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Russia: Lower Prices May Be Good For Economy, But Warning For OPEC

  • Michael Lelyveld

Russian President Vladimir Putin's economic aide Andrei Illarionov argued this week that lower oil prices will help rather than hurt the country's economy. The view, which seems to have the government's backing, may serve as a warning to OPEC members that Russia will increase oil output this year despite the price risks.

Boston, 1 February 2002 (RFE/RL) -- Russian officials have given a glimpse of their economic policy and the struggle over world oil prices in a series of statements this week.

Speaking on 29 January in Moscow, Prime Minister Mikhail Kasyanov labeled the fight against inflation as the government's top priority after failing to meet the 2000 target for consumer prices.

Kasyanov told a press conference, "The government is resolute in its determination to lower inflation from last year's 18.6 percent to 12-14 percent this year," "The Moscow Times" reported. The prime minister spoke before leaving for the World Economic Forum in New York and meetings in Washington this week.

Kasyanov voiced confidence that the inflation goal would be met in 2001, despite a January jump that prompted the government to scale back plans for utility tariff hikes at the start of the year.

He argued that inflation was reduced to a little more than 1 percent per month in the second half of 2000. What Kasyanov did not say is that the government kept inflation in check only by canceling its tariff increases for the same period.

While the tariff policy could pose financial problems for Russia's giant gas and electricity monopolies, the government's monetary policy may have even wider implications for the world price of oil.

Also speaking on 29 January, President Vladimir Putin's economic adviser Andrei Illarionov defied the conventional wisdom that Russia's continued recovery depends on keeping oil prices high. Instead, Illarionov argued that low oil prices would now benefit the economy more, the RIA-Novosti news agency reported.

Although oil revenues have helped Russia to pump up its revenues and Central Bank reserves, they have also strengthened the ruble in real terms, posing a risk for Russian manufacturers and exports.

The argument may be hard for Russian consumers to understand, but it is likely to have a profound effect on their economy this year.

While reports have focused on the ruble's falling value in exchange with the dollar since the start of last year, it has actually risen in comparative value when inflation is taken into account.

The reason is that ruble rates have depreciated only slightly, while inflation has raced ahead. According to a report by the U.S.-Russia Business Council, the ruble rate fell only about 6.4 percent last year while inflation reached 18.6 percent, resulting in a real strengthening of about 12 percent against the dollar. In the United States, inflation was estimated at just 1.9 percent last year.

Illarionov argues that a stronger ruble is not necessarily good for the economy because Russian products are quickly losing their cost advantage over imports from abroad. Russia's recovery has been driven by higher production since the huge devaluation during the ruble crisis of August 1998. But Russia has been gradually losing the currency advantage as a result of real appreciation and inflation.

In other words, while consumers are worried that the ruble looks like it is falling against the dollar, Russian manufacturers have been worried because it has actually risen in real terms. Russia halted the appreciation only in the second half of last year when it got inflation under control.

Illarionov argues that lower oil prices this year will help rather than hurt. Part of the logic is that high oil prices have been bringing in huge amounts of cash, which drive inflation higher, while stimulating demand for more imports.

If Illarionov prevails, the result could be significant for the world price of oil. Although Russia reached an agreement with the OPEC cartel to restrain exports in the first quarter of this year, most of Russia's oil companies plan to increase production.

In December, OPEC officials argued that Russia could not afford a price war. But under Illarionov's reasoning, Russia's economic strategy is to embrace lower prices.

Illarionov was quoted as saying, "Holding back oil exports and reducing production is not only counterproductive, but suicidal." A World Bank report released this week concluded that Russia will be able to avoid large deficits and borrowing this year unless oil prices drop to less than $10 per barrel for a sustained period.

The Russian Foreign Ministry was noncommittal about future oil cuts during an energy conference in Athens this week that included top OPEC officials.

Stanislav Zhiznin, deputy director of the ministry's department of economic cooperation, was quoted by AP as saying: "Our foreign policy is dictated by our own interests, those of other importing and exporting countries, and the global oil situation. We will apply the same logic in the future regarding any future OPEC request."

At the same conference, Iranian Oil Minister Bijan Namdar Zangeneh showed no interest in further cuts, perhaps because OPEC countries have already lost too much market share to Russia.

Zangeneh said: "I don't think it's necessary to cut production in the current situation. Of course, everything will depend on the market." He added, "Oil prices will be determined by the market and not OPEC."

Russia's policy is likely to make OPEC even more anxious about economic recovery in the United States, where slight growth of 0.2 percent was reported this week for the fourth quarter of last year.

If the U.S. recovery falters and Russia pursues its course, OPEC could again be faced with the problem of plummeting prices and too much oil.

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