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Daniel J. Graeber

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World Bank: Russian Energy Strength is Economic Weakness

World Bank: Russian Energy Strength is Economic Weakness

The head of the World Bank in Russia said Wednesday he was alarmed by the slowdown in the Russian economy.  The bank said the Russian economy was slow to emerge from a recession still gripping parts of the eurozone despite recovery elsewhere in the world. It said the government's investment activities slowed down in part because of the completion of the Nord Stream natural gas pipeline through the Baltic Sea. Its dependence on oil and natural gas exports, meanwhile, exposed the Russian economy to additional risks. With Europe finding new sources of natural gas, and Asian economies looking at Canadian markets, the Russian economy is starting to retreat behind the former Iron Curtain.

The World Bank said it revised its growth projection for the Russian economy from its May estimate of 2.3 percent to 1.8 percent for 2013.

"The economy appears to be growing close to its capacity, constrained by feeble investment activities and a tight labor market," Birgit Hansl, World Bank coordinator for economic policy in Russia, said in a statement.

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The report said Russia's dependence on oil and natural gas exports left its economy exposed to volatility on the global commodity market. Major oil price indices continued a steady decline on word Libyan oil production was on the rebound. Natural gas prices on the New York Mercantile Exchange, meanwhile, are near their lowest level since December. The World Bank said trade in global markets did not provide the expected level of relief to the Russian economy.

"The recent economic tendencies in Russia are quite alarming," Mikhail Rutkovsky, head of the World Bank in Russia, said.

Gazprom Deputy Chairman Alexander Medvedev told investors at a Far East energy summit it was in an ideal position to capitalize on growing energy demands from Asian economies. He said he expected Asian economies should need an additional 2.3 trillion cubic feet of natural gas by 2035.  As soon as oil reserves are exhausted and coal falls by the low-carbon wayside, it will be natural gas that will become the leader in the global energy mix, he said.

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The World Bank, however, said economic diversification may be central to Russia's recovery. Last week, BP said it secured a series of 25-year sales agreements to deliver more than 500 billion cubic feet of natural gas per year to European markets from the Shah Deniz gas field offshore Azerbaijan. Ukraine, a former Soviet Republic, said it may have enough natural gas locked on shale reserves to ward off any future "gas wars" with Russia. Japanese Prime Minister Shinzo Abe, meanwhile, said his country was ready to secure more natural gas from Canada to offset energy shortages resulting from the Fukushima nuclear disaster in 2011. While that's not necessarily a snub to Russia, whose Sakhalin gas facility lies just a few hundred miles north of Japan, it's not a ringing endorsement for Gazprom either.

The World Bank said Russia's completion of the Nord Stream pipeline to Germany was in part responsible for the fall in Russia's investment activity. The twin pipeline, completed last year, may be viewed as the bellwether of Russia's former dominance. With its once-major trading partners looking elsewhere for energy support, Russia may find itself isolated by its own ambitions.

"The oil-and-gas sector has experienced double-digit annual export growth in the last decade and accounted for nearly 69 percent of the value of Russia’s exports in 2010," the World Bank said. "Such strength originating from so few sectors may already be a risk in the economy."

By. Daniel J. Graeber of Oilprice.com




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