The Russia Journal
November 30-December 6, 2001
No cause for oil panic
By OTTO LATSIS
The era of high oil prices seems to be over. Prices of $25 or even $30 a barrel are a thing of the past, and even the more modest $18 a barrel – the government’s pessimistic forecast – has become optimistic. Prices could settle around $15 a barrel or even fall to the 1998 level of $10-$12 a barrel, which ended with financial collapse in Russia.
For now, Russia is still bargaining with OPEC over export quotas, and serious Russian economists think Russia’s bargaining position is stronger than that of, say, Saudi Arabia or other major Middle East oil-exporting states. The difference is that these Middle East states’ budgets are 100-percent dependent on oil exports, while Russia’s budget is 20-percent dependent, 30-percent dependent if gas is also included.
It could well be that the OPEC countries end up having to make serious cutbacks to their own export volumes without getting new concessions from Russia. But even if this is what happens, oil prices aren’t likely to rise to their previous levels in the near future.
The OPEC countries’ price regulation mechanism through changes to export quotas worked reliably so long as the world enjoyed a favorable economic situation, above all in the United States, which meant demand for oil remained stable. But with recession in the United States and Japan, high oil prices are simply impossible.
Many see high oil prices as providing the foundation for Russia’s economic growth, and by this logic, a fall in oil prices is a harbinger of economic crisis such as that of 1998. This seemingly obvious conclusion has sparked panic in the media, with daily speculation about the looming crisis. Serious analysts are playing calmer, however, saying there is no cause for alarm. It’s worth having a careful look at the real economic threats Russia could face in connection with oil prices.
First, gas price movements aren’t completely synchronized with oil prices, but lag behind them by about six months. This will soften the blow for the Russian economy. Another defense against the oil price menace is the additional budget revenue for 2001 that will be carried over to 2002. This money will be enough, for example, to make a $2 billion to $3 billion advance payment on foreign debt due in 2003.
This means that instead of the $14.5 billion due this year, Russia will pay $17 billion, and then in 2003, when foreign debt payments reach their peak, will have no more than another $17 billion to pay. Only half of all additional budget revenue is going on these foreign debt payments, while the other half is being spent mostly on social needs.
Russia has already made advance payments to cover its debt with the International Monetary Fund. Its IMF debt is now less than its quota in the organization, and this means that if necessary, Russia won’t have trouble getting a cheap loan, though there’s no reason at the moment to suppose this need will arise.
President Vladimir Putin’s recent lightning visit to Urengoi, Russia’s gas capital, shows that the government has considerable internal reserves it can draw on with the help of simple administrative levers and without even implementing complicated reform. Putin’s famous question to the gas bosses – "where’s the money?" – reflects the Kremlin’s determination to make big business more transparent and make sure the budget gets its fair share of money made from exploiting Russia’s natural resources, unlike now, when much of this money is hidden away from the state.
Austerity measures could also bring results. They haven’t been used much so far, despite the economic difficulties in the country. A good example of where austerity measures could be called for is with regard to the Railways Ministry, one of Russia’s largest natural monopolies, and its plans to revive an ambitious project of the Stalin era and link Sakhalin Island to the mainland. Unlike Stalin’s project, which proposed digging a tunnel under the sea, the new plan calls for a bridge. Either way, it is a phenomenally expensive and completely unnecessary project. Sakhalin has long since been linked to the mainland by ferries, and nothing has changed that would make a bridge necessary.
All these resources are enough to soften or eliminate the negative consequences caused by falling oil prices. And then there’s the main thing – continued economic reform. This year’s experience shows that lower tax rates automatically increase the amount of taxes collected, as companies bring their revenues out of the shadows. The authorities have only just begun to use all the opportunities they have in this area. So far, taxes have been lowered for individuals – employees. Taxes on manufacturers are still high, and lowering them would have an even greater effect than personal income tax reform.
There are other promising reforms that could boost the budget without causing any losses. These include administrative reform and deregulation that would open the doors to an increased flow of investment and more taxes. Freeing entrepreneurs from the arbitrary power of bureaucrats is a huge economic resource the state has at its disposal.
The conclusion then is that in 2000-01, the state was able to enjoy economic growth without having to make much of an effort (it’s a wonder any reform at all went ahead). Now, however, the time has come for some serious reform. But there’s no reason to expect an imminent catastrophe because of falling oil prices.