RUSSIA PARADOX: HIGH OIL PRICES PROVOKE ECONOMIC SLUMP Novosti | April 13, 2005, http://en.rian.ru/rian/index.cfm? prd_id=126&msg_id=5500407&startrow=1&date=2005-04-13&do_alert=0 MOSCOW (Igor Tomberg, candidate of economics and leading researcher at the Institute of World Economic and Political Studies, Russian Academy of Sciences, for RIA Novosti) - The events of the past few weeks on the global oil market have reinvigorated discussions in Russia about the economy's dependence on energy exports. Record-high oil prices, surging OPEC prices, and the cartel's inability (or unwillingness) to increase the output substantially have engendered numerous alarmist forecasts, which have also influenced the mood in Russia. Goldman Sachs analysts recently predicted a sky-high rise of oil prices by 2007. They issued a report that reads oil markets have entered a period of super-growth, which may end with oil prices of $105 per barrel. The world economy may be entering a long oil crisis, warn IMF experts. Their World Economic Outlook report, published in early April, predicts oil prices at $34 per barrel in 2010 in current money and $39-$56 by 2030, though one of their scenarios promises $80 per barrel. Commenting on their conclusions, the IMF experts admitted that the scandalous Goldman Sachs forecast ($105 per barrel) is likely. Russia, which is a major oil exporter, will get a considerable chunk of the cash, but Russian analysts agree that these "easy petrodollars" will not do Russia good. Yevgeny Gavrilenkov, chief analyst with Troika Dialog, says tying budget expenditures to high oil prices is fraught with budget destabilization when oil prices slump. "The money that comes down like manna from heaven teaches one to drink champagne on a beer budget," agrees Vladimir Mau, rector of the Academy of the National Economy. "In the late 1970s and early 1980s, the Soviet leadership was convinced that oil would always be expensive, and so plummeting oil prices pulled down the Soviet economy." The Russian government agrees with the experts' view on the inflow of petrodollars. It has come to believe that the influence of highoil prices on the economic growth is rapidly decreasing. The growth of oil prices by $1 in 2004 ensured a GDP increase of 0.1% as against 0.35% in 1999, Finance Minister Alexei Kudrin said at a board session of the Ministry of Economic Development and Trade on March 29. He noted, though, that reducing the economy's dependence on high oil prices was a good but "alarming" sign, "because we have to look for alternative sources of economic growth." Minister of Economic Development and Trade German Gref was even more straightforward. He said at an April 7 session of the government that the record-high oil prices were not as beneficial as they might seem. "A $10 fall in oil prices by will take 1.5% off GDP, while a rise of $10 will not add anything to the economy but will even increase inflationary risks and capital outflow," the minister said. In other words, the economy may get "indigestion" from the petrodollars. The Cabinet discussion of Russia's economic outlook was reduced to debates over oil prices. Russia's attempts to break free from its oil dependence are probably not enjoying the greatest success if the government still judges economic growth by oil prices. Interestingly, foreign economists do not share the Russians' concern. John Litwack, the World Bank's chief economist in Russia, writes in a World Bank report on Russia's economic outlook presented in early April that Russia's raw materials orientation should not be viewed as a drawback, as the Russian expert community often presumes. Oil and gas revenues ensure a number of competitive advantages to the Russian companies, such as cheaper energy resources and lower tax rates than those levied on their rivals in non-raw materials countries. An almost the same view was expressed in a study on Russia's road to prosperity in the post-industrial world and how it could broaden its horizons, presented by Al Breach, chief economist with Brunswick UBS Warburg, in February 2003. He wrote that Russiashould prosper by exporting raw materials to rapidly industrializing China (as Australia was Japan's raw materials base). That report provoked fierce debates and refutations, but nothing has changed in the two years since then. The Russian government is still looking for alternative sources of growth, while the Russian economy is sliding. According to the Economic Development and Trade Ministry, average monthly GDP growth (minus seasonal changes) was 0% in January and 0.1% in February 2005. In terms of economic structure, Russia could only be described as a market economy at a stretch. Nothing new has been created in more than a decade. The state has given up its main function of creating an institutional framework for the economy, which alone can ensure its "automatic" operation when capital moves between branches without state interference, depending only on market interests. This is the apparent reason for the petrodollar saturation and economic stagnation despite the marvelous foreign trade situation. ------------------------ Yahoo! Groups Sponsor --------------------~--> Has someone you know been affected by illness or disease? Network for Good is THE place to support health awareness efforts! http://us.click.yahoo.com/RzSHvD/UOnJAA/79vVAA/NJYolB/TM --------------------------------------------------------------------~-> �������������������������������������������������������� This is ZESTEconomics. 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