fields in the world sitting on Europe's Northern border _ the 2.7 trillion Shtokman field _ Russia looms large in Europe's energy plans.
"Its going to be a long time before anyone can find alternatives to Russia," Westin said.
High energy prices that have boosted wages across the economy have made President Vladimir Putin hugely popular among ordinary citizens. A soaring stock market, dominated by energy companies, mean foreign investors praise him too _ despite charges of democratic backsliding and the use of energy reserves as a diplomatic weapon.
With 65 percent of its revenues coming from oil and gas, Russia's ledger books are full of black ink. Gross domestic product is growing at a healthy clip of 7 percent per year, Russia has the highest hard currency reserves outside Asia, and a windfall oil fund is steadily approaching US$100 billion (euro77 billion).
All of that means that an oil price crunch, if or when it comes, will hurt much less.
But local industry is flagging and economists argue that the time to act to modernize the economy is now _ while Russia has the luxury to spend its oil bonanza on incentives and tax breaks aimed at spurring decrepit industries and boosting small businesses. Wait too long, they say, and the chance will be missed because the government's money men will be trying to protect savings as oil prices fall.
Ironically, part of the reason industry is being held back is due directly to Russia's huge energy earnings. The flow of energy revenue into Russia has seen the ruble appreciate by some 10 percent against the dollar over the past two years, sending up companies' ruble-denominated costs.
"This means new companies that can make new products and diversify the economy are appearing at a much slower rate. They can't compete with imports," said Yevgeny Gavrilenkov, chief economist with the Troika Dialog investment bank.
If prices for oil and gas remain high, the prospect of dwindling reserves as a force to diversify the economy is unlikely to bother Kremlin policy makers for some time to come. Some economists argue there has been a structural shift to higher prices and that oil at under US$30 per barrel is a thing of the past.
At current production rates of 9.7 million barrels per day it would take nearly 30 years to get through the 105 billion barrels in reserves that companies working in Russia report. And that, geologists argue, is a conservative figure. No comprehensive review of Russia's reserves has been conducted since Soviet times and experts suggest the true figure could be closer to 200 billion barrels.
Russia's vast gas reserves, meanwhile, can last long into the next century at current production rates, analysts say.


Updated : 2021-04-19 12:21 GMT+08:00