Old Saint Basil's Cathedral in MoscowJohnson's Russia List title and scenes of Saint Petersburg
Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson

ANALYSIS-Russia's economic focus switches to US from OPEC
By Samantha Shields

MOSCOW, Nov 16 (Reuters) - Russia's long-term economic priorities have shifted towards its improving relationship with the United States which means it may be able to spurn OPEC's demands for cuts in oil output, analysts said on Friday.

Russia's economy is still very much oil based, with 20 percent of the budget dependent on the commodity.

But even if Russian oil prices average $15 a barrel next year, just over a dollar below current levels, it can still increase gross domestic product (GDP), meet its budget needs and stick to its debt repayment schedule, they said.

Increasing U.S.-Russian warmth after this week's Bush-Putin summit will lead to a more relaxed medium- to long-term attitude by investors towards Russian risk and increase its chances of joining the World Trade Organisation, they said.

"You don't hear Putin talking about OPEC membership, he's talking about WTO membership, that's the main focus now, and that means Russia will be seen as an industrialised country," said James Fenkner, chief strategist at Troika Dialog in Moscow.

Moscow has been in talks to join the WTO, which aims to boost world trade and ease access to markets, since 1993.

But after its strong support for the U.S. war on terrorism it is hoping the process will speed up significantly.

There are certainly incentives for both OPEC and Russia to come to an understanding, said Niclas Sundstrom, economic and political strategist for Russia and eastern Europe at Schroeder Salomon Smith Barney in London.

"But the ongoing changes in the U.S.-Russian relationship are much more important than the oil price at this moment," he added.


Oil prices plunged around $4 a barrel to two year lows this week after OPEC said it will not cut output unless non-OPEC states, including Russia, do the same, which has raised the spectre of a price war.

Benchmark Brent crude oil futures were trading around $17.60 a barrel late on Friday afternoon after Russian Prime Minister Mikhail Kasyanov said no one could tell it to change its oil output.

"No one can make demands of us," he was quoted by Russia's RIA news agency as saying.

Such low prices may not matter too much to Russia, analysts said.

Alfa-Bank said in a research note that at an average price of $15 for Brent next year Russia's GDP would grow 1.6 pct. Even if Brent fell to 1998 levels at around $13 growth would remain positive, it said.

The government forecasts 2001 growth at around 5.5 percent.

Peter Westin, senior economist at Aton in Moscow, projected GDP in 2002 at $310-320 billion dollars at an oil price of $15, adding that every dollar a barrel fall in the oil price will pare 0.2 to 0.3 percent off that figure.

"If GDP falls 0.3 pct you get a tiny budget deficit but Russia can live with a tiny deficit," he said. Russia is aiming for a balanced budget this year.

Russia's 1998 financial crisis was largely spawned by a drop in Brent to $13 a barrel, but analysts said today's economy was very different.

The federal budget currently has a debt burden, which is sustainable, of around 38 percent of total tax revenues compared to 61 percent before the crisis, Alfa-Bank said in a research note.

Alfa also pointed out that outstanding domestic debt amounts to only two percent of GDP compared to 18 percent before the 1998 crisis and said it believed Russian growth would remain positive in 2002 even with Brent at $13 a barrel.

"Before the crisis Russia had a huge budget deficit and a fixed exchange rate which was overvalued, the scenario now is completely different," Aton's Westin said.


Some analysts said lower oil prices could lead the Russian government to push through structural and institutional reforms, long an impediment to investment in the country.

"There is such a thing as too high an oil price for Russia, traditionally high oil prices have been connected with very poor economic policy," said Sundstrom.

He said that over the next two months Russia had a busy reform schedule, with debt management, pension and corporate governance reforms all due to come before the State Duma.

"Given the U.S.-Russian focus and the need for these reforms to go through, perhaps this oil price situation is not detrimental," he added.

Westin also said a lower oil price could speed reforms.

"We have a government that is actually reform-minded at the moment. This could raise the pressure as Russia is now held hostage to structural and institutional reform," he said, naming reforms to the energy grid and the banking sector as key processes already underway.

Analysts agreed that a fully-fledged price war that pushed oil prices below $10 a barrel would be very bad for the Russian economy.

"But from Russia's perspective it doesn't need to do anything right now," said Fenkner.

Back to the Top    Next Article