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Russia needs more than oil for future growth
By Samantha Shields

MOSCOW, Jan 22 (Reuters) - Russia is turning its attention from boosting oil output to building export pipelines, but to fuel broad growth it must invest in a diversified economy that can flourish without a high oil price, economists say.

"The oil and gas industry was the locomotive that pulled Russia out of the mire, but going forward it will have to be domestic consumption that drives it," said Steven Dashevsky, oil and gas analyst at Aton brokerage.

Russian oil output has risen for five years straight and is set to jump another 10 percent in 2003 from current levels around eight million barrels per day.

Russia has said it could eventually leapfrog Saudi Arabia as the world's top producer. It wants to maximise exports, keep producers happy and pay foreign debt while oil prices are high.

The challenge is to find billions of dollars for new pipelines to carry Russian oil to world markets, and at the same time meet a long-term goal to wean its economy off dependence on oil by stimulating growth and investment in other industries.

"The objective for the last couple of years has been to reduce vulnerability to the oil price. For the next couple of years it is to create favourable conditions for foreign direct investment," said Chris Weafer, chief strategist at Alfa-Bank.


Russia needs to invest massively in pipelines and other oil infrastructure to boost its oil exports substantially.

"Oil producers are running up against bottlenecks in the export routes," said Weafer.

First, Russian oil firms want the state pipeline monopoly Transneft to reopen a pipeline to the Latvian port of Ventspils.

But that would only solve the problem for this year, as new capacity will be needed to keep pace with export demand so long as oil prices remain firm. Otherwise new bottlenecks will restrict exports to major markets.

"Long-term Russia will need to build new major pipeline infrastructure, to Japan, China and elsewhere," said Weafer.

"In a sense you could say that this is the critical year because next year it is going to be a bigger problem," said Dashevsky.

With four projects on the table, Russia is in the process of deciding which it can afford, and whether to reluctantly allow private firms to build pipelines.

Transneft has proposed a $5.0 billion pipeline from Western Siberia to the Pacific port of Nakhodka, and number two oil firm YUKOS (YUKO.RTS) would back a $1.7 billion link to China.

Transneft also has plans to expand the Primorsk terminal on the Gulf of Finland and four private oil majors have suggested a route to Murmansk.


Analysts say that if Russia is serious about reducing its dependence on oil, which at present accounts for 20 percent of its budget revenues, it needs to invest not just in pipelines but in infrastructure to stoke growth right across its economy.

"If the government wants more foreign direct investment, or direct investment full stop, it has to give a good deal and provide the infrastructure so that risk can be assessed properly," said Paul Collison, energy analyst at Brunswick UBS Warburg.

Stephen O'Sullivan, head of research at UFG in Moscow, said there were signs that other sectors of the economy, mainly consumer goods and cars, were becoming more attractive to investors, both foreign and Russian.

Ford Motor Co. (F.N) and General Motors Corp (GM.N) both began producing cars in Russia last year.

The country's most popular juice and dairy products maker, Wimm-Bill-Dann (WBD.N), listed American Depositary Shares on the New York Stock Exchange in February 2002.

These are examples of the kind of industrial diversification Russia needs in the long term to shield its economy from oil price shocks in the longer term, a goal that will depend on what kind of infrastructure it chooses to build now.

"You can't force the oil companies to pump money into other sections of the economy, but what you can do is make them attractive to investors," O'Sullivan said.

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