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RUSSIA: Problems Rise With Falling Oil Prices
By Kester Kenn Klomegah
MOSCOW, Feb 24, 2009 (IPS) - The Russian economy is plunging into a crisis as oil prices fall and the
government digs deep into its reserve fund.
"Persistent and for a really long time low oil prices will likely lead to currency
devaluation and in the long run may eventually lead to budget deficit," Maria
Gorban, senior researcher at the Centre for Economic and Financial Research
at Moscow's New Economic School told IPS.
"As for private sector bailouts, my understanding is that a lot of this has
taken place recently - including banks, retail economic networks and other
sectors, but the big question is what can be the negative impact of this policy
in the near future if the trend continues."
Windfall oil and gas profits have been a major source of revenue into the
national reserve fund. But with oil prices down 70 percent since July last year,
Russia is spending more than it earns. A significant part of the government's
215 billion dollar stabilisation fund will be spent to cover the budget deficit
this year. The country is facing a budget shortfall of 124.6 billion dollars, or
5.4 percent of its gross domestic product (GDP).
The reserve fund came down from a peak of 597 billion dollars last year to
less than 400 billion dollars at the beginning of this month, according to the
Finance Ministry. The ministry is diverting the stabilisation fund into the
reserve fund, designed to cushion the federal budget against a plunge in oil
prices, and into the national welfare fund, designed to help Russia carry out
pension reforms.
While reserves fall, spending commitments mount. The crisis means Russia's
once-bulging state coffers are melting fast - with almost one-third gone as
of January.
Karen Kostanyan, head of the Russia research department at Merrill Lynch, is
tracking the level of Russia's fiscal reserves, and looking out for what she
calls the capitulation threshold.
"We see that level at 300 billion dollars, which is basically the reserve fund
and also some foreign currency reserves which are going to be six months of
imports recommended by the IMF (International Monetary Fund) because the
reserve fund is probably going to be necessary next year to cover the
impending budget deficit."
Sergey Guriev, head of the New Economic School in Moscow, is pushing the
idea of covering the budget deficit with borrowed money. Having cleared all
sovereign debts in recent years, it is time now for Russia to tap foreign
markets for funding, he says.
"Russia has paid off all its debts when oil prices were high, and now when oil
prices are low, it will be able to borrow in the market because everybody
knows once oil prices go up again Russia will repay."
Merrill Lynch's Kostanyan says Russia may be better off with lower oil prices
if it wants to move away from the boom-bust of commodities suppliers.
"Maybe in the long run it's better for Russia that oil prices stay low so that we
diversify away from a commodities based economy, because otherwise the
commodities cycle is going to hit us hard and hit us again and again."
Commodities - mostly oil - provide 40 percent of budget revenues through
taxes and export duties, despite government efforts to diversify the economy
from its dependence on crude.
"When the state spends money bailing out companies, especially those in the
public sector, as a way of saving them from total collapse, this implies that
the Russian government is simply substituting for foreign lenders which had
previously funded capital expenditure by the Russian corporate sector," Eric
Kraus, director of Otkritie Financial Corporation, a Moscow-based financial
brokerage, told IPS. "Russian reserve funds were deposited with foreign banks
and in G7 assets - primarily dollar bonds. That money is now being used to
repurchase Russian corporate debt."
Kraus says that the private sector is also benefiting, but the problem is one of
allocation of capital, the transparency of this process and the choice of
beneficiaries, very much like the situation in the west. And in Russia too the
difficulty is in getting banks to resume crediting the productive sector.
Anton Tabakh, an economist from Troika Dialog, an investment company in
Moscow, told IPS that the reserve fund is declining due to capital flight from
Russia and debt payments by companies. "Economic implications are
obviously negative, even as fast growth of reserves was a temporary boom
from oil prices. But now, after devaluation it is likely that decline would be
halted."
Oligarchs in Russia as elsewhere get their "fair share" of support - at the
expense of workers, consumers and especially disadvantage groups, Tabakh
said. "Moreover, I think nationalisation is not a goal – the goal is for more
enlightened government officials to promote growth and for the corrupt ones
to take control of property and enrich themselves."
Russia had been growing economically with oil prices - but with low living
standards, he said. A new option will be more attention to domestic
development and less reliance on exports, he said.
(END)
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