#5
Moscow Time
November 21, 2001
EBRD Sees Solid Russian Growth
By Victoria Lavrentieva
Staff Writer
Russia will see strong economic growth this year and next, but key reforms in energy and banking must be implemented for the country to see extended growth, the European Bank for Reconstruction and Development said Tuesday.
The EBRD, in its annual Transition Report on Russia and 26 other countries in the former Soviet Union and Eastern Europe, also said that more than $300 billion would probably need to be invested in the Russian and Caspian oil and gas industries over the next 10 years.
Echoing other recent rosy economic forecasts for Russia, the EBRD said that the economy will grow 5.5 percent this year and 4 percent in 2002 if oil prices stay above $18 per barrel.
The EBRD's chief economist, Willem Buiter, was even more bullish.
"As long as Russia continues to maintain its expenditure controls, it can survive even with oil prices as low as $12 per barrel," Buiter said at a news conference in London, Reuters reported.
But, as oil prices continued a two-month slide to lows of about $16 per barrel this week, the EBRD cautioned that energy reforms were crucial.
"As the outlook for oil prices remains uncertain, Russia and the resource-rich CIS countries must adapt and strengthen financial policies to reduce the impact of commodity price volatility on domestic stability," the bank said.
Those policies should provide a more stable investment climate, redefine the role of the state in the energy sector and improve access to pipelines, the EBRD said.
"Addressing the last challenge will require regional cooperation and international assistance," it said.
Most pipelines in Russia and the other countries of the former Soviet Union are owned by Transneft and Gazprom, companies controlled by the government.
"As a result, pipeline access and transit fees often reflect political ... concerns," the report said.
Competition could be increased and Russia's political influence limited by the construction of new pipelines, it said.
On investment, the report said that although it is difficult to estimate how much cash would be needed in the Caspian and Russian oil and gas sectors, the amount would probably exceed $300 billion over the next decade. Some three-quarters of that investment could come from Russia, the report said.
"The cash flow in Russia's hydrocarbon sector should be sufficient to finance modest production growth over the next few years, but as the need to develop new fields increases, Russian energy producers will increasingly have to raise external capital," the EBRD said.
Energy reform was a key issue addressed in the report, which tied improvements in energy efficiency to energy price reform.
"Slow progress in energy sector reform and flawed tariff policies have been the main factors delaying improvements in energy efficiency," the EBRD said. "Price reform is the key to improve it."
However, for this price reform to be sustained, there must be a regulatory and institutional framework that supports private investment in the secondary energy sector and protects the most vulnerable segments of the population from price adjustments, the bank said.
Reforms adopted by Russia on land and taxes won kudos, but the EBRD said banks needed more attention.
"Banking sector reform has been the weakest element in the reform program and a credible reform process would require both more effective prudential supervision by the Central Bank and a strategy for the commercial operation of state banks," the report said.
Prime Minister Mikhail Kasyanov's government only this autumn began to thrash out banking reform legislation.
Overall, the EBRD was pleased with reforms implemented by Russia and the other countries in its report.
"Supported by a strong recovery, a number of CIS and Eastern European countries achieved significant reform gains, in particular Russia, but also Azerbaijan, and, from a low level, Belarus and Uzbekistan," the EBRD said.
At the same time, countries at more advanced stages of transition that are candidates for EU accession continued to make steady progress in strengthening the performance of their market-supporting institutions.
"Only in Turkmenistan, where the political commitment to reform has been weak, was there backtracking in reform," the report said.
The bank said that most Central and Eastern European economies are set to grow for a third consecutive year in 2001, but global economic weakness and falling oil prices could slow expansion in 2002. The EBRD forecasts average gross domestic product growth of 4.3 percent this year, down from a record 5.5 percent in 2000.
The EBRD is expecting economic growth in Central and Eastern Europe and the Baltic states to slow down to 2.9 percent in 2001 and further down to 2.7 percent in 2002. Growth in southeastern Europe and the CIS is expected to exceed these figures in 2001 at 4 percent and 5.8 percent, respectively. The outlook for 2002 in both regions is less certain and depends highly on oil prices.
The only country covered by the EBRD forecast to record negative growth in 2001 was Macedonia, whose economy contracted sharply in 2001 as a result of an ethnic conflict.
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