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Higher Energy Prices Help Russia Regain its Fiscal Footing

Higher energy prices have helped Russia regain its fiscal footing after the global financial crisis walloped the country in 2008. But some experts say the economic forecast for the Kremlin remains cloudy, as Russian leaders are mired in deficit spending. 
According to Russian Finance Minister Alexei Kudrin, Russia is projected to register a 4.3 percent growth rate this year. Beyond this year, however, Russia’s economic fortunes appear to be dangerously dependent on energy, specifically the price of oil and natural gas. That’s a factor that is largely beyond Russia’s ability to control.

Leonid Grigoriev, the director of the Institute for Energy and Finance in Moscow and a former Russian deputy minister of finance, told EurasiaNet.org that Kudrin’s growth estimate was more or less on the mark for this year. But, Grigoriev stressed, Russia’s economic future beyond 2010 was unpredictable. Grigoriev discussed his views on the Russian economy during a roundtable in Washington, DC, on November 5. The discussion was hosted by the official Russian news agency RIA Novosti.

Grigoriev maintained that Russia’s current economic recovery differs in several important aspects from its robust recovery after the financial crisis of 1998. This time around, there has been no major currency devaluation, the economy has been operating near full capacity, no sharp and sustained oil price rise has occurred, companies have not received extensive debt forgiveness, little foreign and domestic direct investment has occurred, and most of the recent recovery has been due to a resurgence in consumer demand, rather than a surge in foreign exports.

In the absence of these extraordinarily benign conditions, Grigoriev asserts that Russia’s current recovery should be compared to what has been happening in the United States, Europe, and other developed economies. “It goes slowly … no big crises exist,” he said.

But uncertainties multiply for Russia as the time horizon expands. For example, the Russian government’s ability to balance its budget will depend heavily on oil prices. Grigoriev concurred with Kudrin that the price of Russian oil on world markets, which is closely related to the price of Russian natural gas exports, has to exceed $100 per barrel—it is around $80 now—for the Russian state budget to return to a surplus. But the government’s taxation of almost all oil profits undermines the incentive of Russian companies to invest in the costly technologies needed to develop new production.

When asked by EurasiaNet.org whether Russia and China were in direct competition for Central Asian energy supplies, especially Turkmenistan’s natural gas, Grigoriev replied that “it is not competition for gas itself; it is a competition for reducing transaction costs” through the optimization of geography and energy markets. He explained that Russia relies on Turkmenistan’s gas to lower the costs of selling Russian-origin gas to Europe. “We do not move Turkmen gas physically to Europe. We consume it in the South Urals” and then ship gas produced in Russia to European consumers.”

Grigoriev did acknowledge Russian concerns about “attempts to create [energy] corridors avoiding Russian territory,” but he doubted that the projected Nabucco route, or other planned pipelines, would ever threaten Gazprom’s dominant position in Central Asia. The energy producers of Turkmenistan, Kazakhstan, and other Eurasian states will still need to rely predominately on Russian-controlled pipelines to reach their main customers in Europe.
When asked about Russian government’s recently announced privatization plans, in which the state will sell shares in as many as a thousand companies, Grigoriev argued that the main reason for the sale was Moscow’s hopes to earn money at a time when surging government spending and weak revenues were pushing the budget into deep deficit.

If implemented as announced, the mass sale would represent Russia’s first “pragmatic privatization” not due to ideological or political considerations. It was simply because “the minister of finance wants money.” Still, Grigoriev noted that the privatization process would take five years to implement and that, in the most important companies, the government would retain majority ownership and therefore control.

By. Richard Weitz

Originally published by EurasiaNet.org




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