Zee Beam News

Sep. 24, 2007 Kommersant by Sergei Minaev - International oil prices set a new record last week, exceeding $81 per barrel. Just like in the 1970s when oil grew in price for the first time, Russia increases oil export and exchanges petrodollars for import. Russia has been among the oil extraction world leaders since the very beginning of oil extraction. The first oil deposit was discovered in Pennsylvania in 1859. U.S. oil extraction reached 1 million metric tons annually by 1873. Extraction in the Caucasus (including Baku deposits) reached the same level in 1889. By 1904, 6 million metric tons annually were being extracted in Pennsylvania and 5 million tons annually – in the Caucasus. However, oil export was not the basis of tsarist Russia’s economy. Oil was used just for producing kerosene, and was relatively inexpensive on the international market. In the 1930s, rich oil deposits were discovered in the Middle East, primarily in Saudi Arabia. They were developed by U.S. companies. Yet, the USSR remained an important oil-producing state as well. Moreover, the Bolsheviks gave considerable attention to increasing the oil extraction. “The foundation for a new powerful oil base was created in the area of the Ural range – in the Ural region, Bashkiria, and Kazakhstan,” said Joseph Stalin at the Communist Party’s 17th congress in 1934. However, oil export was not the basis of the Soviet economy then, primarily because oil was still cheap on the world’s market, which U.S. companies saturated with Saudi Arabian oil. Only after the Arab oil embargo in 1973 had oil become a desired and expensive product. Saudi Arabia speedily nationalized the oil extraction industry, and everything changed for the USSR. In 1960, Soviet oil production made up 3.1 million barrels daily. In 1978, the USSR became the first oil power in the world, leaving the U.S. and Saudi Arabia behind, and extracting 11 million barrels daily. The development of West Siberia’s oil-and-gas deposits played the key role in that process. Between 1976 and 1980, “the Siberians, inspired by the Party’s appreciation, […] more than doubled the extraction of oil (including gas condensate), and increased the natural gas extraction by 4.3 times, committing one more heroic deed for the motherland’s sake,” said Nikolai Tikhonov, chairman of the Council of Ministers, at the Communist Party’s 26th congress in 1981. “Extraction of oil (including gas condensate) in the north-west of Siberia made up 31 million metric tons in 1970, while it exceeded 312 million in 1980. In the same period, natural gas extraction grew from 9.5 billion to 156 billion cubic meters,” said the Communist Party Central Committee’s Secretary General Leonid Brezhnev. One third of the extracted Soviet oil was exported. Yet, it was rarely exported to Socialist states: they could pay only by low-quality consumer goods, and not by convertible currency. Petrodollars received from capitalist buyers became a real basis of the Russian economy. Moreover, the rise of oil extraction strengthened the USSR’s credibility. Western creditors reasoned that the oil extraction world leader, which is also a totalitarian state, cannot fail to pay its debts. The USSR began experiencing difficulties with the fall of international oil prices in the 1980s. Consequently, the entire Socialist economy went downhill. “Oil extraction industry, especially in West Siberia, needs considerable improvement. The region should provide two thirds of the USSR’s oil extraction by the end of the five-year period. Failures in that sector caused difficulties in the economy. The Oil Industry Ministry, GlavTyumenNefteGaz and its enterprises turned out to be unprepared for working in the circumstances of lowering well flow rates at large oil deposits. It is necessary to overcome the current retardation as soon as possible. The party and the government gave considerable aid to oil producers. The success now depends on the ministry’s organizational work and its determination to unconditionally implement the tasks […] and on mobilizing staff teams. Local party and administrative bodies are to play an important role in securing the planned amounts of oil extraction,” said Nikolai Ryzhkov, chairman of the Council of Ministers, at the Communist Party’s 17th congress in 1986. The party and administrative bodies obviously failed the task, and the USSR collapsed. It is not that petrodollars were not counted on in post-Soviet Russia of the 1990s. Oil remained the most important export product. Yet, it became clear that petrodollars will not last forever. The year of 1998 confirmed it, when international oil prices fell down to $10 per barrel. A new era of high oil prices began after 1999. Oil prices grew by more than thrice between 1999 and 2007. The prices reached almost $80 per barrel in 2006. Last week, they topped $81. Russian authorities proudly pointed out the success of oil extraction and export. At the OPEC conference in Vienna last week (where the cartel decided to expand production by 500,000 barrels daily), Russia’s Deputy Minister of Industry and Energy Andrei Reus said that Russia raised oil extraction up to 480.02 million metric tons last year, and became the first in the world by the amount of oil production. Compared to the previous year, the growth made up 2.1 percent. Oil extraction in Russia grew by 2.9 percent more in the first seven months of 2007. Reus said that Russia now refines 46.2 percent of extracted oil and gas condensate on its own territory. At the same time, the Federal Customs Service announced that oil export from Russia to non-CIS states grew by 4.4 percent in January-July 2007 and made up 128.4 million metric tons. The oil price reached $474.7 per metric ton in June, kept growing and made up $507.1 per ton in July. The volume of oil products export to non-CIS countries increased by 3.1 percent in the seven months of 2007, as compared to January-July 2006, including the export of jet fuel (grew by 25.4 percent) and of residual oil (grew by 10.3 percent). The cost and volume of oil export to CIS states increased by 10.1 percent and 14.7 percent accordingly in January-July 2007 as compared to the same period of 2006. The volume of oil products export grew by 78.8 percent, including the export of car gasoline (by 69.8 percent), of jet fuel (by 75.6 percent), of diesel oil (by 61 percent), and of residue oil (by 3.2 times). The USSR’s transition to oil-based economy in the 1970s caused considerable import growth. For instance, most modern equipment was bought. However, that equipment could often be found rotting away in the backyards of Socialist enterprises; but some part of it was used. For instance, it is owing to the 1970s oil boom that Russia now has telephone connection (the multiplex equipment was bought from Finland). Bread import began back in the 1960s (a special foreign trade enterprise with a misleading name ExportKhleb [ExportBread] was created for that purpose). However, really large supplies of grain were secured by expensive oil: cereals and grain legumes worth $1 billion in total were bought from the U.S. in 1977, and the USSR spent $1.7 billion on it in 1978. Very often, Soviet citizens did not know that the basic food products like raw meat (if it somehow appeared in stores) were of foreign origin and were acquired by means of exporting oil that drastically went up in price. When international oil prices fell, the import fell as well, leading to empty stores in the period of the USSR’s collapse. The monetary-financial crisis of 1998 also led to a catastrophic decrease in import. However, now it is all right both with oil export and with the inflow of imported goods, due to the current growth of international oil prices. The Federal Customs Service’s latest data says that Russia increased goods import from non-CIS countries by 49.7 percent, up to $101.055 billion, in January-August 2007, as compared to the same period of 2006. Goods import from non-CIS states grew by 32 percent in August 2007, as compared to August 2006. In comparison to July 2007, import grew by 2.4 percent, or by $358.1 million. For instance, the import of raw sugar grew by 16.8 percent up to 2.316 million metric tons in the seven months of 2007: $732.1 million (instead of $835.5 million last year) was spent on sugar. All sugar was imported from non-CIS states. White sugar import made up 81,500 metric tons worth $39.1 million (instead of 65,600 tons worth $29.6 million a year before). Import of frozen and fresh meat to Russia grew by 20.6 percent (up to 746,200 metric tons) in January-July 2007, as compared to the same period of 2006. The total cost of purchases made up $1.825 billion (instead of $1.214 billion a year earlier). In non-CIS states, 724,800 metric tons of meat were purchased, worth $1.767 in total. Fish purchases made up 438,600 thousand tons worth $709.4 million (337,200 thousand tons worth $466.3 million a year earlier). Just like in the 1970s, the authorities avoid underlining the fact that Russia’s economy is more and more built on the principle “more expensive oil in exchange for import, including food”. Moreover, the current authorities copy their Soviet predecessors in saying that it is necessary to develop most modern types of industrial production and to create Russia’s own high technologies. However, Russia’s import is growing so rapidly that the authorities have to mention it sometimes. Then they directly point out the import’s positive impact on the economy: foreign goods influx allows filling Russia’s growing consumer market, satisfying the growing investment and consumer demand, tightening the domestic market competition, and slowing down inflation in Russia. For all these blessings, Russia should thank the international oil market.
“A lot has been done to get away from the dependence”
President Vladimir Putin: “Oil prices certainly have impact on Russia’s economy. You know, it was created not by us and not in recent years. It was created by the entire history of the Soviet Union’s economy development… Yet, a lot has been done in the last year-year and a half to get away from the dependence. In fact, the tax sphere underwent revolutionary changes. The economy was liberated from red tape. Other market laws were adopted. I think they gave a good momentum to the economic growth.” (November 11, 2001, at a press conference with representatives of Moscow offices of U.S. mass media). Prime Minister in 2004-2007 Mikhail Fradkov: “The country’s economic potential is strengthening… The oil-and-gas sector’s contribution to the growth of Russia’s economy will be decreasing, and that of machine-building, communications and science – increasing. The economy should go towards diversification.” (August 17, 2006, at the government’s session). Deputy Prime Minister Alexander Zhukov: “The dependence of Russia’s economy on world oil prices is becoming weaker. Economic growth is more and more linked to the inner economy’s development, to the growth of citizens’ incomes.” (August 27, 2006, at a press conference). Economic Development and Trade Minister German Gref: “New tasks set to the Government include diversifying the economy and achieving rapid economic growth by means of the diversification, despite the current international oil prices.” (September 11, 2006, at the international economic forum in Kazan). Finance Minister Alexei Kudrin: “Russia’s economy is now less dependent on the international oil prices’ fluctuations. Before, oil price growth by $1 or by $10 seriously affected Russia’s GDP. The GDP fell when oil prices fell. The dependence is less now. We are building our own financial system, less dependent on oil.” (April 23, 2006, at a briefing in Washington). Head of the President’s Expert Department Arkady Dvorkovich: “Russia’s dependence on oil prices is strongly exaggerated, and will be decreasing with each year. Just a quarter of Russia’s economy growth was secured by means of favorable oil prices last year. The growth was also due to the development of Russia’s financial market, services sphere, and to the increased activity of Russian and foreign investors. Even if oil prices fall drastically, there are no grounds for a crisis in Russia.” (May 28, 2003, at a press conference).