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Oil riches making Russia poorer

Russian Oil WellMore petrodollars will not make Russians richer, comes the gloomy message from economists. Forget the heady pre-crisis days, this time round rising oil prices will mean inflation.

Insiders at the ministry of economic development say that the price of oil is set to leap this year from $81 per barrel to $105, a jump of 30 per cent, Vedomosti reported.

"It's becoming pretty obvious if you look at the state of Brent for this year. It's currently $122 per barrel, from Jan.1 it was $106 and it looks like it is not going to be much weaker than $100 for the rest of the year," Alexei Kokin, Uralsib oil and gas analyst, told The Moscow News.

The economy, however, is set to ignore the booming fees for Russia's biggest export and stick to its current growth rate of 4.2 per cent. Inflation, meanwhile, is set to rise from 6.7 per cent to 7 or 7.5 per cent.

Victim of the times

The oil sector was what drove the boom years of 2000 ­ 2005, Sergey Alexashenko, director of macroeconomics at the Higher School of Economics, told Vedomosti. But high prices are now bad news for a more developed Russian economy.

"There was a consumer boom against a background of rising oil prices but now this mechanism is broken and for now there isn't another one," Kseniya Yudayeva, chief economist at Sberbank told Vedomosti.

Now consumer confidence is low, and most spending goes on foreign imports rather than domestic products.

While budget surplus, government spending and credit fueled consumption all blazed the trail ahead, now all attempts to stimulate the economy result in import growth and inflation.

"There is no confidence in the future, oil is not helping to improve expectations," she said.

"After oil prices go up so do contractors' fees and the tax burden. Almost everything goes on tax. So you don't win anything major [from rising oil prices]," a disgruntled employee at a large oil holding told Vedomosti.

And oil revenue can still cause the treasury a headache. "The tax windfall from oil is also a bit of a problem as it has to be managed and channelled," Kokin said by telephone.

Look to other sources

Russia is looking down the barrel of inflation and in the run-up to elections the government could ignore the golden rule of not spending petro dollars, a worried finance minister Alexei Kudrin said on Tuesday, and this could contribute to inflation.

"People lost trust for years after high inflation. Retreating [from obligations] creates distrust for a long time," he added, Vedomosti reported.

A new source of growth could be investment but, as Medvedev's latest bid to de-politicise the boardrooms and make Russia more attractive to investors shows, this is still a work in progress.

There has been a surprisingly large amount of capital flight from Russia this first quarter of 2011, as investors load up the wagon and get out.

"The fact that there is still capital flight only serves to demonstrate to foreign investors that the 'locals' are not convinced about growth prospects and investment risk in Russia," Chris Weafer, Uralsib chief strategist, wrote in a note to investors.

Trouble here to stay

Trouble in the Middle East is pushing up oil prices and Russia see the disturbances as a potentially protracted threat to its interests,

"I think such conflicts, which result in instability and an inevitable sharp increase in energy prices, are not beneficial for Russia. Stable prices would be more beneficial for us," Sergei Ivanov, deputy Prime Minister, told RIA Novosti.

Some experts have predicted that oil prices may clear $200 per barrel if the political chaos in the Middle East continues.

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