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From: "Stanislav Menshikov" <menschivok@globalxs.nl>
Subject: RUSSIA CHOOSES OPEC But Better Stabilising Schemes Are Possible
Date: Fri, 7 Dec 2001

"MOSCOW TRIBUNE", 7 December 2001
But Better Stabilising Schemes Are Possible

By Stanislav Menshikov

After long hesitation the Russian government finally chose to side with OPEC. The decision to cut oil exports by 150,000 barrels per day is somewhat less than suggested by the cartel. The hope is that together with cuts by other non-OPEC oil exporters - Norway, Mexico and Oman - their overall reduction will come close to the 500,000 minimum consistent with the cartel' s plan to take as much as 2 million barrels off the market. Traders have greeted the prospect by price increases.

For Russia this was a logical decision to take. Oil exports are an important source of revenue for the federal budget. At the export duty rate of $17.3 per ton set for early next year and assuming oil exports at 120 million tons for the full year, total annual income to the budget will amount to $2.1 billion, or about 3 percent of total federal revenues. The export price also affects profits of oil companies, from which taxes are also paid, as well as the value-added tax. Total dollar company revenue from oil exports is much larger and amounts to $17 billion or more depending on the price and volume. Because companies have to sell half of their dollar proceeds to the Central Bank in exchange for roubles, this is also a major source of official hard currency reserves, from which Russia's foreign debts are paid. According to the Finance Ministry, the federal budget will have a surplus next year if the world oil price exceeds $18 per barrel. Therefore, the government and the oil companies are materially interested at keeping the price within the $20 to 25 range. Whether that indeed happens considering global recession remains to be seen.

But cutting oil exports was also a hard decision to make for various reasons. The oil industry is largely owned by private companies that have their own profit maximising formulas. For instance, export duties are charged only if the export price exceeds $12 per barrel. Therefore a loss to the budget is not necessarily a total loss to individual businesses that can save on taxes. No wonder that some companies were originally unwilling to go along with the cuts citing various hardships for their businesses. Forcing them to follow the government line is not something that can be done easily. In this particular case it took more than a month to reach a consensus.

The other reason is that Moscow has been under pressure from Washington to forego siding with OPEC. US Energy Secretary Spencer Abraham visited Russia in part for the purpose of convincing it to stay away from the cartel. Signals were sent to the Kremlin that by refusing to go along with production cuts that OPEC favours, Russia could help encourage warmer ties between Russia and the United States. In the words of a "New York Times editorial, "this is an opportunity President Vladimir Putin should not squander". Hints were made that somehow Europe, chief customer for Russia's oil, could guarantee a minimum price of $20 per barrel. Apparently, after considering Messrs Putin and Kasyanov decided that this was pie in the sky and chose OPEC as a more workable alternative.

An interesting idea has been suggested by a noted US scholar Ira Straus, who is currently Fulbright Professor at Moscow State University. He is in favour of a price scheme, under which Russia would stay out of OPEC but would be fully compensated for its losses by leading industrial countries "when oil prices dip below a mutually agreed fair price, say $20 a barrel". Dr. Straus 's logic runs this way. A reduction of $1 in the price means a loss of nearly $1 billion to Russia, but a gain of $10 billion to the West and a $15 billion gain for global economic growth. Therefore, by compensating Russia the industrial world would be foregoing only 10 percent or less of its total gain from lower oil prices.

While the idea is interesting, it is difficult to see how it could be put into practice. Schemes like this rarely work in a market economy. Consider the fate of commodity stabilisation agreements, which were popular fifty or more years ago. Reaching agreement on a fair oil price today would be extremely difficult. Many oil importers might insist on a price that is too low to make sense for the Russian budget. And the very idea of financing Moscow assumes a general level of political good will towards the former "evil empire" that simply does not exist so far. Remember that Russia is not yet accepted as a member of the WTO and is still not officially recognised as a market economy. Perhaps a partial restructuring of its foreign debts could be another way of compensating for oil price loses. But nobody on a sufficiently high level is suggesting anything of the kind.

Making a temporary arrangement with OPEC does not mean that Russia has joined it formally. Russia's hands are kept free. If a better alternative appears it should certainly be considered in good faith.

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