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Sep. 18, 2006 - Kommersant - by Sergey Minaev - Russia is in a tough spot, notes "Vlast" columnist Sergey Minaev. Global oil prices are falling so precipitously that Russia's last hope may rest with OPEC. Otherwise, Russia's days in the clover may have ended. In recent years, Russia has already become accustomed to living in conditions of exceptionally high – and continuously rising – oil prices. According to calculations by the IMF, in 2004 the average price for a barrel of oil (meaning the average price for North Sea Brent, American WTI, and Arab Dubai Crude) was $37.76 (growth for that year was 30.7%), while in 2005 it was already $54.23 (growth for that year was 43.6%). This year, oil prices have skyrocketed to unbelievable heights: on July 13, American oil fetched $78.40 per barrel, while Brent on August 7 commanded an even higher price of $78.64 per barrel. Foreigners, in their turn, have already become accustomed to being astonished at what Russians are doing with their enormous oil wealth. In 2005, Russia earned $70.8 billion from oil exports, of which hard-currency revenues in the first half of that year posted by export enterprises were $32.5 billion (a 28.7% annual growth rate). In the first half of this year, export yielded $49.5 billion in profits (a 52.4% annual growth rate). The Russian authorities are eager to explain where that money is going. At the beginning of last week, Russian Trade and Economic Development Minister German Gref said that the volume of the stabilization fund will hit 6 trillion rubles by 2009 and that gold reserves will exceed $300 billion: "that volume will allow us to levelly pursue a course of macroeconomic stability that is indispensable for supporting the country's high investment potential and credit rating." In other words, Russia is already socking away enormous sums and is looking to put away even more. With regard to macroeconomic stability, of course, many questions arise if the authorities currently officially consider a 9% increase in consumer prices over 2006 to be a success. For all that, however, growing oil prices are allowing Russia to report rapid economic growth: last week, the government statistics agency Rosstat announced that in the second quarter the pace of real GDP growth was 7.4%. It is oil prices that are allowing the government to pay off the loan to the Paris Club, a debt that was inherited from the USSR, ahead of schedule. What is more, Russia has let it be known that it will pay off its other debts at an accelerated pace. In general, it is not exaggeration to say that the entirety of the current Russian economy (and in some sense also its domestic and foreign policies) are built on a continuous and significant growth in worldwide oil prices. And now the prices have started to fall, and how! Before the beginning of last week, oil depreciated on world markets for seven trading sessions in a row, something that has not happened since 2003. On Monday, a barrel of WTI was worth $64.85, which is the lowest price since March 28 of this year. Since the record level it hit on July 13, American oil has already decreased in price by more than 17%. North Sea Brent, for its part, cost $63.97 – a bigger decrease than American oil, and in the shorter period since its record high on August 7. The matter is very simple to explain. The Israeli military operations in Lebanon have ended, and the situation surrounding the Iranian nuclear program appears not to be intensifying. Thus international investment and pension funds, which were previously investing enormous amounts of money in oil futures in the hope that they would continue to appreciate in value, have now lost that hope. And if the funds do not believe in appreciation, they believe in depreciation – and rush to sell futures in order to turn them into profit realized from the earlier growth in oil prices. The more the funds sell oil, the cheaper it becomes, and the more incentive there is to sell it. Under such conditions, oil prices may fall for as long as they please. Everyone remembers that periods of very expensive oil regularly give way to periods in which oil is relatively cheap. In 1975-1979, for example, worldwide oil prices were an average of $17 per barrel; in 1980-1985, they doubled to $33 per barrel; and in 1986-1989 they were back to an average of $18.5 per barrel. The turning point came exactly twenty years ago, in 1986, with a catastrophic decline in oil prices that the USSR could not survive. The matter has advanced to the point that on Monday the OPEC oil-producing countries, during their conference in Vienna, definitively made it known that, for the first time in a long while, a decision to cut back on production may be made in order to forestall a sharp drop in prices: "Everything will be done to ensure that prices stay at the crucial level, and the members of OPEC are prepared to undertake quick and decisive action in response to events in the market that threaten their interests." Such an event would have to be revolutionary, if it is taken into account that, in connection with sharply rising prices, in recent years OPEC has practically discarded its system of production quotas, and after Hurricane Katrina the organization promised to help the world with an additional two million barrels of oil per day. Among the factors that were enumerated as causes of the drop in prices were a significant growth in oil extraction that is expected in the next year, a possible slowdown of worldwide economic growth, and a weakening of geopolitical tensions. It is necessary to note that even a possible production cut by OPEC will not necessarily make an impression on investment and pension funds – they ultimately can only assure themselves that there will be more than enough oil on the market. However things turnout, though, all Russia can do now is regret the end of the Israeli military action and hope for some self-sacrifice from Arab oil producers.

Aug. 29, 2006 Kommersant - by Sergey Minaev - Russia cleared the Soviet debt for the Paris Club last week. Russia took it bickering, so was it, giving it back. Kommersant Vlast columnist Sergey Minaev has the story. Terms of the loan can be found in foreign press. On March 5, 1972, The New York Times wrote the USSR had started to fail its economic plans in spring because of severe frosts in wintertime which killed all winter crops and disrupted the regular work of all industrial enterprises. The Soviet economy pinned its hopes on securing a $1.5 billion credit from Japan to develop Siberia. The strive of Soviet authorities to get the money whatever it takes despite the political ambiguity of the situation shows that the country needed cash badly. The same American newspaper noted on May 11 that Kissinger failed at talks with Brezhnev in Zavidovo because the unbending Soviet stance. The evidence of the position was Russia's strive to secure from a European banking group a $1 billion credit with such a low interest rate that will hardly cover the bank's expenses on giving the credit – no more than 3/8 of a percent point above the LIBOR rate. A report appeared on December 23 that the credit would be given but it would be only $300 million with a higher interest rate. The newspaper said that the story with the credit was a test for an ability of competing Western financial institutions to "confront the Soviet pressure". On December 21, 1973, The New York Times quoted Soviet First Deputy Foreign Trade Minister Semichastnov as saying that the Soviets will fulfill their obligations on oil supplies to the West but said the supplies would not be increased to battle the world oil crisis. Semichastnov underscored that the USSR sent 45 million metric tons of oil to the West in 1972, and 62 million tons went to socialist countries. He also said he hoped that "business circles and progressive forces in the United States will not let Soviet-American projects in Siberia be because of restrictions on large U.S. state credits to Moscow." Semichastnov also announced that the American party agreed to give the USSR a $47 million credit to build an international trade center in Moscow. On May 24, 1974, The New York Times quoted Congressman William Cotter who said the 6 percent annual interest rate for the $180 million state credit that the USSR received to build a plant to produce fertilizers is "an insult for millions of Americans who pay much more for their loans." The Congress representative also said that a benefit for the United States from the credit was a myth since the USSR had not promised to export the fertilizers to America. On October 7, 1986, the Financial Times reported that Finnish Prime Minister Esko Ollila had urged to settle Finland's trade surplus with the USSR (4 billion Finnish marks), otherwise Western countries would accuse Finland of an illegal business practice calling this money an interest-free and permanent loan to the Soviet Union. All in all, there have always been problems with the West giving money to Soviet authorities. Even when money went to private banks, the deal was considered a political one and attracted the society and media's attention. Things were worse when governments allocated money at the expense of their tax payers. The USSR, Western countries and Japan always bickered over the size of credits, their interest rates and purposes. There was argument even when oil prices were lofty, as in 1973, or then they were at their lowest, as in 1986. The USSR always needed foreign money. Foreign governments found a consolation in the fact that the world leader of oil production could not fail to pay off its debts, so giving loans to it was quite safe in terms of finances compared to giving money to African or Latin American countries. Russia did pay off, but it took two restructuring of the Soviet debt to the Paris Club – in 1996 and 1999. Russian authorities have taken the Soviet practices in the recent years. It seemed quite natural because when it concerned Soviet debts. Russia noted that it was paying off the debts with a higher interest rats than G7 nations did, and therefore preferred to clear the debt ahead of schedule. Russian officials even mentioned the capitalistic exploitation of Russian workers by Western governments. The propaganda used to say in the Soviet times that imperialistic powers threw their money to developing countries on crushing terms to make fortunes on interest rates. Paying off the debt ahead of schedule has turned into a bargain. When Russian first mentioned clearing the first part of the debt ahead of time it insisted on getting a bonus for this. Western nations, however, replied that they were actually losing money on this operation, so there should be a fine. The argument went like this: Russia has enough money if it is so willing to pay in advance but Western government and tax payers have none. First, they came to a compromise: no bonus but no fine. But the West ended up with imposing a fine. The parties have exchanged final remarks as Russia presented the debt payment as a proof of an amazing success of its financial policy even though creditors made it clear that it was mostly due to high oil prices, so the money was taken from Western tax payers. The Soviet debt story stopped at that.

Aug. 31, 2006 - Kommersant - by Mikhail Zygar - The price of the question
Russia's appearance on the list of threats to U.S. national security is a curious event. It's not unexpected though, especially since Russia was placed there next to Iran and Venezuela. U.S. Vice President Dick Cheney accused Russia of using oil and gas "to frighten and blackmail its neighbors" in May and called that policy unjustifiable. After Cheney's strongly-worded speech, there were several partial disavowals of it. By the time the G8 summit rolled around, Washington has somewhat moderated its views. Three months passed and nothing changed. Cheney wasn't joking when he said that the U.S. was concerned about Russian policy and, moreover, considers it dangerous, no less than the policies of Iran and Venezuela. Everything is clear about Iran and Venezuela. Those countries are waging a de facto energy war against the U.S. Venezuelan President Hugo Chavez, for instance, visited China last week and announced that he would increase oil deliveries to that country by reducing them to the U.S. Iran is even clearer cut. Iran controls the entire southern, Shiite, part of Iraq, where oil pipelines are being blown up. The U.S. expected that it is premeditated sabotage. The last blast occurred the day before yesterday. Eighty-two people were killed. Richard Lugar made his speech after a tour of Russia's neighbors on the Caspian Sea. It seems that he came to the conclusion there that Russia is waging the same kind if energy war against the U.S. The importance for the U.S. of the Baku-Tbilisi-Ceyhan oil pipeline, whose route Lugar just traced, is no secret. It's Washington's intention that the pipeline play the same role as the North Sea did in 1973, that of dependable source of oil and counterweight to pressure from energy suppliers. There are even plans to include Kazakhstan in the pipeline. That's the kind of insurance Washington wants against any nightmares on the oil market. Russia's policy is an obvious attempt to pry that insurance out of its hands. The current regime in Tbilisi is an important element for the pipeline. If Moscow comes out on top of its fight against Georgian President Mikhail Saakashvili, the pipeline the Kremlin hates so much that bypasses Russia may be rerouted. Then Azerbaijan and Kazakhstan will abandon America in a flash. If any one link in the pipeline fails, the U.S. loses everything in Central Asia. But Iran, covered by Russia to its north, will feel more secure. Apparently that is what Lugar realized when he was in the region. Cheney said in his June speech that he did not believe that Russia was fated to become America's enemy. Lugar apparently does not share his optimism.

MOSCOW, September 13 (RIA Novosti) - A former acting prime minister of Russia said Wednesday he saw no serious risks for the Russian economy before 2008. "We see no risks in the current financial situation, but only until 2008," said Yegor Gaidar, the architect of Russia's shock therapy and director of the Institute of Transitional Economy. Gaidar said the Russian budget was heavily dependent on world oil prices, and that this dependence was the most serious risk for the economy. The scholar said the situation after 2008 would depend on oil prices, which could not be predicted in the long term. A dramatic decline in world oil prices could trigger a scenario similar to the situation in 1985-1986, which led to the disintegration of the Soviet Union, Gaidar said. But today, Russia is better prepared for a decline in oil prices with its flexible economy, small foreign debt and strong financial position, the scholar said, adding that risks still remained. Gaidar said the Russian economy continued to depend on raw material exports because "structural reforms in Russia have been paralyzed" since 2003. He said it was difficult to carry out these reforms amid high world oil prices and on the eve of elections. The scholar said the government should continue its conservative financial policy and restart structural reforms.

09-06-2006 Kommersant by Vladimir Milov, president of the Institute of Energy Policies -
// The Doctrine of an “Energy Superpower” Harms the Development of Power Engineering and the Economy as a Whole
The idea of transforming the country into an “energy superpower” has become extremely popular in Russia over the last year. But does the concept of an “energy superpower” make any sense economically? How close is Russia to having that status? And what kind of economic benefits could be derived from such status? What kinds of possibilities will it open up for Russia’s financial modernization and competitiveness, as well as the strengthening of the country’s international standing?

Not Enough Money

One of the most important tricks involved in considerations of Russia’s energy potential is to abandon comparisons of absolute quantities of the production and export of energy resources, as well as compounded export revenues on a countrywide scale and the modernization challenges that the country faces. Yes, we produce a lot of oil and gas, but only countries with populations of five million or less have the possibility of converting their export revenues into a high level of per-capita GDP (a purchasing power parity rate of more than $20,000). In countries with populations larger than 50 million, the achievement of a high quality of life using only hydrocarbon potential is impossible. For that it would be necessary to export 40-50 tons of oil equivalent per capita per year. Russia exports approximately three tons, and even if the extraction of oil and gas were doubled (which is unrealistic), all the same the country could not export more than ten tons.

Is it possible in this situation to use revenues from oil and gas exports to accomplish large-scale modernization of the economy, the infrastructure, or the army? The basic modernization plans in the works – the government program for arms development for 2007-2015, transport strategies, the building of new nuclear power plants, programs for the development of the Yamal, Western Siberia, and Far East gas fields, and the development of a unified energy system – in total require a volume of yearly financing that exceeds Russia’s entire stabilization fund. And there is still the need to build houses, modernize communal infrastructures, and deal with the growing deficit in the pension fund. Revenues from oil and gas exports will allow for the realization of a small selection of projects, but the large-scale modernization of Russia is beyond their capacity.

An “Engine” in Stagnation

What possibilities are there for the energy sector to support a brisk pace of economic growth? For reasons that are most likely linked with the policies of the Russian authorities, in 2005-2006 this sector posted its worst growth rate ever. Oil extraction, which could reach 550 million tons a year, is growing by only a little over two percent, versus an average growth rate of 8.5% in 2001-2004. In the gas field, the situation is even worse: although the existing reserves would allow for the extraction of a trillion cubic meters of gas per year, the extraction level is stagnant. Gazprom’s extraction rate in 2005 and the first half of 2006 did not increase at all, while the increasing rate of extraction by independent producers substantially slowed down, dropping from 10.5% in 2000-2004 to 5% in 2005.

In the gas sector, the influence of political factors is becoming more obvious. A refusal to carry out structural reforms has led to the preservation of Gazprom’s monopoly, as well as to the company’s failure to fulfill the basic function of developing the country’s national gas extraction industry. In 2003-2006, Gazprom invested approximately $18 billion in the purchase of assets in sectors other than gas extraction, which exceeded the company’s entire capital investment in gas extraction for the past decade. And even if internal gas prices rise sharply, the additional funds will undoubtedly be used not for long-term investment in gas extraction but for the purchase of “non-gas” assets. And this is all at a time when Russia is entering the phase of depletion of its primary hydrocarbon fields. The development of new fields is linked with large-scale capital formation that requires stockholder rather than lender financing. Russian companies have no such capabilities, and the government has begun to introduce stringent restrictions on foreign investment.

Export Restrictions

It is also important to remember that Russia is first and foremost a consumer rather than an exporter of energy resources. In 2005, we used about half of the hydrocarbon resources that we extracted. Russia’s economy will remain very energy-consuming unless wide-ranging structural reforms and liberalization of internal prices for energy resources are carried out. Currently 75% of the country’s energy resources are purchased by the final consumers for regulated prices, as a result of which internal demand for energy is continuing to grow. In the near future, this could lead not to the strengthening of a “superpower” status, but to the necessity of limiting exports of energy resources.

Today almost 100% of Russia’s energy is exported to Europe. This is entirely logical: deliveries to Europe are minimally expensive, and the prices, especially in comparison to China, are high. Even if projects for the development of the production of liquid natural gas are realized, the volume of exports from them will not make up more than 10% of all Russian gas exports in 2015. Similarly, the realization of all gas and oil pipeline projects in the Asian-Pacific region (ATR) to export hydrocarbon products to the countries of the ATR will result in exports that are no more than 20% of the overall volume of oil exports and not more than 15% of all gas exports. In other words, even from a long-term perspective we will remain a regional supplier of energy resources, not a global supplier.

Energy and Politics

It is highly unlikely that the use of energy in pursuit of foreign-policy goals has an economic motivation. The reverse situation is more probable: energy will increasingly become the hostage of foreign-policy ambitions. And the risks involved in a politically-motivated supply interruption will foster serious changes in the behavior of the consumer countries. The best example is the Arab oil embargo of the 1970s. After the embargo, the importer countries achieved great success in lowering demand for oil: oil’s share in electricity production in the countries of the OECD fell from 25.3% in 1973 to less than 5% in 2005.

As a result of the Russian government’s policies, the level of trust in Russia as a reliable supplier, a perception that remained from the days of the USSR, has sharply declined. This is made clear by the behavior of Russia’s European partners, both in the search for a quick switch to other import sources and in the drive to make the conditions of contracts with Gazprom more unfavorable for the company (for example, turning down the take or pay condition) in negotiations concerning restrictions on Gazprom’s purchase of shares in European companies (although Russian companies had earlier easily bought such shares: YUKOS in Slovakia and Lithuania and LUKoil in Bulgaria and Romania).

In sum, it can be said that the idea of an “energy superpower” elicits heightened expectations in society and is the exact opposite of the real state of the country’s energy affairs. Russia is truly a large producer of energy resources, and in recent years it has managed to stabilize the functioning of its energy sector. But energy is only one of the sectors of the economy, and it is necessary to develop the energy sector in accordance with the demands of the market: a completely different model than the one currently being followed by the government. And further imaginary notions of “super ideas” that accompany increasing political interference in the energy sector are capable only of undermining the sector’s balanced development.