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#12
ANALYSIS-OPEC row shows need for more Russia reforms
By Patrick Lannin

MOSCOW, Dec 6 (Reuters) - Russia's economy should be able to take a five percent cut in oil exports in its stride, but still faces issues such as more reforms to boost domestic and foreign investment and to diversify away from oil dependence.

The reduction of 150,000 barrels per day in exports from the first quarter next year was announced on Wednesday to show Russia wants to help oil cartel OPEC support prices for oil.

The output cut, called a phantom move by some as exports anyway fall during the winter, seems likely to be enough to convince OPEC to make its own promised output reductions.

Russia should benefit if oil prices are kept at current levels, although it is unclear how long this will last given the global economic slowdown and weaker oil demand.

But the oil price focus highlights other long-term issues which Russia must face and which are revealed in the latest report on growth from the Economy Ministry.

Its analysis of the first 10 months of the year showed stagnation in October, scary reading for government officials grown used to boasting of Russia's new economic respectability.

"After nine months of uninterrupted economic growth, a halt to the positive dynamic of several macroconomic indicators was observed in October," the ministry said in its report.

"According to the ministry's calculations, GDP, with seasonal and calendar aspects stripped out, showed practically zero growth," it added. The rate of GDP growth is still impressive at 5.5 percent, but it remained at that level in the first 10 months.

Laying the blame for the halt in expansion firmly on lower oil prices, the report showed that Russia's key task remains diversifying its economy.

OIL A BLESSING AND A CURSE

Key officials have also said the oil price/OPEC issue is a wrong focus. "Will Russia succeed in avoiding a crash?" asked economist Andrei Illarionov in a comment in the English-language daily, the Moscow Times.

"The answer to this question can be found not in the price of oil but in the quality of government decisions, i.e. in the responsibility and consistency of government policy," said Illarionov, who is an adviser to President Vladimir Putin.

"Whether there will be a crisis or whether industrial growth will continue in Russia depends primarily on the economic policies pursued, and not on oil prices," Illarionov added.

He has said that lower oil prices would actually help Russia as they encourage the government to work on reforms rather than simply sit back and reap the profits of rising crude prices.

Apart from the short-term preoccupation with oil, Russia needs further reforms to correct the balance in its lop-sided economy.

Changes are needed to the banking system, to make it safe for people to put money there and to allow funds to find their way to businesses in the form of loans.

The European Bank for Reconstruction and Development (EBRD) highlighted the need for Russian banks to become more effective in its latest transition report on eastern Europe.

It said bank lending as a percentage of GDP in Russia was low compared with other nations in the former communist bloc.

The EBRD, World Bank and others have called for faster reforms of banks, with a speedy introduction of international accounting standards or a rise in capital levels, which would force out weak banks and cause consolidation.

INVESTMENT NEED

Another area where Russia must concentrate efforts and where progress has been made is in the reform of its giant state-owned electricity and gas companies, prices for whose products are way below world levels, and sometimes the cost of production.

The government has said it will allow a rise in tariffs for electricity and gas of a maximum 35 percent next year, although it said that the companies themselves wanted 60 percent.

Such steps and reforms are aimed at boosting competitiveness and investment, the mantra of the Putin administration. But investment remains problematic, although it is improving.

In the first 10 months of the year, capital investment rose 8.2 percent, slower than the 17.4 percent of the same period in 2000, although ahead of the economy's growth.

But showing the fragility of the economic balance, investments in the oil and gas sector accounted for more than a fifth of the total.

The ministry also highlighted worries for further economic development, saying that the consolidated profits of companies in what it calls the real sector -- manufacturing, trade and building -- had fallen in the first nine months of the year.

In its own clarion call to the government, the Economy Ministry said: "Supporting high rates of economic growth demands the active inclusion of supplementary sources of growth, most of all further efforts in the area of improving the investment and business climate."

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