Questions continue this year for Russia's economy after oil prices ended 2001 on a down note. Officials say the new Russian budget can withstand falling oil prices, but troubles may multiply if Moscow's deal with OPEC falls apart.
Boston, 3 January 2002 (RFE/RL) -- Russia's economy may be starting the new year with the same questions that dogged the old year to its end, as oil prices weaken despite attempts to prop them up.
So far, markets have shown mixed reactions to a deal to cut worldwide oil output on 1 January. On the last trading day of 2001, crude oil prices dropped nearly 3 percent, driven by doubts that the Organization of Petroleum Exporting Countries (OPEC) would be able to trim supplies by 1.5 million barrels per day.
OPEC has worked on its plan to rein in production for the past two months, but the soft economy since 11 September has kept oil demand falling faster than the plan could be put into place. Despite OPEC's agreement on 28 December to lower its output, the market continues to fret about an oil glut.
A Bloomberg News service survey of analysts concluded that OPEC reductions would reach only 1 million barrels per day, due to sales by some countries above their assigned quotas. The cartel has already compromised on its demand that Russia and other non-OPEC producers pitch in with another 500,000 barrels in cuts of their own.
After weeks of arm-twisting, the non-OPEC total came up short with only 462,500 barrels per day. There are also problems with Russia's pledge to contribute a decrease of 150,000 barrels, since the Kremlin has encouraged Russia's oil companies to shift more of their output to products like heating oil instead of crude.
The switch may help to keep Russia's oil revenues high. But the effect on the market may be the same as no cut at all, since a surplus of oil products may drag prices down as much as a surplus of crude.
OPEC seems to have deliberately looked the other way rather than call attention to the Russian loophole, in part because the market's reaction has been ruled by sentiment rather than fact for the past two months. The last days of December were no exception.
Prices rose sharply the day before OPEC's announcement, but they quickly settled back during the next two trading sessions, although there was little data to support either move. OPEC leaders were forced to concede that their preferred corridor for prices of between $22 and $28 per barrel had been broken.
On 28 December, Saudi Arabia Oil Minister Ali al-Naimi said, "We hope that prices will stabilize within reasonable limits, meaning between $20 and $25. This is what is expected now."
But on 31 December, prices dipped again below $20, raising concerns for both OPEC nations and Russia, which remains reliant on exports of oil and gas.
Russian officials have issued conflicting statements about the effect of oil prices on the 2002 budget. Early in December, Prime Minister Mikhail Kasyanov said, "Even with an average annual price of $12 per barrel there should be no problems for the budget."
But in late December, Finance Minister Aleksei Kudrin told reporters that his budget revenue plan was based on the "optimistic scenario" that Urals crude would sell for $23.50 per barrel. In October, Kudrin said the budget was designed with a "reference point" of oil prices at $18.50.
The budget appears to have room for fluctuation because it was designed with a surplus equal to 1.65 percent of gross domestic product. But officials also hope it will support foreign debt payments of some $14 billion in 2002 with a reserve set aside for payments of $19 billion in 2003.
While the government may have some flexibility, it also seems to be aiming at moving targets. It has relied on raising domestic tariffs for gas, electricity, and railways by 35 percent this year and housing by 60 percent, according to "The Moscow Times." Such hikes have proved unpalatable in the past and could be halted if inflation rises too fast.
It is also unclear if there is any plan if Russia loses its game of brinksmanship with OPEC and a price war breaks out. Kasyanov's assurance on the budget even if oil falls to $12 per barrel does not seem to cover the possible effect on the ruble if confidence is lost due to an oil price plunge.
At least two pieces of evidence seem to argue for a pessimistic view.
The first is a forecast in December by the Middle East Economic Survey that Russia's average daily exports of crude outside the Commonwealth of Independent States (CIS) will rise by 200,000 barrels rather than fall by 150,000 barrels this year. MEES projects that Russia's net exports of oil products outside the CIS will rise by an additional 60,000 barrels per day.
Unless economic recovery comes quickly, OPEC nations may be forced to balance the increases with further cuts to keep prices from falling further. But the second sign suggests that OPEC members could be hard to persuade.
Under OPEC's agreement in Cairo, some members like Iran and Venezuela have already been asked to accept cuts that are greater than Russia's pledge of 150,000 barrels, even though they already export far less.
In a shrinking market, Russia's export growth can only come at the expense of oil revenues for countries like Iran, making resistance likely if more reductions are needed to keep prices up. If the OPEC deal did not solve last year's problems, it may only create more in 2002.