Thursday, November 20, 2008

Window on Eurasia: A Return to Higher Oil Prices Alone Will Not Stabilize Russia, Moscow Experts Say

Paul Goble

Kuressaare, November 20 – The dramatic decline in the price of oil and hence of Russia’s foreign currency earnings has contributed to that country’s economic crisis, but contrary to the expectations of many Russians, a return to a period of higher oil prices by itself will not put the country on the path to stable development, according to Moscow experts.
Nearly 50 percent of all Russians tell pollsters that their country’s economy is “strongly” dependent on the price of oil, more than two-thirds think the decline in the price of oil has had a negative impact on their own lives and the country as a whole. And consequently, many believe that a new rise in prices would help Russia (
But Russian experts say that even if oil were to rise to 120 US dollars a barrel, that by itself “would not automatically bring Russia a future without crises.” And they add that if the country does not do more than work to achieve higher prices again, it will face new and more serious problems “three years from now” (
Yury Safranik, the president of the Russian Union of Oil and Gas Producers, says that there were two reasons for that. On the one hand, he suggested, most of Russia’s production now is based on Soviet-era investments that no one has added much to in recent years despite the need to replace equipment and develop new fields.
And on the other, he said, the Russian government has made a mistake in directing all its attention to “the salvation of the stock market,” an approach that he argues should be a “warning sign” to all “because these fund may not reach the real sector of the economy,” which will continue to decay.
Safranik warns that “if a principle decision is not taken today on the financial of direct investments in the oil and gas sector” – and he suggests they should be trebled -- then crisis phenomena will reappear in an even sharper form” three or four years from now. That will be true even if, as he expects, the price of oil goes p to 85 dollars a barrel by the spring.
If the government changes course, the oil and gas specialist continues, the crisis ahead will be less severe, but if it does not, then the crisis ahead will be “even more severe” than the one the country is living through at present.
Safranik is obviously concerned about saving the industry he represents, and consequently, some may be inclined to dismiss his argument as little more than a way to extract more government money for his sector. But many more independent Moscow specialists are making even more dire predictions.
One of the most thoughtful of these is Ruslan Grinberg, director of the Institute of Economics of the Russian Academy of Sciences. He argues that there is likely to be an easing of the economic crisis in the near term as the price of oil goes up to 70 to 80 US dollars a barrel but adds that any resulting improvement will not last long unless Moscow makes other changes.
Expanding Russian natural gas sales – a step many have urged in recent weeks -- will not help very much either, Grinberg says. “Of course that is fine when gas costs a lost but if oil will become less expensive, so too with gas. [And] if the recession continues, then the demand for resources will decline and that means the price for gas will fall.
At present, he continues, Russia is too dependent on the sale of gas and oil, and to get out of that dangerous trap, he says, Moscow must work “not only to revive the economy but to change its structure,” so that the country will be able to offer for sale a greater variety of products and thus not be so dependent on the price of only one or two.
The current situation, he continues, is the result of Russian government decisions, and this “primitivization” of the economy, which began in the 1990s, deepened still further over the last eight years,” the period during which Vladimir Putin ran the country and claimed to have stabilized the situation there.
“Crudely speaking,” the Academy of Sciences economist says, what happened was the following: first, we produced poor quality goods, then, we ceased to produce anything at all. [And in order to reverse that,] we have some very serious tasks ahead” if the Russian economy and Russian society are going to avoid a disaster.

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